Income Taxes

PSEG’s, Power’s and PSE&G’s effective tax rates for the three months and nine months ended September 30, 2014 and 2013 were as follows:




	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013
PSEG	37.0%	41.0%	37.8%	40.5%
Power	39.4%	40.5%	38.6%	40.0%
PSE&G	38.5%	40.6%	38.6%	40.0%

For the three months ended September 30, 2014, as compared to the same period in the prior year, the decrease in PSEG's and PSE&G's effective tax rates was due primarily to the audit settlement and depreciation flow-through, respectively.

For the nine months ended September 30, 2014, as compared to the same period in the prior year, the decrease in PSEG's effective tax rates was due primarily to the audit settlement.

On August 11, 2014, PSEG received notice from the Internal Revenue Service (IRS) that the audit settlement covering tax years 2007 through 2010 had been approved by the Joint Committee on Taxation. This effectively settles all issues with the IRS through 2010. On September 9, 2014, PSEG received refunds from the IRS totaling $121 million, representing the net settlement of all disputed amounts, including interest, through the tax year 2010. As a result of the settlement of this audit, PSEG recorded a $12 million reduction of tax expense in the quarter ended September 30, 2014.

PSEG’s unrecognized tax benefits decreased by $156 million in the third quarter 2014 inclusive of interest, of which $62 million was attributable to the settlement of the IRS audit tax liability and the remaining $94 million was due to the reversal of positions taken in prior periods. As a result, the December 31, 2013 balance of unrecognized tax benefits that was reasonably possible to increase or decrease within the next twelve months decreased to an immaterial amount as of September 30, 2014.

There is no material increase or decrease in the interest and penalties associated with the unrecognized tax benefits. The impact on the accumulated deferred income taxes and regulatory tax benefits is not material. The change in the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is not material.

In September 2013, the U.S. Department of the Treasury and the IRS released final regulations effective in 2014 that provide guidance on applying Section 263(a) of the Internal Revenue Code to amounts paid to acquire, produce, or improve tangible property, as well as rules for materials and supplies. Implementation of these regulations did not have any material impact on PSEG’s and its subsidiaries’ results of operations, financial condition or cash flows.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 included a provision making qualified property placed into service after September 8, 2010 and before January 1, 2012, eligible for 100% bonus depreciation for tax purposes. In addition, qualified property placed into service in 2012 was eligible for 50% bonus depreciation for tax purposes. The American Taxpayer Relief Act of 2012 further extended the 50% bonus depreciation for qualified property placed into service before January 1, 2014. In addition, long production property placed into service in 2014 is eligible for 50% bonus depreciation for tax purposes. These provisions have generated cash for PSEG through tax benefits related to the accelerated depreciation. These tax benefits otherwise would have been received over an estimated average 20 year period.

Income Taxes

PSEG’s, Power’s and PSE&G’s effective tax rates for the three months and nine months ended September 30, 2014 and 2013 were as follows:




	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013
PSEG	37.0%	41.0%	37.8%	40.5%
Power	39.4%	40.5%	38.6%	40.0%
PSE&G	38.5%	40.6%	38.6%	40.0%

For the three months ended September 30, 2014, as compared to the same period in the prior year, the decrease in PSEG's and PSE&G's effective tax rates was due primarily to the audit settlement and depreciation flow-through, respectively.

For the nine months ended September 30, 2014, as compared to the same period in the prior year, the decrease in PSEG's effective tax rates was due primarily to the audit settlement.

On August 11, 2014, PSEG received notice from the Internal Revenue Service (IRS) that the audit settlement covering tax years 2007 through 2010 had been approved by the Joint Committee on Taxation. This effectively settles all issues with the IRS through 2010. On September 9, 2014, PSEG received refunds from the IRS totaling $121 million, representing the net settlement of all disputed amounts, including interest, through the tax year 2010. As a result of the settlement of this audit, PSEG recorded a $12 million reduction of tax expense in the quarter ended September 30, 2014.

PSEG’s unrecognized tax benefits decreased by $156 million in the third quarter 2014 inclusive of interest, of which $62 million was attributable to the settlement of the IRS audit tax liability and the remaining $94 million was due to the reversal of positions taken in prior periods. As a result, the December 31, 2013 balance of unrecognized tax benefits that was reasonably possible to increase or decrease within the next twelve months decreased to an immaterial amount as of September 30, 2014.

There is no material increase or decrease in the interest and penalties associated with the unrecognized tax benefits. The impact on the accumulated deferred income taxes and regulatory tax benefits is not material. The change in the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is not material.

In September 2013, the U.S. Department of the Treasury and the IRS released final regulations effective in 2014 that provide guidance on applying Section 263(a) of the Internal Revenue Code to amounts paid to acquire, produce, or improve tangible property, as well as rules for materials and supplies. Implementation of these regulations did not have any material impact on PSEG’s and its subsidiaries’ results of operations, financial condition or cash flows.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 included a provision making qualified property placed into service after September 8, 2010 and before January 1, 2012, eligible for 100% bonus depreciation for tax purposes. In addition, qualified property placed into service in 2012 was eligible for 50% bonus depreciation for tax purposes. The American Taxpayer Relief Act of 2012 further extended the 50% bonus depreciation for qualified property placed into service before January 1, 2014. In addition, long production property placed into service in 2014 is eligible for 50% bonus depreciation for tax purposes. These provisions have generated cash for PSEG through tax benefits related to the accelerated depreciation. These tax benefits otherwise would have been received over an estimated average 20 year period.

Income Taxes

PSEG’s, Power’s and PSE&G’s effective tax rates for the three months and nine months ended September 30, 2014 and 2013 were as follows:




	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013
PSEG	37.0%	41.0%	37.8%	40.5%
Power	39.4%	40.5%	38.6%	40.0%
PSE&G	38.5%	40.6%	38.6%	40.0%

For the three months ended September 30, 2014, as compared to the same period in the prior year, the decrease in PSEG's and PSE&G's effective tax rates was due primarily to the audit settlement and depreciation flow-through, respectively.

For the nine months ended September 30, 2014, as compared to the same period in the prior year, the decrease in PSEG's effective tax rates was due primarily to the audit settlement.

On August 11, 2014, PSEG received notice from the Internal Revenue Service (IRS) that the audit settlement covering tax years 2007 through 2010 had been approved by the Joint Committee on Taxation. This effectively settles all issues with the IRS through 2010. On September 9, 2014, PSEG received refunds from the IRS totaling $121 million, representing the net settlement of all disputed amounts, including interest, through the tax year 2010. As a result of the settlement of this audit, PSEG recorded a $12 million reduction of tax expense in the quarter ended September 30, 2014.

PSEG’s unrecognized tax benefits decreased by $156 million in the third quarter 2014 inclusive of interest, of which $62 million was attributable to the settlement of the IRS audit tax liability and the remaining $94 million was due to the reversal of positions taken in prior periods. As a result, the December 31, 2013 balance of unrecognized tax benefits that was reasonably possible to increase or decrease within the next twelve months decreased to an immaterial amount as of September 30, 2014.

There is no material increase or decrease in the interest and penalties associated with the unrecognized tax benefits. The impact on the accumulated deferred income taxes and regulatory tax benefits is not material. The change in the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is not material.

In September 2013, the U.S. Department of the Treasury and the IRS released final regulations effective in 2014 that provide guidance on applying Section 263(a) of the Internal Revenue Code to amounts paid to acquire, produce, or improve tangible property, as well as rules for materials and supplies. Implementation of these regulations did not have any material impact on PSEG’s and its subsidiaries’ results of operations, financial condition or cash flows.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 included a provision making qualified property placed into service after September 8, 2010 and before January 1, 2012, eligible for 100% bonus depreciation for tax purposes. In addition, qualified property placed into service in 2012 was eligible for 50% bonus depreciation for tax purposes. The American Taxpayer Relief Act of 2012 further extended the 50% bonus depreciation for qualified property placed into service before January 1, 2014. In addition, long production property placed into service in 2014 is eligible for 50% bonus depreciation for tax purposes. These provisions have generated cash for PSEG through tax benefits related to the accelerated depreciation. These tax benefits otherwise would have been received over an estimated average 20 year period.