This combined MD&A is separately filed by PSEG, Power and PSE&G. Information contained herein relating to any individual company is filed by such company on its own behalf. Power and PSE&G each make representations only as to itself and make no representations whatsoever as to any other company.

PSEG's business consists of three reportable segments, which are:

• Power, our wholesale energy supply company that integrates its generating asset operations with its wholesale energy, fuel supply, energy trading and marketing and risk management activities primarily in the Northeast and Mid Atlantic U.S.,

• PSE&G, which provides transmission and distribution of electricity and gas in New Jersey, and

• Energy Holdings, which owns our other generation assets and holds other energy-related investments.

OVERVIEW OF 2009 AND FUTURE OUTLOOK

Our business discussion in Part I Item 1 Business of our 2008 Annual Report on Form 10-K provides a review of the regions and markets where we operate and compete, as well as our strategy for conducting our businesses within these markets, focusing on operational excellence, financial strength and making disciplined investments. The following discussion supplements that discussion and the discussion included in the Overview of 2008 and Future Outlook provided in Item 7 in our Form 10-K by describing significant events and business developments that have occurred during 2009 and any changes to the key factors that we expect will drive our future performance. The following discussion refers to the Condensed Consolidated Financial Statements (Statements) and the Related Notes to Condensed Consolidated Financial Statements (Notes). This information should be read in conjunction with such Statements, Notes and the 2008 Annual Report on Form 10-K.

Operational Excellence

Our generating assets continued to perform with strong operations in the first half of 2009. Our nuclear generation output for the first six months of 2009 was higher than in the comparable period in 2008. While our fossil fleet also continued to perform well, fossil generation volumes were approximately 25% lower than in the comparable period in 2008. The volumes were negatively impacted by reduced demand due to cooler weather and the general economic slowdown. The largest reduction in volume was at our coal units due to higher-priced coal in 2009 than in 2008.

For the first half of 2009, our hedging strategy has resulted in higher average realized electric prices than a year ago, which helped to mitigate the effect of our reduced generation resulting from recent mild weather and recessionary conditions. The increase in realized prices was due to comparably higher-priced contracts entered into in prior years that replaced older, lower-priced contracts, such as the 2005 and 2006 Basic Generation Service (BGS) auction contracts which expired in May 2008 and May 2009. Looking forward, the lower market prices being experienced currently could create a less attractive environment for Power to contract for the future sale of its anticipated generation output.

We continue to receive strong pricing for our capacity. As a result of the most recent Reliability Pricing Model (RPM) auction for the 2012-2013 period, the prices set for our generation assets in PJM were $185.00 per MW-day in PSEG-North, $139.73 per MW-day in Eastern Mid-Atlantic Area Corridor (MAAC) and $133.37 per MW-day in MAAC. These prices compared favorably with the $110.00 per MW-day set for each of these regions for the 2011-2012 period. PJM has accepted our proposal for 178 MW of new capacity to be added for the 2012-2013 period.

Our distribution operations experienced a 5.6% increase in total gas delivery volumes and 3.7% decline in total electric delivery volumes in the first half of 2009 as compared to the same period in 2008 as a result of weather impacts and the current economic conditions. In the first half of 2009, winter weather, as

On May 29, 2009, we filed a Petition with the BPU for an increase in electric and gas distribution base rates. The amounts requested were $134 million and $97 million for electric and gas respectively. We expect this matter to be resolved during the first half of 2010.

During 2008 and the first quarter of 2009, we undertook a project to update our customer service system. In April 2009, our customer service system was fully integrated into our utility operations.

During the first six months there were also two significant regulatory developments that we believe have the potential to positively impact future operations.

• In March 2009, the Federal Energy Regulatory Commission (FERC) issued an order regarding PJM's RPM. The effect of this order includes an increase in the cost of new entry value to more accurately reflect construction and equipment costs. This should incent both new build and continued operation of existing facilities. For additional information, see Part II, Item 1. Legal Proceedings.

• On April 1, 2009, the U.S. Supreme Court concluded that the U.S. Environmental Protection Agency (EPA) permissibly relied upon cost-benefit analysis in setting the national performance standards and in providing for cost-benefit variances from those standards as part of the Phase II Section 316(b) regulations of the Federal Water Pollution Control Act. This is important to us in that it allows the EPA to continue to use the site-specific cost-benefit test in determining best technology available for minimizing adverse environmental impact. For additional information, see Note 6. Commitments and Contingent Liabilities.

There continue to be significant developments addressing the need to promote clean and renewable energy, energy efficiency and the reduction of greenhouse gases which may impact our operations in the future as new rules and regulations are adopted.

• In April 2009 the EPA released a proposed finding under the Clean Air Act concluding that CO2 is one type of six specific greenhouse gases which cause or contribute to the climate change problem and constitute air pollution which endangers both public health and welfare. If applied to fossil fuel generation facilities, additional regulation of CO2 emissions could impact our operations, our ability to renew permits and licenses and could result in additional material compliance costs.

• In June 2009, the U.S. House of Representatives passed a bill that promotes renewable energy and requires a reduction in the emission of greenhouse gases from the majority of emission sources, including the generation sector. The bill sets forth major initiatives which include: 1) establishing a national renewable energy standard, and 2) creating a market mechanism for the sale and purchase of greenhouse gas emission allowances (cap-and-trade program). The bill could reduce or eliminate existing regional inconsistencies in greenhouse gas regulations. The Senate is expected to consider these issues as well as transmission planning, siting and cost allocation issues in the fourth quarter, but ultimate enactment into law of a bill with comparable provisions and rules is not certain.

In 2009, we have continued to focus on managing costs while maintaining our safety and reliability standards and believe that our financial position remains strong.

Our businesses continued to generate strong cash from operations in the first six months of 2009. In addition, Power established a program for the issuance of up to $500 million of unsecured medium-term notes (MTNs) to retail investors in January and, to date, has issued $209 million under this program. We used these funds, cash from operations, and cash on hand to:

• contribute $364 million into our pension plans in 2009,

• pay $250 million of Power's 3.75% Senior Notes at maturity,

• pay $60 million of PSE&G's 8.10% and 8.16% MTNs at maturity,

• make an additional $140 million deposit with the IRS to defray potential interest costs associated with the disputed tax liability for the leveraged lease investments,

• redeem $280 million of non-recourse debt at our Texas plants at the end of February, and

• repurchase $10 million of Energy Holdings' remaining Senior Notes.

The Board of Directors has also approved an increase in the quarterly dividends from $0.3225 per share to $0.3325 per share of Common Stock for each of the first three quarters of 2009 resulting in an indicated annual dividend of $1.33 per share. This increase is consistent with maintaining our target payout ratio of 40% to 50% of Operating Earnings.

In addition, in order to reduce the cash tax exposure related to certain lease transactions, Energy Holdings is pursuing opportunities to terminate international leases with lessees that are willing to meet certain economic thresholds and where the transactions in total will result in a positive or neutral earnings and cash impact. Proceeds from these terminations are being used to reduce Energy Holdings' tax exposure related to these investments. See Note 6. Commitments and Contingent Liabilities for additional information.

Disciplined Investment

During 2009, we expect to continue to pursue investments focusing on areas that complement our existing businesses and provide prudent growth opportunities. These areas include responding to climate change and continuing to improve environmental performance, upgrading critical energy infrastructure and providing new energy supplies. During 2009:

• We were assigned construction and operating responsibility for an additional 500 kV transmission project in New Jersey. The project would run from Branchburg to Hudson. The project is still in the design phase.

• We are continuing to pursue obtaining all necessary regulatory approvals for the $750 million Susquehanna-Roseland transmission project. The New Jersey Highlands Council has provided a favorable applicability determination. A decision by the New Jersey Department of Environmental Protection is now pending. A decision from the BPU is expected by the end of 2009.

• We requested approval from the BPU for a new solar loan program, called "Solar Loan II". Under Solar Loan II, we would help finance the installation of an additional 40 MW of solar-powered generating systems in our electric service territory. Any remaining financing capacity from our current solar loan program would be rolled into this new program.

• The BPU approved our Solar 4 All Program. Under this program, we anticipate investing approximately $515 million of capital, and $22 million for operations and maintenance, to develop 80 MW of utility-owned solar photovoltaic systems over a four-year horizon.

• The BPU approved our Capital Economic Stimulus Program. Under this program, we anticipate accelerating $694 million of capital infrastructure investments and

• The BPU issued an Order approving our Energy Efficiency Economic Stimulus Program. Under this program, we anticipate investing approximately $166 million of capital, and $24 million in operations and maintenance, in energy efficiency expenditures through PSE&G for electric and gas programs in New Jersey over an 18 month period. Goals of the program are to help New Jersey meet its Energy Master Plan goal of reducing energy consumption by 20% by 2020 and to help improve New Jersey's economy through the creation of new jobs.

• We have approved the expenditure of $192 million for steam path retrofit and related upgrades at Peach Bottom Units 2 and 3. Completion of these upgrades is expected to result in an increase of Power's share of nominal capacity by 32 MW (14 MW at Unit 3 in 2011 and 18 MW at Unit 2 in 2012). Significant project expenditures began in July 2009 and are expected to continue through 2012. We anticipate expenditures in pursuit of additional output through an extended power up-rate of our co-owned Peach Bottom nuclear plants. The up-rate is expected to be in service in 2015 for unit 2 and 2016 for unit 3. Power's share of the increased capacity is expected to be 133 MW with an anticipated cost of approximately $400 million.

• We plan to construct 178 MW of gas-fired peaking capacity at Power's Kearny site. This capacity was bid into and has cleared the PJM RPM base residual capacity auction for the 2012-2013 period. Final approval has been received and construction is expected to commence in the third quarter of 2011. The project is expected to be in-service by June 2012. We estimate the cost of these generating units to be $160 million to $200 million. Total capitalized expenditures to date were $7 million which are included in Other Noncurrent Assets in Power's and PSEG's Condensed Consolidated Balance Sheets.

There is no guarantee that these or future initiatives will be achieved since many issues need to be favorably resolved, such as system conditions, regulatory approvals and funding of construction or development costs.

We receive immediate recovery of our transmission investments and costs through our FERC approved formula transmission rate. The formula rate mechanism provides for an annual setting of our transmission rates as well an annual true up to ensure that there is no over-recovery or under- recovery of the actual costs of providing transmission service or in PSE&G's approved return on equity. We have similar recovery mechanisms in place, which have been approved by the BPU, for certain utility programs including our Capital Economic Stimulus Program, Solar 4 All Program, Solar Loan Programs and the energy efficiency and demand response programs.

RESULTS OF OPERATIONS

The results for PSEG, PSE&G, Power and Energy Holdings for the quarters and six
months ended June 30, 2009 and 2008 are presented below:


                                                        Three Months                      Six Months
                                                            Ended                           Ended
                                                          June 30,                         June 30,
Earnings (Losses)                                   2009            2008            2009             2008
                                                                           Millions
Power                                             $   257        $    240         $   575         $    515
PSE&G                                                  44              52             168              189
Energy Holdings                                        10            (453 )            17             (424 )
Other                                                   -              (5 )            (5 )            (11 )

PSEG Income (Loss) from Continuing Operations     $   311        $   (166 )       $   755         $    269
Income from Discontinued Operations                     -              16               -               29

Net Income (Loss)                                 $   311        $   (150 )       $   755         $    298




                                                      Three Months Ended                 Six Months Ended
                                                           June 30,                          June 30,
Earnings Per Share (Diluted)                        2009             2008              2009            2008
PSEG Income (Loss) from Continuing Operations     $   0.61        $   (0.32 )        $   1.49        $   0.53
Income from Discontinued Operations                      -             0.03                 -            0.06

PSEG Net Income (Loss)                            $   0.61        $   (0.29 )        $   1.49        $   0.59

Our results include the following after-tax impacts of mark-to-market (MTM) activity:

                                                   Three Months Ended               Six Months Ended
                                                        June 30,                        June 30,
Non-Trading Mark-to-Market (MTM) After Tax        2009            2008            2009            2008
                                                                        Millions
Power                                           $     2         $    27         $   (16 )       $    30
Energy Holdings                                     (26 )           (13 )           (23 )           (11 )

Total                                           $   (24 )       $    14         $   (39 )       $    19

Both the quarter-over-quarter and six-month over six month increases in our Income from Continuing Operations reflect the following large drivers:

• the absence of a charge taken in June 2008 related to IRS' disallowance of deductions taken in prior years associated with certain types of leveraged lease transactions, and

• improved earnings at Power due to lower generation costs and higher contract pricing,

• offset partially by lower sales volumes due to milder weather in the second quarter and economic conditions, and

• the absence of tax benefits taken in 2008 at PSE&G and Energy Holdings related to an IRS refund claim and other tax items.

Our results of operations are primarily comprised of the results of operations of our operating subsidiaries, Power, PSE&G and Energy Holdings, excluding charges related to intercompany transactions, which are eliminated in consolidation. We also include certain financing costs, and charitable contributions along with general and administrative costs at the parent company. For additional information on intercompany transactions, see Note 15. Related-Party Transactions. For an explanation of the variances, see the discussions for Power, PSE&G and Energy Holdings that follow the table below.

                                    Three Months Ended                     Increase/                     Six Months Ended                      Increase/
                                         June 30,                         (Decrease)                         June 30,                         (Decrease)
                                  2009              2008                 2009 vs 2008                  2009             2008                 2009 vs 2008
                                                 Millions                              %                              Millions                             %
Operating Revenues              $   2,561        $   2,550        $     11                -         $   6,482        $   6,342        $    140                2
Energy Costs                        1,067            1,535            (468 )            (30 )           3,135            3,654            (519 )            (14 )
Operation and Maintenance             628              620               8                1             1,303            1,247              56                4
Depreciation and
Amortization                          203              191              12                6               410              383              27                7
Income from Equity Method
Investments                             9                7               2               29                19               19               -                -
Impairment on Equity
Method Investments                      8                -               8              N/A                 8                -               8              N/A
Other Income and
(Deductions)                           47               41               6               15                63               77             (14 )            (18 )
Other Than Temporary
Impairments                             1               32             (31 )            (97 )              61               70              (9 )            (13 )
Interest Expense                      133              146             (13 )             (9 )             278              299             (21 )             (7 )
Income Tax Expense                    240              213              27               13               544              446              98               22
Income from Discontinued
Operations, net of tax                  -               16             (16 )           (100 )               -               29             (29 )           (100 )

Power



                                           Three Months Ended               Increase/                Six Months Ended               Increase/
                                                June 30,                    (Decrease)                   June 30,                   (Decrease)
                                          2009              2008           2009 vs 2008            2009             2008           2009 vs 2008
                                                                                       Millions

For the three months ended June 30, 2009, the primary reasons for the $17 million increase in Income from Continuing Operations were:

• lower net losses on investments in the Nuclear Decommissioning Trust (NDT) Funds and lower maintenance costs,

• offset partially by lower sales volumes on generation and BGS contracts mitigated by lower generation costs, and

• reduced sales volumes under the Basic Gas Supply Service (BGSS) contract mitigated by lower gas costs, and lower trading gains.

Included is the recognition of non-trading MTM gains of $2 million, after-tax, in 2009 as compared to $27 million in 2008.

• lower generation costs offset lower sales volumes and prices on generation, and

• slightly improved margins on higher sales volumes at lower inventory costs under the BGSS contract,

• offset partially by higher maintenance costs for planned outage work and higher depreciation due to additional assets having been placed in service.

Included is the recognition of non-trading MTM losses of $16 million, after-tax, in 2009 as compared to $30 million of after-tax MTM gains in 2008.

The quarter and year-to-date details for these variances are discussed below:

                                  Three Months Ended                      Increase/                      Six Months Ende                      Increase/
                                       June 30,                          (Decrease)                          June 30,                         (Decrease)
                                2009              2008                  2009 vs 2008                  2009             2008                  2009 vs 2008
                                                Millions                              %                              Millions                              %
Operating Revenues            $   1,301        $   1,623         $   (322 )            (20 )       $   3,675        $   3,998         $   (323 )            (8 )
Energy Costs                        563              867             (304 )            (35 )           2,025            2,456             (431 )           (18 )
Operation and
Maintenance                         271              275               (4 )             (1 )             529              514               15               3
Depreciation and
Amortization                         48               41                7               17                95               79               16              20
Other Income and
(Deductions)                         42               38                4               11                62               71               (9 )           (13 )
Other Than Temporary
Impairments                           -               32              (32 )           (100 )              60               70              (10 )           (14 )
Interest Expense                     39               41               (2 )             (5 )              82               83               (1 )            (1 )
Income Tax Expense                  165              165                -                -               371              352               19               5

For the three months ended June 30, 2009 as compared to 2008

Operating Revenues decreased $322 million due to:

• Generation revenues decreased $167 million due to

¡ lower revenues of $148 million resulting from lower volumes of generation being sold at lower prices, and

¡ a net decrease of $26 million due to a lower volume of BGS contracts mitigated slightly by higher prices,

¡ offset partially by higher revenues of $14 million due to several new wholesale contracts that were entered into in late 2008 and early 2009.

• Gas Supply revenues decreased $138 million

¡ including a net decrease of $110 million resulting from sales under the BGSS contract, comprised of $132 million from lower average gas prices in 2009, offset partially by $18 million of gains on financial hedging transactions, and by higher sales volumes of $4 million, and

¡ a net decrease of $28 million due to lower prices offset partially by increased sales volume to third party customers.

• Trading revenues decreased $17 million due primarily to losses on gas contracts, partly offset by gains on electric-related contracts.

• Energy Costs represent the cost of generation, which includes fuel purchases for generation as well as purchased energy in the market, and gas purchases to meet Power's obligation under its BGSS contract with PSE&G. Energy Costs decreased by $304 million due to:

. . .