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Special Economic Issue

PSEG Outlook: 2008 N.J. International Association of Business Communicators "Best in Show" Award Winner

DECEMBER 2009

A monthly publication for People providing Safe, reliable, Economic and Green energy, like ... Lisa Battisti, administrative associate, community affairs, Newark general office.

INSIDE OUTLOOK

It's more than just numbers:

An interview

with

IPOWER:

A smart investment in bits and bytes. p. 3.

Caroline Dorsa

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Communicating directly with institutional investors is a critical part of PSEG's investor relations strategy. Investor feedback provides an opportunity to examine the effectiveness of the company's approach. PSEG Outlook sat down with Caroline Dorsa, PSEG's chief financial officer, to talk about the importance of understanding shareholders' perceptions of PSEG. PSEG Outlook: How important to PSEG is shareholder perception? Caroline Dorsa: Shareholder perception is important not solely because we want to know what investors think. We need to ensure that our investors, both institutional and individual, understand PSEG's strategic outlook so that they can make an informed investment choice. Investors will continue to have confidence in our strategy, not only by looking at our quarterly results, but by understanding PSEG's challenges and opportunities and how we plan to address them. That is the core of our communications approach. Companies that don't communicate with their investors

suffer in valuation, as current and potential investors may not appreciate how they are capturing opportunities. They also suffer if there are unexpected challenges that need to be explained to investors. If you haven't been communicating, your investors will not be as willing to listen and put challenges in context. Confidence is critical; investors can leave and invest elsewhere in an instant. Outlook: What are some of the top concerns that investors have today? CD: We conducted a survey of our institutional investors and sellside analysts to learn what they understand about our strategy and to ensure that we are communicating in the most effective way. The results showed that shareholders understand the key messages that the company is trying to communicate and understand where we are focused. And that's gratifying. Their

See DORSA, Page 6

PHOTO: MARK LOVRETIN

BY LEE GRAY

PSEG SOLAR SOURCE

making strides in

renewable energy. p. 4.

4

CHANGE

NIGHT AND DAY,

Bryan Sock helps hold down the trading floor fort. p. 5.

Gas takes power producers on a wild ride

BY MIKE JENNINGS

SAFETY WATCH

2008 YTD

OCTOBER

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2009 YTD

OCTOBER

OSHA Recordable Injuries

Declining natural gas prices will have a long-term impact on PSEG. Prices have come down because of new discoveries and easy access.

Natural gas prices have whipsawed the electricity industry during the past year and will likely severely squeeze PSEG's future earnings. Gas is the fuel that usually sets the wholesale electricity market price. For most of this year, gas has cost less than $5 per million BTUs, which has kept the price of electricity in the PJM wholesale market around $53/MWH. By contrast, in mid-2008, gas sold for $14 per million BTUs and electricity prices were about $104/MWH, nearly double the 2009 price. Prices in other wholesale markets have moved in a similar pattern. The steep decline in electricity prices has slashed the operating margins of PSEG Power's nuclear and combined cycle units and often priced its coal units out of the market. The dramatic drop in gas prices is harming Power's profitability this year.

See GAS PRICES, Page 6

144 1.54 6.65 217

144 1.55

(OSHA total cases include OSHA Hearing Loss Cases)

OSHA Recordable Rate

(OSHA Rate includes Hearing Loss Cases)

OSHA Days Away From Work Rate

PHOTO COURTESY OF PSEG POWER, GUADALUPE, TX

20.09 227

(Lost Time Days Severity Rate)

Motor Vehicle Collisions

(MVC includes Commuting Collisions)

Visit the Health & Safety ­ the Only Choice Website at

www.informationcentral.pseg.com

Published monthly for the employees of Public Service Enterprise Group, 80 Park Plaza, Newark, N.J. 07102 News Office: P-3B, Newark.

o insightut

EDITOR: Melissa Ficuciello 973-430-3819 [email protected]

Stepping up

ASSISTANT EDITOR: Lee Gray 973-430-5122 [email protected]

CREATIVE DIRECTION: Kathy Spina DESIGN AND LAYOUT: Sally Boncich John Masi

PHOTO: MARK LOVRETIN

CONTRIBUTORS: Beth Gill Mike Jennings Jenn Kramer Angelica Marucci Zach Narrett Judy Ohl Cheryl Olcheski Paul Rosengren Nicole Swan

BY RALPH IZZO PSEG CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER

T

psegoutlook

C Printed on recycled paper

FORWARD-LOOKING STATEMENT The statements contained in this communication about our and our subsidiaries' future performance, including, without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, are forwardlooking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance they will be achieved. There are a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements made herein. A discussion of some of these risks and uncertainties is contained in our Annual Report on Form 10-K and subsequent reports on Form 10-Q and Form 8-K filed with the Securities and Exchange Commission (SEC). These documents address in further detail our business, industry issues and other factors that could cause actual results to differ materially from those indicated in this communication. In addition, any forward-looking statements included herein represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if our estimates change, unless otherwise required by applicable securities laws.

This year brought more than its share of challenges ­ from a weak economy, to lower energy demand and lower prices, to much cooler summer weather. And we cannot expect things to get easier. Excess gas supplies could dampen energy prices for a long time. Clearly, we have our work cut out for us, but there is plenty of reason for optimism ­ especially when you consider the great way our employees stepped up to tough challenges, throughout the year and across the company, in the best PSEG tradition. Operational excellence is the heart of it all. Our employees achieved new levels of operational excellence in 2009. Indeed, there have been a whole slew of outstanding results ­ many more than can be cited in a brief article, but all deserving recognition. Nuclear is a mainstay of our profitability. We are benefiting from superb nuclear operations, such as Salem Unit 2's longest continuous run of 515 days between refuelings. My hat is off to Fossil, as well. While our coal units were called on less this year, they shaved 40 percent off average start-up times and successfully responded to demand more than 90 percent of the time. Our combined-cycle units ran a lot more, and our peaking units also performed with flying colors when called upon to run. Meanwhile, the folks at PSE&G again won honors for making top performance par for the course. For the fourth time in five years, PSE&G received the ReliabilityOne award as the nation's most reliable electric utility, plus its eighth straight regional reliability title. Gas operations continued to get the job done with exemplary efforts, including meeting the demands of a new peak gas-system delivery day. At PSEG Energy Holdings, sales in our lease portfolio from December 2008 through September 2009 brought in $675 million and reduced our potential tax exposure by $525 million. The Services Corporation is continuing to provide vital support while reducing costs significantly below plan. And employees across the company have pitched in terrifically with ideas and efforts to economize in ways that add up. These and other achievements are positioning us to meet our long-term objectives with a strong balance sheet that supports new investments.

We have been able to seize good growth opportunities. PSE&G got the green light from its regulators for more than a billion dollars in new investments that will improve reliability and help address climate change. We have a range of additional growth opportunities, from the expansion of Power's peaking fleet to Holdings' focus on renewable energy. Longer term, we are preparing the ground for new nuclear.

There is plenty of reason for optimism ­ especially when you consider the great way our employees stepped up to tough challenges.

For all our opportunities, the road ahead will not be easy. Aligning our business with new market realities is a huge, ongoing task. We all own this challenge. It has never been more important to achieve operational excellence across all measures that go into being a recognized leader for People providing Safe, reliable, Economic and Green energy. This means being ever more diligent on the cost front, as well. PSEG is blessed with great assets and, most of all, with great people. I couldn't be prouder of our employees. Thanks for all your hard work and best wishes for a safe, happy holiday season.

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PSEG OUTLOOK

We'veGot Mail

>

iPower:

>

PHOTO: MARK LOVRETIN

How does New Jersey's recent announcement that it has reached 100 megawatts of solar capacity impact PSEG Power? ­ a PSEG employee Investment in solar energy makes sense and needs to be encouraged ­ it is part of our vision of People providing Safe, reliable Economic and Green energy. This is why we have investments in solar throughout different parts of our business, such as the Solar 4 All loan program in the utility and PSEG Solar Source's solar garden announcement with Mars Chocolate North America. For the foreseeable future, I expect that solar energy will minimally affect PSEG Power's New Jersey business because of its low capacity factor and relatively modest scale of development. Solar is an intermittent resource and must be backed up by other forms of generation that are able to provide power when the sun is not shining. Solar is most productive on warm, sunny days and, on those days, it could shave demand for our peaking units. In addition, solar is ­ and is expected to remain ­ a small facet of New Jersey's generation mix. New Jersey's Energy Master Plan sets aggressive targets for developing renewable energy resources. It anticipates solar providing 2 percent of the state's electricity production by 2020. While the state's solar capacity surpassed 100 MWs last month, PSEG Power's overall New Jersey capacity is more than 9,600 MWs, with a peaking capacity exceeding 2,700 MWs.

A smart investment in bits and bytes

BY BETH GILL

Earlier this year, PSE&G went live with the iPower project to replace its 28-year-old customer information system. The planned project cost: $160 million.

even longer. However, thanks to planning and hard Is this investment worth the price? Dan Eichhorn, work, the fundamental system issues already are fixed director-iPower, responds with an emphatic "Yes!" and the iPower team is now working on the smaller Eichhorn says that the new system has long-term technical bugs. Eichhorn expects iPower to reach strategic and financial benefits. "It will position us steady state within the next two to five months. well in a changing industry, improve the customer One of the many financial benefits of using iPower experience, and generate savings," he said. PSE&G had to replace its former system, which was is that, at steady state, it will cost less in contractor fees to support, maintain and upgrade iPower, versus the oldest in the industry. The number of technical the legacy system, which is written in computer code experts versed in fixing the outdated computer code that most contractors no longer support. was dwindling and were charging increasingly higher fees for fixes and upgrades. More importantly, the system could not expand to accommodate new features or keep up with the changing needs of the business. iPower uses the SAP platform, which is state-of-the-art technology and the system of choice for large utilities. SAP is scalable and flexible. It can be expanded in the case of a merger or acquisition. It can be adapted to meet changing regulatory requirements or to track and bill for new customer offerings, such as WorryFree services or renewable energy programs. With iPower, customer service representatives have additional, real-time information at their Tracy Kirk (left), manager-process integration and iPower paperless billing program lead, and fingertips, and customers get Dan Eichhorn, director-iPower, discuss paperless billing, which not only is environmentally more of the self-service features friendly and convenient for customers, but also significantly reduces paper, printing and they want. In the long-term, postage costs. More than 46,000 PSE&G customers now receive their bills electronically. iPower should greatly improve the customer experience. However, Plus, iPower streamlines and automates processes customer service initially has been negatively and tracks more real-time customer information. For impacted because it takes time for employees to example, iPower will help to improve processes for become truly proficient with the new system and for managing delinquent accounts by providing more the technical team to fix glitches. "We apologize to customers for any inconvenience credit information, better security deposit tracking, and more. As a result, the utility expects to see a and thank them for their patience," said Joe Forline, reduction in customer money owed but never paid. vice president-customer operations. "We have been Furthermore, iPower supports new services, working hard to address the customer service such as paperless billing. Electronic delivery of impacts and have seen dramatic improvements since bills significantly reduces paper, printing and late October." postage costs. There also are financial benefits associated with "As the technical team works hard to get iPower to using iPower versus the former system, once iPower its steady state, we know that, at times, it can be reaches its "steady state." frustrating for the employees using the system," said Steady state is when all of the technical bugs are Eichhorn. "We thank them for their flexibility and found and fixed and the system fully works the way it support and for all they do to help make the was intended. When other companies installed SAP transition as seamless as possible for the customer. systems, it took them one to three years to reach "The good news is that, in time, employees and steady state. Because iPower is one of the most customers alike will benefit from all that this state-ofcomprehensive and complex SAP systems in the the-art system offers," he said. O industry, this recovery time would, in theory, take

­ Bill Levis, president and chief operating officer, PSEG Power

PSEG Outlook welcomes your correspondence. Please e-mail the publication's editor at [email protected], or send your letter to Melissa Ficuciello, Editor, PSEG Outlook, 80 Park Plaza, P-3B, Newark, N.J. 07102. All correspondence should include the writer's full name, address and daytime telephone number. Anonymous letters may be submitted, but will inhibit the editor's ability to contact the author with questions, should a reply be necessary. Correspondence may be edited for purposes of clarity and space.

The PSEG Vision

Being a recognized leader for:

People providing Safe, reliable Economic and Green

Energy

PSEG OUTLOOK

3

aroundpseg

Credit where credit is due

PSEG

Solar Source making strides in

A cross-functional team comprising employees from PSEG Services Corporation and PSE&G worked together to help the company to reduce SF6 emissions, a highly potent greenhouse gas used to insulate circuit breakers. Pictured are (front, l-r): Isabel Goncalves-Rooney, materials management; Karen Noe, corporate planning; and Angela Rothweiler, asset management; (back, l-r): Mark Scorsolini, environment, health and safety; Howard Leitch, supply chain management; and Dean Koncsol, environment, health and safety.

renewable energy

BY JENN KRAMER

In 2008, a cross-functional team of employees from corporate planning, asset management, supply chain, electric delivery, Maplewood testing services, and environment, health and safety initiated an effort to help detect and repair SF6 (sulfur hexafluoride) emissions. SF6, used as an insulating gas in circuit breakers, also is a highly potent greenhouse gas. One pound of SF6 is equal to approximately 12 tons of carbon dioxide (CO2). SF6 emissions are an eligible emissions offset category under the Regional Greenhouse Gas Initiative (RGGI). RGGI is the first mandatory cap-and-trade program in the United States for CO2. States participating in RGGI can help support a green economy by using revenues from CO2 allowance auctions to boost investment in energy efficiency and renewables. PSE&G is working with other utilities and RGGI regulators to establish a process that could

allow SF6 emissions reductions to be monetized as a RGGI offset credit. The team used a maintenance strategy, dealing directly with station mechanics who work with SF6, to identify equipment that could be categorized as "heavy leakers." This resulted in two breakers being replaced in Essex County, N.J, to reduce SF6 emissions and improve reliability. Because of PSE&G's pioneering research and development in leak detection and repair capabilities, the company projects that it could achieve a 40 percent reduction of SF6 leaks by 2025. More immediately, as a result of better inventory management practices and SF6 recovery efforts, PSE&G was able to avoid approximately $100,000 in SF6 procurement costs in 2009. ­ Lee Gray

PHOTO: MARK LOVRETIN

PSEG Solar Source develops, constructs of PSE&G's service territory. The compa large-scale solar facilities of at least tw

Savings go underground

One of gas delivery's primary functions is to install and maintain the underground system of pipes and equipment where natural gas flows. Many jobs require excavating and call for stopping the gas while working on the system. The bigger and more complex the excavation, the more expensive it is. Gas delivery's construction efficiency team and technical support group work hand in hand to look for ways to reduce construction costs and improve efficiencies. In 2002, technical support began working with a vendor to develop equipment that could reduce excavation sizes and remove a step when replacing or adding a 12-inch gas main to the system. The group has been successful in expanding the size range of the equipment to include up to 30-inch pipe. "When performing gas main tie-ins, we use a double block-and-bleed pressure control procedure," said Wade Miller, planning and design manager and construction efficiency team member. "We have a primary and secondary stop-off and a vent in between to safely control gas pressure. This occurs through the use of three separate taps and fittings on the gas main. The new equipment eliminates one of the separate taps and fittings by combining the secondary stop-off and vent in one tap and fitting. Eliminating an additional tap and fitting reduces excavation sizes, welding and fitting installation time, and material and restoration cost." The technical support group has performed approximately 60 jobs with the new equipment and has saved more than $300,000. "Refining the technology reduces costs and shortens the time it takes to get a job done," said Jorge Cardenas, vice president-gas delivery. "There's another advantage, too. We disturb less soil, meaning we use less paving material. It's a greener way to excavate." ­ Judy Ohl

PHOTOS COURTESY OF MARS CHOCOLATE NORTH AMERICA

Construction begins on the largest solar facility installed in New Jersey by a food manufacturing plant.

PHOTO: MARK LOVRETIN

Gas delivery is using new equipment to reduce excavation sizes and make tie-in operations more efficient. Without this equipment, the excavation shown would have been significantly larger.

Here, the first panels are installed, helping Mars Chocolate North America strengthen its pledge to serve as an environmentally friendly corporate citizen.

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PSEG OUTLOOK

PeopleFirst

Night and day, Sock helps hold down the trading floor fort

BY MELISSA FICUCIELLO

e

n

PHOTO: MARK LOVRETIN

BRYAN SOCK ENERGY SUPPLY SPECIALIST PSEG ENERGY RESOURCES AND TRADE ­ NEWARK

M&M "representatives" gave tours of the new solar garden ­ PSEG Solar Source's first project ­ which powers Mars Chocolate North America's plant.

s, owns and operates large-scale solar facilities outside any, a subsidiary of PSEG Global, focuses on developing wo megawatts in size.

PSEG Solar Source currently has three solar projects in its portfolio, totaling nearly 30 megawatts (MW). Each of these projects is being created in partnership with juwi solar Inc., with panels from First Solar. The photos here show the making of the company's first project, a 2 MW solar garden in Hackettstown, N.J., which is providing approximately 20 percent of the energy needed to power the nearby Mars chocolate and candy manufacturing plant. With more than 28,000 solar panels on 18 acres, this facility has the power to reduce carbon dioxide emissions by more than 1,000 metric tons, equivalent to removing 190 vehicles from the road each year. And it will be dwarfed ­ in size and impact ­ by projects that PSEG Solar Source is constructing in Florida and Ohio. The company is constructing a 15 MW solar farm on 100 acres in Jacksonville, Fla., and a 12 MW facility on 80 acres in Wyandot, Ohio. Local utilities are purchasing the system's output and the renewable energy credits. The projects are expected to be completed by the end of 2010. "The Mars project is the first of many that we are developing across the country ­ projects that are establishing us as a leader in the U.S. solar industry," said Diana Drysdale, director-development, energy renewables, PSEG Global, who is leading PSEG Solar Source.

This aerial shot shows the more than 28,000 ground-mounted solar panels on 18 acres adjacent to Mars Chocolate North America's headquarters.

He arrives at work in the dark and, this time of year, leaves in the dark, too. And that's when he works days. When he's on the night shift, it's more of the same ­ only darker and quieter. Such is the life that Bryan Sock leads as energy supply specialist for PSEG Energy Resources and Trade (ER&T). Working 12-hour shifts ­ alternating weekly between day and night shifts, as well as working alternate weekends ­ Sock is responsible for monitoring the output of the company's nuclear, coal, combined cycle and peaking units to assure optimal economic dispatch, while also taking profitable trading positions when opportunities present themselves during the course of a shift. "I am the direct line of communication between the energy markets and our power plants," Sock said. "Minute by minute, hour by hour, I analyze system conditions in all markets in which our plants run, as well as monitor the plants currently online to make sure they are running on schedule." Sock says that each day is different, which he loves. "There are so many variables within a day ­ the weather, the demand for electricity, system conditions in the different energy markets," he said. "There's an opportunity to learn something new every day." With ER&T one year on Dec. 15 (he also worked as a contractor for PSEG Fossil for eight months prior to his current position), Sock notes that his schedule presents one of the job's biggest challenges. "My schedule is different from that of my family and friends, so it has been a bit of an adjustment," Sock said. "However, the other nine energy supply specialists all deal with the same schedule. We interact with operators at the power plants, transmission operators in ESOC, and gas operators in GSOC on the overnights, so I know we're not alone." One major accomplishment of Sock's has been getting up to speed and comfortable with his job during the course of the year. "There's a vast amount of information to learn in a very short period of time," he said. "We need to understand the ins and outs of the power plants that are being dispatched, the rules and procedures for the four different markets in which we operate, as well as all core job functions that happen daily." Sock said that there was ample on-the-job training, as new dispatchers are trained by senior dispatchers until they are certified by PJM, while mandatory off-site market training also is required to become certified within PJM. "Ultimately, in this job, one needs excellent written and verbal communication skills and strong analytical and problemsolving skills to be successful," Sock said. "These skills are necessary on the day shift, when relaying current market conditions and power plant status to the traders and management, and also on the night shift, when no one else is around and real-time decisions must be made that can significantly impact the company's bottom line." "Bryan's position allows him the opportunity to acquire operational and market knowledge that, along with time and experience, will ensure that he will become an asset to ER&T and to PSEG," said Steve Kimmish, director-operations, ER&T and Sock's supervisor. With the company vision top of mind, Sock says that his job supports the economic component of the vision most. "By doing my job correctly, I'm protecting the company's position, while also finding opportunities to make additional revenue by understanding what's going on in the energy markets," he said.

PSEG OUTLOOK

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PHOTO: MARK LOVRETIN

People R Talking

Dorsa

Continued from page 1

AS PSEG EMPLOYEES, WE ALL HAVE THE POWER TO MAKE CHANGES TO SAFEGUARD THE FINANCIAL POSITION OF THE COMPANY GOING FORWARD. IN SEPTEMBER, PSEG OUTLOOK SHARED A NUMBER OF INITIATIVES THAT EMPLOYEES HAD IMPLEMENTED TO BE MORE COST EFFICIENT. BELOW ARE MORE RESPONSES.

concerns focused mostly on the state of commodity markets, natural gas prices, and how the company will manage through those challenges to deliver shareholder value. They also do understand and value the investments that we are making to grow PSE&G. But their concerns continue to be focused on how PSEG will manage the challenges in the power markets and still deliver a strong bottom line. Outlook: Do shareholders feel that management has a grasp on the issues facing the company?

plans and achieve our earnings guidance. If you execute on plans and achieve guidance, you often create your own options and you continue to achieve the confidence and support of your investor base.

"We had to find a way to reduce costs while keeping safety a top priority. To help, we are cutting the number of face-to-face health and safety meetings. Starting in 2010, the PSEG Health and Safety Council will meet four times a year instead of monthly. In PSE&G, electric and gas line of business councils have agreed to meet every other month, and the customer operations line of business council already is meeting quarterly. This will save time and travel expenses and we will be sure that nothing falls through the cracks. It will put more weight on our local councils, but that's good because that's where the grassroots efforts begin."

CD: We scored relatively high in confidence in management and in the engagement of management in the operating issues of the business. In fact, we scored better than the majority of S&P 500 companies. It's a credit to our management team, which is very engaged in the operating issues in our business. It also is a credit to our investor relations team, CFO Caroline Dorsa talks about the importance of shareholder perception. ensuring that our investors have the continued opportunity to see our management and appreciate their level of involvement. Of course, Outlook: How would you categorize the this only raises the bar for all of us to continue to importance of individual investors, such as PSEG deliver results. employees? Outlook: Can you talk a bit about where shareholders view the greatest growth opportunities? CD: Shareholders understand and appreciate the growth opportunities in PSE&G and see it as a smart, well-executed strategy. They also understand that our growth in the utility is not sufficient to compensate for the challenges in the power markets. They look to us to focus on operational excellence and organic growth ­ growing the company from within. They do not see us as a company that should pursue mergers and acquisitions. They want us to execute on our CD: The importance of individual investors cannot be overstated. The same issues that are of concern to institutional shareholders exist for individual investors. PSEG needs to assure shareholders that the company will be able to return cash in the form of dividends, as well as grow through investments that will yield an appropriate return. All of us who are shareholders should be thinking about delivering not just to achieve our own objectives, but because we are owners in the company. O

"We installed an interval meter in Springfield to review energy use. Once we compiled all the data, employees decided which lights and other appliances were necessary at various times of the day. We've been able to save about $46,000 with this initiative and we're working with other customer operations locations to become more energy and cost efficient."

Gas prices

Continued from page 1

"I used to manually send letters to the Hackensack District municipalities to notify them of pending service shutoffs for nonpayment. It was a timeconsuming process. I developed a database to help me send these letters electronically, saving not only time but also more than $2,000 a year in postage and supplies. I also introduced this process to the Roseland District."

­ COMPILED BY LEE GRAY

However, the repercussions will be more fully felt in the future, even if the economy recovers and normal weather returns. Power sells its baseload generation through forward contracts. The prices of those contracts are a blend of the 2007, 2008 and 2009 market prices. Through those contracts, Power is selling energy at prices considerably above those in the current market energy markets. Those contracts have cushioned the impacts of the decline in wholesale prices. As these contracts expire, the succeeding contracts increasingly will reflect lower prices. Power has benefited from the price lag in forward contracts during the last year, when electricity prices fell. The price lag will likewise prevent Power from benefiting quickly when prices rise. It is important to remember that Power generates roughly 70 percent of PSEG's earnings, which is why the company has undertaken an aggressive effort to control costs and improve efficiency. Many analysts expect that gas prices will rebound as the economy recovers and demand increases. Supply and demand will determine how big the bounce back will be. Some experts proclaim that America is "drowning" in natural gas and that low prices are here to stay for years to come. Other experts are uncertain the gas boom will materialize. Prices are so low that some producers have closed their wells. Power producers have been reluctant to spend the billions of dollars to convert coal plants to gas, which emits half as much carbon as coal. Utilities were burned 10 years ago when gas prices were thought to have

reached a permanent low, only to spike a few years later. "Today's market conditions are somewhat similar to the conditions of a decade ago," said Dave Wohlfarth, vice president-gas supply. "Then large gas surpluses drove the price of gas down and gas units took market share from coal units. It sparked a huge investment in combined cycle plants, which, along with a stronger economy, drove natural gas prices higher. That, in turn, made coal more economical for the next several years." Estimates of America's gas reserves have been increased by nearly 40 percent during the past two years. At current levels of demand, the U.S. has 90 years of potential supply. Much of the boost is the result of an extraction process that combines horizontal drilling with hydraulic fracturing, which will allow producers to tap previously inaccessible and abundant supplies of natural gas from underground rock formations. Shale gas is not without its critics. The process involves blasting millions of gallons of water, mixed with chemicals and sand, at very high pressure thousands of yards underground. Environmentalists are concerned about potential adverse environmental impact on aquifers that supply drinking water. Those concerns recently prompted a gas company to withdraw plans to drill for gas in New York. "It's a very dynamic situation and no one knows how it will play out," said Ray DePillo, vice president-Power operations and asset management. "Power, because of its fuel diversity, will adapt to the changing market conditions and take advantage of the opportunities created." O

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PSEG OUTLOOK

PHOTOS: MARK LOVRETIN

PHOTO: MARK LOVRETIN

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100the4.3 Behind 1.31

Numbers

BY LEE GRAY

BUILDING ON A COMMITMENT TO EMPLOYEES AND THE COMMUNITY

Many employees have asked why the company continues to make community/charitable contributions during these tough economic times. As with many companies, PSEG created a separate legal entity ­ a foundation ­ to formalize its giving and to put money aside in good years for those rainy days when funds are tight. Thanks to this approach, PSEG has been able to maintain its commitment to its employees and the communities in which it does business. The PSEG Foundation funds a number of employee programs, including the Educational Matching Gift program, where gifts to educational institutions are matched dollar for dollar up to $5,000, and Dollars for Doers, which supports employee volunteer efforts with $250 grants. This year, the Foundation announced a match of employee contributions, up to $100 per employee, to all non-profit organizations during the Power of Giving Campaign. In 2009, the PSEG Foundation also announced the creation of the Employee Crisis Fund. The fund is designed to support employees with taxfree financial assistance ­ up to $5,000 ­ when faced with a life-threatening illness or injury or a catastrophic event, such as a natural disaster. The PSEG Foundation contributed $50,000 to initiate the fund and will continue to make annual contributions. However, employee donations are needed to help sustain the fund, since the Foundation is prohibited by law to be a permanent sole funder.

The PSEG Foundation is critical to PSEG's support of communities' efforts to grow, prosper and contribute to a strong economy. By focusing on education, the environment, and community and economic development, the PSEG Foundation makes strategic contributions that support a variety of programs in areas that have relevant alignment with PSEG business strategies. Contributions typically are modest, but PSEG has earned a reputation as a steady donor, solidifying the company's role as a good corporate citizen. The PSEG Foundation last received a gift from PSEG in 2008; no significant donations are expected near term. All company contributions are made from PSEG earnings that would have been dedicated to shareholders. Because it is funded, the PSEG Foundation will continue to disperse funds in 2009 and 2010 to support employee and community programs.

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The PSEG Foundation makes strategic contributions that support a variety of programs that have relevant alignment with PSEG business strategies.

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FYI: SERVICE AWARDS, RETIREMENTS, IN MEMORIAM

SERVICE AWARDS

40 YEARS

Carl J. Apgar, construction inquiry ­ Cranford Joseph J. Baeli, Jr., appliance services ­ Clifton gas Kenneth J. Tanis, electric delivery planning ­ G.O. Leon J. Jordan, Jr., Central division ­ Somerset Charles T. Mach, appliance services ­ Audubon gas Stephen T. Maginnis, projects ­ new generation ­ G.O. Roman J. Nedza, Southern division ­ Lawrenceville Martin Nolan, appliance services ­ Plainfield gas Michael L. Pankok, PSEG Nuclear Alan E. Smekal, Trenton gas Kenneth E. Thoman, Jr., SMD ­ Hadley Road Edward W. Zack, Metropolitan division ­ Clifton Mark Zeliff, Central division ­ Somerset James P. Harmon, Jr., Central division ­ Somerset Pamela M. Hettmannsperger, PSEG Nuclear Thomas P. Kiernan, Central division ­ Somerset John C. Liable, PSEG Nuclear Wade R. Linden, Southern division ­ Moorestown Gino J. Lopez, PSEG Power ­ CT Betty Lou McKeich, PSEG Nuclear Jeffrey W. Morris, PSEG Nuclear Scott R. Padovano, fleet maint. ­ Hackensack David A. Pankz, appliance services ­ Orange gas Roberto J. Perez, emp. relations/ HR srvs. ­ G.O. Walter J. Pollard, Jr., Southern division ­ Lawrenceville Gerald C. Riley, New Brunswick gas Jose M. Ruas, Jersey City gas Domingos Santos, billing and rev. ops. ­ G.O. Mark S. Schneider, Palisades division ­ Secaucus Leslie G. Shook, PSEG Nuclear John C. Stanton, PSEG Nuclear Jeffrey Stewart, Central division ­ Elizabeth James J. Tarver, supply chain mgmt. ­ Hadley Rd. William C. Wapelhorst, Central division ­ Elizabeth Marvin C. White, II, PSEG Nuclear Michael F. Wolfram, Southern division ­ Moorestown Gary W. Young, PSEG Nuclear

i

Sandra L. Mulvania, supply chain mgmt. ­ Moorestown Larry D. Packer, PSEG Power ­ CT John A. Schmidt, ER&T ops mgmt. ­ G.O. Harry A. Simmonds, PSEG Nuclear Charles A. Susino, energy operations ­ G.O. Thomas R. Tode, employee & payroll services ­ G.O. Audrey R. Vetter, Plainfield gas

35 YEARS

Gary S. Grysko, engineering support ­ G.O. Henry A. Morris, Jr., SIAC

IN MEMORIAM

Albert K. Anderson Charles P. Andrews John M. Bandola Arthur C. Belvin Edward Brown William S. Dyke D.C. Easer Leonard A. Falco James A. Halstead Bernard C. Henry William R. Iurato Edward L. Klein Arthur F. Kull Thomas L. Miller, Jr. Peter T. O'Neill Walter J. Shelfer Gerald G. Smith Roland C. St. John Barbara A. Wettach Joanne Wilkoski (active), IT ­ G.O.

25 YEARS

Douglas A. Atwell, PSEG Nuclear Helen L. Baksh, Central division ­ Somerset Michael J. Bast, PSEG Nuclear Kenneth A. Brown, Southern division ­ Moorestown John B. Carlin, PSEG Nuclear Glenn J. Cunningham, Southern division ­ Moorestown James H. Dennis, Jr., fleet maint. ­ Moorestown Charles R. Elvin, Metropolitan division ­ Clifton Thomas S. Fisher, Palisades division ­ Hackensack Raymond J. Fitzpatrick, appliance services ­ Clifton gas Neal A. Gomes, transmission ­ Hadley Rd. Joseph R. Graber, Central division ­ Somerset Kenneth R. Gralley, PSEG Nuclear Michael A. Halter, PSEG Nuclear

30 YEARS

Bernhard Albrecht, Metropolitan division ­ Clifton Gary Assimos, PSEG Nuclear Craig N. Assimos, PSEG Nuclear Terry J. Brennan, PSEG Nuclear Paul L. Dametz, CMS David Despotovich, MTS John H. Dilks, Jr., PSEG Nuclear Jo Ann Dow-Breslin, community affairs ­ G.O. Bruce J. Faure, Audubon gas George A. Fidecaro, Plainfield gas Joseph B. Gaines, supply chain mgmt. ­ Somerset Michael L. Gardner, Summit gas Gary R. Giacalone, Edison training center Edward C. Hagemann, Bergen generating station Gerald W. Hunkele, Sewaren generating station David L. Hutchins, Maplewood testing services

RETIREMENTS

Jean C. Beck, strategic staffing ­ G.O. Bruce E. Ervin, constr. inquiry ­ Cranford David M. Keenan, supply chain mgmt. ­ Somerset

PSEG OUTLOOK

7

Organic growth applies to more than just vegetation

BY NICOLE SWAN

Letterof the Month

Caroline Dorsa PSEG Newark, N.J. Dear Ms. Dorsa, Hello from a retiree, as well as a stockholder. I read recently with interest your comments about reliability and shareholder value. Having been a responsible employee and now a retiree for approximately 10 years, I am now a "responsible" shareholder, with PSEG as my largest holding. This is true for my wife, too. We value what you and others have done to keep the company ahead of the curve ­ so to speak ­ and provide a commitment to shareholders, which is rare in the utility business. Your statement that "shareholders matter" says so much for your business philosophy. All this in such a difficult economy, where the financial world is still topsy turvy, is impressive. I don't envy your position, but apparently you are able to address the many negative outside influences and still keep PSEG on an even keel. I admire you for your tenacity and principles. Turning challenges into opportunities says a lot for your progressive thinking. Sincerely, George Oaks Westmoreland, N.H.

Companies traditionally have two basic strategies to achieve growth: expansion through mergers and acquisitions, referred to as inorganic growth; and/or development of existing businesses to generate growth internally, or organic growth. Organic growth is the result of continued investment in a company's businesses and improvements in the operation of its existing assets. This strategy challenges management to take advantage of the company's core strengths to generate additional profit and grow earnings, rather than invest in mergers and acquisitions. Today, PSEG is using the organic growth strategy to expand its businesses. The company continues to make investments in its critical infrastructure and is creating new alternative energy businesses internally. PSE&G is investing significantly in growing its business by investing more than $1.3 billion in Solar 4 All, induction lighting, accelerated infrastructure investments in gas and electric, and investments in energy efficiency programs. These investments will become part of the company's rate base, the prudent long-term capital investments made to run the business. For every dollar that PSEG invests in its rate base assets, it expects to earn a fair return over the useful life of those assets. When combined with its significant investments in transmission infrastructure, these investments will essentially double PSE&G's rate base by 2014. Simply stated, PSEG is doubling the size of its asset base organically ­ without acquiring another utility business. PSEG Power also is investing internally, building new peaker units in Connecticut and Kearny, N.J., and conducting an extended power uprate and a steam path retrofit at Peach Bottom Units 2 and 3, which are expected to increase Power's share of capacity at Peach Bottom by approximately 165 megawatts by 2016. This follows on an uprate at Hope Creek and a steam generator replacement at Salem Unit 2 ­ together increasing output by 173 MW. Organic growth is the strategy used at PSEG Energy Holdings, as well. PSEG is building a new solar unregulated solar business, PSEG Solar Source, as well as investing in two joint ventures: Garden State Offshore Energy and Energy Storage and Power, a developer of compressed air energy storage. All three are challenging PSEG's greatest assets ­ its employees ­ to explore and develop alternative energy businesses. PSEG will continue to explore innovative ways to grow internally. This will require the company and its employees to take advantage of opportunities to run the business better ... and more efficiently.

Comments on this column are welcome. Please send your feedback and ideas to [email protected]

"PSE&G has shown that significant and strategic investments in solar energy can occur outside of the Sunbelt. The Solar 4 All program represents a measured yet innovative approach to deploying utility-owned photovoltaics in sizes ranging from micro- to macro-applications. To be sure, challenges in implementation remain, but their program design shows a new level of thought in the placement of large amounts of solar."

­ Julia Hamm, Solar Electric Power Association (SEPA) executive director, on PSE&G's Solar 4 All program being named the recipient of the 2009 SEPA Award for Solar Business Achievement in the category, "Innovation in Solar Program Design"

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N

OTABLE"Quote"

PRESORTED STANDARD MAIL U.S. POSTAGE PAID PERMIT No. 1578 NEWARK, NJ

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