-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S0eBQTqNf2QkNBrYvi8tx4NJvd5P6kSJPyaLw/f38qkmz4K2bQ7+eGW8rYeubGal UJNSQwm8KAFb2nqIukzOXQ== 0000950110-00-000138.txt : 20000229 0000950110-00-000138.hdr.sgml : 20000229 ACCESSION NUMBER: 0000950110-00-000138 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE ENTERPRISE GROUP INC CENTRAL INDEX KEY: 0000788784 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 222625848 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09120 FILM NUMBER: 554258 BUSINESS ADDRESS: STREET 1: 80 PARK PLZ STREET 2: P O BOX 1171 CITY: NEWARK STATE: NJ ZIP: 07101 BUSINESS PHONE: 9734307000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE ELECTRIC & GAS CO CENTRAL INDEX KEY: 0000081033 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 221212800 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00973 FILM NUMBER: 554259 BUSINESS ADDRESS: STREET 1: 80 PARK PLZ STREET 2: PO BOX 570 CITY: NEWARK STATE: NJ ZIP: 07101 BUSINESS PHONE: 2014307000 10-K405 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ COMMISSION REGISTRANT, STATE OF INCORPORATION, I.R.S. EMPLOYER FILE NUMBER ADDRESS, AND TELEPHONE NUMBER IDENTIFICATION NO. - ----------- -------------------------------------------- ------------------ 1-9120 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 22-2625848 (A New Jersey Corporation) 80 Park Plaza P.O. Box 1171 Newark, New Jersey 07101-1171 973 430-7000 http://www.pseg.com SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------------------ ----------------------------------------- Common Stock without par value New York Stock Exchange Philadelphia Stock Exchange Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's Debentures), $25 par value at 7.44%, issued by Enterprise Capital Trust I (Registrant). Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's Debentures), $25 par value at 7.25%, issued by Enterprise Capital Trust III (Registrant). SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: Floating Rate Capital Securities (Guaranteed Preferred Beneficial Interest in PSEG's Debentures), $1,000 par value issued by Enterprise Capital Trust II (Registrant), LIBOR plus 1.22%. Extendible Notes, Series A, LIBOR plus 0.22%, Due 2000. Extendible Notes, Series B, LIBOR plus 0.60%, Due 2000. Extendible Notes, Series C, LIBOR plus 0.40%, Due 2001. The aggregate market value of the Common Stock of Public Service Enterprise Group Incorporated held by non-affiliates as of January 31, 2000 was $7,439,341,868 based upon the New York Stock Exchange Composite Transaction closing price. The number of shares outstanding of Public Service Enterprise Group Incorporated's sole class of Common Stock, as of the latest practicable date, was as follows: CLASS OUTSTANDING AT JANUARY 31, 2000 ----- ------------------------------- Common Stock, without par value 216,417,218 DOCUMENTS INCORPORATED BY REFERENCE PART OF FORM 10-K DOCUMENTS INCORPORATED BY REFERENCE - ----------------- ------------------------------------------------------------- III Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders of Public Service Enterprise Group Incorporated to be held April 18, 2000, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 1, 2000, as specified herein. ================================================================================ COMMISSION REGISTRANT, STATE OF INCORPORATION, I.R.S. EMPLOYER FILE NUMBER ADDRESS, AND TELEPHONE NUMBER IDENTIFICATION NO. - ----------- --------------------------------------- ------------------ 1-973 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 22-1212800 (A New Jersey Corporation) 80 Park Plaza P.O. Box 570 Newark, New Jersey 07101-0570 973 430-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS TITLE OF EACH CLASS ON WHICH REGISTERED - -------------------- ---------------------------- ---------------------- Cumulative Preferred First and Refunding Mortgage Stock $100 par value Bonds Series Due: Series: 4.08% 4.18% 9 1/8% BB 2005 4.30% 9 1/4% CC 2021 5.05% 8 7/8% DD 2003 5.28% 7 7/8% FF 2001 5.97% 7 5/8% II 2000 6.92% 6 7/8% MM 2003 New York Stock Exchange 6 1/2% PP 2004 $25 par value Series: 6% QQ 2000 6.75% 6 1/8% RR 2002 7% SS 2024 7 3/8% TT 2014 6 3/4% UU 2006 6 3/4% VV 2016 6 1/4% WW 2007 6 1/2% XX 2000 6 3/8% YY 2023 8% 2037 5% 2037 Monthly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures), $25 par value at 9.375%, $25 par value at 8.00%, issued by Public Service Electric and Gas Capital, L.P. (Registrant) and registered on the New York Stock Exchange. Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures), $25 par value at 8.625%, issued by PSE&G Capital Trust I (Registrant) and registered on the New York Stock Exchange. Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures), $25 par value at 8.125%, issued by PSE&G Capital Trust II (Registrant) and registered on the New York Stock Exchange. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: REGISTRANT TITLE OF CLASS ---------- -------------- Public Service Electric and Gas Company 6.92% Cumulative Preferred Stock $100 par value Medium-Term Notes, Series A Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| As of January 31, 2000, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record by Public Service Enterprise Group Incorporated. TABLE OF CONTENTS ----------------- PAGE ---- PART I - ------ Item 1. Business........................................................ 2 General......................................................... 2 Risk Factors.................................................... 3 Competitive Environment......................................... 4 Regulatory Issues............................................... 4 Customers....................................................... 10 PSE&G/Power..................................................... 11 Energy Holdings................................................. 17 Employee Relations.............................................. 18 Segment Information............................................. 19 Environmental Matters........................................... 19 Item 2. Properties...................................................... 22 Item 3. Legal Proceedings............................................... 26 Item 4. Submission of Matters to a Vote of Security Holders............. 29 PART II - ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................. 30 Item 6. Selected Financial Data......................................... 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 33 PSEG............................................................ 33 Corporate Structure............................................. 33 Overview of 1999 and Future Outlook............................. 33 Results of Operations........................................... 36 Liquidity and Capital Resources................................. 42 External Financings............................................. 47 Qualitative and Quantitative Disclosures About Market Risk...... 49 Foreign Operations.............................................. 50 Year 2000 Readiness............................................. 50 Accounting Issues............................................... 51 PSE&G........................................................... 51 Forward Looking Statements...................................... 51 Item 7A. Qualitative and Quantitative Disclosures About Market Risk...... 52 Item 8. Financial Statements and Supplementary Data..................... 52 Consolidated Financial Statements............................... 53 Notes to Consolidated Financial Statements...................... 64 Financial Statement Responsibility..............................103 Independent Auditors' Reports...................................105 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.............................107 PART III - -------- Item 10. Directors and Executive Officers of the Registrants.............108 Item 11. Executive Compensation..........................................110 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................................114 Item 13. Certain Relationships and Related Transactions..................115 PART IV - ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................................................116 Schedule II--Valuation and Qualifying Accounts..................118 Signatures......................................................119 Exhibit Index...................................................121 i PART I ITEM 1. BUSINESS GENERAL PSEG Public Service Enterprise Group Incorporated (PSEG), incorporated under the laws of the State of New Jersey with its principal executive offices located at 80 Park Plaza, Newark, New Jersey 07102, is an exempt public utility holding company. PSEG has three principal direct wholly-owned operating subsidiaries: Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG Energy Holdings Inc. (Energy Holdings). In November 1999, PSEG formed PSEG Services Corporation (Services) to provide management and administrative services to PSEG and its subsidiaries. PSEG ORGANIZATIONAL CHART --------------- PSEG --------------- | ------------------------------------------------------------------- | | | | - --------------- --------------- --------------- --------------- PSE&G _ Power _ Energy Holdings Services - --------------- | --------------- | --------------- --------------- | | | --------------- | ------------------- |- Fossil |- Global | --------------- | ------------------- | | | --------------- | ------------------- |- Nuclear |- Resources | --------------- | ------------------- | | | --------------- | ------------------- - ER&T - Energy Technologies --------------- ------------------- PSE&G PSE&G is a New Jersey corporation with its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. PSE&G is an operating public utility company engaged principally in the generation, transmission, distribution and sale of electric energy service and in the transmission, distribution and sale of gas service in New Jersey. Upon the final resolution of appeals of certain regulatory orders issued by the New Jersey Board of Public Utilities (BPU) under the New Jersey Energy Master Plan Proceedings, as more fully discussed below, PSE&G expects to transfer its generation-related assets to Power. PSE&G will continue to own and operate its transmission and distribution businesses as a public utility. More information on the New Jersey Energy Master Plan proceedings can be found in Regulatory Issues. Within this report, the results of operations of the generation business have been included within PSE&G since PSE&G continued to own and operate the generation-related assets throughout 1999. Currently, PSE&G supplies electric and gas service in areas of New Jersey in which approximately 5.5 million people, about 70% of the State's population, reside. PSE&G's electric and gas service area is a corridor of approximately 2,600 square miles running diagonally across New Jersey from Bergen County in the northeast to an area below the City of Camden in the southwest. The greater portion of this area is served with both electricity and gas, but some parts are served with electricity only and other parts with gas only. As of December 31, 1999, PSE&G provided service to approximately 1.9 million electric customers and approximately 1.6 million gas customers. This heavily populated, commercialized and industrialized territory encompasses most of New Jersey's largest municipalities, including its six largest cities--Newark, Jersey City, Paterson, Elizabeth, Trenton and Camden--in 2 addition to approximately 300 suburban and rural communities. This service territory contains a diversified mix of commerce and industry, including major facilities of many corporations of national prominence. PSE&G's load requirements are almost evenly split among residential, commercial and industrial customers. PSE&G believes that it has all the franchises (including consents) necessary for its electric and gas distribution operations in the territory it serves. Such franchise rights are not exclusive. POWER Power and its subsidiaries were formed in 1999 to acquire, own and operate the electric generation-related assets of PSE&G pursuant to the terms of the Final Decision and Order (Final Order) issued August 24, 1999 by the BPU under the New Jersey Energy Master Plan and the New Jersey Electric Discount and Energy Competition Act (Energy Competition Act). Through its subsidiaries, Power will provide energy and capacity to PSE&G under a full requirements contract through the end of July 2002 and will also market electricity, natural gas, capacity and ancillary services throughout the Eastern United States. Power has three direct wholly-owned subsidiaries: PSEG Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy Resources & Trade LLC (ER&T). As noted previously, the results of operation of the generation business in 1999 have been reported within PSE&G in this report. ENERGY HOLDINGS Energy Holdings is the parent of three energy-related lines of business through its wholly-owned subsidiaries: PSEG Global Inc. (Global), which develops, acquires, owns and operates electric generation and distribution facilities and engages in power production and distribution, including wholesale and retail sales of electricity, in selected domestic and international markets; PSEG Resources Inc. (Resources), which invests in energy-related financial transactions and manages a diversified portfolio of investments; and PSEG Energy Technologies Inc. (Energy Technologies), an energy management company that constructs, operates and maintains heating, ventilating and air conditioning (HVAC) systems for, and provides energy-related engineering, consulting and mechanical contracting services to, industrial and commercial customers in the Northeastern and Middle Atlantic United States. Energy Holdings also has a finance subsidiary, PSEG Capital Corporation (PSEG Capital), which provides privately-placed debt financing to Energy Holdings' operating subsidiaries on the basis of a minimum net worth maintenance agreement with PSEG. Energy Holdings is also the parent of Enterprise Group Development Corporation (EGDC), a nonresidential real estate property management business and has been conducting a controlled exit from the real estate business since 1993. RISK FACTORS PSEG and its subsidiaries are affected by many issues that are generic to the electric and gas industries such as: deregulation, the unbundling of energy supplies and services and the establishment of a competitive energy marketplace for products and services (see Competitive Environment and Regulatory Issues); energy sales retention and growth potential in a mature, competitive service territory; the need to reduce operating and capital costs in a competitive environment and in light of mandated rate reductions; revenue stability and growth, including the ability to obtain adequate and timely rate relief, cost recovery, including stranded costs, and other necessary regulatory approvals (see Regulatory Issues); the ability to economically and safely operate power generation facilities in accordance with regulatory requirements (see Electric Supply and Capacity); increased capital investments attributable to environmental regulations (see Environmental Matters); nuclear decommissioning and the availability of storage facilities for spent nuclear fuel and related costs of disposal (see Electric Fuel Supply and Disposal); managing wholesale energy trading operations in conjunction with electricity production and gas supply activities, transmission and distribution systems, including commodity price fluctuations, volatility and credit risk from counterparties; limited control of minority investments; seasonality; purchasing electricity at higher prices than provided in the basic generation service rates approved by the BPU; replacing basic generation service revenues after the transition period expires in 2003; sufficient insurance coverages; managing foreign investments and electric generation and distribution operations in locations outside of the traditional utility service territory (see Foreign Operations of MD&A); political and foreign currency risks; exposure to market price fluctuations and volatility (see Qualitative and Quantitative Disclosures About Market Risk and Foreign Operations of MD&A); and debt and equity market concerns associated with these issues. 3 COMPETITIVE ENVIRONMENT OVERVIEW The regulatory structure which has historically governed the electric and gas industries in the United States and in New Jersey is in transition. Deregulation is well underway in New Jersey and in other states in the Northeast and across the United States. The deregulation and restructuring of the nation's energy markets, the unbundling of energy and related services, the diverse strategies within the industry related to holding, buying or selling generation capacity and the anticipated resulting industry consolidation will have a profound effect on PSEG and its subsidiaries, providing them with new opportunities and exposing them to new risks (see Overview of 1999 and Future Outlook of MD&A). PSE&G / POWER In response to the opening of the New Jersey electric generation market to competition, a variety of electric generators and retail energy marketers have begun operating in New Jersey and are competitors of PSE&G and Power. As of December 31, 1999, several third party suppliers (TPS) participated in the New Jersey electric generation market and gained approximately 5% of the customer load traditionally served by PSE&G. As the competitive market matures, the loss of customer load is likely to increase. As PSE&G loses customers served under the basic generation service (BGS) obligation, Power will seek to replace those lost revenues by selling generation into the wholesale marketplace. Power's success as a competitive generator will be due in part to the extent it can produce power at rates lower than the BGS contract and prevailing market prices. There is virtually no financial impact on PSE&G's transmission and distribution business due to customers choosing an alternate electric or gas supplier. For further information on regulatory changes, see Regulatory Issues. ENERGY HOLDINGS Energy Holdings and its subsidiaries are subject to substantial competition in the United States as well as in the international markets from independent power producers, domestic and multi-national utility generators, fuel supply companies, engineering companies, equipment manufacturers and affiliates of other industrial companies. Restructuring of worldwide energy markets, including the privatization of government-owned utilities and the sale of utility-owned assets, is creating opportunities for, and substantial competition from, well-capitalized entities which may adversely affect Energy Holdings' ability to make investments on favorable terms and achieve its growth objectives. Resources faces competition from numerous well-capitalized investment and finance company affiliates of banks, utilities and industrial companies. Energy Technologies faces substantial competition from energy marketers, utilities and their affiliates and HVAC and mechanical contractors. For additional information, see Energy Holdings. REGULATORY ISSUES STATE REGULATION As a New Jersey public utility, PSE&G has been subject to comprehensive regulation by the BPU including, among other matters, regulation of intrastate rates and service and the issuance and sale of securities. As a participant in the ownership of certain generation and transmission facilities in Pennsylvania, PSE&G is subject to regulation by the Pennsylvania Public Utility Commission (PPUC) in limited respects in regard to such facilities. PSEG is not subject to direct regulation by the BPU, except potentially with respect to certain transfers of control, reporting requirements and affiliate standards. Additionally, PSEG and its subsidiaries are subject to the rules and regulations of the New Jersey Department of Environmental Protection (NJDEP) and the New Jersey Department of Transportation. 4 FEDERAL REGULATION PSEG and certain of its subsidiaries' domestic operations are subject to regulation by the Federal Energy Regulatory Commission (FERC) with respect to certain matters, including interstate sales and exchanges of electric transmission, capacity and energy. PSEG has claimed an exemption from regulation by the Securities and Exchange Commission (SEC) as a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), except for Section 9(a)(2) thereof, which relates to the acquisition of 5% or more of the voting securities of an electric or gas utility company. Global's investments include exempt wholesale generators (EWGs) and foreign utility companies (FUCOs) under PUHCA. Failure to maintain status of these plants as EWGs or FUCOs could subject PSEG and its subsidiaries to regulation under PUHCA. The Public Utility Regulatory Policy Act (PURPA) provides to qualifying facilities (QFs) certain exemptions from Federal and state laws and regulations, including organizational, rate and financial regulation. Global's investments include QFs under PURPA. If any of the domestic plants in which Global has an interest lose their QF status or if amendments to PURPA are enacted that substantially reduce the benefits currently afforded QFs, PSEG could lose its exemption under PUHCA unless such generation plant was able to qualify for EWG status. In addition, actions of PSEG, PSE&G, Power, Resources, Global or Energy Technologies could cause PSEG, and its subsidiaries, to be no longer exempt from regulation under PUHCA. If PSEG were no longer exempt from PUHCA, PSEG and its subsidiaries would be subject to additional regulation by the SEC with respect to their financing and investing activities, including the amount and type of non-utility investments. PSEG believes, however, that this would not have a material adverse affect on PSEG and its subsidiaries. Construction, operation and decommissioning of nuclear generating facilities are regulated by the Nuclear Regulatory Commission (NRC). For additional information relating to regulation by the NRC, see Nuclear Operations. In addition, the Federal Emergency Management Agency is responsible for the review, in conjunction with the NRC, of certain aspects of emergency planning relating to the operation of nuclear plants. PSE&G is also subject to the rules and regulation of the Federal Environmental Protection Agency (EPA), U.S. Department of Transportation (DOT) and U.S. Department of Energy (DOE). Additionally, Global is subject to the rules and regulations of the EPA, DOT and DOE in the operation of its domestic generation facilities. For information on environmental regulation, see Environmental Matters. PSE&G ----- NEW JERSEY ENERGY MASTER PLAN PROCEEDINGS AND RELATED ORDERS In January 1999, the State Legislature passed the Energy Competition Act which was signed into law on February 9, 1999. Following the passage of the Energy Competition Act, the BPU rendered its summary decision relating to PSE&G's rate unbundling, stranded costs and restructuring proceedings (Summary Order) on April 21, 1999 and subsequently issued its Final Order in these matters on August 24, 1999. The Energy Competition Act and the related BPU proceedings are referred to herein as the Energy Master Plan Proceedings. For discussion of the extraordinary charge to earnings recorded as a result of the deregulation of PSE&G's generation business, see Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation of Notes to Consolidated Financial Statements (Notes). Among other things, the Energy Competition Act provides that all New Jersey retail electric customers may select their electric supplier commencing August 1, 1999 and all New Jersey retail gas customers may select their gas suppliers commencing January 1, 2000, thus fully opening the New Jersey energy markets to customer choice and competition. Following the restructuring of the energy industry, PSE&G's distribution business and transmission business will continue to be regulated by the BPU and FERC, respectively. THE FINAL ORDER PROVIDED FOR THE FOLLOWING: ------------------------------------------- TRANSITION PERIOD o A four-year transition period from August 1, 1999 through July 31, 2003. During this transition period, rates for services provided by PSE&G are capped for all electric customers. 5 RATE REDUCTIONS o In addition, through July 2003, electric customers will receive the following rate reductions from those rates in effect on July 31, 1999: Effective Date Amount of Rate Reduction -------------- ------------------------ August 1, 1999: 5% At the time of securitization: increasing to 7% (minimum) August 1, 2001: increasing to 9% (minimum) August 1, 2002: increasing to 13.9% average (10% off rates in effect in April 1997) The BPU conditioned the second and third incremental rate reductions upon implementation of securitization (which has been delayed by the appeals discussed below). The BPU further determined that the final aggregate rate reduction of 13.9% on August 1, 2002 is required by the Energy Competition Act and is not contingent on the implementation of securitization. SHOPPING CREDITS o Shopping credits (credits which a customer electing a new supplier of electricity will receive from PSE&G) have been established for the transition period and include the cost of energy, capacity, transmission, ancillary services, losses, taxes and a retail adder. The average overall credits will be as follows: 1999: 4.95 cents per kilowatt hour (kWh) 2000: 5.03 cents per kWh 2001: 5.06 cents per kWh 2002: 5.10 cents per kWh 2003: 5.10 cents per kWh STRANDED COSTS o The BPU concluded that PSE&G should be provided the opportunity to recover up to $2.94 billion (net of tax) of its generation-related stranded costs, through securitization of $2.4 billion (discussed below) and an opportunity to recover up to $540 million (net of tax) of its unsecuritized generation-related stranded costs on a present value basis. The $540 million is subject to recovery by various means, including an explicit market transition charge (MTC). o PSE&G was directed to use the overrecovered balance in the Levelized Energy Adjustment Clause (LEAC) as of July 31, 1999 as a mitigation tool for stranded cost recovery associated with non-utility generation (NUG) contracts. PSE&G applied the overrecovery as a credit to the starting deferred balance of the non-utility generation market transition charge (NTC) to offset future above market costs and/or contract buyouts otherwise recoverable from ratepayers. SECURITIZATION o The BPU determined that it would issue an irrevocable Bondable Stranded Costs Rate Order (Finance Order) upon PSE&G's request providing for the issuance of up to $2.525 billion of transition bonds, with a scheduled amortization upon issuance of 15 years, representing $2.4 billion of generation-related stranded costs (net of tax) and an estimated $125 million of transaction costs. A transition bond charge will be collected from all existing and future electric customers via a single per kWh "wires charge" subject to adjustment at least annually. o The BPU determined that the taxes related to securitization, which reflect the grossed up revenue requirements associated with the $2.4 billion in generation-related stranded costs (net of tax) being securitized, are recoverable stranded costs. The BPU determined that such taxes should not be collected 6 through the transition bond charge; rather, such taxes will be collected via a separate MTC. The duration of this separate MTC is to be identical to the duration of the transition bond charge. o The net proceeds of securitization are required to be used to refinance or retire certain of PSE&G debt and/or equity in a manner that will not substantially alter PSE&G's overall capital structure. SALE OF GENERATION-RELATED ASSETS o The BPU directed PSE&G to sell its generation plants to an affiliate of PSEG for $2.443 billion plus the net book value of other generation-related assets and liabilities transferred at the time of sale, such as fuel and materials and supplies. When the transaction is completed, PSE&G and Power will record the difference between the net book value of the generation plants and the $2.443 billion of sale proceeds as an increase and decrease to contributed capital, respectively. o The BPU further directed that any gains resulting from any subsequent sale of the generation-related assets to a third party which occurs before August 1, 2004 must be shared equally between ratepayers and shareholders. For further discussion, see Generation-Related Asset Sale to Power. BASIC GENERATION SERVICE o PSE&G is obligated to provide BGS to customers who do not choose another electric supplier and to serve as the supplier of last resort to all customers. PSE&G will contract with ER&T to provide the energy and capacity required to meet its BGS and Off-Tariff Rate Agreements (OTRA) obligations for the first three years of retail choice (see Generation-Related Asset Sale to Power). PSEG, PSE&G and Power are prohibited from promoting such service as a competitive alternative to other electricity suppliers and marketers. The contract to provide capacity and energy for BGS will be competitively bid for the year beginning August 1, 2002 and thereafter. Any payments to PSE&G resulting from the BGS supply contract being bid out will be applied to the deferred societal benefit costs balance for purposes of establishing the societal benefit clause (SBC) rate in the year beginning August 1, 2003. SOCIETAL BENEFIT CLAUSE AND NON-UTILITY GENERATION MARKET TRANSITION CLAUSE o Societal benefit costs and stranded costs associated with NUG contracts will be collected through separate charges. Both charges will remain constant throughout the four-year transition period and PSE&G will use deferral accounting, including interest on any over/underrecoveries. The charges will be reset annually thereafter. The NTC charge will be initially set at the 1999 level of $183 million annually. Any NUG contract buyouts will also be charged to the NTC and will be subject to deferral accounting. The SBC will include costs related to: 1) social programs which include the universal service fund; 2) nuclear plant decommissioning; 3) demand side management (DSM) programs (see Other Regulatory Issues); 4) manufactured gas plant remediation; and 5) consumer education. ELECTRIC DISTRIBUTION DEPRECIATION o PSE&G was directed by the BPU to record a regulatory liability by reducing its depreciation reserve for its electric distribution assets by $569 million. This regulatory liability will be amortized over the period from January 1, 2000 to July 31, 2003. INVESTMENT TAX CREDITS (ITC) o The BPU directed PSE&G to seek a private letter ruling from the Internal Revenue Service (IRS) to determine if the ITC included in the impairment write-down of generation assets, which amounted to $235 million, can be credited to customers without violating the tax normalization rules of the Internal Revenue Code. If the IRS's private letter ruling determines that the ITC could be passed on to PSE&G's customers without violating the IRS's normalization rules, then in the fourth year of the transition period, the BPU will consider any action which it may deem appropriate regarding the treatment of the ITC, giving 7 consideration to the issues resolved in the Final Order and other relevant matters. PSE&G accounted for the ITC as a reduction to the extraordinary charge recorded in 1999. An adverse resolution to this matter would result in an additional extraordinary charge to income up to the amount of the ITC, which would likely have a material adverse impact on PSEG's and PSE&G's financial condition, results of operations and net cash flows. However, based on PSE&G's analysis, an adverse outcome does not appear to be likely. SECURITIZATION FILING AND FINANCE ORDER On September 17, 1999, the BPU issued its Finance Order to authorize, among other things, the imposition of a non-bypassable transition bond charge on PSE&G's customers; the sale of PSE&G's property right in such charge to a bankruptcy-remote financing entity; the issuance and sale of $2.525 billion of transition bonds by such entity as consideration for such property right, including an estimated $125 million of transaction costs; and the application by PSE&G of the transition bond proceeds to retire outstanding debt and/or equity. PSE&G Transition Funding LLC, a wholly owned subsidiary of PSE&G, was created to issue such transition bonds. Assuming a favorable decision on the appeals discussed below, PSEG and PSE&G expect such sale of transition bonds and the receipt of proceeds in 2000. APPEALS In October and November 1999, two appeals of the BPU's Final Order and two appeals of the Finance Order were filed in the Appellate Division of the New Jersey Superior Court on behalf of several customers. The Court granted PSE&G's requests to accelerate the appeals and ordered that the matters be consolidated. All briefs have been filed and oral arguments on the consolidated matters have been set for March 8, 2000. While PSEG and PSE&G believe that the appeals are without merit, no assurances can be given at this time as to the timing or outcome of these proceedings. Accordingly, neither PSEG nor PSE&G are able to predict whether such appeals will have a material adverse effect on their financial condition, results of operations or net cash flows. GENERATION-RELATED ASSET SALE TO POWER It is anticipated that Power will acquire and manage PSE&G's electric generation-related assets. The appeal which has been filed challenging the Final Order has delayed this transaction. PSEG and PSE&G expect such sale will occur later in 2000, upon a favorable conclusion of the appeal process. Certain regulatory approvals are required prior to the sale of the generation-related assets to Power. Power has made the necessary filings and is awaiting final approval from the NJDEP to transfer certain liabilities and the PPUC to transfer PSE&G's assets in Pennsylvania. Additionally, in October 1999, Nuclear and Fossil filed with the FERC for EWG status. In September 1999, FERC approved PSE&G's proposed sale of its generating units to Power and its subsidiaries, conditionally accepted a number of other agreements between Power and certain counterparties and directed Power to make amendments to its filing clarifying certain other proposals. In February 2000, NRC approval was gained to transfer PSE&G's nuclear licenses to Nuclear, conditioned upon BPU approval. METERING, BILLING AND ACCOUNT SERVICES In accordance with the Energy Competition Act, the BPU has initiated a proceeding to determine the timeline and extent to which metering, billing and customer services may become competitive services. To accomplish this, the BPU conducted a series of workshops in 1999 to define the issues and functions that must be considered when it evaluates the issue of competition for these services. A formal proceeding is expected to begin in early 2000. GENERIC ISSUES In 1999, the BPU issued a series of interim orders that decided generic issues related to the deregulation of the electric and gas industries in New Jersey. These orders addressed environmental disclosure standards, energy aggregation program standards, anti-slamming standards, retail choice consumer protection standards and licensing and registration standards applicable to all energy service providers. In February 2000, the BPU orally approved affiliate standards and fair competition standards which apply to transactions between a public utility and its affiliates which provide, or offer, competitive services to retail customers in New Jersey. The official version of these standards will be attached to a BPU order adopting the standards. 8 GAS UNBUNDLING The Energy Competition Act also required that all customers have the ability to choose a competitive gas supplier by January 1, 2000. On April 30, 1999, PSE&G submitted its required gas unbundling compliance filing to the BPU. On January 10, 2000, the BPU verbally approved PSE&G's stipulation regarding its gas unbundling filing with certain modifications. The main features of the gas unbundling are: o The development of a SBC to recover specific costs including, social programs, DSM, Remediation Adjustment Clause (RAC) and consumer education. o The development of a Realignment Adjustment Charge to recover lost revenues incurred by PSE&G (subject to certain criteria) as a result of customers switching from commodity service to transportation service. o The reallocation of approximately $40 million from transportation rates to commodity and balancing rates. o An incentive of approximately 0.9 cents per therm for all customers who leave PSE&G to shop with a TPS. An additional incentive of 1.4 cents per therm for residential customers who leave PSE&G to shop with a TPS. o PSE&G must propose a daily delivery option to the current monthly based balancing mechanism to be in place prior to the next winter season. OTHER REGULATORY ISSUES ENERGY EFFICIENCY AND RENEWABLE ENERGY (FORMERLY DSM) The BPU adopted rules in 1991 to encourage utilities to offer DSM-related load management and conservation services. These rules were re-adopted in 1996 and are designed to treat DSM programs on equal regulatory footing with supply side or energy production investments. The Energy Competition Act requires the continuation of these energy efficiency programs and the initiation of renewable energy programs, the costs of which are to be recovered through an SBC charge on all electric and gas customers' bills. On June 9, 1999, the BPU initiated the Comprehensive Resource Analysis (CRA) proceeding causing a comprehensive resource analysis of energy programs to be undertaken including the reevaluation of existing DSM programs and the incorporation of new energy efficiency and renewable energy programs. Key to the CRA proceeding is the determination of the appropriate level of funding for energy efficiency and renewable energy programs on a statewide basis. Hearings were conducted in November 1999 and a record was established that would permit the BPU to render decisions for each New Jersey utility in lieu of settlements, if necessary. PSE&G filed its proposed CRA plan with the BPU on August 23, 1999. On October 1, 1999, the BPU approved the PSE&G 1999 Interim Demand Side Management Plan which was filed in June 1998. This Plan was proposed as an interim plan to facilitate the continuation of DSM programs until replaced by the energy efficiency and renewable energy programs anticipated to be approved in the CRA proceeding. NON-UTILITY GENERATION BUYDOWN Under Federal and State regulations, utilities were required to enter into long-term power purchase agreements with NUGs at prices which have subsequently proven to be above market. PSE&G is seeking to restructure certain of its BPU approved contracts with NUGs, which were estimated to be $1.6 billion above assumed future market prices. In July 1999, PSE&G announced an agreement to amend one such NUG contract, yielding a cost reduction of up to $100 million over the remaining 20 years of the contract. In September 1999, the agreement was approved by the BPU and the costs to restructure this contract will be recovered through the NTC. TAX SHARING AGREEMENT The issue of PSEG sharing the benefits of consolidated tax savings with PSE&G or its customers was addressed by the BPU in 1995 in a letter which informed PSE&G that the issue of consolidated tax savings can be discussed in 9 the context of its next base rate case or plan for an alternative form of regulation. PSEG believes that PSE&G's taxes should be treated on a stand-alone basis for rate making purposes, based on the separate nature of the utility and non-utility businesses. However, neither PSEG nor PSE&G is able to predict what action, if any, the BPU may take concerning consolidated tax savings in future proceedings. ENERGY HOLDINGS Energy Holdings is not subject to direct regulation by the BPU, except for reporting requirements, affiliate standards and power purchase agreements. However, as a result of the 1992 focused audit of PSEG's non-utility businesses (Focused Audit), PSEG agreed, among other things, that it would not permit the non-utility assets of Energy Holdings to exceed 20% of PSEG's consolidated assets without prior notice to the BPU and that it would make a good faith effort to eliminate its net worth maintenance agreement with PSEG Capital by 2003. At December 31, 1999, such assets were approximately 22% of PSEG's consolidated assets and PSEG Capital's outstanding debt was $630 million, with maturities through 2003. For additional information, see Liquidity and Capital Resources of MD&A. INTERNATIONAL REGULATION Energy Holdings' foreign distribution companies are subject to varying amounts of regulation in the countries in which they operate. Global's electric and gas distribution facilities in South America are rate-regulated enterprises. Rates charged to customers are established by governmental authorities and are currently sufficient to cover all operating costs and provide a fair return. Energy Holdings can give no assurances that future rates will be established at levels sufficient to cover such costs, provide a return on its investment or generate adequate cash flow to pay principal and interest on its debt or to enable it to comply with the terms of debt agreements. Global's Latin American facilities are also subject to quality of service standards. Global intends to implement capital improvement budgets which will attempt to meet these standards. Failure to meet required standards would result in penalties which are not expected to have a material impact on these investments, although no assurances can be given. Certain generation projects are also subject to rate regulation. Global is also subject to foreign environmental rules and regulations. CUSTOMERS PSE&G As of December 31, 1999, PSE&G provided service to approximately 1.9 million electric customers and 1.6 million gas customers. For the year ended December 31, 1999, PSE&G's operating revenues aggregated $5.89 billion, of which 71% was from its electric operations and 29% from its gas operations. PSE&G's business is weather sensitive and seasonal in that sales of electricity are higher during the summer months because of air conditioning requirements and sales of gas are greater in the winter months due to the use of gas for space-heating purposes. PSE&G does not rely upon a single customer or group of customers for a significant portion of its revenues. For a breakdown of electric revenues between the generation, energy resources and trade and transmission and distribution businesses of PSE&G, see Note 16. Financial Information by Business Segments of Notes. POWER Power will sell generation and capacity to PSE&G through the BGS contract, into the wholesale power market (including PJM Interconnection, L.L.C. (PJM) and other power pools) and through bilateral contracts. It is expected that, in the near term, PSE&G will be Power's most significant customer in that under the BGS contract, Power is obligated to supply all of PSE&G's energy and capacity requirements through July 31, 2002. For the period beginning August 1, 2002 and thereafter, the BGS contract will be bid out by PSE&G. If Power is not the successful bidder, Power will have to replace lost revenues from the BGS contract by entering into other bilateral supply contracts and selling into the wholesale power markets. 10 ENERGY HOLDINGS GLOBAL Through its ownership interests in six distribution companies, Global provides electricity to over 2.7 million customers in Brazil, Argentina, Peru and Chile. Also, through its ownership interests in 19 operating generating projects in the United States, Asia and South America totaling 2,002 megawatts (MW) (535 MW, net), Global sells energy, capacity and ancillary services to a number of customers through purchase power agreements (PPAs) as well as into the wholesale power marketplace. RESOURCES Resources primarily makes passive investments in energy related projects. Current investments include leveraged leases, leveraged buyout (LBO) Funds, limited partnerships and securities. Resources has no customers. ENERGY TECHNOLOGIES Energy Technologies provides energy-related services for industrial and commercial customers in the Northeastern and Middle Atlantic United States. Energy Technologies currently provides such services to approximately 13,000 customers. PSE&G / POWER ELECTRIC SUPPLY AND CAPACITY The nature of the supply and capacity markets are changing due to deregulation in various states and FERC initiatives. The resulting development of new markets has increased volatility and risks and also has created opportunities for PSEG. Power will seek to pursue growth opportunities through expansion of its capacity, acquisitions, in whole or in part, of existing fossil plants and formation of partnerships with independent power producers in the region. Power will employ a disciplined approach to growth (see Note 11. Commitments and Contingent Liabilities of Notes). Power's growth strategy is designed to increase its generating portfolio 3,000 MW to 5,000 MW over the next five years. As Power continues to acquire generating capacity in the region, Power will utilize its wholesale marketing, trading and risk management capabilities, together with its growing asset base, to expand its wholesale marketing and trading volume. Once the anticipated sale of PSE&G's generation-related assets to Power is complete in 2000, the supply of electricity for PSE&G will continue to be provided by Power under a BGS contract through, at least, July 31, 2002. Power's supply of electricity will come from owned capacity and purchases from power pools, such as PJM, and through bilateral contract arrangements. ELECTRIC GENERATING CAPACITY Fuel sources for the generating assets are split among natural gas (33%), nuclear (28%), coal (20%), fuel oil (17%) and pumped storage (2%) on a capacity basis. This generating asset portfolio represents a strategic mix among all market segments consisting of 35% base load, 36% load following and 29% peaking units. The capacity available at any time may be less than the installed capacity because of temporary outages for inspection, maintenance, repairs, legal and regulatory requirements including environmental constraints or unforeseen circumstances. The maximum one-hour demand (peak load), which PSE&G experienced in 1999, which is also the all time peak load, was 9,804 MW, which occurred on July 6, 1999, when the day's output was 199,127 megawatt-hours (mWh) of electricity. For additional information, see Item 2. Properties--PSE&G--Electric Generation Properties. 11 PSE&G's demand for electricity will come from PSE&G's retail customers to whom PSE&G will continue to provide basic generation service. PSE&G expects to be able to continue to meet the demand for electricity on its system through its contract with Power. However, if periods of unusual demand should coincide with outages of equipment, PSE&G could find it necessary at times to reduce voltage or curtail load in order to safeguard the continued operation of its energy delivery systems. PJM INTERCONNECTION, L.L.C. (PJM) PSE&G is a member of PJM and participates on the PJM Members Committee as part of its governance structure. The PJM Office of Interconnection (PJM OI) administers the open-access transmission tariff for the PJM power pool and operates the centrally dispatched bid-based energy market for the PJM region, including sections of Pennsylvania, New Jersey, Delaware, Maryland, Virginia and the District of Columbia. The PJM electric system is interconnected with other major electric utility companies in the eastern half of the United States. The PJM area of the power grid is operated as one system to provide increased reliability and assure adequate supply of electricity. PSE&G's output, as shown under Electric Fuel Supply and Disposal, reflects significant amounts of purchased power. Electricity is purchased from other sources for various reasons, including those times when demand exceeds available capacity or when it is more economic to purchase then generate. As of April 1, 1999, FERC lifted the requirement that bids for electric energy offered for sale in the PJM interchange energy market not exceed the variable cost of producing such energy. However, transactions that are bid into the PJM pool are now capped at $1,000 per mWh. All power providers are paid the locational marginal price (LMP) set through power providers' bids. The LMP will be higher in congested areas reflecting the price bids of those higher cost generating units that are dispatched to supply demand and alleviate the transmission constraint. Furthermore, in the event that all available generation within the PJM control area is insufficient to satisfy demand, PJM may institute emergency purchases from adjoining regions. The cost of such emergency purchases is not subject to any PJM price cap. Since the LEAC was discontinued as of August 1, 1999, to the extent PSEG's generation business provides less energy than required to supply PSE&G's BGS and OTRA customers, the lifting of such caps would present additional risks with respect to the difference between the cost of such purchases and the BGS rate. Transmission constraints have and will affect energy pricing when the PJM system is congested. For further discussion of price volatility of electricity, see Qualitative and Quantitative Disclosures About Market Risk. On June 7, 1999, the FERC issued an Order establishing procedures for the interconnection of new generation projects in PJM. Pursuant to the FERC-approved queuing process contained in the proposal, PSE&G has established a favorable position in the queue for its planned generation capacity expansion projects. The June 7, 1999 FERC Order has been appealed by other parties to the D.C. Circuit Court of Appeals. PSE&G cannot predict the outcome of this appeal. On December 29, 1999, PJM filed amendments to its Tariff and to the Operating Agreement to provide interconnection customers that have cost responsibility for the construction of transmission facilities or upgrades necessary to accommodate their interconnection requests with rights to Incremental Fixed Transmission Rights and to set forth the process for assigning such rights. Incremental Fixed Transmission Rights are created by the addition of new transmission facilities or upgrades resulting from accommodation of an Interconnection Request. At this time the FERC has not yet issued a decision related to this filing. On December 15, 1999, FERC promulgated a Final Rule ("Order 2000") in the Regional Transmission Organization ("RTO") rulemaking proceeding, which had been instituted on May 12, 1999. The provisions of Order 2000 are for the most part, very similar to those of the proposed rulemaking. It appears that the current structure and procedures of the PJM Independent System Operator are largely in compliance with the requirements of Order 2000. Order 2000 does not permit transmission owners such as PSE&G to file for changes in rate design for transmission service, but it does allow transmission owners to establish their own revenue requirements. PSE&G has filed a request for rehearing of certain provisions of Order 2000, and it is expected that other entities may file requests as well. The ultimate outcome of such requests, and possible court challenges to Order 2000, cannot be predicted. 12 OTHER POWER MARKETS Recently, PSE&G has become an active participant in the wholesale electricity markets in each of the two other Independent System Operator organizations in the eastern United States, the New York ISO and the ISO New England. A major step in establishing a multi-pool diversity was achieved on October 6, 1999 when Power reached an agreement to acquire Niagara Mohawk Power Corporation's Albany Steam Station located in New York. PSE&G is actively following the development of the New York ISO. NUCLEAR OPERATIONS PSE&G has an ownership interest in five nuclear generating units and operates three of them, the Salem Nuclear Generating Station, Units 1 and 2 (Salem 1 and 2), and the Hope Creek Nuclear Generating Station (Hope Creek). PECO Energy Company (PECO Energy) operates the Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom 2 and 3). Operation of nuclear generating units involves continuous close regulation by the NRC. Such regulation involves testing, evaluation and modification of all aspects of plant operation in light of NRC safety and environmental requirements. Continuous demonstrations to the NRC that plant operations meet requirements are also necessary. The NRC has the ultimate authority to determine whether any nuclear generating unit may operate. For 1999, PSE&G's nuclear units achieved an average capacity factor of approximately 87%. Refueling outages, which have been reduced in duration due to operating efficiencies, are expected to last for approximately five to six weeks and are scheduled for Salem 2, Hope Creek and Peach Bottom 2 in 2000. Salem 1 and 2 completed their latest planned refueling and maintenance outages in October and May 1999, respectively; Hope Creek completed its latest planned refueling and maintenance outage in March 1999; and Peach Bottom 3 completed a scheduled refueling and maintenance outage in October 1999. Historically, planned outages of nuclear units caused PSE&G to incur replacement energy costs of approximately $4 million to $6 million per month for a Salem or Peach Bottom unit or $8 million to $10 million per month for Hope Creek. These costs vary greatly depending upon the time of year an outage occurs since times of higher demand will cause prices to rise significantly. Over the past few years, price volatility has increased due to the evolving energy commodity market place. Commensurate with the discontinuation of the LEAC, the difference between energy revenues and energy costs impact earnings. To mitigate this risk, ER&T enters into contracts to hedge anticipated demand (see Qualitative and Quantitative Disclosures About Market Risk in MD&A for further discussion). SALEM Salem consists of two 1,106 MW pressurized water nuclear reactors (PWR) located in Salem County, New Jersey on the Delaware River. PSE&G owns 42.59% of the Salem units and operates them on behalf of itself and three other owners: PECO Energy--42.59%; Atlantic City Electric Company (ACE)--7.41%; and Delmarva Power & Light Company (DP&L)--7.41%. In March 1998, ACE and DP&L merged to become Conectiv. In September 1999, Power entered into a contract to purchase Conectiv's interest in Salem. Once the sale of this interest is complete, PSEG will own 57.41% of Salem (see Note 11. Commitments and Contingent Liabilities of Notes). Each Salem unit represents approximately 5% of PSE&G's installed electric generating capacity. For 1999, Salem achieved an average capacity factor of approximately 82%. For certain litigation relating to Salem, see Item 3. Legal Proceedings. For information on the operating performance standard applicable to Salem, see Note 11. Commitments and Contingent Liabilities of Notes. For discussion of the lawsuit by PSE&G and the other co-owners of Salem seeking to recover damages for the costs of replacing the steam generators at Salem 1 and 2, see Item 3. Legal Proceedings. For discussion of the 1994 NJPDES permit related to Salem and its operations, see Water Pollution Control. 13 HOPE CREEK Hope Creek consists of one 1,031 MW boiling water nuclear reactor (BWR) located in Salem County, New Jersey on the Delaware River adjacent to Salem. PSE&G owns 95% of Hope Creek and operates the unit on behalf of itself and Conectiv, which owns the remaining 5%. In September 1999, Power entered into a contract to purchase Conectiv's interest in Hope Creek. Once the sale of this interest is complete, PSEG will own 100% of Hope Creek (see Note 11. Commitments and Contingent Liabilities of Notes). Hope Creek represents approximately 10% of PSE&G's installed electric generating capacity. For 1999, Hope Creek achieved an average capacity factor of approximately 85%. PEACH BOTTOM Peach Bottom consists of two 1,093 MW BWRs located in southeastern Pennsylvania. PECO Energy owns 42.49% of the Peach Bottom units and operates them on behalf of itself and three other owners: PSE&G--42.49%; ACE--7.51%; and DP&L--7.51%. Power and PECO Energy have each contracted to purchase one-half of Conectiv's interest in Peach Bottom. Once the sale of this interest is complete, PSEG and PECO Energy will each own 50% of Peach Bottom (see Note 11. Commitments and Contingent Liabilities of Notes). Each Peach Bottom unit represents approximately 5% of PSE&G's installed electric generating capacity. For 1999, Peach Bottom achieved an average capacity factor of approximately 94%. NUCLEAR DECOMMISSIONING In accordance with Federal regulations, utilities owning an interest in nuclear generating facilities are required to determine the costs and funding methods necessary to decommission such facilities upon termination of operation. As a general practice, each nuclear utility places funds in independent external trust accounts it maintains to provide for decommissioning. PSE&G currently recovers from its customers the amounts paid into the trust fund each year. The Energy Master Plan continues this treatment. Also, Power will receive the portion of Conectiv's Nuclear Decommissioning Trust (NDT) Fund related to the additional interests in Salem, Hope Creek and Peach Bottom units being purchased. For information concerning nuclear decommissioning costs and the Energy Master Plan Proceedings, see Regulatory Issues and Note 12. PSE&G Nuclear Decommissioning of Notes. ELECTRIC FUEL SUPPLY AND DISPOSAL The following table indicates PSE&G's mWh output by source of energy in 1999 and the estimated output by PSE&G / Power for 2000. In addition, PSE&G will purchase power under various NOG contracts and sell such power into the wholesale market with the costs and proceeds applied to the NTC. ACTUAL ESTIMATED SOURCE 1999 2000 (A) - ------------------------------------------ -------------- --------- Nuclear: New Jersey facilities............... 32% 43% Pennsylvania facilities............. 18% 20% Fossil: Coal: New Jersey facilities............... 11% 14% Pennsylvania facilities............. 13% 16% Natural Gas......................... 6% 6% Oil(B) ............................. -- 1% Net PJM Interchange and Purchases From Utilities and NUGs 20% -- -------------- --------- Total ........................ 100% 100% ============== ========= (A) No assurances can be given that actual output will match estimates. (B) Oil generation for 1999 was less than 1%. 14 NUCLEAR FUEL PSE&G has several long-term contracts with uranium ore operators, converters, enrichers and fabricators to meet the currently projected fuel requirements for Salem and Hope Creek. PSE&G has been advised by PECO Energy that it has similar contracts to satisfy the fuel requirements of Peach Bottom. Currently, there is an adequate supply of nuclear fuel for Salem, Hope Creek and Peach Bottom. For a discussion of issues related to disposal of spent nuclear fuel and related litigation, see Nuclear Fuel Disposal and Note 11. Commitments and Contingent Liabilities of Notes. COAL Approximately 50% and 35% of PSE&G's coal supply for its New Jersey facilities is obtained under contracts which expire on December 31, 2000 and December 31, 2001, respectively. The balance of the supply is contracted annually from various suppliers, supplemented by spot market purchases. PSE&G does not presently anticipate any difficulties in obtaining adequate coal supplies. PSE&G owns approximately 23% of the Keystone and Conemaugh coal-fired generating stations located in western Pennsylvania and operated by Sithe Energies, Inc. The Keystone Conemaugh Projects Office, which performs project administration at these plants on a day to day basis, has advised PSE&G that it does not presently anticipate any difficulties in obtaining adequate coal supplies through long-term contracts and spot market purchases. NATURAL GAS PSE&G utilizes natural gas available from various spot and short-term gas contracts for electric generation. PSE&G does not presently anticipate any difficulties in obtaining adequate natural gas supplies. OIL PSE&G uses residual oil in its conventional fossil-fired, steam-electric units which is purchased in the spot market. PSE&G uses distillate fuel in its combustion turbines which is also acquired by spot market purchases. PSE&G does not presently anticipate any difficulties in obtaining adequate oil supplies. NUCLEAR FUEL DISPOSAL After spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Under the Nuclear Waste Policy Act of 1982 (NWPA), as amended, the Federal government has entered into contracts with utilities operating nuclear power plants for transportation and ultimate disposal of the spent fuel and mandated that the nuclear utilities contribute to a Nuclear Waste Fund at a rate of one mill per kWh of nuclear generation, subject to such escalation as may be required to assure full cost recovery by the Federal government. In addition, a one-time payment was made to the DOE for permanently discharged spent fuels irradiated prior to 1983. Payments made to the DOE for disposal costs are based on nuclear generation and are included in Electric Energy Costs in the Statements of Income. Until August 1, 1999, these costs were recovered through the LEAC. Thereafter, PSE&G and Power bear the risks of nuclear fuel disposal costs. The Federal government's present policy is that spent nuclear fuel will be accepted for storage and disposal at government-owned and operated repositories. However, at present, no such repositories are in service. DOE construction of a permanent disposal facility has not begun and DOE has announced that it does not expect a facility to be available earlier than 2010. For a discussion of legislation regarding a centralized interim spent fuel storage facility, see Note 12. PSE&G Nuclear Decommissioning of Notes. Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be stored in reactor facility storage pools or in independent spent fuel storage installations located at or away-from-reactor sites for at least 30 years beyond the licensed life for reactor operation (which may include the term of a revised or renewed license). As a result of reracking the two spent fuel pools at Salem, the availability of adequate spent fuel storage capacity is estimated through 2012 for Salem 1 and 2016 for Salem 2, prior to losing an operational full core discharge reserve. The Hope 15 Creek pool is also fully racked and it is expected to provide storage capacity until 2008, prior to losing an operational full core discharge reserve. PSE&G is currently assessing available options which could satisfy the potential need for additional storage capacity, including the option of constructing an on-site storage facility that would satisfy the spent fuel storage needs of both Salem and Hope Creek. PECO Energy has advised PSE&G that spent fuel racks at Peach Bottom have storage capacity until 2000 for Peach Bottom 2 and 2001 for Peach Bottom 3, prior to losing full core discharge reserve capability. PECO Energy is constructing an on-site dry storage facility at Peach Bottom which it has advised is expected to be operational in 2000 to provide additional storage capacity. In 1998, legislation which would have the DOE establish a centralized interim spent fuel storage facility was introduced in Congress. However, Congress ultimately elected not to consider this legislation, and whether or not similar legislation will be considered in the future is unknown. In litigation brought by PSE&G, 40 other utilities and many state and local governments, the United States Court of Appeals for the District of Columbia Circuit reaffirmed DOE's unconditional obligation to begin spent fuel acceptance by January 31, 1998. In November 1997, the court ruled that the utilities had fulfilled their obligations under their respective contracts with DOE by contributing to the Nuclear Waste Fund. The court further ruled that DOE's argument of unavoidable delay to meet its obligation was without merit. However, the court did not order DOE to commence spent fuel acceptance by January 31, 1998; instead, it decided that the standard contract provided a potentially adequate remedy in the form of payment of damages if DOE failed its obligations. In May 1998, the court denied a petition to order DOE to begin spent fuel acceptance immediately and declare that the utilities are allowed to escrow their Nuclear Waste Fund fees until DOE begins spent fuel acceptance. Following this decision, DOE offered a proposal to settle issues related to its failure to meet its obligation, which the utilities unanimously rejected. Some utilities have initiated litigation against DOE to recover damages and this option, among others, is currently being considered by PSE&G. No assurances can be given as to any damage recovery or the ultimate availability of a facility. URANIUM ENRICHMENT DECONTAMINATION AND DECOMMISSIONING FUND In accordance with the National Energy Policy Act of 1992 (EPAct), domestic utilities that own nuclear generating stations are required to pay into a decontamination and decommissioning fund, based on their past purchases of U.S. government enrichment services. These amounts are being collected over a period of 15 years. Under this legislation, PSE&G's obligation for the nuclear generating stations in which it has an interest is $72 million (adjusted for inflation). Since 1993, PSE&G has paid $37 million, resulting in a balance due of $35 million. PSE&G believes that it should not be subject to collection of any such fund payments under EPAct. Along with other nuclear generator owners, PSE&G has filed suit in the U.S. Court of Claims and in the U.S. District Court, Southern District of NY to recover these costs. LOW LEVEL RADIOACTIVE WASTE (LLRW) As a by-product of their operations, nuclear generating units produce LLRW. Such wastes include paper, plastics, protective clothing, water purification materials and other materials. LLRW materials are accumulated on site and disposed of at licensed permanent disposal facilities. PSE&G, through its affiliation with the Northeast Compact Commission, is currently in negotiations with a task force established by South Carolina to ensure access to the Barnwell LLRW disposal facility, which is the primary disposal site used by PSE&G. Both PSE&G and PECO Energy have on-site LLRW storage facilities for Peach Bottom, Salem and Hope Creek which has the capacity for at least five years of temporary storage. GAS OPERATIONS AND SUPPLY PSE&G supplies its gas customers principally with natural gas. PSE&G supplements natural gas with purchased refinery/landfill gas and liquefied petroleum gas produced from propane. The adequacy of supply of all types of gas is affected by the nationwide availability of all sources of fuel for energy production. 16 As of December 31, 1999, the daily gas capacity of PSE&G was as follows: TYPE OF GAS THERMS PER DAY ---------------------------------------- --------------------------- Natural gas............................. 22,630,990 Liquefied petroleum gas................. 2,200,000 Refinery/landfill gas................... 323,000 ---------- Total........................... 25,153,990 ========== About 40% of the daily gas capacity is firm transportation which is available every day of the year. The remainder comes from field storage, liquefied natural gas, seasonal sales, contract peaking supply, propane and refinery/landfill gas. PSE&G's total gas sold to and transported for its various customer classes in 1999 was 3.9 billion therms. Included in this amount is 1.1 billion therms of gas delivered to customers under PSE&G's transportation tariffs and individual cogeneration contracts. During 1999, PSE&G purchased approximately 3.3 billion therms of gas for its combined gas and electric operations directly from natural gas producers and marketers. These supplies were transported to New Jersey by four interstate pipeline suppliers. The majority of PSE&G's gas transportation and supply contracts expire at various times over the next 10 years. Since the quantities of gas available to PSE&G under its supply contracts are more than adequate in warm months, PSE&G nominates part of such quantities for storage, to be withdrawn during the winter season under storage contracts with its principal suppliers. Underground storage capacity currently is approximately 750 million therms. PSE&G does not presently anticipate any difficulty in obtaining adequate supplies of natural gas. Substantially all of PSE&G's gas sales are made under rates which are currently designed to permit the recovery of projected increases in the cost of gas when compared to levels included in base rates. Different rate structures could be implemented in the future as part of gas industry restructuring in New Jersey. For more information on gas regulation, see Regulatory Issues--Gas Unbundling. The demand for gas by PSE&G's customers is affected by customer conservation, economic conditions, weather, the price relationship between gas and alternative fuels and other factors not within PSE&G's control. Rates for gas sold in interstate commerce are not subject to cost of service ratemaking but are subject to market forces. PSE&G buys gas from producers, marketers, unregulated marketing affiliates of interstate pipeline companies and others. PSE&G was able to meet all of the demands of its firm customers during the 1998-1999 winter season and expects to continue to meet such energy-related demands of its firm customers during the 1999-2000 and 2000-2001 winter seasons. However, the sufficiency of supply could be affected by several factors not within PSE&G's control, including curtailments of natural gas by its suppliers, the severity of the winter and the availability of feedstocks for the production of supplements to its natural gas supply. ENERGY HOLDINGS GLOBAL Global develops, acquires, owns and operates electric generation and distribution facilities and engages in power production and distribution, including wholesale and retail sales of electricity, in selected domestic and international markets. Global has ownership interests in 19 operating generation projects totaling 2,002 MW (535 MW net) located in the United States, Argentina, China and Venezuela. Global has ownership interests in 18 projects totaling 4,832 MW (2,252 MW net) in construction or advanced development that are located in the United States, Argentina, Venezuela, India, Tunisia, China, Italy and Poland. Of Global's generation projects in operation, construction or advanced development, 1,292 MW net or 46% are located in the United States. Global is actively involved, through its joint ventures, in managing the operations of eight operating generation projects and will be actively involved in managing the operations of five of the projects in construction or advanced development. Global owns interests in six distribution companies which, as of December 31, 1999, totaled approximately 68% of Global's assets, providing electricity to approximately 2.7 million customers in Argentina, Brazil, Chile and Peru. 17 Deregulation and privatization of energy markets, as well as growth in electricity demand throughout the world, have provided the opportunity for Global to expand the scope of its operations. Global has concentrated its development activities in markets in which it believes most of the new worldwide electric generating capacity will be installed in the next five years: China, India, the Middle East, Latin America and selected regions in the United States. Global has established a presence in these high growth markets which allows it to access and better evaluate potential investment opportunities. Prior to proceeding with a particular investment, Global's strategy is to conduct a multi-faceted analysis of the resident country, potential partners and transaction economics. Initially, countries are evaluated to assess the social, political, economic and regulatory environment. To mitigate certain risks, Global next seeks to identify partners with complementary skills and capabilities. Global then focuses on projects which may present potential synergies with existing projects or future investments. As a result, Global has developed or acquired interests in electric generation and/or distribution facilities in the United States, Argentina, Brazil, Chile, Peru, Venezuela, and China. Global expects that most of its new generation investments will be in the international markets. Of Global's total net equity interest in projects in operation, construction or advanced development, approximately 50% sell, or are expected to sell, output pursuant to long-term power purchase agreements. The remaining projects operate, or will operate, on a merchant basis. Global believes that it has adequate fuel supplies and transmission access and capacity for its generation projects. For a listing of Global's projects, see Item 2. Properties. RESOURCES Resources provides energy infrastructure financing in developed countries. Resources invests in energy-related financial transactions and manages a diversified portfolio of more than 60 investments including leveraged leases, leveraged buyout (LBO) funds, limited partnerships and marketable securities. As of December 31, 1999, Resources had approximately $1.8 billion invested in leveraged leases representing approximately 84% of Resources' assets. Approximately 79% of these leveraged leases are with lessees that have investment grade credit ratings. Leveraged leases of energy-related plant and equipment totaled approximately $1.3 billion or 72% of the lease portfolio and 62% of Resources assets. The remainder of Resources' portfolio is further diversified across a wide spectrum of asset types and business sectors, including leveraged leases of aircraft, railcars, real estate and industrial equipment, limited partnership interests in project finance transactions, LBO and venture funds and marketable securities. Worldwide deregulation of energy markets is also creating investment opportunities for Resources. As energy assets are privatized or sold, purchasers require significant amounts of acquisition capital. In addition to traditional bank and debt financing, leveraged leases provide purchasers with a source of funding for such acquisitions. Resources, as an experienced participant in the leveraged lease financing market for energy assets, is actively pursuing domestic and international opportunities to invest in these highly structured transactions. Resources has invested in 15 energy-related leveraged lease transactions since 1997. When evaluating leveraged lease investments, Resources focuses on mitigating credit risk while eliminating operating and currency risk. Resources seeks to invest in transactions where its expertise and understanding of the inherent risks and operating characteristics of energy assets provide a competitive advantage. Resources expects to continue to concentrate its investment activity on energy-related financial transactions. ENERGY TECHNOLOGIES Energy Technologies is an energy management company that constructs, operates and maintains HVAC systems for, and provides energy-related engineering, consulting and mechanical contracting services to, industrial and commercial customers in the Northeastern and Middle Atlantic United States. Energy Technologies was established in 1997 and as of December 31, 1999 had assets of approximately $249 million. Deregulation of the domestic electric and gas utility industries is presenting opportunities for Energy Technologies in the energy services business in the Northeastern and Middle Atlantic United States. Since its formation, Energy Technologies has acquired nine companies involved in the engineering, construction, installation, operation and maintenance of energy equipment and HVAC systems. Energy Technologies plans to grow its existing operations and utilize the recently acquired companies to deliver expanded energy-related services and products, including gas and electricity, to existing and new customers. EMPLOYEE RELATIONS PSEG has no employees. In December 1999, certain employees of PSE&G were transferred to Power and Services. As of December 31, 1999, PSE&G had 5,974 employees, Power had 3,081 employees, Energy Holdings had 1,656 employees and Services had 1,180 employees. With respect to transferred employees, the impacted union groups agreed that the collective bargaining agreements established with PSE&G would remain in effect until their 18 scheduled expiration. These six-year collective bargaining agreements with all of PSE&G's, Power's and Services' union groups, representing 6,195 employees, expire on April 30, 2002. Energy Holdings has various agreements with union groups representing 903 employees. PSE&G, Power, Services and Energy Holdings believe that they maintain satisfactory relationships with their employees. For information concerning employee pension plans and other postretirement benefits, see Note 14. Pension, Other Postretirement Benefit and Savings Plans of Notes. SEGMENT INFORMATION Financial information with respect to business segments of PSEG and PSE&G is set forth in Note 16. Financial Information by Business Segments of Notes. ENVIRONMENTAL MATTERS Federal, regional, state and local authorities regulate the environmental impacts of the operations of PSEG and its subsidiaries. Global has ownership interests in facilities, including operating power plants and distribution companies and power plants under construction or in development, which are subject to similar regulation not only in the United States, but in numerous other countries as well. Areas of regulation include air quality, water quality, site remediation, land use, waste disposal, aesthetics and other matters. Generators of hazardous substances potentially face joint and several liability, without regard to fault, when they fail to manage these materials properly and when they are required to clean up property affected by the production and discharge of such substances. Compliance with environmental requirements has caused PSEG and its subsidiaries to modify the day-to-day operation of their facilities, to participate in the cleanup of various properties that have been contaminated, and to modify, supplement and replace existing equipment and facilities. During 1999, PSE&G expended approximately $17 million for capital related expenditures to improve the environment and comply with laws and regulations and estimates that it will expend approximately $21 million, $22 million and $11 million in the years 2000 through 2002, respectively, for such purposes. Such amounts are included in estimates of construction expenditures (see MD&A--Liquidity and Capital Resources). AIR POLLUTION CONTROL Federal, state, and local air pollution laws (such as the Federal Clean Air Act (CAA) and the New Jersey Air Pollution Control Act), and the regulations implementing those laws, require controls of emissions from sources of air pollution, as well as recordkeeping, reporting and permit requirements. To reduce emissions of sulfur dioxide (SO2), the CAA sets a cap on total emissions of SO2 from affected units, and allocates SO2 "allowances" (each allowance authorizes the emission of one ton of SO2) to those units. Generating units needing to cover emissions above their allocations can buy allowances from sources that have excess allowances. Similarly, to reduce emissions of nitrogen oxides (NOx), which contribute to the formation of smog, Northeastern states and the District of Columbia have set a cap on total emissions of NOx from affected units, and allocated NOx allowances (with each allowance authorizing the emission of one ton of NOx) to those units. The allowances can be bought and sold through a regional trading program similar to the trading of SO2 allowances. In 2003, the cap will be reduced to limit NOx emissions further. To comply with the SO2 and NOx requirements, affected units may choose one or more strategies, including installing air pollution control technologies, changing or limiting operations, changing fuels or obtaining additional allowances. At this time, PSE&G does not expect that it will incur material expenditures to continue complying with the SO2 program. PSEG's current analysis leads it to believe that the potential costs for purchasing additional NOx allowances will also not be material through December 31, 2002. In 2003, when the NOx cap is reduced, expenditures associated with installing control technology could result in an additional $72 million. However, PSE&G is currently analyzing alternatives which could preclude the necessity of capital improvements. On September 24, 1998, EPA issued regulations (commonly known as the "SIP Call") requiring the 22 states in the eastern half of the United States to make significant NOx emission reductions by 2003 and to subsequently cap 19 these emissions. The NOx reduction requirements are consistent with requirements already in place in New Jersey and thus are not likely to have an additional impact on PSE&G's New Jersey facilities nor change the capacity availability from these facilities. The impact on PSE&G's facilities in Pennsylvania cannot be assessed at this time as such impacts are dependent upon Pennsylvania's implementation of the SIP Call through state regulations which have not been adopted. On May 25, 1999, a federal court partially stayed the implementation of the SIP Call, potentially delaying the reduction of NOx emissions outside the region and continuing the adverse impact of those emissions on New Jersey's air quality. The court has not yet made a decision on the merits of the case. On December 1, 1999, the EPA proposed to approve New Jersey's plan to attain the ozone National Ambient Air Quality Standards. That approval is contingent on New Jersey reducing emissions of smog-forming chemicals (including NOx) by an additional 4% to 5% in order to attain the standard by the deadlines set in the Clean Air Act. New Jersey has committed to make these reductions, and must choose which measures it will use to achieve them by October 1, 2001. New Jersey and other states may seek to implement a wide variety of measures including reductions in the regional cap, further reductions in the size of the NOx emission cap and other measures that could affect electric generating units and other equipment operated by PSE&G. EPA adopted a new air quality standard in July 1997 for fine particulate matter. To attain the fine particulate matter standard, states may require further reductions in NOx and SO2. However, under the time schedule announced by EPA when the new standard was adopted, non-attainment areas will not be designated until 2002 and control measures to meet this standard will not be identified until 2005. The timing of these actions is uncertain due to a federal court decision that overturned the new standard. Under the CAA, states must require each major facility to obtain a facility-wide operating permit. Operating permits for certain PSE&G facilities may require changes to facility operations or technology, installation of additional air pollution controls and performance of supplemental emissions monitoring. Capital costs of complying with these and other air pollution control requirements through 2004 are included in PSE&G's estimate of construction expenditures (see Construction and Capital Requirements). On November 3, 1999, the federal government announced the filing of lawsuits by several states against seven companies operating power plants in the Midwest and Southeast, charging that 32 coal-fired plants in ten states violated the New Source Review requirements of the CAA. Various environmental and public interest organizations have given notice of their intent to file similar lawsuits. The federal government is seeking to order these companies to install the best available air pollution control technology at the affected plants and to pay monetary penalties of up to $27,500 for each day of continued violation. At this time, no facility owned or operated by PSE&G has received notice of New Source Review violation or notice of an intent to file a lawsuit alleging violation of New Source Review requirements. WATER POLLUTION CONTROL The Federal Water Pollution Control Act (FWPCA) authorizes the imposition of technology and water-quality based effluent limitations to regulate the discharge of pollutants into surface waters through the issuance of National Pollutant Discharge Elimination System (NPDES) permits. Certain PSEG facilities are directly regulated by NJPDES permits. The NJPDES permit renewal application for PSE&G's Hudson Station, a 983 MW coal-fired fossil plant, is in the process of being reviewed by the NJDEP. As part of that renewal, the NJDEP has requested updated information in part, to address issues identified by a consultant hired by NJDEP. The consultant recommended that Hudson Station be retrofitted to operate with closed cycle cooling to address alleged adverse impacts associated with the thermal discharge and intake structure. PSE&G proposed certain modifications to the intake structure and submitted these demonstrations to NJDEP in the fourth quarter of 1998. While PSE&G believes that these demonstrations address the issues identified by the NJDEP's consultant and provide an adequate basis for favorable determinations under the FWPCA without the imposition of closed cycle cooling, it is impossible to predict the outcome of the agency's review at the present time. PSE&G presently estimates that the cost of retrofitting Hudson Station to operate with closed cycle cooling, if required, to be approximately $100 million. Such amount is not included in PSE&G's estimate of construction expenditures (see Liquidity and Capital Resources of MD&A). 20 NJDEP has advised PSE&G that it is reviewing a renewal application for Mercer Station, a 648 MW coal fired fossil plant and in connection with that renewal, will be reexamining the effects of Mercer Station's cooling water system pursuant to the FWPCA. PSE&G will submit updated demonstrations to the NJDEP in December 2000. It is not possible to predict the outcome of such review. PSE&G is implementing the 1994 NJPDES permit issued for Salem which requires, among other things, water intake screen modifications and wetlands restoration. Under the 1994 permit, which remains in effect until such time as a renewed permit is issued, PSE&G is continuing to restore wetlands and to conduct the requisite management and monitoring associated with the implementation of the special conditions of that permit. The existing permit remains in full force and effect based upon the timely submission of a renewal filing. On March 4, 1999, PSE&G filed a timely and comprehensive application for the renewal of Salem's NJDEP permit which included updated FWPCA demonstrations as well as a demonstration of the implementation of the Special Conditions of the 1994 NJPDES permit and their biological efficacy. NJDEP is reviewing this application. If the NJDEP or the EPA were to impose a requirement at Salem, Hudson or Mercer, or at other PSE&G generating stations, that closed cycle cooling be implemented, or that material operating restrictions be imposed, the continued operation of the station would need to be reassessed. PSE&G believes that the current operations of its stations are in compliance with the FWPCA and will vigorously pursue its applications to continue operations of its generating stations with present cooling water intake structures. The EPA, as a result of litigation by environmental groups, is conducting a rulemaking under the FWPCA that may result in the establishment of regulatory guidance on material issues with respect to the FWPCA permitting decisions, such as guidance on determinations of adverse environmental impact and best technology available. The rulemaking may impact NJDEP determinations with respect to PSE&G's permit renewal applications. The DRBC issued a Revised Docket for Salem in 1995 (Revised Docket) approving a modification to the 1970 Salem Docket that approved the construction and operation of the station's cooling water system and the continued operation of the station's cooling water system for an additional five years. The Revised Docket provided that the authorization would expire September 27, 2000 absent review of the Docket on or before August 31, 1999 and renewal by the DRBC. PSE&G filed a preliminary information submission with DRBC during April 1999 and the DRBC commenced its review of the matter in the second quarter of 1999. The DRBC modified the Revised Docket to provide that it shall remain in effect until six months after the NJDEP acts on PSE&G's application for renewal of Salem's NJPDES Permit, or at a later date established by the DRBC. While it is impossible to predict the timing and/or outcome of the review of these applications in respect of the Hudson, Mercer and Salem generating stations, an unfavorable determination could have a material adverse effect on PSEG's and PSE&G's financial position, results of operations and net cash flows. CONTROL OF HAZARDOUS SUBSTANCES PSE&G MANUFACTURED GAS PLANT REMEDIATION PROGRAM For information regarding PSE&G's Manufactured Gas Plant Remediation Program, see Note 11. Commitments and Contingent Liabilities of Notes. HAZARDOUS SUBSTANCES Certain Federal and state laws authorize the EPA and the NJDEP, among other agencies, to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is determined to present an actual or potential threat to human health or the environment because of an actual or threatened release of one or more hazardous substances. Because of the nature of PSE&G's business, including the production of electricity, the distribution of gas and, formerly, the manufacture of gas, various by-products and substances are or were produced or handled which contain constituents classified as hazardous. For a discussion of these hazardous waste issues, see Note 11. Commitments and Contingent Liabilities of Notes. For a discussion of remediation/clean-up actions involving PSE&G, see Item 3. Legal Proceedings. The EPA has determined that a six mile stretch of the Passaic River in Newark, New Jersey is a "facility" within the meaning of that term under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and that, to date, at least thirteen corporations, including PSE&G, may be potentially liable for performing required remedial actions to address potential environmental pollution at the Passaic River "facility." In a separate matter, PSE&G and certain of its predecessors operated industrial facilities at properties within the Passaic River "facility," including the former Harrison Gas Plant and Essex Generating Station. PSE&G cannot predict what action, if any, the EPA or any third party may take against PSE&G with respect to these matters, or in such event, what costs PSE&G may incur to address any such claims. However, such costs may be material. PSE&G's anticipated sale of generation-related assets to PSEG Power may trigger the requirements of the New Jersey Industrial Site Recovery Act (ISRA). ISRA requires that before any transfer of an industrial establishment 21 can be made, the interested parties shall remediate or cause to be remediated potential site environmental concerns in accordance with NJDEP requirements. Certain of the generation-related assets being sold are industrial establishments as defined by ISRA. In October 1999, PSE&G filed a request with the NJDEP for a determination that the sale involves a transfer to an affiliate and, as such, is not a covered transaction under ISRA. In the second quarter of 1999, PSE&G recorded a $53 million liability related to these obligations (see Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation of Notes). Other liabilities associated with environmental remediation include Natural Resource Damages. CERCLA and the New Jersey Spill Compensation and Control Act (Spill Act) authorize Federal and state trustees for natural resources to assess "damages" against persons who have discharged a hazardous substance, which discharge resulted in an "injury" to natural resources. Until recently, the State trustee, NJDEP, has not aggressively pursued natural resource damages. In February 1997, the NJDEP adopted changes to the Technical Requirements for Site Remediation pursuant to the Spill Act. Among these changes was a new provision requiring all persons conducting remediation to characterize "injuries" to natural resources. Further, these changes required persons to address those injuries through restoration or damages. The State's program is still developing and PSE&G cannot assess the magnitude of the potential impact of this regulatory change. Although inestimable, these costs could be material. ITEM 2. PROPERTIES PSE&G PSE&G's First and Refunding Mortgage (Mortgage), securing the bonds issued thereunder, constitutes a direct first mortgage lien on substantially all of PSE&G's property. PSE&G maintains insurance coverage against loss or damage to its principal plants and properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost. For a discussion of nuclear insurance, see Note 11. Commitments and Contingent Liabilities of Notes. The electric lines and gas mains of PSE&G are located over or under public highways, streets, alleys or lands, except where they are located over or under property owned by PSE&G or occupied by it under easements or other rights. These easements and rights are deemed by PSE&G to be adequate for the purposes for which they are being used. 22 ELECTRIC GENERATION PROPERTIES As of December 31, 1999, PSE&G's share of installed generating capacity was 10,287 MW, as shown in the following table:
INSTALLED PRINCIPAL NAME AND LOCATION CAPACITY (MW) FUELS USED - --------------------------------------------------------------------------- ------------- ------------ Steam: Hudson, Jersey City, NJ........................................ 991 Coal/Gas Mercer, Hamilton, NJ........................................... 648 Coal/Gas Sewaren, Woodbridge Twp., NJ................................... 453 Gas/Oil Linden, Linden, NJ............................................. 424 Oil Keystone, Shelocta, PA--22.84%(A).............................. 388 Coal Conemaugh, New Florence, PA--22.50%(A)......................... 382 Coal Kearny, Kearny, NJ............................................. 300 Oil ------------- Total Steam.............................................. 3,586 ------------- Nuclear: (Capacity calculated in accordance with industry maximum dependable capability standards) Hope Creek, Lower Alloways Creek, NJ 95%(A).................... 979 Nuclear Salem 1, Lower Alloways Creek, NJ 42.59%(A).................... 471 Nuclear Salem 2, Lower Alloways Creek, NJ 42.59%(A).................... 471 Nuclear Peach Bottom 2, Peach Bottom, PA 42.49%(A)..................... 465 Nuclear Peach Bottom 3, Peach Bottom, PA 42.49%(A)..................... 465 Nuclear ------------- Total Nuclear............................................ 2,851 ------------- Combined Cycle: Bergen, Ridgefield, NJ......................................... 675 Gas Burlington, Burlington, NJ..................................... 245 Gas ------------- Total Combined Cycle..................................... 920 ------------- Combustion Turbine: Essex, Newark, NJ.............................................. 617 Gas/Oil Edison, Edison Township, NJ.................................... 504 Gas/Oil Kearny, Kearny, NJ............................................. 504 Gas/Oil Burlington, Burlington, NJ..................................... 389 Oil Linden, Linden, NJ............................................. 223 Gas/Oil Hudson, Jersey City, NJ........................................ 129 Oil Mercer, Hamilton, NJ........................................... 129 Oil Sewaren, Woodbridge Township, NJ............................... 129 Oil Bayonne, Bayonne, NJ........................................... 42 Oil Bergen, Ridgefield, NJ......................................... 21 Gas National Park, National Park, NJ............................... 21 Oil Salem, Lower Alloways Creek, NJ 42.59%(A)...................... 16 Oil ------------- Total Combustion Turbine................................. 2,724 ------------- Internal Combustion: Conemaugh, New Florence, PA--22.50%(A)......................... 3 Oil Keystone, Shelocta, PA--22.84%(A).............................. 3 Oil ------------- Total Internal Combustion................................ 6 ------------- Pumped Storage: Yards Creek, Blairstown, NJ--50%(A)(B)......................... 200 ------------- Total PSE&G.............................................. 10,287 =============
(A) PSE&G's share of jointly owned facility. (B) Excludes energy for pumping and synchronous condensers. 23 In addition to the generating facilities in New Jersey and Pennsylvania as indicated in the table above, as of December 31, 1999, PSE&G owned 41 switching and/or generating stations with an aggregate installed capacity of 30,417,670 kilovolt-amperes and 223 substations with an aggregate installed capacity of 7,396,000 kilovolt-amperes. In addition, six substations having an aggregate installed capacity of 108,000 kilovolt-amperes were operated on leased property. All of these facilities are located in New Jersey. It is anticipated that all of these properties, as well as related assets of these properties, will be sold to Power in accordance with the BPU's Final Order. ELECTRIC TRANSMISSION AND DISTRIBUTION PROPERTIES As of December 31, 1999, PSE&G's transmission and distribution system included approximately 155,766 circuit miles, of which approximately 38,945 miles were underground, and approximately 812,697 poles, of which approximately 539,880 poles were jointly owned. Approximately 99% of this property is located in New Jersey. In addition, as of December 31, 1999, PSE&G owned four electric distribution headquarters and five subheadquarters in four operating divisions all located in New Jersey. GAS DISTRIBUTION PROPERTIES As of December 31, 1999, the daily gas capacity of PSE&G's 100%-owned peaking facilities (the maximum daily gas delivery available during the three peak winter months) consisted of liquid petroleum air gas (LPG) and liquefied natural gas (LNG) and aggregated 2,973,000 therms (approximately 2,886,000 cubic feet on an equivalent basis of 1,030 Btu/cubic foot) as shown in the following table: DAILY CAPACITY -------------- PLANT LOCATION (THERMS) - ----- -------- Burlington LNG....................... Burlington, NJ 773,000 Camden LPG........................... Camden, NJ 280,000 Central LPG.......................... Edison Twp., NJ 960,000 Harrison LPG......................... Harrison, NJ 960,000 -------- Total............................. 2,973,000 ========= As of December 31, 1999, PSE&G owned and operated approximately 16,377 miles of gas mains, owned 11 gas distribution headquarters and two subheadquarters all in two operating regions located in New Jersey and owned one meter shop in New Jersey serving all such areas. In addition, PSE&G operated 61 natural gas metering or regulating stations, all located in New Jersey, of which 28 were located on land owned by customers or natural gas pipeline companies supplying PSE&G with natural gas and were operated under lease, easement or other similar arrangement. In some instances, portions of the metering and regulating facilities were owned by the pipeline companies. 24 ENERGY HOLDINGS As of December 31, 1999, Global had interests in the following generation and distribution facilities: GENERATION FACILITIES
NET EQUITY GLOBAL'S INTEREST IN TOTAL OWNERSHIP TOTAL LOCATION PRIMARY FUEL MW INTEREST MW ------------------------------------------------------------------------------------ OPERATING POWER PLANTS UNITED STATES Eagle Point NJ Natural gas 225 50% 113 Kalaeloa HI Oil 180 49% 88 GWF Bay Area I CA Petroleum coke 21 50% 10 Bay Area II CA Petroleum coke 21 50% 10 Bay Area III CA Petroleum coke 21 50% 10 Bay Area IV CA Petroleum coke 21 50% 10 Bay Area V CA Petroleum coke 21 50% 10 Hanford CA Petroleum coke 27 50% 14 Tracy CA Biomass 21 35% 7 Bridgewater NH Biomass 16 40% 7 SEGS III CA Solar 30 9% 3 Kennebec ME Hydro 15 16% 2 Conemaugh PA Hydro 15 50% 8 ------- ------- Sub-Total United States 634 292 INTERNATIONAL CTSN Argentina Coal/Natural gas/Oil 650 19% 124 MPC Jingyuan - Units 5 and 6 China Coal 600 15% 90 Jinqiao (Thermal Energy) China Coal/Oil N/A 30% N/A Tongzhou China Coal 30 40% 12 Zuojiang - Units 1 and 2 China Hydro 48 30% 14 TGM Venezuela Natural gas 40 9% 3 ------- ------- Sub-Total International 1,368 243 ------- ------- Sub-Total Operating Power Plants 2,002 535 IN SERVICE DATE ---- Power Plants in Construction or Advanced Development Turboven Maracay Venezuela Natural Gas 60 50% 30 2000 Cagua Venezuela Natural Gas 60 50% 30 2000 Valencia Venezuela Natural Gas 80 50% 40 2001 MPC Zuojiang - Unit 3 China Hydro 24 30% 7 2000 Shanghai BFG China Blast furnace gas 50 16% 8 2000 Fushi China Hydro 54 35% 19 2000 Nantong China Coal 24 46% 11 2000 Texas Independent Energy, L.P. Guadalupe Texas Natural Gas 1,000 50% 500 2000 Odessa Texas Natural Gas 1,000 50% 500 2001 Prisma 2000 Crotone Italy Biomass 20 70% 14 2001 Bando Italy Biomass 20 70% 14 2001 Strongoli Italy Biomass 40 70% 28 2002 Porto Empedocle Italy Biomass 24 70% 17 2002 Parana Argentina Natural gas 830 33% 274 2001 Rades Tunisia Natural gas 471 35% 165 2001 PPN India Naphtha/Natural gas 330 20% 66 2001 Tri-Sakthi India Coal 525 63% 331 2003 Chorzow Poland Coal 220 90% 198 2003 ------- ------- Sub-Total Construction or Advanced Development 4,832 2,252 ------- ------- TOTAL 6,834 2,787 ======= =======
25 DISTRIBUTION OPERATIONS Number of Global's Ownership Location Customers Interest ------------------------------------------------------ EDEN Argentina 270,000 30% EDES Argentina 130,000 30% EDELAP Argentina 290,000 30% Rio Grande Energia Brazil 940,000 31% Chilquinta Energia Chile 410,000 50% Luz del Sur Peru 690,000 43% --------- 2,730,000 ========= OFFICE BUILDINGS AND FACILITIES PSE&G PSE&G leases substantially all of a 26-story office tower for its corporate headquarters at 80 Park Plaza, Newark, New Jersey, together with an adjoining three-story building. PSE&G also leases other office space at various locations throughout New Jersey for district offices and offices for various corporate groups and services. PSE&G also owns various other sites for training, testing, parking, records storage, research, repair and maintenance, warehouse facilities and for other purposes related to its business. ENERGY HOLDINGS Energy Holdings does not own any real property. Energy Holdings subleases office space for its corporate headquarters at 80 Park Plaza, Newark, New Jersey from PSE&G. Energy Holdings' subsidiaries also lease office space at various locations throughout the world to support business activities. Energy Holdings maintains adequate insurance coverage for properties in which its subsidiaries have an equity interest, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost. ITEM 3. LEGAL PROCEEDINGS As previously disclosed, by complaints filed in 1995 and 1996, shareholder derivative actions on behalf of PSEG shareholders were commenced by purported shareholders against certain directors and officers. The four complaints generally sought recovery of damages for alleged losses purportedly arising out of PSE&G's operation of the Salem and Hope Creek generating stations, together with certain other relief, including removal of certain executive officers of PSE&G and PSEG and certain changes in the composition of PSEG's Board of Directors. By decision dated July 28, 1999, the Court granted the defendants' motions for summary judgment dismissing all four derivative actions. The plaintiffs have appealed in all these actions. PSEG cannot predict the outcome of these appeals. Public Service Enterprise Group Inc. by G. E. Stricklin, derivatively v. E. James Ferland, et. al., Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-160-96. Dr. Steven Fink and Dr. David Friedman, P.C. Profit Sharing Plan, derivatively, Lawrence R. Codey, et. al., Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-65-96. A. Harold Datz Pension and Profit Sharing Plan derivatively, et. al., v. Lawrence R. Codey, et. al., Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-68-96. Tillie Greenberg, derivatively v. E. James Ferland, et. al., Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-188-96. As previously disclosed, on June 25, 1998, a complaint was filed against the directors of PSEG, and PSEG as a nominal defendant, by one of the purported shareholders of PSEG who instituted one of the December 1995 shareholder derivative complaints discussed above, alleging that the 1996, 1997 and 1998 proxy statements provided to shareholders of PSEG were false and misleading. The court has dismissed all of the plaintiff's claims in this action. No appeal has been filed by the plaintiff and the time for filing any such appeal has expired. G.E. Stricklin v. E. James Ferland, et al., United States District Court for the Eastern District of Pennsylvania, Civil Action No. 98-3279. 26 A complaint dated April 19, 1999 was received by PSEG naming as defendants the current directors of PSEG, and naming PSEG as a nominal defendant, from the same purported shareholder of PSEG who instituted the June 1998 proxy litigation, alleging that the 1999 proxy statement provided to shareholders of PSEG was false and misleading by reason, among other things, of failure to disclose certain material facts relating to (i) the controls over and oversight of PSEG's nuclear operations, (ii) the condition of problems at PSEG's nuclear operations and (iii) the derivative litigation described above. The complaint sought to have the 1999 proxy statement declared to be in violation of law, to set aside the election of directors of PSEG and the ratification of the selection of Deloitte & Touche LLP as PSEG's auditors at the 1999 annual shareholder meeting, and to require PSEG to conduct a special meeting of shareholders providing for election of directors following timely dissemination of a proxy statement approved by the Court hearing the matter, which should include as nominees for election as directors persons having no previous relationship with PSEG or the current directors, and other relief. On August 2, 1999, the Court issued an order granting the defendants' motion to dismiss this complaint. Plaintiff has filed a Notice of Appeal. PSEG cannot predict the outcome of this appeal. G. E. Stricklin v. I. Lerner, et. al., United States District Court for the Eastern District of Pennsylvania. Civil Action No. 99-1950. PSE&G and the three other co-owners of Salem filed suit in February 1996 in the U.S. District Court for the District of New Jersey (Civil Action No. CB96-925) against Westinghouse Electric Corporation (Westinghouse) seeking damages to recover the cost of replacing the steam generators at Salem 1 and 2. In April 1996, Westinghouse filed an answer and $2.5 million counter claim for unpaid work related to services at Salem. On January 27, 2000, the parties to this matter reached a settlement under which the co-owners will receive certain consideration from Westinghouse, including discounts on the purchase of certain goods and services. In October 1997, PSE&G filed a Petition with the BPU (Docket No. GM97100758) seeking approval to transfer to its subsidiary Public Service Energy Trading Company (PSETC), all of PSE&G's rights and obligations under its transportation and storage contracts with interstate pipelines. PSETC, in turn, would supply all of the natural gas requirements of PSE&G pursuant to a Requirement Contract between the two parties. The proposed transaction would transfer to PSETC all future contractual liabilities under these agreements and protect the regulatory status of certain off-system sales transactions. In December 1997, one of the affected interstate pipeline companies filed a declaratory judgment action with FERC challenging PSE&G's interpretation of the capacity release rules. Under the interpretation proposed by the interstate pipeline company, PSE&G would be required to guarantee the performance of PSETC under the transferred agreements. PSE&G disagreed with these claims and filed a protest challenging the filing. In February 1998, FERC ruled in favor of the interstate pipeline company (Texas Eastern Transmission Corporation, Docket No. RP98.83-000). In April 1998, FERC denied PSE&G's request for a rehearing. In June 1998, PSE&G filed a petition for review of FERC's order with the U.S. Court of Appeals, District of Columbia Circuit. The matter is being held in abeyance pending settlement negotiations between the parties. See information on the following regulatory proceedings at the pages indicated: (1) Pages 5, 33, 64, and 69. Proceedings before the BPU in the matter of the Energy Master Plan Phase II Proceeding to investigate the future structure of the Electric Power Industry, Docket Nos. EX94120585Y, EO97070462 and EO97070463. (2) Pages 8, 34, and 69. Appeals of the BPUs Final Order and Finance Order in the Energy Master Plan Proceedings. (3) Pages 20 and 21. Administrative proceedings before the NJDEP under the FWPCA for certain electric generating stations. (4) Page 84. Generic proceeding before the BPU relating to recovery of capacity costs associated with power purchases from cogenerators, Docket No. EX93060255. 27 (5) Page 85. Investigation and additional investigation by the U.S. Environmental Protection Agency (EPA) regarding the Passaic River site. In addition, see the following environmental related matters involving governmental authorities. Based on current information, PSEG and PSE&G do not expect expenditures for any such site, individually or all such current sites in the aggregate, to have a material effect on their financial condition, results of operations and net cash flows. (1) Claim made in 1985 by U.S. Department of the Interior under CERCLA with respect to the Pennsylvania Avenue and Fountain Avenue municipal landfills in Brooklyn, New York, for damages to natural resources. The U.S. Government alleges damages of approximately $200 million. To PSE&G's knowledge there has been no action on this matter since 1988. (2) Duane Marine Salvage Corporation Superfund Site is in Perth Amboy, Middlesex County, New Jersey. (3) Various Spill Act directives were issued by NJDEP to PRPs, including PSE&G with respect to the PJP Landfill in Jersey City, Hudson County, New Jersey, ordering payment of costs associated with operating and maintenance expenses, interim remedial measures and a Remedial Investigation and Feasibility Study (RI/FS) in excess of $25 million. The directives also sought reimbursement of NJDEP's past and future oversight costs and the costs of any future remedial action. (4) Claim by EPA, Region III, under CERCLA with respect to a Cottman Avenue Superfund Site, a former non-ferrous scrap reclamation facility located in Philadelphia, Pennsylvania, owned and formerly operated by Metal Bank of America, Inc. PSE&G, other utilities and other companies are alleged to be liable for contamination at the site and PSE&G has been named as a potentially responsible party. A Pre-Design Investigative Report was submitted to EPA on January 21, 2000, which presents several alternatives for implementation of an EPA selected remediation remedy. Dependent upon the EPA's approval of the proposed remedy implementation alternatives, the costs of remedy implementation are estimated to range from $14 million to $24 million. PSE&G's share of the remedy implementation costs are estimated between $4 million and $8 million. Additionally, with respect to this site, the United States of America application in the matter entitled United States of America, et. al., v. Union Corporation, et. al., Civil Action No. 80-1589, United States District Court for the Eastern District of Pennsylvania, seeking leave of court to file an amended complaint adding claims under the CERCLA was granted. PSE&G and one other utility were named as third party defendants in the foregoing captioned matter. (5) The Klockner Road site is located in Hamilton Township, Mercer County, New Jersey, and occupies approximately two acres on PSE&G's Trenton Switching Station property. PSE&G has entered into a MOA with the NJDEP for the Klockner Road site pursuant to which PSE&G will conduct an RI/FS and remedial action, if warranted, of the site. Preliminary investigations indicated the potential presence of soil and groundwater contamination at the site. (6) In 1991, the NJDEP issued Directive and Notice to Insurers Number Two (Directive Two) to 24 Insurers and 52 Respondents, including PSE&G, in connection with an investigation and remediation of the Global Landfill Site in Old Bridge Township, Middlesex County, New Jersey seeking recovery of past and anticipated future NJDEP response costs ($37 million). PSE&G and other participating PRPs have agreed with NJDEP to a partial settlement of such costs and to perform the remedial design and remedial action. In 1996, 13 of the Directive Two Respondents, including PSE&G, filed a contribution action pursuant to CERCLA and the Spill Act against approximately 190 parties seeking contribution for an equitable share of all liability for response costs incurred and to be incurred in connection with the site. In September 1997, the NJDEP issued a Superfund ROD with estimated cost of $3.7 million. (7) In 1991, the NJDEP issued Directive and Notice To Insurers Number One (Directive No. One) to 50 insurers and 20 respondents, including PSE&G, seeking from the respondents payment of $5.5 million of NJDEP's anticipated costs of remedial action and of administrative oversight at the Combe Fill South 28 Sanitary Landfill in Washington and Chester Townships, Morris County, New Jersey (Combe Site). The $5.5 million represents NJDEP's 10% share of total estimated site remediation costs and administrative oversight costs pursuant to a cooperative agreement with the United States concerning the selected remedial action for the site. In 1996, the NJDEP issued Directive Number Two (Directive No. Two) to 37 respondents, including PSE&G, directing the respondents to arrange for the operation, maintenance and monitoring of the implemented remedial action described therein or pay the NJDEP's future costs of these activities, estimated to be $39 million. In addition, Directive No. Two directs the respondents to prepare a work plan for the development and implementation of a Natural Resource Damage Restoration Plan. In October 1998, the NJDEP and The United States of America filed separate cost recovery actions pursuant to CERCLA and/or the Spill Act against approximately 30 parties seeking recovery of their respective shares of past and future site investigation and remediation response and administrative oversight costs incurred and to be incurred at the site. Third party contribution actions were also filed in each of the foregoing cost recovery actions seeking contribution for an equitable share of all liability for these same costs from approximately 170 third party defendants. PSE&G is a named defendant in the NJDEP cost recovery action and a named third party defendant in the contribution action filed in the United States' lawsuit. (8) Spill Act Multi-Site Directive (Directive) issued by the NJDEP to PRPs, including PSE&G, listing four separate sites, including the former solid waste bulking and transfer facility called the Marvin Jonas Transfer Station (Sewell Site) in Deptford Township, Gloucester County, New Jersey. With regard to the Sewell Site, this Directive ordered approximately 350 PRPs, including PSE&G, to enter into an Administrative Consent Order (ACO) with NJDEP, requiring them to remediate the Sewell Site. Certain PRPs, including PSE&G, have completed the interim actions directed at both site security and off-site disposal of containers, trailers and contaminated surface soils. PRPs, including PSE&G, are currently fulfilling the terms of a MOA entered into with NJDEP in 1993 to conduct an RI/FS and, if necessary, take remedial action. (9) The NJDEP assumed control of a former petroleum products blending and mixing operation and waste oil recycling facility in Elizabeth, Union County, New Jersey (Borne Chemical Co. site) and issued various directives to a number of entities including PSE&G requiring performance of various remedial actions including: establishment of security at the site; removal and off-site disposal of containerized wastes at the site; and conduct of a remedial investigation of the site. PSE&G's nexus to the site is based upon the shipment of certain waste oils to the site for recycling. PSE&G and certain of the other entities named in NJDEP directives are members of a PRP group that have been working together to satisfy NJDEP requirements including: funding of the site security program; containerized waste removal; and a site remedial investigation program. (10) See Pages 21 and 84 regarding PSE&G's MGP Remediation Program. (11) One Argentine electric distribution company in which Global has an interest has been notified by its health and safety regulation relating to a claim regarding alleged PCB contamination at one of its sites. Clean up costs are estimated at approximately $100,000 and the distribution company is subject to penalties of approximately $1 million. Global has a 30% interest in this company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PSEG and PSE&G, inapplicable. 29 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PSEG's Common Stock is listed on the New York Stock Exchange, Inc. and the Philadelphia Stock Exchange, Inc. All of PSE&G's common stock is owned by PSEG. As of December 31, 1999, there were 134,877 holders of record of PSEG Common Stock. The following table indicates the high and low sale prices for PSEG's Common Stock and dividends paid for the periods indicated: DIVIDEND COMMON STOCK HIGH LOW PER SHARE - ------------ ---- --- --------- 1999: First Quarter......................... $40 3/8 $36 1/2 $.54 Second Quarter........................ 42 5/8 37 1/2 .54 Third Quarter......................... 42 37 1/16 .54 Fourth Quarter........................ 40 32 .54 1998: First Quarter......................... $37 15/16 $30 5/16 $.54 Second Quarter........................ 37 7/8 31 3/4 .54 Third Quarter......................... 39 11/16 32 5/16 .54 Fourth Quarter........................ 42 3/4 36 15/16 .54 For additional information concerning dividend history, policy and potential preferred voting rights, restrictions on payment and common stock repurchase programs, see Liquidity and Capital Resources and External Financings of MD&A and Note 7. Schedule of Consolidated Capital Stock and Other Securities of Notes. 30 ITEM 6. SELECTED FINANCIAL DATA PSEG The information presented below should be read in conjunction with PSEG's Consolidated Financial Statements and Notes thereto.
YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (MILLIONS OF DOLLARS, WHERE APPLICABLE) Total Operating Revenues ......................... $ 6,497 $ 6,010 $ 6,177 $ 6,106 $ 5,942 ======== ======== ======== ======== ======== Income from Continuing Operations ................ $ 723 $ 644 $ 560 $ 588 $ 627 Income from Discontinued Operations (A) .......... -- -- -- 24 35 -------- -------- -------- -------- -------- Income Before Extraordinary Item ................. 723 644 560 612 662 Extraordinary Item (B) ........................... (804) -- -- -- -- -------- -------- -------- -------- -------- Net Income (Loss) ................................ $ (81) $ 644 $ 560 $ 612 $ 662 ======== ======== ======== ======== ======== Earnings per Average Share (Basic and Diluted): From Continuing Operations ................... $ 3.29 $ 2.79 $ 2.41 $ 2.42 $ 2.57 From Discontinued Operations (A) ............. -- -- -- .10 .14 -------- -------- -------- -------- -------- Before Extraordinary Item .................... 3.29 2.79 2.41 2.52 2.71 Extraordinary Item (B) ....................... (3.66) -- -- -- -- -------- -------- -------- -------- -------- Total Earnings per Average Share .......... $ (0.37) $ 2.79 $ 2.41 $ 2.52 $ 2.71 ======== ======== ======== ======== ======== Dividends Paid per Share ......................... $ 2.16 $ 2.16 $ 2.16 $ 2.16 $ 2.16 As of December 31: Total Assets ................................. $ 19,015 $ 17,991 $ 17,979 $ 16,795 $ 16,706 Long-Term Liabilities: Long-Term Debt ............................ $ 4,575 $ 4,763 $ 4,885 $ 4,580 $ 5,190 Other Noncurrent Liabilities .............. $ 2,131 $ 764 $ 609 $ 544 $ 469 Preferred Stock With Mandatory Redemption ........ $ 75 $ 75 $ 75 $ 150 $ 150 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures ........... $ 210 $ 210 $ 210 $ 210 $ 210 Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures ........... $ 303 $ 303 $ 303 $ 208 -- Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures ............ $ 525 $ 525 -- -- -- Ratio of Earnings to Fixed Charges plus Preferred Securities Dividend Requirements (C) ......... 3.09 2.86 2.55 2.68 2.78
(A) On July 31, 1996, Energy Holdings sold Energy Development Corporation (EDC). As a result, Consolidated Financial Statements previously issued were restated to give effect to the classification of EDC as discontinued operations. (B) See Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation of Notes. (C) Excludes income and expenses from discontinued operations and Extraordinary Item. 31 PSE&G The information presented below should be read in conjunction with PSE&G's Consolidated Financial Statements and Notes thereto.
YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (MILLIONS OF DOLLARS, WHERE APPLICABLE) Total Operating Revenues ............................ $ 5,890 $ 5,568 $ 5,833 $ 5,803 $ 5,692 ======== ======== ======== ======== ======== Income Before Extraordinary Item .................... $ 653 $ 602 $ 528 $ 535 $ 617 Extraordinary Item (A) .............................. (804) -- -- -- -- -------- -------- -------- -------- -------- Net Income (Loss) ................................... $ (151) $ 602 $ 528 $ 535 $ 617 ======== ======== ======== ======== ======== As of December 31: Total Assets .................................... $ 14,724 $ 14,669 $ 14,844 $ 14,700 $ 14,477 Long-Term Liabilities: Long-Term Debt ............................... $ 3,099 $ 4,045 $ 4,127 $ 4,107 $ 4,586 Other Noncurrent Liabilities ................. $ 2,104 $ 741 $ 586 $ 536 $ 464 Preferred Stock With Mandatory Redemption ........... $ 75 $ 75 $ 75 $ 150 $ 150 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures ................. $ 210 $ 210 $ 210 $ 210 $ 210 Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures ................. $ 303 $ 303 $ 303 $ 208 -- Ratio of Earnings to Fixed Charges (B) .............. 3.58 3.27 2.74 2.83 3.25 Ratio of Earnings to Fixed Charges plus Preferred Securities Dividend Requirements (B) ............ 3.46 3.15 2.64 2.62 2.77
(A) See Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation of Notes. (B) Excludes extraordinary item. 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PSEG This discussion refers to the Consolidated Financial Statements and related Notes of Public Service Enterprise Group Incorporated (PSEG) and should be read in conjunction with such statements and notes. CORPORATE STRUCTURE PSEG has three principal direct wholly-owned operating subsidiaries: Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG Energy Holdings Inc. (Energy Holdings). In 1999, PSEG formed PSEG Services Corporation (Services) to provide management and administrative services to PSEG and its subsidiaries. PSE&G is an operating public utility providing electric and gas service in certain areas within the State of New Jersey. Following the anticipated sale of its generation-related assets to Power, PSE&G will continue to own and operate its transmission and distribution businesses. Within this discussion, the results of operations of the generation business for 1999 have been included within PSE&G since PSE&G continued to own and operate the generation-related assets throughout the year. Power and its subsidiaries were formed in 1999 to acquire, own and operate the electric generation-related assets of PSE&G pursuant to the Final Decision and Order (Final Order) issued by the New Jersey Board of Public Utilities (BPU) under the New Jersey Energy Master Plan Proceedings. Through its subsidiaries, Power will provide energy and capacity to PSE&G under certain contracts and market electricity, natural gas, capacity and ancillary services throughout the Eastern United States. Power has three direct wholly-owned subsidiaries: PSEG Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy Resources & Trade LLC (ER&T). Energy Holdings is the parent of three energy-related lines of business through its wholly-owned subsidiaries: PSEG Global Inc. (Global), which develops, acquires, owns and operates electric generation and distribution facilities and engages in power production and distribution, including wholesale and retail sales of electricity, in selected domestic and international markets; PSEG Resources Inc. (Resources), which invests in energy-related financial transactions and manages a diversified portfolio of investments including leveraged leases, leveraged buyout (LBO) funds, limited partnerships and marketable securities; and PSEG Energy Technologies Inc. (Energy Technologies), an energy management company that constructs, operates and maintains heating, ventilating and air conditioning (HVAC) systems for, and provides energy-related engineering, consulting and mechanical contracting services to, industrial and commercial customers in the Northeastern and Middle Atlantic United States. Energy Holdings also has a finance subsidiary, PSEG Capital Corporation (PSEG Capital), which provides privately-placed debt financing to Energy Holdings' operating subsidiaries, except Energy Technologies, on the basis of a minimum net worth maintenance agreement with PSEG. Energy Holdings is also the parent of Enterprise Group Development Corporation (EGDC), a nonresidential real estate property management business and has been conducting a controlled exit from the real estate business since 1993. OVERVIEW OF 1999 AND FUTURE OUTLOOK The electric and gas utility industries in the United States and around the world continue to experience significant change. Deregulation, restructuring, privatization and consolidation are creating opportunities and risks for PSEG, PSE&G, Power and Energy Holdings. At the same time, competitive pressures are increasing. Following the passage of the Energy Competition Act, the BPU rendered its summary decision relating to PSE&G's rate unbundling, stranded costs and restructuring proceedings (Summary Order) and subsequently issued its Final Order in these matters. The New Jersey Electric Discount and Energy Competition (Energy Competition 33 Act), the BPU's Summary Order and Final Order and the related BPU proceedings are referred to as the Energy Master Plan Proceedings. These proceedings opened the New Jersey energy markets to competition by allowing all New Jersey retail electric customers to select their electric supplier commencing August 1, 1999 and all New Jersey retail gas customers to select their gas supplier commencing January 1, 2000. In October and November 1999, appeals of the Final Order and of the BPU's order approving PSE&G's petition relating to the proposed securitization transaction for an irrevocable Bondable Stranded Costs Rate Order (Finance Order) were filed in the Appellate Division of the New Jersey Superior Court on behalf of several customers. While PSEG and PSE&G believe that the appeals are without merit, no assurances can be given at this time as to the timing or outcome of these proceedings. Accordingly, neither PSEG nor PSE&G are able to predict whether such appeals will have a material adverse effect on their financial condition, results of operations or cash flows. As a result of the Summary Order, PSE&G concluded that it no longer met the requirements of Statement of Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), for the electric generation portion of its business. As a result, PSE&G recorded an extraordinary charge to earnings of $804 million, net of tax, which reflects the impairment of PSE&G's electric generation-related assets calculated in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). In addition to the impairment of PSE&G's electric generating stations, the extraordinary charge consisted of various accounting adjustments to reflect the absence of cost of service regulation in the electric generation portion of the business in the future. The adjustments primarily related to materials and supplies, general plant items and liabilities for certain contractual and environmental obligations. For further discussion of the Energy Master Plan Proceedings, including the appeals, the related extraordinary charge to earnings and securitization, see Note 2. Regulatory Issues and Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation of Notes and Liquidity and Capital Resources. As set forth in the Final Order, PSE&G has been directed to sell all of its electric generation-related assets and all associated rights and liabilities to a separate corporate entity to be owned by PSEG. The Final Order specifies a purchase price of $2.443 billion plus the book value of PSE&G's other generation-related assets, including materials, supplies and fuel. As a result, PSEG organized Power to acquire and manage PSE&G's electric generation-related assets. Assuming a favorable outcome of the appeals, PSEG and PSE&G expect that the transfer of such assets will occur later in 2000. Prior to the execution of such transfer, Power must obtain approval from the New Jersey Department of Environmental Protection (NJDEP) to transfer certain liabilities and the Pennsylvania Public Utility Commission (PPUC) to transfer PSE&G's assets in Pennsylvania. In September 1999, the Federal Energy Regulatory Commission (FERC) approved PSE&G's proposed sale of its generating units to Power. In December 1999, FERC approved exempt wholesale generator (EWG) status for Fossil and Nuclear. In February 2000, the Nuclear Regulatory Commission (NRC) gave approval to transfer PSE&G's nuclear licenses to Nuclear, conditioned upon BPU approval. The Final Order requires PSE&G to provide, through July 31, 2002, basic generation service (BGS) for all customers who do not select a different supplier. PSE&G is also required to provide BGS for customers whose third party suppliers (TPS) are not able to satisfy their obligations. Once the generation-related asset sale to Power is complete, pursuant to a contractual relationship, Power will provide PSE&G with the energy and capacity required to meet its BGS and off-tariff rate agreement (OTRA) obligations. BGS will be competitively bid for the year beginning August 1, 2002 and thereafter. PSE&G's earnings and, following the anticipated sale of generation-related sale to Power, Power's earnings, will be exposed to the risks of the competitive wholesale electricity market to the extent that Power has to purchase energy and/or capacity or generate energy to meet its obligations to supply power to PSE&G at market prices or costs, respectively, which approach or exceed the BGS contract rate. To mitigate this risk, Power's policy will be to use derivatives, consistent with its business plans and prudent practices and build and purchase additional capacity in the PJM and surrounding regions. This risk will be further mitigated due to customer migration from BGS to TPS. Power will also participate in the competitive wholesale electricity market for other items such as energy, capacity and ancillary services. 34 The Energy Master Plan Proceedings have dramatically reshaped the utility industry in New Jersey and have directly affected how PSEG will conduct business, and therefore, its financial prospects in the future. PSEG has realigned its organizational structure to address the competitive environment brought about by the deregulation of the electric generation industry in New Jersey and the Northeast. PSEG has been engaged in the competitive energy business for a number of years through certain of its unregulated subsidiaries; however, competitive businesses now constitute a much larger portion of PSEG's activities. It is expected that by July 31, 2003, the end of the transition period under the Energy Master Plan Proceedings, PSEG's unregulated subsidiaries (Energy Holdings and Power) will contribute between 65% and 75% of PSEG's earnings as compared to 1999 when PSE&G comprised approximately 90% of PSEG's earnings, excluding the extraordinary charge. Additionally, PSEG will be more dependent on cash flows generated from its unregulated operations for its capital needs. As the unregulated portion of the business continues to grow, financial risks and rewards will be greater, financial requirements will change and the volatility of earnings and cash flows will increase. In 1999, PSE&G's operations were highlighted by the commencement of the transition into a competitive, deregulated environment. This included the discontinuation of SFAS 71 for the electric generation portion of PSE&G's business, the start of customer choice, the implementation of the initial 5% electric rate reduction and changes to customers' bills. In 1999, Energy Holdings continued to implement its strategy to develop its business through international expansion as Global made its first investments in Europe with a major stake in several generation projects in Italy and plans to build a combined heat-power facility in Poland. Global also continued its growth in Latin America through the acquisition of a majority interest in electric distribution companies in Chile and Peru and completing financing for a power plant in Argentina. Additionally, Global acquired a majority stake in a generation facility in India and is building two 1,000 megawatt (MW) plants in Texas. Resources also continued its investment strategy with its investments in several leveraged leases on energy-related assets. Going forward, PSEG expects to continue to pursue its strategies to grow its family of energy-related businesses as well as consider opportunities for expansion through business combinations. More emphasis will be placed on finding opportunities for expansion outside of its traditional utility services and markets. Power's business strategy is to size its fleet of generation assets to take advantage of market opportunities in the Northeast U.S., while seeking to increase its value and manage commodity price risk through its wholesale trading activity. PSE&G's transmission and distribution objective is to provide cost-effective, high quality, reliable service. PSEG has positioned Energy Holdings as a major part of its planned growth strategy. In order to achieve this strategy, Global will focus on generation and distribution investments within targeted high-growth regions of the worldwide energy market. Resources will utilize its market access, industry knowledge and transaction structuring capabilities to expand its energy-related financial investment portfolio. Energy Technologies will continue to provide HVAC contracting and other energy-related services to industrial and commercial customers in the Northeastern and Middle Atlantic United States. To the extent that the discussion that follows reports on business conducted under full monopoly regulation of the utility businesses, it must be understood that such businesses have changed due to the deregulation of the electric generation and natural gas commodity sales businesses. Past results are not an indication of future business prospects or financial results. 35 RESULTS OF OPERATIONS EARNINGS (LOSSES) ---------------------------- YEAR ENDED DECEMBER 31, ---------------------------- 1999 1998 1997 ----- ----- ----- (MILLIONS OF DOLLARS) PSE&G, Before Extraordinary Item $ 644 $ 593 $ 513 PSE&G Extraordinary Item (804) -- -- ----- ----- ----- Total PSE&G (160) 593 513 Energy Holdings 83 51 47 PSEG* (4) -- -- ----- ----- ----- Total PSEG $ (81) $ 644 $ 560 ===== ===== ===== CONTRIBUTION TO EARNINGS PER SHARE (BASIC AND DILUTED) ---------------------------- YEAR ENDED DECEMBER 31, ---------------------------- 1999 1998 1997 ----- ----- ----- PSE&G, Before Extraordinary Item $2.93 $2.57 $2.21 PSE&G Extraordinary Item (3.66) -- -- ----- ----- ----- Total PSE&G (0.73) 2.57 2.21 Energy Holdings 0.38 0.22 0.20 PSEG* (0.02) -- -- ----- ----- ----- Total PSEG $(0.37) $2.79 $2.41 ===== ===== ===== * Interest on certain financing transactions. In 1999, PSE&G recorded an extraordinary charge to earnings of $804 million, net of tax, as a result of the BPU's Summary Order in the Energy Master Plan Proceedings. For further discussion, see Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation of Notes. Excluding that extraordinary charge, basic and diluted earnings per share of Common Stock were $3.29 in 1999, representing an increase of $0.50 per share, or 18% from 1998. Excluding the extraordinary charge, PSE&G's contribution to earnings per share of Common Stock in 1999 increased $0.36 from 1998, including $0.14 of accretion as a result of PSEG's stock repurchase program. This increase was primarily due to increased sales of gas and electricity resulting from favorable weather conditions in 1999 augmented by positive economic factors in New Jersey and profits realized from wholesale energy activities. In addition, generation-related depreciation expenses were lower for a portion of 1999 as a result of the SFAS 121 impairment write-down, partially offset by changes in depreciation and capitalization policies stemming from the discontinuation of SFAS 71. The increase in earnings was also partially offset by the 5% electric rate reduction, beginning August 1, 1999, associated with the BPU's Final Order, coupled with higher operating and maintenance expenses, including higher transmission, distribution and wholesale energy costs, than those incurred in 1998. Energy Holdings' contribution to earnings per share of Common Stock in 1999 increased $0.16 from 1998 primarily due to the better overall performance of Resources, Global and Energy Technologies and $0.02 of accretion due to PSEG's stock repurchase program. The improvements were attributable largely to Resources which benefited from an upturn in the equity markets as compared to 1998. In addition, Energy Holdings' results reflect Global's gain from the sale of its interest in a co-generation facility partially offset by impairment write-downs of other investments in Global's portfolio. PSE&G's contribution to earnings per share of Common Stock in 1998 increased $0.36 compared to 1997 primarily due to the settlement of the lawsuits filed by the co-owners of Salem which negatively impacted 1997 earnings by $0.27 per share, an increase in electric revenues resulting from considerably warmer weather in the 36 third quarter of 1998 and wholesale power activities of PSE&G. These increases were partially offset by lower gas sales in 1998 due to mild winter weather during the 1998 heating seasons. Energy Holdings' contribution to earnings per share in 1998 increased $0.02 compared to 1997. Energy Holdings' earnings were primarily those of PSEG Resources due to the strong overall performance of its investment portfolio, including leveraged leases, limited partnerships, leveraged buyout funds and marketable securities. Global's 1998 earnings were negatively impacted by the loss on the sale of its investment in an electric generating facility located in Colombia. PSE&G -- REVENUES The presentation of revenues on the Consolidated Statements of Income has changed effective August 1, 1999, due to the change in regulation as required by the Final Order. PSE&G's generation business has been deregulated and, starting August 1, 1999, earns revenues by providing the energy and capacity necessary to meet PSE&G's BGS obligations as well as through sales of wholesale energy, capacity and ancillary services. PSE&G's transmission and distribution businesses remain regulated and will continue to earn revenues based on its approved tariffs under which it provides transmission and distribution services for its residential, commercial and industrial customers in New Jersey. The rates charged for transmission and distribution are regulated by FERC and the BPU, respectively. Revenues are also generated from a variety of other activities such as sundry sales, wholesale transmission services and other miscellaneous services. For more information, see Note 1. Organization, Basis of Presentation and Summary of Significant Accounting Policies and Note 2. Regulatory Issues of Notes. Because historical information is not available for the Electric Generation and Electric Transmission and Distribution Revenues, variances in Electric Revenues will be discussed in the aggregate. For estimates of historical Electric Generation and Electric Transmission and Distribution Revenues, see Note 16. Financial Information by Business Segments of Notes. Certain of the below listed year-to-year variances did not impact earnings as there was an offsetting variance in expense. To the extent fuel revenue and expense flowed through the Electric Levelized Energy Adjustment Clause (LEAC) through July 31, 1999, the Levelized Gas Adjustment Clause (LGAC), the Societal Benefits Clause (SBC) or the non-utility generation market transition charge (NTC) mechanisms, variances in certain revenues and expenses offset and thus had no effect on earnings. These include base fuel revenues through July 31, 1999, demand side management (DSM) revenue and Remediation Adjustment Charge (RAC) revenue. On August 1, 1999, the LEAC mechanism was eliminated as a result of the Final Order. This is likely to increase earnings volatility since PSE&G and Power now bear the full risks and rewards of changes in nuclear and fossil generating fuel costs and replacement power costs. See Note 2. Regulatory Issues and Note 4. Regulatory Assets and Liabilities of Notes for a discussion of LEAC, LGAC, SBC, NTC, RAC and DSM and their status under the Energy Master Plan Proceedings. ELECTRIC Revenues increased $164 million or 4% in 1999 as compared to 1998 primarily due to favorable weather conditions in 1999 augmented by positive economic factors in New Jersey. These factors increased both generation and transmission and distribution revenues; however, the increase in generation revenues was partially offset by the 5% rate reduction, effective on August 1, 1999, which decreased generation revenues by approximately $80 million through December 31, 1999. The increase was also due to stronger profits realized from wholesale energy activities than in 1998. Also, higher DSM revenues in 1999 than in 1998 contributed to increased distribution revenues. Customers selecting a third party supplier (TPS) will result in lower BGS revenues. However, it also creates the opportunity for the generation business to mitigate the price risk of the BGS contract and to sell available energy and capacity into the wholesale market. The degree to which net generation revenues will be impacted will depend on the volume of sales and the amount by which market prices vary from prices under the BGS contract. Electric revenues increased $113 million or 3% in 1998 as compared to 1997. The increase in 1998 was primarily due to higher sales resulting from considerably warmer weather in the third quarter of 1998 augmented by positive economic factors in New Jersey. Additionally, revenue from wholesale power activities and DSM revenue were higher in 1998 than in 1997. These increases were partially offset by a decrease to revenue caused by New Jersey energy tax reform in 1998. For a discussion of energy tax reform, see Note 13. Income Taxes of Notes. Collection of New Jersey Gross Receipts and Franchise Tax (NJGRT) was reflected in revenue and expense in prior 37 years. As a result of energy tax reform, the portion of NJGRT replaced by the New Jersey sales and use tax is no longer reflected in revenue or expense on the income statement. State sales and use tax is a liability of the customer collected by PSE&G and remitted to the State and is recorded in Other Current Liabilities on the Consolidated Balance Sheets. GAS Revenues increased $158 million or 10% in 1999 as compared to 1998. The increase was primarily due to increased revenues from gas service contracts and higher sales to large commercial and industrial customers than in 1998. Additionally, more favorable weather in 1999 contributed to the increases. The potential loss of residential customers due to the opening of competition in 2000 could reduce future revenues. Gas revenues decreased $378 million or 20% in 1998 as compared to 1997. The decrease in 1998 is primarily due to lower therm sales resulting from milder winter weather in 1998 and energy tax reform (see Note 13. Income Taxes of Notes). PSE&G -- EXPENSES ELECTRIC ENERGY COSTS Electric Energy Costs increased $13 million or 1% in 1999 as compared to 1998. The increase was primarily due to an increase in electric sales volumes due to hot summer weather in 1999. Beginning in August 1999, lower prices for power purchases helped to offset the increase. Electric Energy Costs increased $36 million or 4% in 1998 as compared to 1997. This increase was primarily due to increased sales of electricity resulting in increased purchases of fuel for electric generation and purchases of power from the PJM Interconnection, L.L.C. (PJM) pool. Due to the elimination of the LEAC on August 1, 1999, these historical trends can not be considered an indication of future Electric Energy Costs. Given the elimination of the LEAC, the lifting of the requirements that electric energy offered for sale in the PJM not exceed the variable cost of producing such energy (capped at $1,000 per megawatt-hour), the absence of a PJM price cap in situations involving emergency purchases and the potential for plant outages, price movements could have a material impact on PSEG's and PSE&G's financial condition, results of operations or net cash flows. GAS COSTS Gas Costs increased $68 million or 7% in 1999 as compared to 1998 due to higher sales to large commercial and industrial customers and increased sales of gas resulting from colder weather in the first and second quarters of 1999 than in 1998. Gas Costs decreased $131 million or 12% in 1998 as compared to 1997. This decrease was primarily due to the milder winter weather in 1998. Due to the operation of the Levelized Gas Adjustment Clause (LGAC) mechanism, variances in fuel revenues and expenses offset and had no direct effect on earnings. OPERATION AND MAINTENANCE Operation and Maintenance expense increased $188 million or 14% in 1999 as compared to 1998. The increase was primarily due to the change in the capitalization policy for PSE&G's electric generation business (see Note 1. Organization, Basis of Presentation and Summary of Significant Accounting Policies of Notes) and higher costs related to wholesale power activities. The change in capitalization policy will result in significant increases in future Operation and Maintenance expenses associated with the electric generation business. This increase in Operation and Maintenance expense was $57 million during 1999 (commencing with the change in policy effective April 1, 1999). These increases will be partially offset in the future by lower depreciation expense due to the lower level of generation-related capitalized costs. 38 In addition, there were higher information technology costs, including costs related to Year 2000 readiness, and higher material and outside services costs in 1999 attributable to several factors, including restoration work required in the wake of Tropical Storm Floyd and the flooding and damage it caused. Also contributing to the increase were higher costs associated with the preparation for deregulation and higher DSM recovery of previously deferred expenses in 1999 than in 1998. Operation and Maintenance expense increased $78 million or 6% in 1998 as compared to 1997. This increase was primarily due to higher DSM recovery resulting in a greater recognition of previously deferred expenses, higher information technology costs in 1998 due to Year 2000 remediation work, higher marketing costs and higher administrative and general cost related to wholesale power activities. These increases were partially offset by lower nuclear operation and maintenance costs due to restart expenses in 1997 for Salem. Through July 31, 1999, DSM costs were recoverable through the demand side adjustment factor of the LEAC and recorded in both expense and revenue and therefore, had no direct effect on earnings. DEPRECIATION AND AMORTIZATION Depreciation and Amortization expense decreased $120 million or 18% in 1999 as compared to 1998 and increased $42 million or 7% in 1998 as compared to 1997. The 1999 decrease was due to lower net book value balances of PSE&G's generation-related assets which were reduced as a result of the impairment write-down recorded pursuant to SFAS 121. These decreases were partially offset by higher depreciation rates for generation-related assets beginning April 1, 1999 due to the change in depreciation policy for generation-related assets and by higher depreciation expense related to capital additions to the transmission and distribution business. Despite the higher depreciation rates for generation-related assets, the net decrease in generation-related depreciation expense will continue due to the reduced asset balances. Additionally, beginning in 2000, electric distribution asset-related depreciation will be further reduced due to the amortization of the excess electric distribution depreciation reserve over the period from January 1, 2000 to July 31, 2003. See Note 4. Regulatory Assets and Liabilities of Notes for a discussion of the amortization schedule. Once the securitization transaction is complete, the regulatory asset recorded for PSE&G's stranded costs will be amortized with such amortization expense partially offsetting these decreases. INCOME TAXES Income Taxes increased $106 million or 26% in 1999 as compared to 1998. The increase is primarily due to higher pre-tax operating income. Income Taxes increased $148 million or 58% in 1998 as compared to 1997. This increase was primarily due to the addition of New Jersey State income tax of $103 million in 1998. PSE&G became subject to New Jersey State income tax, effective January 1, 1998, due to energy tax reform in the State of New Jersey. For more detail on energy tax reform and changes in New Jersey taxes, see Note 13. Income Taxes of Notes. TAXES OTHER THAN INCOME TAXES Taxes Other Than Income Taxes include the Transitional Energy Facility Assessment (TEFA) and the New Jersey Gross Receipts and Franchise Tax (NJGRT). Taxes Other Than Income Taxes decreased $14 million or 7% in 1999 as compared to 1998 and $398 million or 66% in 1998 as compared to 1997. The 1999 decrease is due to New Jersey energy tax reform and the five-year phase out of the TEFA commencing in January 1999. For 1998, the amount represents TEFA unit-based taxes while the 1998 amount represents NJGRT unit-based taxes. The TEFA unit tax rates are approximately 30% of the NJGRT unit tax rates. See Note 13. Income Taxes of Notes for other impacts of New Jersey energy tax reform. 39 SETTLEMENT OF SALEM LITIGATION In January and February 1997, the settlement of litigation by the co-owners of Salem against PSE&G related to the 1995 shutdown of Salem Nuclear Station which reduced Other Income and Deductions by $82 million, or $53 million, net of tax, was recorded. For a further discussion of the Salem settlement, see Note 11. Commitments and Contingent Liabilities of Notes. ENERGY HOLDINGS -- EARNINGS (LOSSES) YEAR ENDED DECEMBER 31, ----------------------------- 1999 1998 1997 ----- ----- ----- (MILLIONS OF DOLLARS) EARNINGS BEFORE INTEREST, TAXES AND PREFERRED DIVIDENDS: Resources $ 169 $ 135 $ 134 Global 117 72 46 Energy Technologies (8) (15) (25) Other (7) (3) (9) ----- ----- ----- Sub-total 271 189 146 INTEREST, TAXES AND PREFERRED DIVIDENDS (188) (138) (99) ----- ----- ----- EARNINGS $ 83 $ 51 $ 47 ===== ===== ===== Energy Holdings' earnings in 1999 were $83 million, an increase of $32 million compared to 1998. The increase in Energy Holdings' earnings was primarily due to the better overall performance of Resources, Global and Energy Technologies. The improvements were attributable largely to Resources which benefited from an upturn in the equities markets as compared to 1998 and additionally from income from new capital leases. In addition, Energy Holdings' results reflect Global's gain from the sale of its interest in a co-generation facility and income from new investments in distribution assets in Chile and Peru, partially offset by write-downs of other investments in Global's portfolio and by higher expenses associated with project development. Energy Technologies' losses narrowed due to higher revenues from recent acquisition activities partially offset by higher operating expenses. Energy Holdings' earnings in 1998 were $51 million, a $4 million increase as compared to 1997. This increase in Energy Holdings' earnings was primarily attributed to PSEG Resources due to the strong overall performance of its investment portfolio. Although Global's 1998 operating earnings increased due to the investments made in three Latin American distribution companies in 1997, the increase was more than offset by the negative impact of the loss on the sale of its investment in an electric generating facility located in Colombia and higher financing costs due to investing activities. ENERGY HOLDINGS -- REVENUES Revenues increased $167 million from $440 million to $607 million in 1999 as compared to 1998. The increase was due to an increase of $34 million at Resources due to higher income from financial investments and higher income from new capital lease investments, a $115 million increase in revenues at Energy Technologies due to the addition of revenues from acquisitions of various HVAC companies in 1999 and a $18 million increase in revenues at Global primarily due to improvement in revenues from domestic generation assets as well as the addition of revenues from the distribution companies in Chile and Peru acquired in June 1999. Global's revenue includes its share of the net income from joint ventures recorded under the equity method of accounting (see Note 1. Organization, Basis of Presentation and Summary of Significant Accounting Policies of Notes). Revenues increased $98 million from $342 million to $440 million in 1998 as compared to 1997. This increase was primarily due to an increase in revenues at Energy Technologies of $67 million from the acquisition of a mechanical contracting firm which added $58 million in revenue. In addition, Global's revenues increased $33 million due to the addition of revenue from investments made in three Latin American distribution companies in 1997. Global is a 50% partner in six generating facilities in California. Beginning in 2000, revenue from these facilities will be reduced due to lower energy prices to be paid by the purchaser under the energy contracts 40 associated with the plants. Four of the facilities in which Global has an interest will change from fixed energy pricing by December 31, 2000, with the remainder changing in 2001. Global's share of annual income before income taxes from these facilities is projected to decrease by approximately $30 million to $35 million when all such contracts reflect the lower energy pricing. Global's projects in operation, construction and development are expected to offset this revenue shortfall; however, no assurances of that result can be given. ENERGY HOLDINGS -- EXPENSES OPERATION AND MAINTENANCE Operation and Maintenance expense increased $120 million from $249 million to $369 million in 1999 as compared to 1998. The increase was primarily due to higher operating expenses from the entities acquired by Energy Technologies in 1999 and, to a lesser degree, by higher development expenses at Global. Operation and Maintenance expense increased $53 million from $196 million to $249 million in 1998 as compared to 1997. The increase was primarily due to the acquisition of a mechanical contracting firm by Energy Technologies in January 1998 which added $55 million in operating expenses. INTEREST EXPENSE AND PREFERRED DIVIDENDS Interest Expense and Preferred Dividends increased $10 million from $110 million to $120 million in 1999 as compared to 1998. The increase was primarily due to financing 1999 investment and acquisition activities. Interest Expense and Preferred Dividends increased $37 million from $73 million to $110 million in 1998 as compared to 1997. The increase was primarily due to financing 1998 investment and acquisition activities. INCOME TAXES Income Taxes increased $39 million from $30 million to $69 million in 1999 as compared to 1998. The increase was primarily due to higher pre-tax income for the year ended December 31, 1999. Income Taxes increased $4 million from $26 million to $30 million in 1998 as compared to 1997. The increase was primarily due to higher pre-tax income for the year ended December 31, 1998. ENERGY HOLDINGS -- OTHER INCOME (LOSS) Other Income increased $34 million from a loss of $1 million to income of $33 million in 1999 as compared to 1998 and decreased $2 million to a loss of $1 million in 1998 from income of $1 million in 1997. The 1999 increases were primarily due to a gain on the sale of Global's interest in a co-generation facility as discussed above, partially offset by write-downs on other investments, as discussed below. In the third quarter of 1999, Global completed a comprehensive review of its existing assets and development activities focusing on rationalizing the portfolio to ensure efficient capital deployment. Global's management has decided that it will not commit additional resources to its investments in Thailand and the Philippines and will focus its current Asian development activities in China. As a result, Global recorded an $8 million write-down, net of tax, to adjust the carrying value of such assets to net realizable value. In addition, the projected substantial decline in revenue, discussed above, related to energy contracts for six generation facilities in California resulted in a $19 million write-down, net of tax, of Global's equity investment in such facilities. PSEG -- PREFERRED SECURITIES DIVIDEND REQUIREMENTS OF SUBSIDIARIES Preferred Securities Dividend Requirements increased $14 million or 18% in 1999 as compared to 1998 and $21 million or 36% in 1998 as compared to 1997. The increases were due to the issuance of trust preferred securities in aggregate principal amount of $525 million in January, June and July 1998. 41 LIQUIDITY AND CAPITAL RESOURCES PSEG AND PSE&G PSEG is a holding company and, as such, has no operations of its own. The following discussion of PSEG's liquidity and capital resources is on a consolidated basis, noting the uses and contributions of PSEG's two direct operating subsidiaries in operation in 1999, PSE&G and Energy Holdings. In 2000, Power is expected to be an operating subsidiary which will impact PSEG's liquidity and capital resources. As of December 31, 1999, PSEG's capital structure consisted of 40.9% common equity, 46.8% long-term debt and 12.3% preferred stock and other preferred securities. As of December 31, 1998, PSEG's capital structure consisted of 46.1% common equity, 43.0% long-term debt and 10.9% preferred securities. As of December 31, 1999, PSE&G's capital structure consisted of 49.8% common equity, 41.1% long-term debt and 9.1% preferred stock and other preferred securities. As of December 31, 1998, PSE&G's capital structure consisted of 49.0% common equity, 43.6% long-term debt and 7.4% preferred stock and other preferred securities. On September 17, 1999, the BPU issued its Finance Order which authorized, among other things, the imposition of a non-bypassable transition bond charge on PSE&G's customers; the sale of PSE&G's property right in such charge created by the Energy Competition Act to a bankruptcy-remote financing entity; the issuance and sale of $2.525 billion of transition bonds by such entity as consideration for such property right, including an estimated $125 million of transaction costs; and the application by PSE&G of the transition bond proceeds to retire outstanding debt and/or equity. Assuming a favorable outcome of the previously discussed appeals, PSEG and PSE&G expect such sale of transition bonds and the receipt of proceeds in 2000. For a discussion of the pending appeals of the Final Order and the Finance Order, see Overview of 1999 and Future Outlook and Note 2. Regulatory Issues of Notes. Both the right of PSE&G to receive the bondable transition charge pursuant to the securitization transaction and the proceeds from the transfer of its generation-related assets to Power are property subject to the lien of PSE&G's First and Refunding Mortgage (Mortgage). All such property will be released from the lien of the Mortgage at the time of sale. In accordance with the provisions of the Mortgage, the net proceeds from the sale of such released property will be deposited with the Trustee. The Mortgage authorizes PSE&G to exercise one or more of the following options as to the application of proceeds of such released property, at its sole discretion: 1. Withdraw funds for corporate use by utilizing additions and improvements. (Option 1) 2. Direct the Trustee to invest the proceeds in U.S. Government Securities. (Option 2) 3. Direct the Trustee to purchase its Mortgage Bonds at the lowest prices obtainable, at or below par value. If the Trustee is unable to purchase sufficient Mortgage Bonds to exhaust such proceeds deposited with it, the balance may be applied on a pro rata basis towards the redemption of eligible series of Mortgage Bonds outstanding at par. (Option 3) At December 31, 1999, PSE&G had a total of $3.727 billion of Mortgage Bonds outstanding, of which $2.935 billion are taxable registered Mortgage Bonds subject to the special redemption provisions outlined in Option 3 (Redeemable Bonds). $623 million of these Redeemable Bonds are scheduled to mature within twelve months. $777 million of the Mortgage Bonds outstanding are tax-exempt Pollution Control Bonds and $15 million are two series of taxable coupon Mortgage Bonds due 2037 (Coupon Bonds). Neither the Pollution Control Bonds nor the Coupon Bonds are subject to the special redemption provisions outlined in Option 3. PSE&G has not yet made a final decision as to the amount and the manner in which it will retire or redeem its Mortgage Bonds. Such a decision will be made on or about the time the proceeds from securitization and the sale of the generation-related assets to Power are deposited with the Trustee, on the basis of market conditions and other 42 factors existing at that time. However, based on current information, a likely utilization of the options available to PSE&G, as noted above, could be as follows: A. Withdraw $2.4 billion of net proceeds from securitization under Option 1, above. These proceeds would be used to: i. Tender for all Coupon Bonds; ii. Redeem $123.5 million of Pollution Control Bonds now redeemable; iii. Retire up to an additional $100 million of Redeemable Bonds through various means, such as maturities, open market purchases and make-whole calls; iv. Reduce PSE&G's short-term debt; and v. Reduce PSE&G common and/or preferred equity with the balance of proceeds, if any. B. Apply proceeds ($2.4 billion to $2.8 billion) from the generation-related asset sale to Power under Option 3 against any remaining taxable Mortgage Bonds outstanding. As previously reported, in anticipation of securitization, PSEG's Board of Directors has authorized the repurchase of up to an aggregate of 30 million shares of Common Stock in the open market. At December 31, 1999, PSEG had repurchased approximately 15.8 million shares of Common Stock, at a cost of approximately $607 million, under this authorization. The repurchased shares have been held as treasury stock or used for other corporate purposes. In December 1999, PSEG entered into a Forward Purchase Agreement with an intermediary, who has purchased and held shares on behalf of PSEG. The repurchase of these shares will not be reflected on PSEG's balance sheet until settlement of the transaction which is expected in the second quarter of 2000. Market conditions and the availability of alternative investments will dictate if and when more shares of Common Stock will be repurchased under this authorization. Going forward, cash generated from PSE&G's regulated business is expected to provide the majority of the funds for PSE&G's business needs. Following Power's initial external financing, Power's capital needs will be dictated by its growth strategy and will be funded with cash generated from operations. Energy Holdings' growth will be funded through external financings, equity infusions from PSEG and cash generated from operations. Dividend payments on Common Stock were $2.16 per share and totaled approximately $474 million and $499 million during the years ended December 31, 1999 and 1998, respectively. PSEG has not increased its dividend rate in eight years in order to retain additional capital for reinvestment and to reduce its payout ratio as earnings grow. Since 1986, PSE&G has made regular cash payments to PSEG in the form of dividends on outstanding shares of PSE&G's common stock. PSE&G paid common stock dividends of $629 million and $503 million to PSEG during the years ended December 31, 1999 and 1998, respectively. These amounts were used to fund PSEG's Common Stock dividends, and in 1999, to support a portion of PSEG's stock repurchase program. PSEG believes that it will have adequate earnings and cash flow in the future from PSE&G and Power to maintain dividends at the current level. However, the amounts and dates of such dividends on Common Stock declared in the future will necessarily be dependent upon PSEG's future earnings, cash flows, financial requirements and other factors. Earnings and cash flows required to support the dividend will become more volatile as PSEG's business changes from one that is principally regulated to one that is principally competitive. PSEG and PSE&G have each issued Deferrable Interest Subordinated Debentures in connection with the issuance of their respective tax deductible preferred securities. If payments on those Deferrable Interest Subordinated Debentures are deferred, or PSEG or PSE&G defaults on the applicable indenture related thereto or its guarantee thereof, neither PSEG nor PSE&G may pay any dividends on its common or preferred stock until such default is cured. Currently, there has been no deferral nor default. As a result of the 1992 focused audit of PSEG's non-utility businesses (Focused Audit), the BPU approved a plan which, among other things, provided that: (1) PSEG would not permit Energy Holdings' non-utility investments to exceed 20% of PSEG's consolidated assets without prior notice to the BPU; (2) the PSE&G Board of Directors would provide an annual certification that the business and financing plans of Energy Holdings will not 43 adversely affect PSE&G; (3) PSEG would (a) limit debt supported by the minimum net worth maintenance agreement between PSEG and PSEG Capital Corporation (PSEG Capital) to $650 million and (b) make a good-faith effort to eliminate such support by April 2003; and (4) Energy Holdings would pay PSE&G an affiliation fee of up to $2 million a year to be applied by PSE&G to reduce utility rates. As a result of the final outcome and the accounting impacts resulting from the deregulation of the electric generation business in New Jersey, PSEG and PSE&G do not believe that the Focused Audit provision requiring notification to the BPU if PSEG's non-utility assets exceed 20% of its consolidated assets (such investments at December 31, 1999 were approximately 22% of PSEG's consolidated assets) remains appropriate and believe that modifications will be required. The Final Order addressed the Focused Audit, noting that PSEG's non-regulated assets would likely exceed 20% of total PSEG assets once the utility's generating assets were sold to a non-regulated subsidiary and directed PSE&G to file a petition with the BPU to maintain the existing regulatory parameters or to propose modifications to the Focused Audit order no later than the end of the first quarter of 2000. The Final Order also recognized that, due to significant changes in the industry and, in particular, PSEG's corporate structure as a result of the Final Order, modifications to or relief from the Focused Audit might be warranted. For discussion of the Energy Master Plan Proceedings, see Overview of 1999 and Future Outlook and Note 2. Regulatory Issues of Notes. Regulatory oversight by the BPU to ensure that there is no harm to utility customers from PSEG's non-utility investments is expected to continue. PSEG and PSE&G believe that these issues will be satisfactorily resolved, although no assurances can be given. In addition, if PSEG were no longer exempt under the Public Utility Holding Company Act (PUHCA), PSEG and its subsidiaries would be subject to additional regulation by the SEC with respect to financing and investing activities, including the amount and type of non-utility investments. PSEG believes, however, that this would not have a material adverse impact on PSEG and its subsidiaries. ENERGY HOLDINGS As noted above, it is expected that Global and Resources will provide earnings and cash flow for long-term growth for Energy Holdings and PSEG. Resources' investments are designed to produce immediate earnings and cash flow that enable Global and Energy Technologies to focus on longer investment horizons. Energy Holdings plans to continue the growth of Global and Resources through further investments made by these subsidiaries. Energy Holdings will assess the growth prospects and opportunities for Energy Technologies before committing additional capital. Investing activity in 2000 will be subject to periodic review and revision and may vary depending on the opportunities presented. During the next five years, Energy Holdings' will need significant capital to fund its planned growth. Factors affecting actual expenditures and investments include availability of capital and suitable investment opportunities, market volatility and economic trends. A significant portion of Global's growth is expected to occur internationally due to the current and anticipated growth in electric capacity required in certain regions of the world. Resources will continue its focus on investments related to energy infrastructure. In June 1999, PSEG contributed approximately $200 million of additional equity to Energy Holdings, which was used by Energy Holdings to pay down short-term debt that was used to acquire its interest in the Chilean and Peruvian distribution companies. In January, June and July 1998, PSEG invested $217 million, $147 million and $145 million, respectively, in Energy Holdings which issued to PSEG like amounts of its 5.01%, 4.80% and 4.875% Cumulative Preferred Stock and made additional equity investments in Global and Resources. PSEG funded its additional investment in Energy Holdings through the sale of tax deductible preferred securities, issued by Enterprise Capital Trust I, II and III, special purpose statutory business trusts controlled by PSEG, representing Guaranteed Preferred Beneficial Interests in PSEG's Debentures. It is Global's policy to limit its financial exposure to each project and to mitigate development and operating risk, including fuel and foreign currency exposure, through contracts. In addition, the project loan agreements are structured on a non-recourse basis. Further, Global structures project financing so that a default under one project's loan agreement will have no effect on the loan agreements of other projects or the debt of Energy Holdings. For a discussion of the source of Energy Holdings' funds, see External Financings. Over the next several years, Energy Holdings and its subsidiaries will be required to refinance their maturing debt and provide additional debt and equity financing for growth. Any inability to obtain required additional external capital or to extend or replace maturing debt and/or existing agreements at current levels and reasonable interest rates may affect PSEG's and Energy Holdings' financial condition, results of operations and cash flows. 44 GLOBAL In August 1999, Global sold its 50% partnership interest in a 137 MW gas-fired combined-cycle co-generation facility in Newark, New Jersey and received net cash proceeds of approximately $70 million resulting in an after-tax gain of approximately $40 million. In June 1999, Global and a partner acquired 90% of a Chilean distribution company, which at the time owned a 37% interest in a distribution company in Peru, together providing electric and gas service to approximately one million customers. The acquisition was made in a 50/50 joint venture arrangement. Global's equity investment was approximately $268 million, including fees and closing costs. In addition, Global's portion of the acquisition was financed with $160 million of debt that is non-recourse to Global, Energy Holdings and PSEG, which is consolidated on the Global balance sheet. Global and its partner later acquired additional interests in the Peruvian and Chilean distribution companies resulting in total combined ownership shares of approximately 85% and 99%, respectively. Global's investment in connection with the additional Peruvian distribution company acquisition was approximately $108 million. RESOURCES In 1999, Resources, through the sale of a portion of its equity interests in an LBO fund, the early buy-outs of three leveraged leases and the sale of its interest in a limited partnership, received cash proceeds totaling approximately $235 million resulting in an after-tax gain of approximately $38 million. In 1999, Resources invested approximately $380 million in six leveraged lease transactions of energy-related assets: gas distribution networks in the Netherlands, cogeneration plants in Germany, a generation facility in the United States and a liquefied natural gas storage facility in the United States. ENERGY TECHNOLOGIES During 1999, Energy Technologies acquired six mechanical, HVAC and building service contractors in New Jersey, Rhode Island and Virginia for a total cost of approximately $63 million, including debt assumed. CAPITAL REQUIREMENTS PSE&G (INCLUDING POWER) PSE&G has substantial commitments as part of its ongoing construction program. PSE&G's construction program is continuously reviewed and periodically revised as a result of changes in economic conditions, revised load forecasts, business strategies, site changes, cost escalations under construction contracts, requirements of regulatory authorities and laws, the timing of and amount of electric and gas transmission and/or distribution rate changes and the ability of PSE&G to raise necessary capital. In 2000, Power announced that it will construct a 500 MW natural gas-fired, combined-cycle electric generating plant at Bergen generating station at a cost of approximately $290 million with completion expected in June 2002. Power will also install four new combustion turbines at Burlington generating station and two new combustion turbines at Linden generating station, adding 186 MW and 164 MW, respectively of electric generating capacity, at a cost of approximately $155 million. The new combustion turbines are expected to be installed and operational by July 2000. On October 6, 1999, Power announced an agreement with Niagara Mohawk Power Corporation (Niagara Mohawk), to purchase its 400 MW oil and gas-fired electric generating station in Albany, New York (Albany Steam Station) for $47.5 million. On September 30, 1999, Power announced that it has signed an agreement to acquire all of Conectiv's interests in the Salem Nuclear Generating Station (Salem) and the Hope Creek Nuclear Generating Station (Hope Creek) and half of Conectiv's interest in the Peach Bottom Atomic Power Station (Peach Bottom), totaling 544 MW for an aggregate purchase price of $15.4 million plus the net book value of nuclear fuel at closing. For further discussion, see Note 11. Commitments and Contingent Liabilities of Notes. For the years ended December 31, 1999, 1998 and 1997, PSE&G had plant additions of $468 million, $547 million and $557 million, respectively, including Allowance for Funds Used During Construction (AFDC) and capitalized interest of $7 million, $12 million and $15 45 million, respectively. The 1999 decrease is primarily due to PSE&G's capitalization policy change for the electric generation portion of its business. See Note 1. Organization, Basis of Presentation and Summary of Significant Accounting Policies of Notes for further discussion regarding the capitalization policy change. Construction expenditures were related to improvements in PSE&G's existing power plants, including the replacement of Salem 1 steam generators in 1997 and acquisition of nuclear fuel, transmission and distribution system, gas system and common facilities. PSE&G also expended $20 million, $10 million and $28 million for the cost of plant removal (net of salvage) in 1999, 1998 and 1997, respectively. Projected construction and investment expenditures for PSE&G from 2000 to 2004 range from approximately $350 million to $400 million per year, excluding AFDC and capitalized interest. Power's projected construction and investment expenditures, excluding AFDC and capitalized interest, for 2000 and 2001 are approximately $440 million and $285 million, respectively. From 2002 to 2004, Power's projected expenditures range from approximately $130 million to $160 million per year. Forecasted construction expenditures are related to improvements in PSE&G's transmission and distribution system, existing power plants (including acquisition of nuclear fuel), gas system and common facilities and the expansion of existing generation sites and acquisition of other generation sites as discussed above. ENERGY HOLDINGS During 1999, Energy Holdings' subsidiaries made investments totaling approximately $963 million. These investments include acquisitions and other investments made by Global, Resources and Energy Technologies. Projected investment expenditures for 2000 to 2004 are approximately $700 million per year, comprised of investments in generation and distribution facilities and projects and leveraged lease transactions. Energy Holdings has approximately $175 million of debt principal payments due in 2000 which are expected to be refinanced or funded through existing credit facilities and operating cash flow. These expenditures could be partially offset by investment liquidations. GLOBAL In February 2000, Global and a partner closed on project financing of $329 million for a 1,000 MW gas-fired combined-cycle electric generation facility to be located near Odessa, Texas. The total cost of the facility is estimated to be approximately $528 million, of which Global's investment, including loans and guarantees, is estimated at $190 million. In November 1999, Global announced that it plans to build a combined heat and power plant of 220 MW of electricity and 500 MW of thermal energy capacity utilizing circulating fluidized bed technology in Poland. Total project cost is estimated at $320 million with commercial operation targeted for the first quarter of 2003. In October 1999, Global closed on the acquisition of a 70% interest in a power project development company in Italy specializing in renewable energy. The company currently has approximately 550 MW of power projects either in development or under construction. Global's acquisition and equity investment requirements over the next two years are expected to be approximately $80 million. In August 1999, Global and its partners closed project financing for a 471 MW gas-fired combined-cycle electric generating facility in Rades, Tunisia. Construction of the facility is expected to be completed in the summer of 2001 at a total cost of approximately $261 million. Upon completion, the facility is expected to qualify as a foreign utility company (FUCO). Global's equity investment for its 35% interest is expected to be approximately $27 million including contingencies. In June 1999, Global and a partner closed the project financing for an 830 MW gas-fired combined-cycle electric generating facility to be constructed in San Nicolas, Argentina. The new facility will be adjacent to an existing 650 MW facility also owned by Global and its partner. Construction began in August 1999 and is expected to be completed by 2001 at a total cost of approximately $448 million. Global's equity investment for its 33% interest, including contingencies, is expected to be approximately $86 million. In May 1999, Global acquired a 63% equity interest in a company which is developing a 525 MW coal-fired electric generating facility to be constructed in Ennore, Tamil Nadu, India. Upon scheduled completion in 2003, Global will be the operator of the plant. The total project cost is expected to be approximately $633 million, of 46 which Global's maximum equity investment, including contingencies, is expected to be approximately $180 million. Global plans to close financing for this project and commence construction in the second quarter of 2000. In April 1999, Global and a partner entered into a joint venture agreement to develop, construct and operate a 1,000 MW gas-fired combined-cycle electric generating facility in Guadalupe County in south central Texas. 500 MW of this facility is expected to be operational in late 2000 and is expected to qualify as an EWG. Global's maximum equity investment for its 50% interest is expected to be approximately $193 million, including loans and guarantees. In October 1999, Global closed on a $312 million non-recourse project financing, consisting of a $260 million term loan and $52 million in letter of credit facilities for the Guadalupe facility. At the completion of construction (approximately fifteen months), the loan will convert to a five-year term loan. Also in April 1999, Global and a partner announced the formation of a joint venture to construct and operate up to three gas-fired electric generating facilities with total installed capacity of 200 MW and associated distribution systems to serve, under contract, industrial customers in Venezuela. Global expects the first two facilities, which are in construction, to be operational in 2000. The total cost of these facilities is expected to be approximately $140 million and Global's equity investment, including contingencies, for its 50% interest, is expected to be approximately $70 million. Global has been advised that litigation has been instituted against it by a Venezuelan state-owned electricity company, alleging that operation of one of the facilities would damage the state-owned company's installations and that the facility does not meet certain Venezuelan legal requirements. On February 4, 2000, the Superior Court in Maracay, Venezuela issued an injunction prohibiting the start-up of the plant. Global believes that all legal requirements have been met and has been advised that the appeal of this decision is likely to be heard by the Supreme Court of Venezuela, and a decision is expected to be rendered within 30 days of the appeal. Settlement discussions are underway. Global cannot predict the outcome of this matter, however, a final decision preventing operation of the facility involved could affect the ability to complete and operate the other two facilities. RESOURCES In January and February 2000, Resources invested $73 million in two leveraged lease transactions including a gas distribution system in the Netherlands and an electric power plant in the United States. EXTERNAL FINANCINGS The changes in the utility industry are attracting increased attention from bond rating agencies which regularly assess business and financial matters including how utility companies are meeting competition. Given the changes in the industry and the anticipated use of securitization, attention and scrutiny of PSEG's, PSE&G's, Power's and Energy Holdings' competitive strategies by rating agencies will likely continue. These changes could affect the bond ratings, cost of capital and market prices of their respective securities. In addition, the impact of the use of securitization proceeds, capital structure changes and other actions which might be taken by PSEG and PSE&G in connection with energy industry restructuring is likely to affect the market prices of their respective securities. For discussion of the use of proceeds of securitization see Liquidity and Capital Resources. PSEG, PSE&G, Power and Energy Holdings are analyzing their future capital and financing needs in light of securitization, the anticipated sale of generation-related assets to Power and their business strategies. However, it is expected that following completion of securitization and the generation-related asset sale, PSE&G will refinance a portion of its debt and reduce its equity level, which will not substantially alter its existing capitalization ratios. PSEG At December 31, 1999 and 1998, PSEG had a committed $150 million revolving credit facility which expires in December 2002. At December 31, 1999, PSEG had $120 million outstanding under this revolving credit facility. On September 8, 1999, PSEG entered into an uncommitted line of credit with a bank for an unlimited amount. At December 31, 1999, PSEG had $25 million outstanding under this line of credit. In November 1998, PSEG issued $100 million of Extendible Notes, Series A, due November 22, 2000. These Notes were automatically tendered to the remarketing agent for remarketing in February 2000. The interest rate through maturity is at the three-month London Interbank Offered Rate (LIBOR) plus 0.22%, reset quarterly. 47 Also in November 1998, PSEG issued $175 million of Extendible Notes, Series B, due November 22, 2000. These Notes were automatically tendered to the remarketing agent for remarketing in November 1999. The interest rate is at the three-month LIBOR plus 0.60%, reset quarterly. These Notes will be automatically tendered to the remarketing agent for remarketing in May 2000. In June 1999, PSEG issued $300 million of Extendible Notes, Series C, due June 15, 2001 with interest at the three-month LIBOR plus 0.40%, reset quarterly. These Notes will be automatically tendered to the remarketing agent for remarketing in March 2000. PSEG used the net proceeds to make an equity investment in Energy Holdings and to reimburse its treasury for expenditures made to repurchase shares of its Common Stock. PSE&G In addition to the petition filed with the BPU to effectuate the securitization transaction, PSE&G will need to file petitions with the BPU for authorization for any additional debt financing needed. PSE&G is currently evaluating the potential uses of the proceeds of securitization (see Liquidity and Capital Resources). Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds against previous additions and improvements and/or retired Mortgage Bonds provided that its ratio of earnings to fixed charges calculated in accordance with its Mortgage is at least 2:1. As of December 31, 1999, the Mortgage would permit up to $3.9 billion aggregate principal amount of new Mortgage Bonds to be issued against previous additions and improvements, the level of which will be impacted by the actions ultimately taken in connection with securitization and the sale of generation-related assets to Power. At December 31, 1999, PSE&G's Mortgage coverage ratio was 4.8:1. PSE&G expects to apply for and receive necessary BPU authorization for external financings to meet its requirements over the next five years, as needed. On July 1, 1999, $100 million of PSE&G's 8.750% Bonds, Series Z, matured. On November 12, 1999, PSE&G redeemed its $2.990 million of 6.9% Pollution Control Bonds, Series C, due September 1, 2009. Also, during 1999, PSE&G purchased $319 million of its Mortgage Bonds in the open market. On February 1, 2000, $100 million of PSE&G's 7.625% Bonds, Series II, matured. To provide liquidity for its commercial paper program, PSE&G has an $850 million revolving credit agreement expiring in June 2000 and a $650 million revolving credit agreement expiring in June 2002 with a group of commercial banks, which provide for borrowings of up to one year. On December 31, 1999, there were no borrowings outstanding under these credit agreements. The BPU has authorized PSE&G to issue and have outstanding at any one time through January 2, 2001, not more than $2.0 billion of short-term obligations, consisting of commercial paper and other unsecured borrowings from banks and other lenders. PSE&G has several uncommitted lines of credit with banks. On December 31, 1999, PSE&G had $1.407 billion of short-term debt outstanding, including $90 million borrowed against its uncommitted bank lines of credit. PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125 million revolving credit facility with a group of banks, which expires on June 28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations under this program. As of December 31, 1999, Fuelco had commercial paper of $73 million outstanding. Once the purchase of PSE&G's generation-related assets is completed, it is anticipated that Fuelco's commercial paper program will be discontinued and financing of Peach Bottom nuclear fuel will be funded through Power. ENERGY HOLDINGS In February 2000, Energy Holdings issued $300 million of 9.125% Senior Notes due February 2004. The proceeds were used for the repayment of short-term debt. Energy Holdings plans to file a registration statement with the SEC relating to an exchange offer for, or the resale of, these Senior Notes later in 2000. Also in February 2000, Energy Holdings closed on a $190 million letter of credit facility to support a future equity investment in a generation project in Texas. 48 In October 1999, Energy Holdings issued $400 million of 10.0% Senior Notes due October 2009. The proceeds were used for the repayment of short-term debt outstanding under revolving credit facilities. Borrowings under the revolving credit facilities were used to finance investments and acquisitions and for general corporate purposes. In January 2000, Energy Holdings filed a registration statement with the SEC relating to an exchange offer for these Senior Notes. At December 31, 1999, Energy Holdings had total debt outstanding of $1.7 billion, including debt at PSEG Capital as discussed below and consolidated debt that is non-recourse to PSEG, Energy Holdings and Global. In September 1999, Energy Holdings closed on a $150 million letter of credit facility to support a future equity investment in a generation project in Texas. In May 1999, Energy Holdings closed on two separate revolving credit facilities, with a syndicate of banks, a $165 million, 364-day revolving credit facility and a $495 million, five-year revolving credit and letter of credit facility. At December 31, 1999, Energy Holdings had $351 million outstanding under existing revolving credit facilities totaling $660 million. The facilities replaced existing revolving credit facilities at Enterprise Capital Funding Corporation (Funding), a financing subsidiary of Energy Holdings, totaling $450 million. Since May 1999, Funding has not been used as a financing vehicle for Energy Holdings. The minimum net worth maintenance agreement between PSEG Capital and PSEG provides, among other things, that PSEG (1) maintain its ownership, directly or indirectly, of all outstanding common stock of PSEG Capital, (2) cause PSEG Capital to have at all times a positive tangible net worth of at least $100,000 and (3) make sufficient contributions of liquid assets to PSEG Capital in order to permit it to pay its debt obligations. In 1993, PSEG agreed with the BPU to make a good-faith effort to eliminate such PSEG support by April 2003. Effective January 31, 1995, PSEG Capital notified the BPU of its intention not to have more than $650 million of debt outstanding at any time. PSEG Capital has a $650 million Medium Term Note (MTN) program which provides for the private placement of MTNs without registration. Energy Holdings believes it is capable of eliminating PSEG support of PSEG Capital debt within the time period set forth in the Focused Audit. PSEG Capital's assets consist principally of demand notes of Global and Resources. Intercompany borrowing rates are established based upon PSEG Capital's cost of funds. In March and June 1999, PSEG Capital issued $252 million of 6.25% MTNs due May 2003 and $35 million of 6.73% MTNs due June 2001, respectively. The proceeds were used to repay $100 million of PSEG Capital MTNs which matured in February 1999 and $35 million which matured in May 1999 and to reduce Energy Holdings' short-term debt. At December 31, 1999, PSEG Capital had total debt outstanding of $630 million, all of which was comprised of MTNs with maturities between 2000 and 2003. Compliance with applicable financial covenants will depend upon Energy Holdings' future financial position and levels of earnings and cash flow, as to which no assurances can be given. In addition, Energy Holdings' ability to continue to grow its business will depend to a significant degree on PSEG's ability to access capital and Energy Holdings' ability to obtain additional financing beyond current levels. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in PSEG's market risk sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices, pollution credits, equity security prices, interest rates and foreign currency exchange rates as discussed below. PSEG's policy is to use derivatives to manage risk consistent with its business plans and prudent practices. PSEG has a Risk Management Committee comprised of executive officers which utilizes an independent risk oversight function to ensure compliance with corporate policies and prudent risk management practices. PSEG is exposed to credit losses in the event of non-performance or non-payment by counterparties. PSEG also has a credit management process which is used to assess, monitor and mitigate counterparty exposure for PSEG and its subsidiaries. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on PSEG's and its subsidiaries' financial condition, results of operations or net cash 49 flows. For discussion of interest rates and Energy Holdings' commodity-related instruments, equity securities and foreign currency risks, see Note 9. Financial Instruments and Risk Management of Notes. COMMODITY-RELATED INSTRUMENTS -- PSE&G (INCLUDING POWER) The availability and price of energy commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand and state and Federal regulatory policies. To reduce price risk caused by market fluctuations, PSE&G enters into derivative contracts, including forwards, futures, swaps and options with approved counterparties, to hedge its anticipated demand. These contracts, in conjunction with owned electric generating capacity and physical gas supply contracts, are designed to cover estimated electric and gas customer commitments. PSE&G uses a value-at-risk model to assess the market risk of its commodity business. This model includes fixed price sales commitments, owned generation, native load requirements, physical and financial contracts. Value-at-risk represents the potential gains or losses for instruments or portfolios due to changes in market factors, for a specified time period and confidence level. PSE&G estimates value-at-risk across its commodity business using a model with historical volatilities and correlations. The measured value-at-risk using a variance/co-variance model with a 95% confidence level over a one-week time horizon at December 31, 1999 was approximately $3 million, compared to the December 31, 1998 level of $4 million. PSE&G's calculated value-at-risk represents an estimate of the potential change in the value of its portfolio of physical and financial derivative instruments. These estimates, however, are not necessarily indicative of actual results, which may differ due to the fact that actual market rate fluctuations may differ from forecasted fluctuations and due to the fact that the portfolio of hedging instruments may change over the holding period. As discussed in Results of Operations, PSE&G's wholesale power activities positively impacted the results of operations for each year since their inclusion in 1997. Certain other generators and power marketers experienced significant losses in their wholesale power operations during that period. These losses were primarily attributable to extreme market volatility, counterparty defaults and unavailability of generation. Given the absence of a PJM price cap in situations involving emergency purchases and the potential for plant outages, extreme price movements can occur and could have a material impact on PSEG's, PSE&G's and Power's financial condition, results of operations and net cash flows. For discussion of changes in the pricing of electric energy offered for sale in the PJM interchange energy market, see PJM Interconnection, L.L.C. FOREIGN OPERATIONS In accordance with their growth strategies, Global and Resources have approximately $1.4 billion and $1.0 billion, respectively, of international investments. For a discussion of foreign currency risk, see Note 9. Financial Instruments and Risk Management of Notes. YEAR 2000 READINESS Many of PSEG's and its subsidiaries' systems, which include information technology applications, plant control and telecommunications infrastructure systems, were modified due to computer program limitations in recognizing dates beyond 1999. PSEG has had a formal project in place since 1997 to address Year 2000 issues. All mission critical systems were ready before January 1, 2000. PSEG's and its subsidiaries' Year 2000 preparations allowed for a smooth transition into the new millennium. PSEG and its subsidiaries did not experience any major problems or Year 2000-related service interruptions as their systems rolled over from 1999 to 2000. PSEG and its subsidiaries expect most material Year 2000 compliance problems would have arisen on or immediately after January 1, 2000. To date, PSEG and its subsidiaries are not aware of any material Year 2000-related problems associated with their internal systems or software or with the software and systems of their vendors, distributors or suppliers. It is possible, however, that further Year 2000-related problems may arise. For example, the date February 29, 2000 could potentially present further problems. Based on testing of their systems for Year 2000 problems and pending a successful rollover from February 29, 2000 to March 1, 2000, PSEG and its subsidiaries do not expect future problems to arise related to the Year 2000. 50 PSEG and its subsidiaries, including their domestic and international investments, have no outstanding litigation relating to Year 2000 issues. The likelihood of future Year 2000-related liabilities cannot be determined at this time. PSEG's and its subsidiaries' total cost related to Year 2000 readiness was approximately $67 million, which was incurred from 1997 through 1999. $32 million was incurred in 1999, $27 million was incurred in 1998 and $8 million was incurred in 1997. A portion of these costs was not incremental to PSEG or its subsidiaries, but rather, represented a redeployment of existing personnel/resources. PSEG and its subsidiaries expect that expenses related to remediating any remaining noncompliant non-critical systems will not be material. ACCOUNTING ISSUES For a discussion of significant accounting matters including SFAS 71; SFAS 121; Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of the Pricing of Electricity-Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF 97-4); SFAS 101, "Regulated Enterprises-Accounting for the Discontinuation of Application of FASB Statement No. 71" (SFAS 101); changes in capitalization, depreciation and asset retirement policies; discontinuation of deferral accounting for fuel revenues and expenses; and EITF 98-10, "Accounting for Energy Trading and Risk Management Activities" (EITF 98-10); see Note 1. Organization, Basis of Presentation and Summary of Significant Accounting Policies of Notes. For a discussion of the impact of new accounting pronouncements including SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - - Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137), see Note 19. Accounting Matters of Notes. PSE&G The information required by this item is incorporated herein by reference to the following portions of PSEG's Management's Discussion and Analysis of Financial Condition and Results of Operations, insofar as they relate to PSE&G and its subsidiaries: Overview of 1999 and Future Outlook; Results of Operations; Liquidity and Capital Resources; External Financings; Foreign Operations; Year 2000 Readiness and Accounting Issues. FORWARD LOOKING STATEMENTS Except for the historical information contained herein, certain of the matters discussed in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used herein, the words "will", "anticipate", "intend", "estimate", "believe", "expect", "plan", "hypothetical", "potential", variations of such words and similar expressions are intended to identify forward-looking statements. PSEG and PSE&G undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following review of factors should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by PSEG and PSE&G prior to the effective date of the Private Securities Litigation Reform Act of 1995. In addition to any assumptions and other factors referred to specifically in connection with such forward- looking statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: deregulation and the unbundling of energy supplies and services and the establishment of a competitive energy marketplace for products and services; managing rapidly changing wholesale energy trading operations in conjunction with electricity and gas production, transmission and distribution systems; managing foreign investments and electric generation and distribution operations in locations outside of the traditional utility service territory; political and foreign currency risks; an increasingly competitive energy marketplace; sales retention and growth potential in a mature PSE&G service 51 territory; ability to complete development or acquisition of current and future investments; partner and counterparty risk; exposure to market price fluctuations and volatility of fuel and power supply, power output, marketable securities, among others; ability to obtain adequate and timely rate relief, cost recovery, and other necessary regulatory approvals; ability to obtain securitization proceeds; Federal, state and foreign regulatory actions; regulatory oversight with respect to utility and non-utility affiliate relations and activities; operating restrictions, increased cost and construction delays attributable to environmental regulations; nuclear decommissioning and the availability of storage facilities for spent nuclear fuel; licensing and regulatory approval necessary for nuclear and other operating stations; the ability to economically and safely operate nuclear facilities in accordance with regulatory requirements; environmental concerns; and market risk and debt and equity market concerns associated with these issues. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Information relating to quantitative and qualitative disclosures about market risk is set forth under the caption "Qualitative and Quantitative Disclosures About Market Risk" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and "Financial Instruments" in Note 1. Organization, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. Such information is incorporated herein by reference. For PSE&G, the information required by this item is incorporated herein by reference insofar as it relates to PSE&G and its subsidiaries. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 52 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (MILLIONS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 1999 1998 1997 --------- --------- --------- OPERATING REVENUES Electric Revenues * Bundled $ 2,480 $ 4,009 $ 3,896 Generation 1,005 -- -- Transmission and Distribution 688 -- -- --------- --------- --------- Total Electric Revenues 4,173 4,009 3,896 Gas Distribution 1,717 1,559 1,937 Other 607 442 344 --------- --------- --------- Total Operating Revenues 6,497 6,010 6,177 --------- --------- --------- OPERATING EXPENSES Electric Energy Costs 972 960 911 Gas Costs 1,107 1,034 1,175 Operation and Maintenance 1,849 1,547 1,405 Depreciation and Amortization 536 660 630 Taxes Other Than Income Taxes 196 205 605 --------- --------- --------- Total Operating Expenses 4,660 4,406 4,726 --------- --------- --------- OPERATING INCOME 1,837 1,604 1,451 Other Income and Deductions 33 18 (16) Settlement of Salem Litigation -- -- (82) Interest Expense (490) (470) (450) Preferred Securities Dividend Requirements (94) (80) (59) --------- --------- --------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 1,286 1,072 844 Income Taxes (563) (428) (284) --------- --------- --------- INCOME BEFORE EXTRAORDINARY ITEM 723 644 560 Extraordinary Item (Net of Tax of $345) (804) -- -- --------- --------- --------- NET INCOME (LOSS) $ (81) $ 644 $ 560 ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (000's) 219,814 230,974 231,986 ========= ========= ========= EARNINGS (LOSSES) PER SHARE (BASIC AND DILUTED): Income Before Extraordinary Item $ 3.29 $ 2.79 $ 2.41 Extraordinary Item (Net of Tax) (3.66) -- -- --------- --------- --------- Net Income (Loss) $ (0.37) $ 2.79 $ 2.41 ========= ========= ========= DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 2.16 $ 2.16 $ 2.16 ========= ========= =========
* Note: Bundled revenues were recorded based on the bundled rates in effect through 7/31/99. Commencing with the unbundling of rates on 8/1/99, revenues are disaggregated between Generation Revenue and Transmission and Distribution Revenue. See Notes to Consolidated Financial Statements. 53 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS ASSETS (MILLIONS OF DOLLARS)
DECEMBER 31, -------------------- 1999 1998 -------- -------- CURRENT ASSETS Cash and Cash Equivalents $ 259 $ 139 Accounts Receivable: Customer Accounts Receivable 646 506 Other Accounts Receivable 371 205 Allowance for Doubtful Accounts (40) (38) Unbilled Revenues 241 255 Fuel 311 331 Materials and Supplies, net of valuation reserves - 1999, $11; 1998, $12 130 167 Prepayments 53 61 Miscellaneous Current Assets 72 35 -------- -------- Total Current Assets 2,043 1,661 -------- -------- PROPERTY, PLANT AND EQUIPMENT Electric - Generation 2,510 9,942 Electric - Transmission and Distribution 5,093 4,953 Gas - Distribution 3,019 2,882 Other 534 550 -------- -------- Total 11,156 18,327 Accumulated depreciation and amortization (4,078) (7,392) -------- -------- Net Property, Plant and Equipment 7,078 10,935 -------- -------- NONCURRENT ASSETS Regulatory Assets 5,041 1,579 Long-Term Investments, net of accumulated amortization and net of valuation allowances - 1999, $65; 1998, $46 3,848 3,029 Nuclear Decommissioning Fund 631 524 Other Special Funds 148 125 Other Noncurrent Assets, net of accumulated amortization - 1999, $12; 1998, $8 226 138 -------- -------- Total Noncurrent Assets 9,894 5,395 -------- -------- TOTAL $ 19,015 $ 17,991 ======== ========
See Notes to Consolidated Financial Statements. 54 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS LIABILITIES AND CAPITALIZATION (MILLIONS OF DOLLARS)
DECEMBER 31, -------------------- 1999 1998 -------- -------- CURRENT LIABILITIES Long-Term Debt Due Within One Year $ 1,073 $ 418 Commercial Paper and Loans 1,972 1,056 Accounts Payable 738 684 Other 394 299 -------- -------- Total Current Liabilities 4,177 2,457 -------- -------- NONCURRENT LIABILITIES Deferred Income Taxes and ITC 2,928 3,701 Regulatory Liability - Excess Depreciation Reserve 569 -- Nuclear Decommissioning 491 -- OPEB Costs 390 344 Other 681 420 -------- -------- Total Noncurrent Liabilities 5,059 4,465 -------- -------- COMMITMENTS AND CONTINGENT LIABILITIES -- -- -------- -------- CAPITALIZATION: LONG-TERM DEBT 4,575 4,763 -------- -------- SUBSIDIARIES' PREFERRED SECURITIES: Preferred Stock Without Mandatory Redemption 95 95 Preferred Stock With Mandatory Redemption 75 75 Guaranteed Preferred Beneficial Interest in Subordinated Debentures 1,038 1,038 -------- -------- Total Subsidiaries' Preferred Securities 1,208 1,208 -------- -------- COMMON STOCKHOLDERS' EQUITY: Common Stock, issued; 231,957,608 shares 3,604 3,603 Treasury Stock, at cost; 1999 - 15,540,390 shares, 1998 - 5,314,100 shares (597) (207) Retained Earnings 1,193 1,748 Accumulated Other Comprehensive Income (Loss) (204) (46) -------- -------- Total Common Stockholders' Equity 3,996 5,098 -------- -------- Total Capitalization 9,779 11,069 -------- -------- TOTAL $ 19,015 $ 17,991 ======== ========
See Notes to Consolidated Financial Statements. 55 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (MILLIONS OF DOLLARS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (81) $ 644 $ 560 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Extraordinary Loss - net of tax 804 -- -- Depreciation and Amortization 536 660 630 Amortization of Nuclear Fuel 92 93 60 Recovery of Electric Energy and Gas Costs - net 61 132 9 Provision for Deferred Income Taxes and ITC - net (215) (55) 22 Investment Distributions 134 73 73 Equity Income from Partnerships (53) (39) (39) Gains on Investments (63) (40) (40) Leasing Activities 6 (20) 71 Net Changes in certain current assets and liabilities: Accounts Receivable and Unbilled Revenues (236) 113 (111) Inventory - Fuel and Materials and Supplies 9 (46) 9 Prepayments 8 (12) 17 Accounts Payable 57 (34) 99 Provision for Rate Refund -- -- (80) Other Current Assets and Liabilities 59 (63) (63) Other 114 93 (33) ------- ------- ------- Net Cash Provided By Operating Activities 1,232 1,499 1,184 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment, excluding Capitalized Interest and AFDC (582) (531) (536) Net Change in Long-Term Investments (980) (92) (1,078) Contribution to Decommissioning Funds and Other Special Funds (70) (115) (63) Other -- (10) (94) ------- ------- ------- Net Cash Used In Investing Activities (1,632) (748) (1,771) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Short-Term Debt 916 (431) 879 Issuance of Long-Term Debt 1,143 525 785 Redemption/Purchase of Long-Term Debt (676) (557) (700) Issuance of Preferred Securities -- 525 95 Redemption of Preferred Stock -- -- (94) Purchase of Treasury Stock (400) (207) -- Retirement of Common Stock -- -- (43) Cash Dividends Paid on Common Stock (474) (499) (501) Other 11 (51) (29) ------- ------- ------- Net Cash Provided By (Used In) Financing Activities 520 (695) 392 ------- ------- ------- Net Change In Cash And Cash Equivalents 120 56 (195) Cash And Cash Equivalents At Beginning Of Period 139 83 278 ------- ------- ------- Cash And Cash Equivalents At End Of Period $ 259 $ 139 $ 83 ======= ======= ======= Income Taxes Paid $ 534 $ 426 $ 170 Interest Paid $ 494 $ 469 $ 416
See Notes to Consolidated Financial Statements. 56 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (MILLIONS)
ACCUMULATED OTHER COMMON TREASURY RETAINED COMPREHENSIVE STOCK STOCK EARNINGS INCOME (LOSS) TOTAL -------------- ------------------ -------- ------------- ------- SHS. AMOUNT SHS. AMOUNT ---- ------ ---- ------ BALANCE AS OF JANUARY 1, 1997 234 $ 3,627 -- -- $ 1,586 -- $ 5,213 Net Income -- -- -- -- 560 -- 560 Other Comprehensive Income (Loss), net of tax: Currency Translation Adjustment, net of tax of $(2) -- -- -- -- -- (15) (15) ------- Other Comprehensive Income (Loss) -- -- -- -- -- -- (15) ------- Comprehensive Income -- -- -- -- -- -- 545 Cash Dividends on Common Stock -- -- -- -- (501) -- (501) Retirement of Common Stock (2) (24) -- -- (19) -- (43) Preferred Securities Issuance Expenses -- -- -- -- (3) -- (3) -------------- ------------------ -------- ------------- ------- BALANCE AS OF DECEMBER 31, 1997 232 3,603 -- -- 1,623 (15) 5,211 -------------- ------------------ -------- ------------- ------- Net Income -- -- -- -- 644 -- 644 Other Comprehensive Income (Loss), net of tax: Pension Plan Additional Minimum Liability, net of tax of $(2) -- -- -- -- -- (3) (3) Currency Translation Adjustment, net of tax of $(3) -- -- -- -- -- (28) (28) ------- Other Comprehensive Income (Loss) -- -- -- -- -- -- (31) ------- Comprehensive Income -- -- -- -- -- -- 613 Cash Dividends on Common Stock -- -- -- -- (499) -- (499) Purchase of Treasury Stock -- -- (5) (207) -- -- (207) Restricted Stock Award -- -- -- -- (5) -- (5) Preferred Securities Issuance Expenses -- -- -- -- (15) -- (15) -------------- ------------------ -------- ------------- ------- BALANCE AS OF DECEMBER 31, 1998 232 3,603 (5) (207) 1,748 (46) 5,098 -------------- ------------------ -------- ------------- ------- Net Income (Loss) -- -- -- -- (81) -- (81) Other Comprehensive Income (Loss), net of tax: Currency Translation Adjustment, net of tax of $(17) -- -- -- -- -- (158) (158) ------- Other Comprehensive Income (Loss) -- -- -- -- -- -- (158) ------- Comprehensive Income (Loss) -- -- -- -- -- -- (239) Cash Dividends on Common Stock -- -- -- -- (474) -- (474) Purchase of Treasury Stock -- -- (11) (400) -- -- (400) Other -- 1 -- 10 -- -- 11 -------------- ------------------ -------- ------------- ------- BALANCE AS OF DECEMBER 31, 1999 232 $ 3,604 (16) $ (597) $ 1,193 $ (204) $ 3,996 ============== ================== ======== ============= =======
See Notes to Consolidated Financial Statements. 57 PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (MILLIONS OF DOLLARS) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 ------- ------- ------- OPERATING REVENUES Electric Revenues * Bundled $ 2,480 $ 4,009 $ 3,896 Generation 1,005 -- -- Transmission and Distribution 688 -- -- ------- ------- ------- Total Electric Revenues 4,173 4,009 3,896 Gas Distribution 1,717 1,559 1,937 ------- ------- ------- Total Operating Revenues 5,890 5,568 5,833 ------- ------- ------- OPERATING EXPENSES Electric Energy Costs 958 945 909 Gas Costs 1,038 970 1,101 Operation and Maintenance 1,573 1,385 1,307 Depreciation and Amortization 529 649 607 Taxes Other Than Income Taxes 194 208 606 ------- ------- ------- Total Operating Expenses 4,292 4,157 4,530 ------- ------- ------- OPERATING INCOME 1,598 1,411 1,303 Other Income and Deductions (2) 17 (13) Settlement of Salem Litigation -- -- (82) Interest Expense (387) (378) (380) Preferred Securities Dividend Requirements (46) (44) (44) ------- ------- ------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 1,163 1,006 784 Income Taxes (510) (404) (256) ------- ------- ------- INCOME BEFORE EXTRAORDINARY ITEM 653 602 528 Extraordinary Item (Net of Tax of $345) (804) -- -- ------- ------- ------- NET INCOME (LOSS) (151) 602 528 Preferred Stock Dividend Requirement (9) (9) (15) ------- ------- ------- EARNINGS (LOSSES) AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED $ (160) $ 593 $ 513 ======= ======= ======= * Note: Bundled revenues were recorded based on the bundled rates in effect through 7/31/99. Commencing with the unbundling of rates on 8/1/99, revenues are disaggregated between Generation Revenue and Transmission and Distribution Revenue. See Notes to Consolidated Financial Statements. 59 PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED BALANCE SHEETS ASSETS (MILLIONS OF DOLLARS)
DECEMBER 31, -------------------- 1999 1998 -------- -------- CURRENT ASSETS Cash and Cash Equivalents $ 173 $ 42 Accounts Receivable: Customer Accounts Receivable 529 451 Other Accounts Receivable 313 178 Allowance for Doubtful Accounts (35) (34) Unbilled Revenues 241 255 Fuel 308 331 Materials and Supplies, net of valuation reserves - 1999, $11; 1998, $12 130 165 Prepayments 48 52 Miscellaneous Current Assets 36 32 -------- -------- Total Current Assets 1,743 1,472 -------- -------- PROPERTY, PLANT AND EQUIPMENT Electric - Generation 2,439 9,942 Electric - Transmission and Distribution 5,093 4,953 Gas - Distribution 3,019 2,882 Other 457 460 -------- -------- Total 11,008 18,237 Accumulated depreciation and amortization (4,046) (7,361) -------- -------- Net Property, Plant and Equipment 6,962 10,876 -------- -------- NONCURRENT ASSETS Regulatory Assets 5,041 1,579 Long-Term Investments 99 65 Nuclear Decommissioning Fund 631 524 Other Special Funds 148 125 Other Noncurrent Assets 100 28 -------- -------- Total Noncurrent Assets 6,019 2,321 -------- -------- TOTAL $ 14,724 $ 14,669 ======== ========
See Notes to Consolidated Financial Statements. 60 PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED BALANCE SHEETS LIABILITIES AND CAPITALIZATION (MILLIONS OF DOLLARS)
DECEMBER 31, -------------------- 1999 1998 -------- -------- CURRENT LIABILITIES Long-Term Debt Due Within One Year $ 623 $ 100 Commercial Paper and Loans 1,475 850 Accounts Payable 676 611 Other 281 253 -------- -------- Total Current Liabilities 3,055 1,814 -------- -------- NONCURRENT LIABILITIES Deferred Income Taxes and ITC 2,032 2,846 Regulatory Liability - Excess Depreciation Reserve 569 -- Nuclear Decommissioning 491 -- OPEB Costs 390 344 Other 654 397 -------- -------- Total Noncurrent Liabilities 4,136 3,587 -------- -------- COMMITMENTS AND CONTINGENT LIABILITIES -- -- -------- -------- CAPITALIZATION: LONG-TERM DEBT 3,099 4,045 -------- -------- PREFERRED SECURITIES: Preferred Stock Without Mandatory Redemption 95 95 Preferred Stock With Mandatory Redemption 75 75 Subsidiaries' Preferred Securities: Guaranteed Preferred Beneficial Interest in Subordinated Debentures 513 513 -------- -------- Total Preferred Securities 683 683 -------- -------- COMMON STOCKHOLDER'S EQUITY: Common Stock, issued; 132,450,344 shares 2,563 2,563 Contributed Capital 594 594 Retained Earnings 597 1,386 Accumulated Other Comprehensive Income (Loss) (3) (3) -------- -------- Total Common Stockholder's Equity 3,751 4,540 -------- -------- Total Capitalization 7,533 9,268 -------- -------- TOTAL $ 14,724 $ 14,669 ======== ========
See Notes to Consolidated Financial Statements. 61 PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (MILLIONS OF DOLLARS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (151) $ 602 $ 528 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Extraordinary Loss - net of tax 804 -- -- Depreciation and Amortization 529 649 607 Amortization of Nuclear Fuel 92 93 60 Recovery of Electric Energy and Gas Costs - net 61 132 9 Provision for Deferred Income Taxes and ITC - net (181) (41) 20 Net Changes in certain current assets and liabilities: Accounts Receivable and Unbilled Revenues (198) 77 (39) Inventory - Fuel and Materials and Supplies 10 (44) 9 Prepayments 4 (8) (14) Accounts Payable 68 15 (28) Provision for Rate Refund -- -- (80) Other Current Assets and Liabilities 25 26 (37) Other 87 80 (22) ------- ------- ------- Net Cash Provided By Operating Activities 1,150 1,581 1,013 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment, excluding Capitalized Interest and AFDC (479) (535) (542) Contribution to Decommissioning Funds and Other Special Funds (70) (115) (62) Other (34) (35) (99) ------- ------- ------- Net Cash Used In Investing Activities (583) (685) (703) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Short-Term Debt 625 (256) 498 Issuance of Long-Term Debt -- 250 288 Redemption/Purchase of Long-Term Debt (423) (350) (574) Issuance of Preferred Securities -- -- 95 Redemption of Preferred Stock -- -- (94) Cash Dividends Paid on Common Stock (629) (503) (523) Other (9) (12) (29) ------- ------- ------- Net Cash Used In Financing Activities (436) (871) (339) ------- ------- ------- Net Change In Cash And Cash Equivalents 131 25 (29) Cash And Cash Equivalents At Beginning Of Period 42 17 46 ------- ------- ------- Cash And Cash Equivalents At End Of Period $ 173 $ 42 $ 17 ======= ======= ======= Income Taxes Paid $ 537 $ 410 $ 259 Interest Paid $ 409 $ 386 $ 357
See Notes to Consolidated Financial Statements. 62 PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (MILLIONS OF DOLLARS)
ACCUMULATED CONTRIBUTED OTHER COMMON CAPITAL FROM RETAINED COMPREHENSIVE STOCK PSEG EARNINGS LOSS TOTAL ------ ------------ -------- ------------- ------- BALANCE AS OF JANUARY 1, 1997 $ 2,563 $ 594 $ 1,309 -- $ 4,466 Net Income -- -- 528 -- 528 Other Comprehensive Income -- -- -- -- -- ------- Comprehensive Income -- -- -- -- 528 ------- Cash Dividends on Common Stock -- -- (523) -- (523) Cash Dividends on Preferred Stock -- -- (12) -- (12) Preferred Securities Issuance Expenses -- -- (3) -- (3) Net Loss on Preferred Stock Redemptions -- -- (3) -- (3) ------- ------- ------- ------- ------- BALANCE AS OF DECEMBER 31, 1997 2,563 594 1,296 -- 4,453 ------- ------- ------- ------- ------- Net Income -- -- 602 -- 602 Other Comprehensive Income (Loss), net of tax: Pension Adjustment, net of tax of $(2) -- -- -- (3) (3) ------- Other Comprehensive Income (Loss) -- -- -- -- (3) ------- Comprehensive Income -- -- -- -- 599 ------- Cash Dividends on Common Stock -- -- (503) -- (503) Cash Dividends on Preferred Stock -- -- (9) -- (9) ------- ------- ------- ------- ------- BALANCE AS OF DECEMBER 31, 1998 2,563 594 1,386 (3) 4,540 ------- ------- ------- ------- ------- Net Income (Loss) -- -- (151) -- (151) Other Comprehensive Income (Loss) -- -- -- -- -- ------- Comprehensive Income (Loss) -- -- -- -- (151) ------- Cash Dividends on Common Stock -- -- (629) -- (629) Cash Dividends on Preferred Stock -- -- (9) -- (9) ------- ------- ------- ------- ------- BALANCE AS OF DECEMBER 31, 1999 $ 2,563 $ 594 $ 597 $ (3) $ 3,751 ======= ======= ======= ======= =======
See Notes to Consolidated Financial Statements. 63 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION PSEG has three principal direct wholly-owned operating subsidiaries: Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG Energy Holdings Inc. (Energy Holdings). In 1999, PSEG formed PSEG Services Corporation (Services) to provide management and administrative services to PSEG and its subsidiaries. PSE&G is an operating public utility providing electric and gas service within certain areas in the State of New Jersey. Power was formed in 1999 and is anticipated to be the owner and operator of PSEG's generation business once the sale of PSE&G's generation-related assets is completed in 2000. Power and its subsidiaries were established to acquire, own and operate the electric generation-related assets of PSE&G pursuant to the Final Decision and Order (Final Order) issued August 24, 1999 by the New Jersey Board of Public Utilities (BPU) under the New Jersey Energy Master Plan Proceedings and the New Jersey Electric Discount and Energy Competition Act (Energy Competition Act). After the sale of its generation-related assets to Power, PSE&G will continue to own and operate its transmission and distribution businesses. Energy Holdings is the parent of three energy-related lines of business through its wholly-owned subsidiaries: PSEG Global Inc. (Global), which develops, acquires, owns and operates electric generation and distribution facilities in selected domestic and international markets; PSEG Resources Inc. (Resources), which invests in energy-related financial transactions; and PSEG Energy Technologies Inc. (Energy Technologies), an energy management company. Energy Holdings also has a finance subsidiary, PSEG Capital Corporation (PSEG Capital), which provides privately-placed debt financing to Energy Holdings' operating subsidiaries on the basis of a minimum net worth maintenance agreement with PSEG. Energy Holdings is also the parent of Enterprise Group Development Corporation (EGDC), a nonresidential real estate development and investment business and has been conducting a controlled exit from this business since 1993. BASIS OF PRESENTATION Effective August 1, 1999, the presentation of revenues in the Consolidated Statements of Income has changed, due to the deregulation of the electric generation business by the BPU in PSE&G's rate unbundling, stranded costs and restructuring proceedings. Effective with that date, electric rates charged to customers have been unbundled and the generation, transmission, distribution and other components of the total rate have become separate charges. As a result, the presentation of revenues has also changed. PSE&G's generation business earns revenues by providing the energy and capacity to meet PSE&G's basic generation service (BGS) obligation. Generation revenues are also produced by a variety of wholesale energy and capacity sales and sales of other ancillary services. PSE&G's transmission and distribution businesses remain rate regulated and will continue to earn revenues based on PSE&G's regulated rate tariffs under which PSE&G provides transmission and distribution services for its residential, commercial and industrial customers in New Jersey. The rates charged for transmission and distribution are regulated by the Federal Energy Regulatory Commission (FERC) and the BPU, respectively. Transmission and distribution revenues are also generated from a variety of other activities such as sundry sales, the appliance service business, wholesale transmission services and other miscellaneous services. Revenues earned prior to August 1, 1999 continue to be presented as Bundled Electric revenues on the Consolidated Statements of Income as they were earned based upon bundled electric rates prior to the deregulation of PSE&G's generation business. For more information on deregulation and PSE&G's rate unbundling, stranded costs and restructuring proceedings, including the BPU's Final Order, see Note 2. Regulatory Issues. 64 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REGULATION -- PSE&G The accounting and rates of PSE&G are subject, in certain respects, to the requirements of the BPU and the FERC. As a result, PSE&G maintains its accounts for its regulated operations in accordance with their prescribed Uniform Systems of Accounts, which are the same. The application of Generally Accepted Accounting Principles (GAAP) by PSE&G differs in certain respects from applications by non-regulated businesses. PSE&G prepares the transmission and distribution portion of its financial statements in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the economic effects of regulation. As a result, a regulated utility is required to defer recognition of costs (a regulatory asset) or recognize obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future rates. Accordingly, PSE&G has deferred certain costs and recoveries, which will be amortized over various future periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G's competitive position, the associated regulatory asset or liability is charged or credited to income unless recovery mechanisms are approved by the regulator. PSE&G's transmission and distribution businesses continue to meet the requirements for application of SFAS 71. Effective April 1, 1999, PSE&G discontinued the application of SFAS 71 for the electric generation portion of its business. PSE&G calculated an extraordinary charge consistent with the requirements of Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF 97-4) and SFAS 101, "Regulated Enterprises--Accounting for the Discontinuation of Application of FASB Statement No. 71" (SFAS 101). The portion of the extraordinary charge related to an impairment of long-lived assets was calculated in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). The discontinuation of the application of SFAS 71 had a material impact on PSEG's and PSE&G's financial condition and results of operations. For further discussion, see Note 2. Regulatory Issues and Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation. In concert with the discontinuation of SFAS 71, PSE&G revised a number of accounting policies related to its electric generation business. Under the revised capitalization policy, PSE&G will only capitalize costs which increase the capacity or extend the life of an existing generation-related asset, represent a newly acquired or constructed asset or represent the replacement of a retired asset. Under the revised depreciation policy, PSE&G will calculate depreciation consistent with revised asset lives determined by PSE&G policy rather than using depreciation rates prescribed by the BPU in rate proceedings. Finally, under the revised asset retirement policy, when a generation-related asset is retired, the remaining net carrying amount will be included in the determination of net earnings. CONSOLIDATION The consolidated financial statements include the accounts of PSEG and its subsidiaries. PSEG and its subsidiaries consolidate those entities in which they have a controlling interest. Those entities in which PSEG does not have a controlling interest are being accounted for under the equity method of accounting. For investments in which significant influence does not exist, the cost method of accounting is applied. All significant intercompany accounts and transactions are eliminated in consolidation. RECLASSIFICATIONS Certain reclassifications of prior period data have been made to conform with the current presentation. 65 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE Bond issuance costs and associated premiums and discounts are generally amortized over the life of the debt issuance. In accordance with FERC regulations, PSE&G's costs to reacquire debt are amortized over the remaining original life of the retired debt. When refinancing debt, the unamortized portion of the original debt issuance costs of the debt being retired must be amortized over the life of the replacement debt. For PSEG's unregulated businesses, gains and losses on reacquired debt are reflected in the statement of operations as incurred. Gains and losses on reacquired debt associated with PSE&G's regulated operations will continue to be deferred and amortized to interest expense over the period approved for ratemaking purposes. PLANT, PROPERTY AND EQUIPMENT -- PSE&G For PSE&G's regulated transmission and distribution businesses, additions to plant, property and equipment and replacements of units of property are capitalized at original cost. The cost of maintenance, repair and replacement of minor items of property is charged to appropriate expense accounts. At the time units of depreciable property are retired or otherwise disposed, the original cost less net salvage value is charged to accumulated depreciation. For its unregulated generation business, PSE&G only capitalizes costs which increase the capacity or extend the life of an existing asset, represent a newly acquired or constructed asset or represent the replacement of a retired asset. Also, under its revised asset retirement policy, the portion of future retirements which have not been fully depreciated will impact earnings for PSE&G's generation business. DEPRECIATION AND AMORTIZATION For PSE&G's regulated transmission and distribution businesses, depreciation is computed under the straight-line method. Depreciation is based on estimated average remaining lives of the several classes of depreciable property. These estimates are reviewed on a periodic basis and necessary adjustments are made as approved by the BPU. Depreciation rates stated in percentages of original cost of depreciable property were 3.52%, 3.52% and 3.53% in 1999, 1998 and 1997, respectively. PSE&G has certain regulatory assets and liabilities resulting from the use of a level of depreciation expense in the ratemaking process that differs from the amount that is recorded under GAAP for non-regulated companies. For its generation operations, under the revised depreciation policy, PSE&G will calculate depreciation consistent with revised asset lives determined by PSE&G policy rather than using depreciation rates prescribed by the BPU in rate proceedings. Nuclear fuel burnup costs are charged to fuel expense on a units-of-production basis over the estimated life of the fuel. Rates for the recovery of fuel used at all nuclear units include a provision of one mill per kilowatt-hour (kWh) of nuclear generation for spent fuel disposal costs. USE OF ESTIMATES The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. 66 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECONTAMINATION AND DECOMMISSIONING -- PSE&G In 1993, FERC issued Order No. 557 regarding the accounting and rate-making treatment of special assessments levied under the National Energy Policy Act of 1992 (EPAct). Order No. 557 provides that special assessments are a necessary and reasonable current cost of fuel and shall be fully recoverable in rates in the same manner as other fuel costs. Effective August 1, 1999, these costs are recovered through the distribution rates established under the Final Order. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFDC) -- PSE&G For PSE&G's regulated operations, AFDC represents the cost of debt and equity funds used to finance the construction of new utility facilities. The amount of AFDC capitalized is reported in the Consolidated Statements of Income as a reduction of interest charges for the borrowed funds component and as other income for the equity funds component. The rates used for calculating AFDC in 1999, 1998 and 1997 were 5.29%, 6.06% and 5.71%, respectively. Effective April 1, 1999, PSEG no longer calculates AFDC for the electric generation portion of its business. REVENUES AND FUEL COSTS -- PSE&G Revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues representing the estimated amount customers will be billed for services rendered from the time meters were last read to the end of the respective accounting period. Prior to August 1, 1999, fuel revenue and expense flowed through the Electric Levelized Energy Adjustment Clause (LEAC) mechanism and variances in fuel revenues and expenses were subject to deferral accounting and had no direct effect on earnings. The fuel component of the LEAC rate was frozen for 1997 and 1998 as part of the BPU's Order dated December 31, 1996 and PSE&G bore all risks associated with fuel prices. Due to the discontinuation of the LEAC mechanism on August 1, 1999, earnings volatility will increase since the unregulated electric generation portion of PSEG's business ceased to follow deferral accounting. PSE&G and Power now bear the full risks and rewards of changes in nuclear and fossil generating fuel costs and replacement power costs. Under the LEAC and the Levelized Gas Adjustment Clause (LGAC), any LEAC and LGAC underrecoveries or overrecoveries, together with interest (in the case of net overrecoveries), are deferred and included in operations in the period in which they are reflected in rates. Effective January 1, 1998, the amount included for LEAC under/overrecovery represented the difference between fuel related revenues and fuel related expenses which are comprised of the cost of generation and interchanged power at the PJM Interconnection, L.L.C. (PJM) market clearing price. For discussion of the status of the LEAC and the LGAC, see Note 4. Regulatory Assets and Liabilities. MATERIALS AND SUPPLIES AND NUCLEAR FUEL-PSE&G For PSE&G's regulated operations, materials and supplies are carried on the books at cost in accordance with rate based regulation. The carrying value of the materials and supplies and nuclear fuel for PSE&G's generation operations is valued at lower of cost or market. COMMODITY CONTRACTS -- PSE&G PSE&G engages in electricity and natural gas commodity forwards, futures, swaps and options purchases and sales with counterparties to manage exposure to electricity and natural gas price risk. Certain contracts, in conjunction with owned electric generating capacity, are designed to provide for estimated electric customer commitments. Similarly, PSE&G uses natural gas futures and swaps to manage the price risk associated with gas supply to customers. 67 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Effective January 1, 1999, PSEG and PSE&G adopted EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (EITF 98-10). EITF 98-10 requires that energy trading contracts be marked to market with gains and losses included in earnings and separately disclosed in the financial statements or footnotes. Previously, the gains and losses associated with these contracts were recorded upon settlement. The adoption of EITF 98-10 did not have a material impact on the financial condition, results of operations or net cash flows of PSEG or PSE&G. PSE&G also enters into forwards, futures, swaps and options that are not used to manage price risk exposure for commitments to customers. As these are considered to be trading contracts, PSE&G's accounting policy has been to mark the contracts to market and record unrealized gains and losses in income. These contracts do not have a material impact on PSE&G's financial condition, results of operations and net cash flows. PSE&G does not hold any financial instruments of a leveraged nature. FINANCIAL INSTRUMENTS -- ENERGY HOLDINGS Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets and liabilities and are ultimately recognized in income when the related asset or liability is realized or settled. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions also are deferred and recognized in income when the hedged transaction occurs. EQUITY INVESTMENTS -- ENERGY HOLDINGS Resources carries its investments in equity securities at their approximate fair market values as of the reporting date. FOREIGN CURRENCY TRANSLATION/TRANSACTIONS -- ENERGY HOLDINGS The assets and liabilities of Energy Holdings' foreign operations are translated into U.S. dollars at current exchange rates and revenues and expenses are translated at average exchange rates for the year. Resulting translation adjustments are reflected as a separate component of stockholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on normal operating transactions denominated in a currency other than the functional currency, except those transactions which operate as a hedge of an identifiable foreign currency commitment or as a hedge of a foreign currency investment position, are included in the results of operations as incurred. INCOME TAXES PSEG and its subsidiaries file a consolidated Federal income tax return and income taxes are allocated to PSEG's subsidiaries based on the taxable income or loss of each subsidiary. Investment tax credits were deferred in prior years and are being amortized over the useful lives of the related property, including nuclear fuel. For discussion of energy tax reform and its impact on New Jersey Gross Receipts and Franchise Taxes (NJGRT), see Note 13. Income Taxes. CAPITAL LEASES AS LESSEE -- PSE&G The Consolidated Balance Sheets include assets and related obligations applicable to capital leases under which the entity is a lessee. The total amortization of the leased assets and interest on the lease obligations equals the net minimum lease payments included in rent expense for capital leases. Capital leases of PSE&G relate primarily to its corporate headquarters. 68 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED IMPAIRMENT OF LONG-LIVED ASSETS SFAS 121 requires review for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon deregulation, PSE&G evaluated the recoverability of its assets and recorded an extraordinary, non-cash charge to earnings. For the impact of the application of SFAS 121, see Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation. NOTE 2. REGULATORY ISSUES NEW JERSEY ENERGY MASTER PLAN PROCEEDINGS AND RELATED ORDERS In January 1999, the State Legislature passed the Energy Competition Act which was signed into law by the Governor on February 9, 1999. Following the passage of the Energy Competition Act, the BPU rendered its summary decision relating to PSE&G's rate unbundling, stranded costs and restructuring proceedings (Summary Order) on April 21, 1999 and subsequently issued its Final Order in these matters on August 24, 1999. The Energy Competition Act and the related BPU proceedings are hereinafter defined as the Energy Master Plan Proceedings. For discussion of the extraordinary charge to earnings recorded as a result of the deregulation of PSE&G's generation business, see Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation. Among other things, the Energy Competition Act provides that all New Jersey retail electric customers may select their electric supplier commencing August 1, 1999 and all New Jersey retail gas customers may select their gas suppliers commencing January 1, 2000, thus fully opening the New Jersey energy markets to customer choice and competition. As a result of this restructuring of the energy industry, the distribution business will remain regulated by the BPU, the transmission business will remain regulated by the FERC and electric generation has become a competitive business. In October and November 1999, two appeals of the Final Order and two appeals of the BPU's order approving PSE&G's petition relating to the proposed securitization transaction for an irrevocable Bondable Stranded Costs Rate Order (Finance Order) were filed in the Appellate Division of the New Jersey Superior Court on behalf of several customers. The Court granted PSE&G's requests to accelerate the appeals and ordered that the matters be consolidated. All briefs have been filed and oral argument on the consolidated matters has been set for March 8, 2000. While PSEG and PSE&G believe that the appeals are without merit, no assurances can be given at this time as to the timing or outcome of these proceedings. Accordingly, neither PSEG nor PSE&G are able to predict whether such appeals will have a material adverse effect on their financial condition, results of operations or net cash flows. NOTE 3. EXTRAORDINARY CHARGE AND OTHER ACCOUNTING IMPACTS OF DEREGULATION In accordance with EITF 97-4, PSE&G determined that SFAS 71 was no longer applicable to the electric generation portion of its business as of April 1999. Therefore, PSE&G recorded an extraordinary charge to earnings of $804 million (net of tax). PSE&G accounted for this charge consistent with the requirements of SFAS 101. The extraordinary charge recorded in 1999 consisted primarily of the write-down of PSE&G's nuclear and fossil generating stations in accordance with SFAS 121. PSE&G performed a discounted cash flow analysis on a unit-by-unit basis to determine the amount of the impairment. As a result of this impairment analysis, the net book value of the generating stations was reduced by approximately $5.0 billion (pre-tax) or approximately $3.1 billion (net of tax). This amount was offset by the creation of a $4.057 billion (pre-tax), or $2.4 billion (net of tax) 69 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED regulatory asset related to the future receipt of securitization proceeds, as provided for in the Summary Order and affirmed in the Final Order. In addition to the impairment of PSE&G's electric generating stations, the extraordinary charge consisted of various accounting adjustments to reflect the absence of cost of service regulation in the electric generation portion of the business in the future. The adjustments primarily related to materials and supplies, general plant items and liabilities for certain contractual and environmental obligations. In its Final Order, the BPU directed PSE&G to seek a private letter ruling from the Internal Revenue Service (IRS) to determine if the $235 million of investment tax credits (ITC), which were used to offset the extraordinary charge, can be credited to customers without violating the tax normalization rules of the Internal Revenue Code. An adverse resolution to this matter would result in an additional extraordinary charge to income up to the amount of the ITC, which would have a material adverse impact on PSEG's and PSE&G's financial condition, results of operations and cash flows, however, based on PSE&G's analysis, an adverse outcome does not appear to be likely. Other accounting impacts of the discontinuation of SFAS 71 included reclassifying the Accrued Nuclear Decommissioning Reserve and the Accrued Cost of Removal for generation-related assets from Accumulated Depreciation to Long-Term Liabilities. In accordance with the Final Order, PSE&G also reclassified a $569 million excess depreciation reserve related to PSE&G's electric distribution assets from Accumulated Depreciation to a Regulatory Liability. Such amount will be amortized in accordance with the terms of the Final Order over the period from January 1, 2000 to July 31, 2003. NOTE 4. REGULATORY ASSETS AND LIABILITIES At December 31, 1999 and December 31, 1998, respectively, PSEG and PSE&G had deferred the following regulatory assets and liabilities on the Consolidated Balance Sheets:
DECEMBER 31, DECEMBER 31, ------------ ------------ 1999 1998 ------------ ------------ (MILLIONS OF DOLLARS) REGULATORY ASSETS Regulatory Asset--Stranded Costs ....................... $4,057 $ -- SFAS 109 Income Taxes .................................. 286 704 OPEB Costs ............................................. 237 270 Regulatory Asset--Societal Benefits Charges (SBC) ...... 130 -- Demand Side Management Costs ........................... 7 150 Environmental Costs .................................... 94 139 Unamortized Loss on Reacquired Debt and Debt Expense ... 117 135 Underrecovered Gas Costs ............................... -- 35 Other .................................................. 113 146 ------ ------ Total Regulatory Assets ........................... $5,041 $1,579 ====== ====== REGULATORY LIABILITIES Regulatory Liability--Excess Depreciation Reserve ...... $ 569 $ -- Regulatory Liability--NTC .............................. 20 -- Overrecovered Gas Costs ................................ 15 -- Overrecovered Electric Energy Costs .................... -- 39 Other Stranded Cost Recovery Offsets ................... -- 4 ------ ------ Total Regulatory Liabilities ...................... $ 604 $ 43 ====== ======
REGULATORY ASSET -- STRANDED COSTS: PSE&G has recorded this regulatory asset to reflect the future revenues which will be collected via the securitization transition charge which was authorized by the Final Order. 70 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED SFAS 109 INCOME TAXES: This amount represents the regulatory asset related to the recognition of deferred income taxes arising from the implementation of SFAS 109, "Accounting for Income Taxes" (SFAS 109). Due to the discontinuation of SFAS 71 for the electric generation portion of PSE&G's business, the deferred taxes related to these assets have been reduced and included in the determination of the Extraordinary Item. OPEB COSTS: Includes costs associated with adoption of SFAS 106 which were deferred in accordance with EITF Issue 92-12. Beginning January 1, 1998, PSE&G commenced the amortization of the regulatory asset over 15 years. See Note 14. Pension, Other Postretirement Benefit and Savings Plans for additional information. REGULATORY ASSET -- SBC: The SBC includes costs related to: 1) social programs which include the universal service fund; 2) nuclear plant decommissioning; 3) demand side management (DSM) programs 4) manufactured gas plant remediation; and 5) consumer education. Before creation of the SBC, the electric DSM and manufactured gas plant remediation costs were included in DSM and Environmental Costs, respectively, as listed above. DEMAND SIDE MANAGEMENT COSTS: Recoveries of DSM/conservation costs (related to BPU-approved programs) are determined by the BPU. Electric DSM costs are included in the SBC balance at December 31, 1999. ENVIRONMENTAL COSTS: Represents environmental investigation and remediation costs which are probable of recovery in future rates. UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE: Represents bond issuance costs, premiums, discounts and losses on reacquired long-term debt. OTHER: Includes Decontamination and Decommissioning Costs, Plant and Regulatory Study Costs, Repair Allowance Tax Deficiencies and Interest, Property Abandonments and Oil and Gas Property Write-Down. REGULATORY LIABILITY -- EXCESS DEPRECIATION RESERVE: As required by the BPU, PSE&G reduced its depreciation reserve for its electric distribution assets by $569 million and recorded such amount as a regulatory liability to be amortized over the period from January 1, 2000 to July 31, 2003. In 2000 and 2001, $125 million will be amortized each year. In 2002 and 2003, $135 million and $184 million will be amortized, respectively. REGULATORY LIABILITY -- NON-UTILITY GENERATION MARKET TRANSITION CHARGE (NTC): Clause established to account for above market costs related to non-utility generation contracts. The charge for the stranded NTC recovery will be initially set at the 1999 level of $183 million annually. Any Non-utility Generator (NUG) contract costs and/or buyouts will also be charged to the NTC and will be subject to deferral accounting. Proceeds from the sale of the energy and capacity purchased under these NUG contracts will also be credited to this account. REGULATORY LIABILITY -- OVERRECOVERED ELECTRIC ENERGY COSTS: As provided by the BPU in the Final Order, PSE&G continued to follow deferral accounting treatment for the LEAC through July 31, 1999. At July 31, 1999, Overrecovered Electric Energy Costs were $59 million. Pursuant to the Final Order, the overrecovered balance as of July 31, 1999 was applied as a credit to the starting deferred balance of the NTC. 71 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 5. LONG-TERM INVESTMENTS Long-Term Investments are primarily those of Energy Holdings. DECEMBER 31, ------------------ 1999 1998 ------ ------ (MILLIONS OF DOLLARS) Leveraged Leases ........................... $1,765 $1,396 Partnerships: General Partnerships ................ 60 77 Limited Partnerships ................ 437 526 ------ ------ Total ......................... 497 603 ------ ------ Corporate Joint Ventures ................... 1,427 874 Securities ................................. 14 25 Other Investments .......................... 145 131 ------ ------ Total Long-Term Investments ... $3,848 $3,029 ====== ====== Resources' leveraged leases are reported net of principal and interest on non-recourse loans, unearned income and deferred tax credits. Income and deferred tax credits are recognized at a level rate of return from each lease during the periods in which the net investment is positive. Partnership investments and corporate joint ventures are those of Resources, Global and EGDC. Other Investments relate primarily to Energy Technologies' investment in DSM projects and had balances of approximately $60 million and $73 million at December 31, 1999 and 1998, respectively. NOTE 6. LEASING ACTIVITIES AS LESSOR Resources' net investments in leveraged leases are composed of the following elements: DECEMBER 31, 1999 DECEMBER 31, 1998 --------------------- --------------------- (MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS) LEVERAGED LEVERAGED LEASES LEASES ---------- ---------- Lease rents receivable ............ $ 2,643 $ 1,924 Estimated residual value .......... 660 665 ------- ------- 3,303 2,589 Unearned and deferred income ...... (1,538) (1,193) ------- ------- Total investments .......... 1,765 1,396 Valuation Allowances .............. (6) (7) Deferred taxes .................... (844) (731) ------- ------- Net investments ............ $ 915 $ 658 ======= ======= 72 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 7. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES
CURRENT REDEMPTION OUTSTANDING PRICE DECEMBER 31, DECEMBER 31, SHARES PER SHARE 1999 1998 ----------- ---------- ------------ ------------ (MILLIONS OF DOLLARS) PSEG Common Stock (no par) (A) Authorized 500,000,000 shares; issued and outstanding at December 31, 1999, 216,417,218 shares and at December 31, 1998, 226,643,508 shares $3,007 $3,396 PSEG Preferred Securities (B) PSEG Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures (D) (E) (G) 7.44%............................................................ 9,000,000 -- $225 $225 Floating Rate.................................................... 150,000 -- 150 150 7 1/4%........................................................... 6,000,000 -- 150 150 -------- -------- Total Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures................................... $525 $525 ======== ======== PSE&G Preferred Securities PSE&G Cumulative Preferred Stock (C) without Mandatory Redemption (D) (E) $100 par value series 4.08%............................................................ 146,221 103.00 $15 $15 4.18%............................................................ 116,958 103.00 12 12 4.30%............................................................ 149,478 102.75 15 15 5.05%............................................................ 104,002 103.00 10 10 5.28%............................................................ 117,864 103.00 12 12 6.92%............................................................ 160,711 -- 16 16 $25 par value series 6.75%............................................................ 600,000 -- 15 15 -------- -------- Total Preferred Stock without Mandatory Redemption.................. $95 $95 ======== ======== With Mandatory Redemption (D) (E) $100 par value series 5.97%............................................................ 750,000 102.99 $75 $75 -------- -------- Total Preferred Stock with Mandatory Redemption..................... $75 $75 ======== ======== PSE&G Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures (D) (E) (F) 9.375%........................................................... 6,000,000 -- $150 $150 8.00%............................................................ 2,400,000 -- 60 60 -------- -------- Total Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures.................................. $210 $210 ======== ======== PSE&G Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures (D) (E) (F) 8.625%........................................................... 8,320,000 -- $208 $208 8.125%........................................................... 3,800,000 -- 95 95 -------- -------- Total Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures.................................. $303 $303 ======== ========
(A) In anticipation of securitization of PSE&G's stranded costs afforded by the Energy Competition Act, the Board of Directors of PSEG authorized the repurchase of up to 30 million shares of its common stock (Common Stock). Under the authorization, repurchases were made in the open market at the discretion of PSEG. At December 31, 1999, PSEG had repurchased approximately 15.8 million shares of Common Stock at a cost of approximately $607 million, under this authorization. The repurchased shares have been held as treasury stock or used for other corporate purposes. 73 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Total authorized and unissued shares include 7,302,488 shares of Common Stock reserved for issuance through PSEG's Dividend Reinvestment and Stock Purchase Plan and various employee benefit plans. In 1999 and 1998, no shares of Common Stock were issued or sold through these plans. (B) PSEG has authorized a class of 50,000,000 shares of Preferred Stock without par value, none of which is outstanding. (C) At December 31, 1999, there were aggregates of 5,954,766 shares of $100 par value and 9,400,000 shares of $25 par value Cumulative Preferred Stock which were authorized and unissued, and which upon issuance may or may not provide for mandatory sinking fund redemption. If dividends upon any shares of Preferred Stock are in arrears in an amount equal to the annual dividend thereon, voting rights for the election of a majority of PSE&G's Board of Directors become operative and continue until all accumulated and unpaid dividends thereon have been paid, whereupon all such voting rights cease, subject to being revived from time to time. (D) At December 31, 1999 and 1998, the annual dividend requirement of PSEG's Trust Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures) and their embedded costs were $38,433,000 and 4.91%, respectively. At December 31, 1999 and 1998, the annual dividend requirement and embedded dividend rate for PSE&G's Preferred Stock without mandatory redemption was $10,886,758 and 5.18%, respectively, and for PSE&G's Preferred Stock with mandatory redemption was $4,477,500 and 6.02%, respectively. At December 31, 1999 and 1998, the annual dividend requirement and embedded cost of the Monthly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures) was $18,862,500 and 5.50%, respectively. At December 31, 1999 and 1998, the annual dividend requirement of the Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures) and their embedded costs were $25,658,750 and 5.18%, respectively. (E) For information concerning fair value of financial instruments, see Note 9. Financial Instruments and Risk Management. (F) PSE&G Capital L.P., PSE&G Capital Trust I and PSE&G Capital Trust II were formed and are controlled by PSE&G for the purpose of issuing Monthly and Quarterly Income Preferred Securities (Monthly and Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures). The proceeds were loaned to PSE&G and are evidenced by PSE&G's Deferrable Interest Subordinated Debentures. If and for as long as payments on PSE&G's Deferrable Interest Subordinated Debentures have been deferred, or PSE&G has defaulted on the indentures related thereto or its guarantees thereof, PSE&G may not pay any dividends on its common and preferred stock. The Subordinated Debentures and the indentures constitute a full and unconditional guarantee by PSE&G of the Preferred Securities issued by the partnership and the trusts. (G) Enterprise Capital Trust I, Enterprise Capital Trust II and Enterprise Capital Trust III were formed and are controlled by PSEG for the purpose of issuing Quarterly Trust Preferred Securities (Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures). The proceeds were loaned to PSEG and are evidenced by PSEG's Deferrable Interest Subordinated Debentures. If and for as long as payments on PSEG's Deferrable Interest Subordinated Debentures have been deferred, or PSEG has defaulted on the indentures related thereto or its guarantees thereof, PSEG may not pay any dividends on its common and preferred stock. The Subordinated Debentures and the indentures constitute a full and unconditional guarantee by PSEG of the Preferred Securities issued by the trusts. 74 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 8. SCHEDULE OF CONSOLIDATED DEBT
DECEMBER 31, LONG-TERM ---------------------------------------- INTEREST RATES MATURITY 1999 1998 ----------------- ---------------- ---------------- (MILLIONS OF DOLLARS) PSEG Extendible Notes (A) LIBOR plus 0.22% - 0.60% 2000............ $275 $275 LIBOR plus 0.40% 2001............ 300 -- ---------------- ---------------- Principal Amount Outstanding (C)............................................ 575 -- Amounts Due Within One Year (D).................................................. (275) -- ---------------- ---------------- Total Long-Term Debt of PSEG (H)............................................ $300 $275 ================ ================ PSE&G First and Refunding Mortgage Bonds (B) 8.75% 1999............ $ -- $100 6.00%-7.625% 2000............ 623 635 7.875% 2001............ 100 100 6.125% 2002............ 257 300 6.875%-8.875% 2003............ 300 300 6.50% 2004............ 286 -- 6.25%-9.125% 2005-2007....... 385 750 6.80%-6.90% 2008-2012....... -- 3 Variable 2008-2012....... 66 66 6.75%-7.375% 2013-2017....... 330 375 6.45%-9.25% 2018-2022....... 139 139 Variable 2018-2022....... 14 14 5.20%-7.50% 2023-2027....... 434 573 5.45%-6.55% 2028-2032....... 499 499 Variable 2028-2032....... 25 25 5.00%-8.00% 2033-2037....... 160 160 Medium-Term Notes 8.10%-8.16% 2008-2012....... 60 60 7.04% 2018-2022....... 9 9 7.15%-7.18% 2023-2027....... 39 41 ---------------- ---------------- Total First and Refunding Mortgage Bonds..................................... 3,726 4,149 ---------------- ---------------- Unsecured Bonds Variable 2027............ 19 19 ---------------- ---------------- Total Unsecured Bonds........................................................ 19 19 ---------------- ---------------- Principal Amount Outstanding (C)................................................. 3,745 4,168 Amounts Due Within One Year (D).................................................. (623) (100) Net Unamortized Discount......................................................... (23) (23) ---------------- ---------------- Total Long-Term Debt of PSE&G (E)............................................ $3,099 $4,045 ================ ================
75 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, ------------------------------------------ MATURITY 1999 1998 ---------------- ----------------- ------------------ ENERGY HOLDINGS Senior Notes 10% 2009............ $400 $-- Net Unamortized Discount.......................................................... (4) -- ----------------- ------------------ 396 -- ----------------- ------------------ PSEG CAPITAL (F) Medium-Term Notes 8.95%-9.93% 1999............ -- 155 6.54% 2000............ 78 78 6.74% 2001............ 135 135 6.73% 2001............ 35 -- 6.80%-7.00% 2002............ 130 130 6.25% 2003............ 252 -- ----------------- ------------------ Principal Amount Outstanding (C).................................................. 630 498 Amounts Due Within One Year (D)................................................... (78) (155) Net Unamortized Discount.......................................................... (2) (2) ----------------- ------------------ Total Long-Term Debt of PSEG Capital.......................................... 550 341 ----------------- ------------------ ENTERPRISE CAPITAL FUNDING CORPORATION 7.58% 1999............ -- 45 ----------------- ------------------ Principal Amount Outstanding (C).................................................. -- 45 Amounts Due Within One Year (D)................................................... -- (45) ----------------- ------------------ Total Long-Term Debt of Funding............................................... -- -- ----------------- ------------------ GLOBAL (G) Non-recourse Debt 7.721% - Bank Loan 1999............. -- 87 11.08%-Bank Loan 2000............. 67 -- 13.73% and 13.23%, respectively- Bank Loan 2000-2002........ 90 123 9.04% - Bank Loan 2001............. 85 -- 9.42% - Bank Loan 2001-2003........ 28 -- 9.42% - Bank Loan 2001-2004........ 47 -- 14.00% - Minority Interest Loan 2027............. 10 10 ----------------- ------------------ Principal Amount Outstanding (C).................................................. 327 220 Amounts Due Within One Year (D)................................................... (97) (118) ----------------- ------------------ Total Long-Term Debt of Global............................................. 230 102 ----------------- ------------------ Total Long-Term Debt of Energy Holdings.................................... $1,176 $443 ================= ================== Consolidated Long-Term Debt............................................. $4,575 $4,763 ================= ==================
(A) In June 1999, PSEG issued $300 million of Extendible Notes, Series C, due June 15, 2001 with interest at LIBOR plus 0.40%, reset quarterly, which will be automatically tendered to the remarketing agent for remarketing on March 15, 2000. At December 31, 1999, the interest rates on Series A, B and C were 6.00%, 6.03% and 5.65%, respectively. (B) PSE&G's First and Refunding Mortgage (Mortgage), securing the Bonds, constitutes a direct first mortgage lien on substantially all of PSE&G's property and franchises. During 1999, PSE&G purchased on the open market $319 million of its Mortgage Bonds. In July 1999, $100 million of PSE&G's 8.34% Bonds, Series Z, matured. (C) For information concerning fair value of financial instruments, see Note 9. Financial Instruments and Risk Management. (D) The aggregate principal amounts of mandatory requirements for sinking funds and maturities for each of the five years following December 31, 1999 are as follows: 76 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SINKING FUNDS MATURITIES --------- --------------------------------------------------------------- PSEG YEAR GLOBAL PSEG PSE&G CAPITAL GLOBAL TOTAL --------------- ---------- ---------- ------------- -------- --------- ------------ 2000......... $30 $275 $623 $78 $67 $1,073 2001......... 41 300 100 170 85 696 2002......... 45 -- 257 130 -- 432 2003......... 29 -- 300 252 -- 581 2004......... 20 -- 286 -- -- 306 ---------- --------- ------------- -------- ----------- ------------- $165 $575 $1,566 $630 $152 $3,088 ========== ========= ============= ======== =========== =============
(A) At December 31, 1999 and 1998, PSE&G's annual interest requirement on long-term debt was $254 million and $282 million, of which $246 million and $274 million, respectively, was the requirement for Mortgage Bonds. The embedded interest cost on long-term debt on such dates was 7.34% and 7.35%, respectively. The embedded interest cost on long-term debt due within one year at December 31, 1999 was 7.78%. (B) PSEG Capital has provided up to $750 million debt financing for Energy Holdings' businesses, except Energy Technologies, on the basis of a net worth maintenance agreement with PSEG. Effective January 31, 1995, PSEG Capital has limited its borrowings to no more than $650 million. (C) Global's projects are generally financed with non-recourse debt at the project level, with the balance in the form of equity investments by the partners in the project. The non-recourse debt shown in the above table is that of three consolidated subsidiaries which have equity investments in distribution facilities in Argentina, Brazil, Chile and Peru. Global's capital at risk on the projects is limited to its original equity investment. The non-recourse debt appears as long-term debt and long-term investments in PSEG's consolidated balance sheets. (D) At December 31, 1999 and 1998, PSEG's annual interest requirement on long-term debt was $409 million and $365 million, of which $246 million and $274 million, respectively, was the requirement for Extendible Notes. The embedded interest cost on long-term debt on such dates was 7.59% and 7.32%, respectively. SHORT-TERM (COMMERCIAL PAPER AND BANK LOANS) PSEG At December 31, 1999, PSEG had a committed $150 million revolving credit facility which expires in December 2002. On September 8, 1999, PSEG entered into an uncommitted line of credit with a bank for an unlimited amount. At December 31, 1999, PSEG had $145 million outstanding under these facilities. The weighted-average, short-term debt rate of PSEG was 6.7%, 5.6% and 6.2% for the years ended December 31, 1999, 1998 and 1997, respectively. PSE&G
1999 1998 1997 ---- ---- ---- (MILLIONS OF DOLLARS) Principal amount outstanding at year end, primarily commercial paper....... $1,475 $850 $1,106 Weighted average interest rate for short-term debt at year end............. 6.56% 5.91% 6.07%
77 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED PSE&G has authorization from the BPU to issue and have outstanding not more than $2.0 billion of its short-term obligations at any one time, consisting of commercial paper and other unsecured borrowings from banks and other lenders. This authorization expires January 2, 2001. PSE&G has a $1.5 billion commercial paper program (Program) supported by an $850 million revolving credit agreement expiring in June 2000 and a $650 million revolving credit agreement expiring in June 2002 with a group of commercial banks. As of December 31, 1999 and 1998, PSE&G had $1.407 billion and $655 million, respectively, outstanding under the Program, which amounts are included in the table above. As of December 31, 1999, there was no debt outstanding under the revolving credit agreements. On September 9, 1999, PSE&G entered into an uncommitted line of credit with a bank for an unlimited amount. PSE&G also had additional uncommitted lines of credit totaling $70 million provided to primarily support short-term borrowings. As of December 31, 1999, PSE&G had $90 million outstanding under these lines of credit which is included in the table above. PSE&G had various lines of credit facilities extended by banks to primarily support the issuance of letters of credit. As of December 31, 1999, letters of credit were issued in the amount of $21 million. PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125 million revolving credit facility with a group of banks, which expires on June 28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations. As of December 31, 1999, Fuelco had commercial paper of $73 million outstanding under the commercial paper program, which amounts are included in the table above. As of December 31, 1999, there was no debt outstanding under the revolving credit facility. Pursuant to the BPU's authorization of long-term debt, PSE&G has entered into standby financing arrangements with banks totaling $124 million. These facilities support long-term tax-exempt multi-mode mortgage bond financings done through the New Jersey Economic Development Authority, The Pollution Control Financing Authority of Salem County (New Jersey), the York County (Pennsylvania) Industrial Development Authority and the Indiana County (Pennsylvania) Industrial Development Authority. As of December 31, 1999, no amounts were outstanding under such arrangements. ENERGY HOLDINGS
1999 1998 1997 ---- ---- ---- (MILLIONS OF DOLLARS) Principal amount outstanding at year end.............................. $351 $206 $306 Weighted average interest rate for short-term debt at year end........ 7.60% 6.46% 6.92%
In 1999, Energy Holdings closed on two separate senior revolving credit facilities. These facilities, a $495 million, five year revolving credit and letter of credit facility and a $165 million, 364 day revolving credit facility, replaced credit facilities at Funding totaling $450 million which expired in 1999. As of December 31, 1999, there was $351 million outstanding under these facilities, which is included in the table above. NOTE 9. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT PSEG's operations give rise to exposure to market risks from changes in commodity prices, interest rates, foreign currency exchange rates and securities prices. PSEG's policy is to use derivative financial instruments for the purpose of managing market risk consistent with its business plans and prudent business practices. 78 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value was determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions at December 31, 1999 and December 31, 1998, respectively. Note that certain future events in connection with securitization and the anticipated sale by PSE&G of generation-related assets to Power will trigger certain redemption features of certain PSE&G mortgage bonds.
DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------ ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- (MILLIONS OF DOLLARS) Long-Term Debt (A): PSEG ................................................ $575 $574 $275 $275 Energy Holdings ..................................... 1,351 1,346 761 769 PSE&G ............................................... 3,722 3,658 4,145 4,389 Preferred Securities Subject to Mandatory Redemption: PSE&G Cumulative Preferred Securities ............... 75 67 75 77 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures .................. 210 200 210 213 Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures .................. 303 277 303 315 Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures ................... 525 420 525 518
(A) Includes current maturities. Includes interest rate swaps with notional amounts of of $34 million and $150 million for Energy Holdings and PSEG, respectively, for the year ended December 31, 1999 and interest rate swaps with notional amounts of $44 million and $150 million for Energy Holdings and PSEG, respectively, for the period ended December 31, 1998. Global has $67 million of project debt that is non-recourse to PSEG, Global and Energy Holdings associated with investments in Argentina that were refinanced in June 1999 for a term of one year. An interest rate swap was entered into which effectively converts 50% of the floating rate obligation into a fixed rate obligation. The interest rate differential to be received or paid under the agreement is recorded over the life of the agreement as an adjustment to interest expense. The pricing on the loan is indexed to the London Interbank Offered Rate (LIBOR). COMMODITY-RELATED INSTRUMENTS -- PSE&G (INCLUDING POWER) At December 31, 1999 and December 31, 1998, PSE&G held or issued commodity and financial instruments that reduce exposure to price fluctuations from factors such as weather, environmental policies, changes in demand, changes in supply, state and Federal regulatory policies and other events. These instruments, in conjunction with owned electric generating capacity and physical gas supply contracts, are designed to cover estimated electric and gas customer commitments. PSE&G uses futures, forwards, swaps and options to manage and hedge price risk related to these market exposures. At December 31, 1999, PSE&G had outstanding commodity financial instruments with a notional contract quantity of 36.1 million megawatt-hours (mWh) of electricity and 25.5 million MMBTU (million British thermal units) of natural gas. At December 31, 1998, PSE&G had outstanding commodity financial instruments with a notional contract quantity of 1.6 million mWh of electricity and 65.2 million MMBTU of natural gas. Notional amounts are indicative only of the volume of activity and are not a measure of market risk. 79 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED As discussed in Note 1. Organization, Basis of Presentation and Summary of Significant Accounting Policies, PSE&G implemented EITF 98-10 effective January 1, 1999. As a result, PSE&G's energy trading contracts have been marked to market and gains and losses from such contracts were included in earnings. PSE&G recorded $42 million and $23 million of gains in the years ended December 31, 1999 and 1998, respectively. COMMODITY-RELATED INSTRUMENTS -- ENERGY HOLDINGS Energy Technologies' policy is to enter into natural gas and electricity futures contracts and forward purchases to lock in prices related to future fixed sales commitments. Whenever possible, Energy Technologies attempts to be 100% hedged on its electric and gas sales positions. During the years ended December 31, 1999 and 1998, Energy Technologies entered into futures contracts to buy natural gas and electricity related to fixed-price sales commitments. Energy Technologies had 64% and 90% of its fixed price natural gas sales commitments hedged and 85% and 63% of its fixed price electric commodity sales commitments hedged at December 31, 1999 and 1998, respectively. As of December 31, 1999 and 1998, Energy Technologies had net unrealized losses of approximately $0.1 million and $5.0 million, respectively, related to its electric and gas hedges. CREDIT RISK Credit risk relates to the risk of loss that PSEG would incur as a result of nonperformance by counterparties, pursuant to the terms of their contractual obligations. PSEG has established credit policies that it believes significantly minimizes PSEG's exposure to credit risk. These policies include an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which may allow for the netting of positive and negative exposures associated with a single counterparty. EQUITY SECURITIES -- ENERGY HOLDINGS Resources directly and indirectly has investments in equity securities. Resources carries its investments in equity securities at their approximate fair value. Consequently, the carrying value of these investments is affected by changes in the fair value of the underlying securities. Fair value is determined by adjusting the market value of the securities for liquidity and market volatility factors, where appropriate. The aggregate fair values of such investments which had available market prices at December 31, 1999 and 1998 were $131 million and $204 million, respectively. The decrease in fair value was primarily due to the sale of certain investments during 1999. The potential change in fair value resulting from a hypothetical 10% change in quoted market prices of these investments amounted to $11 million at December 31, 1999 and $17 million at December 31, 1998. FOREIGN CURRENCIES -- ENERGY HOLDINGS In accordance with their growth strategies, Global and Resources have made international investments of approximately $1.4 billion and $1.0 billion, respectively. Resources' international investments are primarily leveraged leases of assets located in Australia, the Netherlands and the United Kingdom with associated revenues denominated in U.S. dollars and, therefore, not subject to foreign currency risk. Global's international investments are primarily in projects that generate or distribute electricity in Argentina, Brazil, Chile, China, India, Peru and Venezuela. Investing in foreign countries involves certain risks. Economic conditions that result in higher comparative rates of inflation in foreign countries likely result in declining values in such countries' currencies. As currencies fluctuate against the U.S. dollar, there is a corresponding change in Global's investment value in terms of the U.S. dollar. Such change is reflected as an increase or decrease in other comprehensive income, a separate component of stockholders' equity. Cumulatively, net foreign currency 80 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED devaluations have reduced the reported amount of PSEG's total stockholders' equity by $200 million, $170 million of which was caused by the devaluation of the Brazilian Real, for the year ended December 31, 1999. In January 1999, Brazil abandoned its managed devaluation strategy and allowed its currency, the Real, to float against other currencies. As of December 31, 1999, the Real had devalued approximately 33% against the U.S. dollar since December 31, 1998, affecting the carrying value of Global's investment in a Brazilian distribution company. For additional information, see Note 16. Financial Information by Business Segments. Higher comparative rates of inflation in foreign economies also means that borrowing costs in local currency will be higher than in the United States. When warranted, Global has financed certain foreign investments with U.S. dollar denominated debt. While less costly to service in terms of U.S. dollars, such debt is exposed to currency risk because a devaluation would cause repayment to be more expensive in local currency terms since more units of local currency would be required to repay the debt. Dollar denominated debt was incurred by Global in Argentina, Chile and Peru to finance the acquisition of interests in rate regulated distribution entities. These entities may be able to recover higher costs incurred as a result of a devaluation specifically through the terms of the concession agreement or as a pass through of higher inflation costs in rates over time, although no assurances can be given that this will occur. In evaluating its investment decisions, Global considers the social, economic, political and currency risks associated with each potential project; and, if warranted, assumes a certain level of currency devaluation when making its investment decisions. In Argentina, the currency is pegged 1:1 with the U.S. dollar and a legislative act is required to de-couple the currency from the dollar. Global had consolidated project debt totaling $90 million as of December 31, 1999 associated with Global's investment in a Brazilian distribution company that is non-recourse to Global, Energy Holdings and PSEG. The debt is denominated in the Brazilian Real and is indexed to a basket of currencies, approximately 50% of which is the U.S. dollar. Global is subject to foreign currency exchange rate risk as a result of exchange rate movements between the indexed foreign currencies and Real and between the Real and the U.S. dollar. Exchange rate changes ultimately impact the debt level outstanding in the reporting currency and result in foreign currency gains or losses. Gains or losses resulting from such exchange rate movements are included in other income for the period and amounted to gains of $2 million and a loss of $3 million for the years ended December 31, 1999 and 1998, respectively. Although Global generally seeks to structure power purchase contracts and other project revenue agreements to provide for payments to be made in, or indexed to, U.S. dollars or a currency freely convertible into U.S. dollars, its ability to do so in all cases may be limited. As Energy Holdings continues to invest internationally, the financial statements of PSEG will be increasingly affected by changes in the global economy. PSEG cannot predict foreign currency exchange rate movements and, therefore, cannot predict the impact of such movements on PSEG's financial condition, results of operations or net cash flows. INTEREST RATES PSEG, PSE&G and Energy Holdings are subject to the risk of fluctuating interest rates in the normal course of business. Their policy is to manage interest rate risk through the use of fixed rate debt, floating rate debt and interest rate swaps. As of December 31, 1999, a hypothetical 10% change in market interest rates would result in a $5 million, $14 million and $3 million change in annual interest costs related to short-term and floating rate debt at PSEG, PSE&G and Energy Holdings, respectively. PSEG entered into an interest rate swap on June 26, 1998 to hedge Enterprise Capital Trust II's $150 million of Floating Rate Capital Securities, Series B, due 2028, which were issued in June 1998. The Floating Rate Capital Securities were issued at an annual rate equal to three-month LIBOR plus 1.22%, reset quarterly. Enterprise Capital Trust II is a special purpose statutory business trust controlled by PSEG. The basis for both the interest rate swap and the Floating Rate Capital Securities is the quarterly LIBOR. This interest rate swap hedges the underlying debt for 10 years at an effective rate of 7.2%. 81 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NUCLEAR DECOMMISSIONING TRUST FUNDS Contributions made into the Nuclear Decommissioning Trust Funds are invested in debt and equity securities. These marketable debt and equity securities are recorded at $631 million which approximates their fair market value. Those securities have exposure to market price risk. The potential change in fair value resulting from a hypothetical 10% change in quoted market prices of these securities amounts to $63 million. PSE&G anticipates transferring the ownership of the Nuclear Decommissioning Trust Funds to Power with the transfer of the generation-related assets to Power. NOTE 10. CASH AND CASH EQUIVALENTS The December 31, 1999 and 1998 balances consist primarily of working funds and highly liquid marketable securities (commercial paper and money market funds) with a maturity of three months or less. NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES NUCLEAR INSURANCE COVERAGES AND ASSESSMENTS PSE&G's insurance coverages and maximum retrospective assessments for its nuclear operations are as follows:
PSE&G MAXIMUM TYPE AND SOURCE OF COVERAGES TOTAL SITE COVERAGES ASSESSMENTS - ---------------------------- -------------------- ----------- (MILLIONS OF DOLLARS) Public and Nuclear Worker Liability (Primary Layer): American Nuclear Insurers........................... $ 200.0 (A) $9.1 Nuclear Liability (Excess Layer): Price-Anderson Act.................................. 9,338.1 (B) 233.6 -------- ------ Nuclear Liability Total....................... $9,538.1 (C) $242.7 ======== ====== Property Damage (Primary Layer): Nuclear Electric Insurance Limited (NEIL) Primary (Salem/Hope Creek/Peach Bottom)............... $500.0 $10.3 Property Damage (Excess Layer): NEIL II (Salem/Hope Creek/Peach Bottom)............. 2,250.0 10.7 -------- ----- Property Damage Total (Per Site).................... $2,750.0 $21.0 ======== ===== Replacement Power: NEIL I (Salem and Peach Bottom)..................... $ 202.8 (D) $5.8 NEIL I (Hope Creek)................................. 449.5 3.1 -------- ---- Replacement Power Total ...................... $ 652.3 $8.9 ======== ====
(A) The primary limit for Public Liability is a per site aggregate limit with no potential for assessment. The Nuclear Worker Liability represents the potential liability from workers claiming exposure to the hazard of nuclear radiation. This coverage is subject to an industry aggregate limit, includes annual automatic reinstatement if the Industry Credit Rating Plan (ICRP) Reserve Fund exceeds $400 million, and has an assessment potential under former canceled policies. (B) Retrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of 1954, as amended. PSE&G is subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in the United States. This retrospective assessment can be adjusted for inflation every 82 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED five years. The last adjustment was effective as of August 20, 1998. This retrospective program is in excess over the Public and Nuclear Worker Liability primary layers. (C) Limit of liability under the Price-Anderson Act for each nuclear incident. (D) Salem and Peach Bottom have an aggregate indemnity limit based on a weekly indemnity of $1.5 million for 52 weeks followed by 80% of the weekly indemnity for 104 weeks. Hope Creek has an aggregate indemnity limit based on a weekly indemnity of $3.3 million for 52 weeks followed by 80% of the weekly indemnity for 104 weeks. The Price-Anderson Act sets the "limit of liability" for claims that could arise from an incident involving any licensed nuclear facility in the nation. The "limit of liability" is based on the number of licensed nuclear reactors and is adjusted at least every five years based on the Consumer Price Index. The current "limit of liability" is $9.5 billion. All utilities owning a nuclear reactor, including PSE&G, have provided for this exposure through a combination of private insurance and mandatory participation in a financial protection pool as established by the Price-Anderson Act. Under the Price-Anderson Act, each party with an ownership interest in a nuclear reactor can be assessed its share of $88.1 million per reactor per incident, payable at $10 million per reactor per incident per year. If the damages exceed the "limit of liability," the President is to submit to Congress a plan for providing additional compensation to the injured parties. Congress could impose further revenue raising measures on the nuclear industry to pay claims. PSE&G's maximum aggregate assessment per incident is $233.6 million (based on PSE&G's ownership interests in Hope Creek, Peach Bottom and Salem) and its maximum aggregate annual assessment per incident is $26.5 million. This does not include the $9.1 million that could be assessed under the nuclear worker policies. Further, a decision by the U.S. Supreme Court, not involving PSE&G, has held that the Price-Anderson Act did not preclude awards based on state law claims for punitive damages. PSE&G is a member of an industry mutual insurance company, Nuclear Electric Insurance Limited (NEIL). NEIL provides the primary property and decontamination liability insurance at Salem/Hope Creek and Peach Bottom. NEIL also provides excess property insurance through its decontamination liability, decommissioning liability, and excess property policy and replacement power coverage through its business interruption and/or extra expense policy. NEIL policies may make retrospective premium assessments in case of adverse loss experience. PSE&G's maximum potential liabilities under these assessments are included in the table and notes above. Certain provisions in the NEIL policies provide that the insurer may suspend coverage with respect to all nuclear units on a site without notice if the NRC suspends or revokes the operating license for any unit on a site, issues a shutdown order with respect to such unit or issues a confirmatory order keeping such unit down. PENDING ASSET PURCHASES PSEG has entered into contracts to purchase combustion turbines to expand capacity at certain generating sites. PSEG's commitment under these contracts is approximately $392 million to be expended through December 2001. Through December 31, 1999, payments of approximately $91 million were made under these contracts. On October 6, 1999, Power announced an agreement with Niagara Mohawk Power Corporation (Niagara Mohawk) to purchase its 400 MW oil and gas-fired electric generating station in Albany, New York (Albany Steam Station) for $47.5 million. Payment of Power's obligation under such agreement has been guaranteed by PSEG. Niagara Mohawk could also receive up to an additional $11.5 million if Power chooses to pursue redevelopment of the Albany Steam Station. Under a transition power supply contract in place through September 2003, Niagara Mohawk will purchase electricity from Power at prices consistent with those established in Niagara Mohawk's regulatory agreement with the New York Public Service Commission (NYPSC). The purchase is subject to approval by the NYPSC and Federal agencies including FERC. Power expects to complete the transaction in 2000. 83 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED On September 30, 1999, Power announced that it has signed an agreement to acquire all of Conectiv's interests in Salem and Hope Creek and half of Conectiv's interest in Peach Bottom for an aggregate purchase price of $15.4 million plus the net book value of nuclear fuel at closing. Payment of Power's obligation under such agreement has been guaranteed by PSEG. Conectiv is the parent of Atlantic City Electric Company (ACE) and Delmarva Power & Light Company (DP&L). Power will purchase Conectiv's 14.82% interest (328 MW) in Salem, Conectiv's 5% interest (52 MW) in Hope Creek and half of Conectiv's 15.02% interest (164 MW) in Peach Bottom. Once completed, PSEG would own a 57.41% interest (1,270 MW) in Salem, a 100% interest (1,031 MW) in Hope Creek and a 50% interest (1,094 MW) in Peach Bottom. The purchases are subject to approval by the BPU, the Delaware Public Service Commission, the Maryland Public Service Commission, the Pennsylvania Public Utility Commission (PPUC) and Federal agencies including the NRC and FERC. Power expects to complete the purchases in 2000. NUCLEAR OPERATING PERFORMANCE STANDARD (OPS) As part of the May 1997 settlement of litigation, PECO Energy, DP&L and PSE&G, three of the co-owners of Salem and Peach Bottom, agreed to an OPS through December 31, 2011 for Salem and through December 31, 2007 for Peach Bottom. Under the OPS, the station operator is required to make payments to the non-operating owners (excluding ACE) commencing in January 2001 if the three-year historical average net maximum dependable capacity factor for that station, calculated as of December 31 of each year commencing with December 31, 2000, falls below 40%. The average capacity factors for the 1998-1999 period were 75%, 81%, 87% and 89% for Salem 1, Salem 2, Peach Bottom 2 and Peach Bottom 3, respectively. Any such payment is limited to a maximum of $25 million per year. The parties have further agreed to forego litigation in the future, except for limited cases in which the operator would be responsible for damages of no more than $5 million per year. As noted above, Power has announced that it has signed an agreement to acquire all of Conectiv's interests in Salem and Hope Creek and half of Conectiv's interest in Peach Bottom. Once the purchases are completed, DP&L will no longer have an interest in the OPS agreement. HAZARDOUS WASTE The New Jersey Department of Environmental Protection (NJDEP) regulations concerning site investigation and remediation require an ecological evaluation of potential injuries to natural resources in connection with a remedial investigation of contaminated sites. The NJDEP is presently working with industry to develop procedures for implementing these regulations. These regulations may substantially increase the costs of remedial investigations and remediations, where necessary, particularly at sites situated on surface water bodies. PSE&G and predecessor companies owned and/or operated certain facilities situated on surface water bodies, certain of which are currently the subject of remedial activities. The financial impact of these regulations on these projects is not currently estimable. PSE&G does not anticipate that the compliance with these regulations will have a material adverse effect on its financial position, results of operations or net cash flows. PSE&G MANUFACTURED GAS PLANT REMEDIATION PROGRAM Since 1988, NJDEP and PSE&G have identified 38 former manufactured gas plant sites. PSE&G is currently working with NJDEP under a program to assess, investigate and, if necessary, remediate environmental conditions at these sites. The Remediation Program is periodically reviewed and revised by PSE&G based on regulatory requirements, experience with the Remediation Program and available remediation technologies. The long-term costs of the Remediation Program cannot be reasonably estimated, but experience to date indicates that costs of approximately $20 million per year could be incurred over a period of about 30 years and that the overall cost could be material. The Energy Competition Act provides for the continuation of RAC programs. The Final Order provides for the recovery of costs for this remediation effort through the SBC. 84 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Net of recoveries, costs incurred through December 31, 1999 for the Remediation Program amounted to $94 million. In addition, at December 31, 1999, PSE&G's estimated liability for remediation costs through 2002 aggregated $62 million. Expenditures beyond 2002 cannot be reasonably estimated. PASSAIC RIVER SITE The EPA has determined that a six mile stretch of the Passaic River in Newark, New Jersey is a "facility" within the meaning of that term under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and that, to date, at least thirteen corporations, including PSE&G, may be potentially liable for performing required remedial actions to address potential environmental pollution at the Passaic River "facility". In a separate matter, PSE&G and certain of its predecessors operated industrial facilities at properties within the Passaic River "facility", including the former Harrison Gas Plant and Essex Generating Station. PSE&G cannot predict what action, if any, the EPA or any third party may take against PSE&G with respect to these matters, or in such event, what costs PSE&G may incur to address any such claims. However, such costs may be material. NOTE 12. PSE&G NUCLEAR DECOMMISSIONING PSE&G has an ownership interest in five nuclear units. In accordance with rate orders received from the BPU, PSE&G has established an external master nuclear decommissioning trust for all its nuclear units. This trust contains two separate funds: a qualified fund and a non-qualified fund. Section 468A of the Internal Revenue Code limits the amount of money that can be contributed into a "qualified" fund. Contributions made into a qualified fund are tax deductible. PSE&G estimated the total cost of decommissioning its share of these five nuclear units at $986 million in year end 1995 dollars (the year that the most recent site specific estimates were prepared), excluding contingencies. On December 23, 1996, PSE&G filed its 1995 nuclear plant decommissioning cost update with the BPU. On December 17, 1997, the BPU accepted PSE&G's decommissioning cost updates and found that the current funding requirements as presented in PSE&G's 1996 Nuclear Decommissioning Trust Fund Report, dated May 15, 1997, appear adequate. The most recent base rate decision provided that $29.6 million of such costs are to be collected through PSE&G's base rates and the LEAC. Per the Final Order, such costs will now be collected through the SBC, since the LEAC was discontinued on July 31, 1999. As of December 31, 1999 and 1998, PSE&G had contributed $338 million and $303 million, respectively, into independent, external, qualified and non-qualified nuclear decommissioning trust funds. The fair market value of these funds as of December 31, 1999 and 1998 was $631 million and $542 million, respectively. NOTE 13. INCOME TAXES The NJGRT was eliminated effective January 1, 1998 and replaced with a combination of the New Jersey Corporate Business Tax which is a State income tax, the State sales and use tax and a Transitional Energy Facility Assessment (TEFA), with no material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G. The TEFA, which is collected from customers, will be phased-out over five years. The corresponding phase out and reduction in rates will cause no material impact on PSEG and PSE&G. While under NJGRT, PSE&G was subject to an effective state tax on unit sales equal to approximately 13% of receipts. As a result of such tax reform, after the phase out of the TEFA, the effective state tax rate applicable to PSE&G will have been substantially reduced, putting PSE&G on a more level playing field with competitors. Interim rates were implemented with regard to the new tax structure effective with service rendered on and after January 1, 1998. The BPU completed its administrative review of the filings of all New Jersey utilities and approved permanent rates for 1998 on July 13, 1998 in a final order. Effective January 1, 1999, revised rates became effective which reflect one 85 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED year's phase out of the TEFA. Effective January 1, 2000, revised rates became effective which reflect two year's phase out of the TEFA. On September 18, 1998 and October 15, 1998, PSE&G filed with the BPU additional information necessary to 1) reconcile its NJGRT collections to its liability through April 1998, 2) reflect the impact of cash working capital and net negative deferred State income taxes on a separate electric and gas basis and 3) provide actual and estimated tax collected and tax liability through December 31, 1998. On December 16, 1998, the BPU issued an "Order Implementing 1999 `TEFA' Reductions and Other Rate Adjustments." This order mandates PSE&G to recognize the cash working capital impact on a separate electric and gas basis and defer such impact as deferred balance sheet credits with interest. In accordance with the order, PSE&G deferred $1.3 million at December 31, 1999 and 1998. On December 23, 1999, the BPU issued an order implementing TEFA reductions and other rate adjustments. This order mandates PSE&G to implement a permanent base rate reduction of $1.3 million to reflect the gas cash working capital impact of energy tax reform act and a one time credit of $2.7 million in 2000 to reflect the gas cash working capital reduction defined in 1999 and 1998, with interest. A reconciliation of reported Net Income with pretax income and of income tax expense with the amount computed by multiplying pretax income by the statutory Federal income tax rate of 35% is as follows:
1999 1998 1997 ------- ------- ------- (MILLIONS OF DOLLARS) Net Income (Loss) ........................................ $(81) $644 $560 Extraordinary Item (Net of Tax of $345) ............. 804 -- -- ------- ------- ------- Net Income before Extraordinary Item ..................... 723 644 560 Preferred securities (net) ............................... 9 9 15 ------- ------- ------- Subtotal ................................... 732 653 575 ------- ------- ------- Income taxes: Operating income: Federal - Current ................................. 398 336 160 Deferred (A) .......................... 63 4 139 ITC ................................... (12) (21) (20) ------- ------- ------- Total Federal .................... 449 319 279 ------- ------- ------- State - Current ................................... 132 121 4 Deferred (A) ............................. (13) (9) 3 ------- ------- ------- Total State ...................... 119 112 7 ------- ------- ------- Foreign - Current ................................. -- -- -- Deferred (A) .......................... (5) (3) (2) ------- ------- ------- Total Foreign .................... (5) (3) (2) ------- ------- ------- ------- ------- ------- Total included in operating income ......... 563 428 284 ------- ------- ------- Pretax income ............................................ $1,295 $1,081 $859 ======= ======= =======
86 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Reconciliation between total income tax provisions and tax computed at the statutory tax rate on pretax income:
1999 1998 1997 ----- ----- ----- (MILLIONS OF DOLLARS) Tax computed at the statutory rate ......................................... $453 $378 $301 Increase (decrease) attributable to flow through of certain tax adjustments: Depreciation ........................................................ 35 23 27 Amortization of investment tax credits .............................. (12) (21) (20) New Jersey Corporate Business Tax ................................... 84 63 2 Other ............................................................... 3 (15) (26) ----- ----- ----- Subtotal ..................................................... 110 50 (17) ----- ----- ----- Total income tax provisions .................................. $563 $428 $284 ===== ===== ===== Effective income tax rate .................................................. 43.5% 39.6% 33.1%
(A) The provision for deferred income taxes represents the tax effects of the following items:
1999 1998 1997 ----- ----- ----- (MILLIONS OF DOLLARS) Deferred Credits: Additional tax depreciation and amortization ........................ $(17) $(33) $34 Leasing Activities .................................................. 94 39 114 Conservation Costs .................................................. 29 36 27 Deferred Fuel Costs--net ............................................ (19) (60) (32) Pension Cost ........................................................ (34) 26 8 New Jersey Corporate Business Tax ................................... (13) (5) -- Severance Pay ....................................................... 8 -- 3 Other ............................................................... (3) (11) (14) ----- ----- ----- Total ........................................................ $45 $(8) $140 ===== ===== =====
PSEG provides deferred taxes at the enacted statutory tax rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate-making purposes. Management believes that it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to PSE&G customers will be recovered from utility customers in the future. Accordingly, an offsetting regulatory asset was established. As of December 31, 1999, PSE&G had a deferred tax liability and an offsetting regulatory asset of $286 million representing the future revenue expected to be recovered through rates based upon established regulatory practices which permit recovery of current taxes payable. This amount was determined using the enacted Federal income tax rate of 35% and State income tax rate of 9%. During 1999, PSE&G's accumulated deferred income tax liability was reduced, reflecting the impact of the impairment writedown of the book basis of PSE&G's generating facilities. This was offset by the establishment of a deferred tax liability representing the future taxes payable applicable to the recovery of the stranded costs. 87 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The following is an analysis of deferred income taxes: DECEMBER 31, ----------------- 1999 1998 ------ ------ (MILLIONS OF DOLLARS) DEFERRED INCOME TAXES Assets: Current (net) .................................... $33 $30 ------ ------ Non-current: Unrecovered Investment Tax Credits ............ 23 110 Nuclear Decommissioning ....................... 26 26 Construction Period Interest and Taxes ........ 13 13 Deferred Electric Energy and Gas Costs ........ 18 -- New Jersey Corporate Business Tax ............. 493 15 Vacation Pay .................................. 6 6 Development Fees .............................. 16 16 Foreign Currency Translation .................. 22 5 Other ......................................... 14 30 ------ ------ Total Non-current ...................... 631 221 ------ ------ Total Assets ........................... 664 251 ------ ------ Liabilities: Non-current: Plant Related Items ........................... 655 2,212 Securitization-EMP ............................ 1,657 -- Leasing Activities ............................ 797 702 Partnership Activities ........................ 118 154 Conservation Costs ............................ 95 75 Hope Creek O&M Costs .......................... -- 19 Unamortized Debt Expense ...................... 39 45 Taxes Recoverable Through Future Rates (net) .. 87 242 Other ......................................... 36 181 ------ ------ Total Non-current ...................... 3,484 3,630 ------ ------ Total Liabilities ...................... 3,484 3,630 ------ ------ Summary -- Accumulated Deferred Income Taxes Net Current Assets ............................... 33 30 Net Non-current Liability ........................ 2,853 3,409 ------ ------ Total ...................................... $2,820 $3,379 ====== ====== 88 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 14. PENSION, OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
- --------------------------------------------------------------------------------------------------------- OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS (A) ---------------- -------------------- (MILLIONS OF DOLLARS) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit Obligation at Beginning of Year $ 2,488 $ 2,123 $ 782 $ 724 Service Cost 68 60 13 15 Interest Cost 163 158 51 56 Actuarial (Gain)/Loss (195) 287 (120) 16 Benefits Paid (140) (140) (35) (29) ------- ------- ------- ------- Benefit Obligation at End of Year 2,384 2,488 691 782 ------- ------- ------- ------- CHANGE IN PLAN ASSETS Fair Value of Assets at Beginning of Year 2,223 1,959 13 -- Actual Return on Plan Assets (Net of Expenses) 368 249 4 1 Employer Contributions 75 155 47 41 Benefits Paid (140) (140) (35) (29) ------- ------- ------- ------- Fair Value of Assets at End of Year 2,526 2,223 29 13 ------- ------- ------- ------- RECONCILIATION OF FUNDED STATUS Funded Status 142 (265) (662) (769) Unrecognized Net Transition Obligation 29 37 368 398 Prior Service Cost 120 134 27 30 (Gain)/Loss (155) 212 (128) (9) ------- ------- ------- ------- Net Amount Recognized $ 136 $ 118 $ (395) (350) ======= ======= ======= ======= AMOUNTS RECOGNIZED IN STATEMENT OF FINANCIAL POSITION Prepaid Benefit Cost 152 129 -- -- Accrued Benefit Cost (44) (42) (395) (350) Intangible Asset 23 26 N/A N/A Accumulated Other Comprehensive Income 5 5 N/A N/A ------- ------- ------- ------- Net Amount Recognized $ 136 $ 118 $ (395) $ (350) ======= ======= ======= ======= SEPARATE DISCLOSURE FOR PENSION PLANS WITH ACCUMULATED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS: Projected Benefit Obligation at End of Year $ 52 $ 49 Accumulated Benefit Obligation at End of Year $ 44 $ 42 Fair Value of Assets at End of Year $ -- $ --
89 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- ---------------------------------------------------------------------------------------------------------------- OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS (A) ---------------- --------------- 1999 1998 1999 1998 ----- ----- ----- ----- COMPONENTS OF NET PERIODIC BENEFIT COST Service Cost $ 68 $ 60 $ 13 $ 15 Interest Cost 163 158 52 56 Expected Return on Plan Assets (197) (176) (2) -- Amortization of Net Transition Obligation 8 8 30 30 Prior Service Cost 14 14 2 2 (Gain)/Loss 1 -- (3) (1) ----- ----- ----- ----- Net Periodic Benefit Cost $ 57 $ 64 $ 92 $ 102 ===== ===== ===== ===== COMPONENTS OF TOTAL BENEFIT EXPENSE Net Periodic Benefit Cost $ 57 $ 64 $ 92 $ 102 Effect of Regulatory Asset -- -- 19 19 Total Benefit Expense Including Effect of Regulatory ----- ----- ----- ----- Asset $ 57 $ 64 $ 111 $ 121 ===== ===== ===== ===== COMPONENTS OF OTHER COMPREHENSIVE INCOME Decrease in Intangible Asset $ 3 $ (1) Increase in Additional Minimum Liability (4) (4) ----- ----- Other Comprehensive Income $ (1) $ (5) N/A N/A ----- ----- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount Rate 7.50% 6.75% 7.50% 6.75% Expected Return on Plan Assets 9.00% 9.00% 9.00% 9.00% Rate of Compensation Increase 4.69% 4.69% 4.69% 4.69% Rate of Increase in Health Benefit Costs Administrative Expense 5.00% 5.00% Pre-65 Medical Costs Immediate Rate 11.00% 11.50% Ultimate Rate 5.00% 5.00% Year Ultimate Rate Reached 2011 2011 Post-65 Medical Costs Immediate Rate 7.00% 7.50% Ultimate Rate 5.00% 5.00% Year Ultimate Rate Reached 2003 2003 Dental Costs Immediate Rate 5.00% 5.50% Ultimate Rate 5.00% 5.00% Year Ultimate Rate Reached 1999 1999 EFFECT OF A CHANGE IN THE ASSUMED RATE OF INCREASE IN HEALTH BENEFIT COSTS Effect of a 1% Increase On Total of Service Cost and Interest Cost $ 5 $ 5 Postretirement Benefit Obligation $ 46 $ 60 Effect of a 1% Decrease On Total of Service Cost and Interest Cost $ (4) $ (4) Postretirement Benefit Obligation $ (39) $ (51)
(A) From January 1, 1993 through December 31, 1997, PSE&G accounted for the differences between its SFAS 106 accrual cost and the cash cost currently recovered through rates as a regulatory asset in accordance with SFAS 71 and EITF 92-12. In 1993, the FASB's EITF concluded that deferral of such costs is acceptable, provided regulators allow SFAS 106 costs in rates within approximately five years of the adoption of SFAS 106, which was December 31, 1997, for financial reporting purposes, with any cost deferrals recovered in 90 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED approximately twenty years. On December 17, 1997, the BPU ruled that PSE&G's current rates are sufficient to recover both the ongoing OPEB costs and the amortization of the deferred regulatory asset created by the accounting change from the cash basis of accounting to the accrual basis of accounting in accordance with SFAS 106 and EITF 92-12. As a result of the BPU's decision, PSE&G began amortizing the regulatory asset over 15 years beginning January 1, 1998. Also effective January 1, 1998, PSE&G began recording the annual SFAS 106 OPEB cost. OPEB costs during 1999 were $111 million, including $19 million of amortization. At December 31, 1999, the amount of the unfunded liability was $663 million. On October 21, 1998, the BPU ordered PSE&G to fund in an external trust its annual OPEB obligation to the maximum extent allowable under Section 401(h) of the Internal Revenue Code. In 1999, $12 million was funded, as allowed. Remaining OPEB costs will not be funded in an external trust, as mandated by the BPU. In October 1999, PSE&G created deferred assets and liabilities associated with the payment and collection of co-owner related OPEB costs. Such costs will be amortized over the remainder of the twenty-year period, in accordance with SFAS 106. Any impairment to such costs as a result of the Conectiv asset purchase will be recognized in Power's financial statements in 2000. No assurances for recovery of such assets and liabilities can be given. 401K PLANS PSEG sponsors two defined contribution plans. Represented employees of PSE&G, Power and Services are eligible for participation in the PSEG Employee Savings Plan (Savings Plan), while non represented employees of PSE&G, Power, Energy Holdings and Services are eligible for participation in the PSEG Thrift and Tax-Deferred Savings Plan (Thrift Plan). These plans are 401(k) plans to which eligible employees may contribute up to 25% of their compensation. Employee contributions up to 7% for Savings Plan participants and up to 8% for Thrift Plan participants are matched with employer contributions of cash or PSEG common stock equal to 50% of such employee contributions related to employee contributions. Employer contributions, related to participant contributions in excess of 5% and up to 7%, are made in shares of PSEG common stock for Savings Plan participants. Employer contributions, related to participant contributions in excess of 6% and up to 8%, are made in shares of PSEG common stock for Thrift Plan participants. PSEG billed its subsidiary companies for their portions of employer contributions. The amount expensed for the matching provision of the plans was approximately $21 million, $14 million and $15 million in 1999, 1998 and 1997, respectively. NOTE 15. STOCK OPTIONS, STOCK PURCHASE PLAN AND STOCK REPURCHASE PROGRAM STOCK OPTIONS PSEG and PSE&G apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for stock-based compensation plans, which are described below. Accordingly, compensation expense has been recognized for performance units and dividend equivalent rights issued in tandem with an equal number of options under its fixed stock option grants. Performance units and dividend equivalents provide cash payments, dependent upon future financial performance of PSEG in comparison to other companies and dividend payments by PSEG, to assist recipients in exercising options granted. Prior to 1997, all options were granted in tandem with performance units and dividend equivalent rights. In 1999, there were no options granted in tandem with performance units and dividend equivalent rights and in 1998, there were 4,600 options granted in tandem with performance units and dividend equivalent rights. No compensation cost has been recognized for fixed stock option grants since the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Had compensation costs for its stock option grants been determined based on the fair value at the grant dates for awards under these plans in accordance with SFAS No. 123 "Accounting for Stock-Based Compensation," there would have been a charge to PSEG's net income of approximately $1.8 million, $0.4 million and $0.1 million in 1999, 1998 and 1997, respectively, with a $(0.01) impact on earnings per share in 1999 and no impact on earnings per share in 1998 and 1997. 91 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED PSEG's Long Term Incentive Plan (LTP) under which non-qualified options to acquire shares of common stock may be granted to officers and other key employees selected by the Organization and Compensation Committee of PSEG's Board of Directors, the plan's administrative committee (the "Committee"). Payment by option holders upon exercise of an option may be made in cash or, with the consent of the Committee, by delivering previously acquired shares of PSEG common stock. In instances where an optionee tenders shares acquired from a grant previously exercised that were held for a period of less than six months, an expense will be recorded for the difference between the fair market value at exercise date and the option price. Options are exercisable over a period of time designated by the Committee (but not prior to one year from the date of grant) and are subject to such other terms and conditions as the Committee determines. Vesting schedules may be accelerated upon the occurrence of certain events, such as a change in control. Options may not be transferred during the lifetime of a holder. The LTP originally provided for the issuance of up to 500,000 options to purchase shares of common stock and was subsequently amended to increase the amount to 5,000,000. At December 31, 1999, there were 2,270,700 options available for future grants under the LTP. Since the LTP's inception, PSEG has purchased shares on the open market to meet the exercise of stock options. The difference between the cost of the shares (generally purchased on the date of exercise) and the exercise price of the options has been reflected in Stockholder's Equity except where otherwise discussed. Changes in common shares under option for the three fiscal years in the period ended December 31, 1999 are summarized as follows:
1999 1998 1997 --------------------------- --------------------------- --------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------------------------- --------------------------- --------------------------- Beginning of year 1,243,800 $36.01 430,300 $29.26 84,000 $29.38 Granted 1,367,000 33.13 841,600 39.16 371,000 29.36 Exercised (44,167) 30.37 (28,100) 26.76 (21,500) 31.38 Canceled (4,750) 28.01 -- -- (3,200) 28.70 ---------- ---------- ---------- ---------- ---------- ---------- End of year 2,561,883 34.60 1,243,800 36.01 430,300 29.26 ---------- ---------- ---------- ---------- ---------- ---------- Exercisable at end of year 412,738 $35.07 100,963 $29.47 6,000 $26.45 ---------- ---------- ---------- ---------- ---------- ---------- --------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $4.20 $4.83 $3.60 ========== ========== ==========
For this purpose, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997, respectively: expected volatility of 21.45%, 21.41% and 17.15%, risk free interest rates of 6.16%, 4.48% and 5.14%, expected lives of 4 years, 4 years and 3.75 years, respectively. Additional weighted averages assumptions include for grants in 1999, 1998 and 1997 a dividend yield of 0% with respect to the dividend equivalent feature of the tandem grants. There was a dividend yield of 6.52% in 1999, 5.51% in 1998 and 7.31% in 1997 on the non-tandem grants. 92 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The following table provides information about options outstanding at December 31, 1999:
- --------------------------------------------------------------------- ------------------------------ OPTIONS OUTSTANDING OPTIONS EXERCISABLE - --------------------------------------------------------------------- ------------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE EXERCISE PRICES DECEMBER 31, 1999 CONTRACTUAL LIFE PRICE DECEMBER 31, 1999 PRICE - --------------------------------------------------------------------- ------------------------------ $24.00-$30.00 363,283 7.81 years $29.34 179,069 $29.57 $30.01-$35.00 1,371,600 9.94 years 33.13 -- -- $35.01-$40.00 827,000 8.93 years 39.31 233,669 39.31 - --------------------------------------------------------------------- ------------------------------ $24.00-$40.00 2,561,883 9.30 years $34.60 412,738 $35.07 - --------------------------------------------------------------------- ------------------------------
In June 1998, the Committee granted 150,000 shares of restricted common stock to a key executive. These shares are subject to restrictions on transfer and subject to risk of forfeiture until earned by continued employment. The shares vest on a staggered schedule beginning on March 31, 2002 and become fully vested on March 31, 2005. The unearned compensation related to this restricted stock grant as of December 31, 1999 is approximately $5 million and is included in retained earnings on the consolidated balance sheets. PSEG's Stock Plan for Outside Directors provides non-employee directors, as part of their annual retainer, 600 shares of common stock, increased from 300 shares per year beginning in 1999. With certain exceptions, the restrictions on the stock provide that the shares are subject to forfeiture if the individual ceases to be a director at any time prior to the Annual Meeting of Stockholders following his or her 70th birthday. These shares are recorded as compensation expense in the consolidated statements of income. STOCK PURCHASE PLAN PSEG has an employee stock purchase plan for all eligible employees. Under the plan, shares of the common stock may be purchased at 95% of the fair market value. Employees may purchase shares having a value not exceeding 10% of their base pay. During 1999, 1998 and 1997, employees purchased 98,099, 102,387 and 144,377 shares at an average price of $38.21, $36.36 and $26.39 per share, respectively. At December 31, 1999, 1,191,681 shares were available for future issuance under this plan. STOCK REPURCHASE PROGRAM The PSEG Board of Directors has authorized the repurchase of up to 30 million shares of its common stock from time to time, subject to market conditions and other relevant factors affecting PSEG. Share repurchases are planned when market and business conditions are deemed favorable. The repurchased shares have been held as treasury stock or used for corporate purposes. As of December 31, 1999, PSEG had repurchased 15.8 million shares at a cost of approximately $607 million. In December 1999, PSEG entered into a Forward Purchase Agreement with an intermediary, who has purchased and held shares on behalf of PSEG. These shares will not be reflected on PSEG's balance sheet until settlement of the transaction which is expected in the second quarter of 2000. Market conditions and the availability of alternative investments will dictate if and when more shares of Common Stock will be repurchased under this authorization. 93 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 16. FINANCIAL INFORMATION BY BUSINESS SEGMENTS BASIS OF ORGANIZATION The reportable segments disclosed herein were determined based on a variety of factors including the regulatory environment of each of PSEG's lines of business and the types of products and services offered. Effective with the unbundling of PSE&G's rates on August 1, 1999 and the deregulation of the electric generation portion of PSE&G's business, the basis of segment reporting has changed beginning with the third quarter of 1999. The generation and energy trading portions of PSE&G's business are now separate reportable segments, whereas they previously had been part of the Electric segment. Note that estimates have been used to separate historical, pre-August 1, 1999, electric segment data into the Generation, Energy Resources and Trade and Transmission and Distribution segments of PSE&G's business. GENERATION The generation segment of PSE&G's business earns revenue through the sale of its energy and capacity. This segment consists of the power plants that will be sold to Power. ENERGY RESOURCES AND TRADE The Energy Resources and Trade segment of PSE&G's business earns revenues through sales of wholesale energy, capacity sales and other ancillary services. TRANSMISSION AND DISTRIBUTION (T&D) This segment represents regulated utility services provided by PSE&G. The electric transmission and electric and gas distribution segment of PSE&G's business generates revenue from its tariffs under which it provides electric transmission and electric and gas distribution services to residential, commercial and industrial customers in New Jersey. The rates charged for electric transmission are regulated by FERC while the rates charged for electric and gas distribution are regulated by the BPU. Revenues are also generated from a variety of other activities such as sundry sales, the appliance service business, wholesale transmission services and other miscellaneous services. RESOURCES Resources earns revenues from its passive investments in leveraged leases, limited partnerships, leveraged buyout funds and marketable securities. GLOBAL Global earns revenues from its investment in and operation of projects in the generation and distribution of energy, both domestically and internationally. OTHER PSEG's other activities generate revenues from Energy Technologies and Enterprise Group Development Corporation (EGDC). Energy Technologies is an energy management company that constructs, operates and maintains HVAC systems for, and provides energy-related engineering, consulting and mechanical contracting services to, industrial and commercial customers in the Northeastern and Middle Atlantic United States. EGDC, which has been conducting a controlled exit from the real estate business since 1993, earns revenues from its nonresidential real estate property management business. Other activities also include amounts applicable to PSEG and Energy Holdings, excluding Resources and Global. 94 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Information related to the segments of PSEG's business is detailed below:
ENERGY RESOURCES CONSOLIDATED GENERATION AND TRADE T & D RESOURCES GLOBAL OTHER TOTAL ---------- --------- ----- --------- ------ ----- ------------ (MILLIONS OF DOLLARS) FOR THE YEAR ENDED DECEMBER 31, 1999: Total Operating Revenues ................. $2,618 $76 $3,196 $179 $141 $286 $6,497 Depreciation and Amortization ............ 224 -- 305 1 1 5 536 Interest Income .......................... -- -- 12 1 -- 2 15 Net Interest Charges ..................... 203 -- 184 46 48 9 490 Operating Income Before Income Taxes ..... 521 56 586 123 69 (69) 1,286 Income Taxes ............................. 213 23 274 50 24 (21) 563 Net income from equity method subsidiaries -- -- -- 78 129 -- 207 Segment Income before Extraordinary Item . 308 33 312 66 28 (24) 723 Extraordinary Item (A) ................... (3,204) -- 2,400 -- -- -- (804) Segment Net Income (Loss) ................ (2,896) 33 2,712 66 28 (24) (81) AS OF DECEMBER 31, 1999: Total Assets (A) ......................... $2,583 $313 $11,828 $2,096 $1,715 $480 $19,015 Investments in equity method subsidiaries -- -- -- 279 1,635 10 1,924 Gross Additions to Long-Lived Assets ..... 202 -- 277 -- 1 99 579 FOR THE YEAR ENDED DECEMBER 31, 1998: Total Operating Revenues ................. $2,524 $50 $2,994 $145 $124 $173 $6,010 Depreciation and Amortization ............ 381 -- 268 2 1 8 660 Interest Income .......................... -- -- 20 9 1 2 32 Net Interest Charges ..................... 204 -- 174 49 41 2 470 Operating Income Before Income Taxes ..... 364 41 601 86 31 (51) 1,072 Income Taxes ............................. 145 16 243 27 12 (15) 428 Net income from equity method subsidiaries -- -- -- 35 114 -- 149 Segment Net Income (Loss) ................ 219 25 358 56 7 (21) 644 AS OF DECEMBER 31, 1998: Total Assets ............................. $7,881 $164 $6,624 $1,809 $1,124 $389 $17,991 Investments in equity method subsidiaries -- -- -- 383 1,059 34 1,475 Gross Additions to Long-Lived Assets ..... 265 -- 270 -- -- 8 545 FOR THE YEAR ENDED DECEMBER 31, 1997: Total Operating Revenues ................. $2,529 $23 $3,281 $144 $91 $109 $6,177 Depreciation and Amortization ............ 360 -- 247 1 2 20 630 Interest Income .......................... -- -- 14 4 -- 3 21 Net Interest Charges ..................... 211 -- 169 46 22 2 450 Operating Income Before Income Taxes ..... 292 18 474 88 24 (52) 844 Income Taxes ............................. 101 6 149 29 10 (11) 284 Net income from equity method subsidiaries -- -- -- 49 78 -- 127 Segment Net Income (Loss) ................ 191 12 325 59 14 (41) 560 AS OF DECEMBER 31, 1997: Total Assets ............................. $8,069 $114 $6,661 $1,616 $1,170 $349 $17,979 Investments in equity method subsidiaries -- -- -- 407 1,125 34 1,560 Gross Additions to Long-Lived Assets ..... 166 -- 376 -- -- 6 548
(A) See Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation for discussion of the extraordinary charge recorded by the Generation segment and the related regulatory asset for securitization recorded by the T&D segment. 95 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Geographic information for PSEG is disclosed below. The foreign investments and operations noted below were made through Energy Holdings. PSE&G does not have foreign investments or operations.
REVENUES (1) IDENTIFIABLE ASSETS ------------------------------ ------------------------------------ YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------------------------ -------------- ----------------- 1999 1998 1999 1998 ------------ ------------ -------------- ----------------- (Millions of Dollars) (Millions of Dollars) United States............................ $6,348 $5,901 $16,595 $16,388 Foreign Countries (2).................... 149 109 2,420 1,603 ------------ ------------ -------------- ----------------- Total.............................. $6,497 $6,010 $19,015 $17,991 ============ ============ ============== ================= Identifiable investments in foreign countries include: Argentina $356 $304 Brazil (3) $330 $480 Chile and Peru $520 $ -- Netherlands $623 $400
- -------------------------------------------------------------------------------- (1) Revenues are attributed to countries based on the locations of the investments. Global's revenue includes its share of the net income from joint ventures recorded under the equity method of accounting. (2) Total assets are net of foreign currency translation adjustment of $(222) million (pre-tax) as of December 31, 1999 and $(48) million (pre-tax) as of December 31, 1998. (3) Amount is net of foreign currency translation adjustment of $(189) million (pre-tax) as of December 31, 1999 and $(43) million (pre-tax) as of December 31, 1998. Information related to Property, Plant and Equipment of PSE&G is detailed below: DECEMBER 31, ------------------------------- 1999 1998 1997 ------- ------- ------- (MILLIONS OF DOLLARS) Property, Plant and Equipment Electric Plant in Service: Fossil Production (A) ................ $1,628 $2,802 $1,840 Nuclear Production (A) ............... 110 6,246 6,162 Transmission ......................... 1,169 1,200 1,163 Distribution ......................... 3,862 3,545 3,315 Other ................................ -- 276 1,212 ------- ------- ------- Total Electric Plant in Service 6,769 14,069 13,692 ------- ------- ------- Gas Plant in Service: Transmission ......................... -- 69 67 Distribution ......................... 3,019 2,608 2,472 Other ................................ -- 170 158 ------- ------- ------- Total Gas Plant in Service .... 3,019 2,847 2,697 ------- ------- ------- Common Plant in Service: Capital Leases ....................... 59 59 59 General .............................. 363 519 499 ------- ------- ------- Total Common Plant in Service . 422 578 558 ------- ------- ------- Total ................... $10,210 $17,494 $16,947 ======= ======= ======= (A) See Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation for discussion of the extraordinary charge recorded by the Generation segment and the related regulatory asset for securitization recorded by the T&D segment. 96 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 17. JOINTLY OWNED FACILITIES -- PROPERTY, PLANT AND EQUIPMENT PSE&G has ownership interests in and is responsible for providing its share of the necessary financing for the following jointly owned facilities. All amounts reflect the share of PSE&G's jointly owned projects and the corresponding direct expenses are included in Consolidated Statements of Income as operating expenses.
PLANT--DECEMBER 31, 1999 ---------------------------------------------------------------- OWNERSHIP PLANT IN ACCUMULATED PLANT UNDER INTEREST SERVICE DEPRECIATION CONSTRUCTION --------- -------- ------------ ------------ (MILLIONS OF DOLLARS) Coal Generating Conemaugh............................... 22.50% $198 $56 $-- Keystone................................ 22.84% 122 42 -- Nuclear Generating Peach Bottom............................ 42.49% 23 12 -- Salem................................... 42.59% 797 679 -- Hope Creek.............................. 95.00% 763 652 -- Nuclear Support Facilities.............. Various 15 2 -- Pumped Storage Facilities Yards Creek............................. 50.00% 28 10 -- Transmission Facilities........................ Various 95 31 -- Merrill Creek Reservoir........................ 13.91% 2 -- -- Linden SNG Plant............................... 90.00% 16 14 --
NOTE 18. SELECTED QUARTERLY DATA (UNAUDITED) The information shown below, in the opinion of PSEG, includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the utility business, quarterly amounts vary significantly during the year.
CALENDAR QUARTER ENDED -------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ------------------ ------------------- ------------------- ------------------ 1999 1998 1999 1998 1999 1998 1999 1998 ------ ------ ------ ------ ------ ------ ------ ------ (MILLIONS WHERE APPLICABLE) Operating Revenues ............. $1,795 $1,659 $1,436 $1,362 $1,606 $1,439 $1,660 $1,550 Operating Income ............... 461 449 437 341 503 450 436 364 Income before Extraordinary Item 188 191 181 122 221 180 133 151 Extraordinary Item ............. -- -- (790) -- (14) -- -- -- Net Income ..................... 188 191 (609) 122 207 180 133 151 Earnings per Share (Basic and Diluted) ......... 0.85 0.82 (2.77) 0.53 0.95 0.78 0.61 0.66 Weighted Average Common Shares and Potential Dilutive Effect of Stock Options Outstanding ......... 223 232 220 232 219 232 218 228
97 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED NOTE 19. ACCOUNTING MATTERS In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137) to defer the effective date of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) for one year. Consequently, SFAS 133 will now be effective for all fiscal quarters beginning after January 1, 2001. The FASB also decided to defer by one year the transition date regarding embedded derivatives in SFAS 133. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is effective for financial statements for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives, within the scope of this statement, as assets or liabilities on the balance sheet at fair value. Also, derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings or be recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the nature of the hedge. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. PSEG and PSE&G are currently evaluating the impact of SFAS 133. 98 PUBLIC SERVICE ELECTRIC AND GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PSE&G Except as modified below, the Notes to Consolidated Financial Statements of PSEG are incorporated herein by reference insofar as they relate to PSE&G and its subsidiaries: Note 1. Organization, Basis of Presentation and Summary of Significant Accounting Policies Note 2. Regulatory Issues Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation Note 4. Regulatory Assets and Liabilities Note 5. Long-Term Investments Note 6. Leasing Activities--As Lessee Note 7. Schedule of Consolidated Capital Stock and Other Securities Note 8. Schedule of Consolidated Debt Note 9. Financial Instruments and Risk Management Note 11. Commitments and Contingent Liabilities Note 12. PSE&G Nuclear Decommissioning Note 13. Income Taxes Note 14. Pension, Other Postretirement Benefit and Savings Plans Note 15. Stock Options, Stock Purchase Plan and Stock Repurchase Program Note 16. Financial Information by Business Segments Note 17. Jointly Owned Facilities--Utility Plant Note 19. Accounting Matters NOTE 1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PSEG owns all of PSE&G's common stock (without nominal or par value). Of the 150,000,000 authorized shares of common stock at December 31, 1999, 1998 and 1997, there were 132,450,344 shares outstanding, with an aggregate book value of $2.6 billion. NOTE 10. CASH AND CASH EQUIVALENTS The December 31, 1999 and 1998 balances consist primarily of working funds. 99 PUBLIC SERVICE ELECTRIC AND GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED NOTE 13. INCOME TAXES A reconciliation of reported Net Income with pretax income and of income tax expense with the amount computed by multiplying pretax income by the statutory Federal income tax rate of 35% is as follows:
1999 1998 1997 ------- ------- ------- (MILLIONS OF DOLLARS) Net Income (Loss) ........................................ $(151) $602 $528 Extraordinary Item (Net of Tax of $345) ............. 804 -- -- ------- ------- ------- Net Income before Extraordinary Item ..................... 653 602 528 ------- ------- ------- Income taxes: Operating income: Federal - Current ................................. 425 342 266 Deferred (A) .......................... (1) (24) 7 ITC ................................... (11) (20) (19) ------- ------- ------- Total Federal .................... 413 298 254 ------- ------- ------- State - Current ................................... 109 118 2 Deferred (A) ............................. (12) (12) -- ------- ------- ------- Total State ...................... 97 106 2 ------- ------- ------- Total included in operating income ......... 510 404 256 ------- ------- ------- Pretax income ............................................ $1,163 $1,006 $784 ======= ======= =======
Reconciliation between total income tax provisions and tax computed at the statutory tax rate on pretax income:
1999 1998 1997 ----- ----- ----- (MILLIONS OF DOLLARS) Tax computed at the statutory rate ......................................... $407 $352 $274 Increase (decrease) attributable to flow through of certain tax adjustments: Depreciation ........................................................ 35 23 21 Amortization of investment tax credits .............................. (11) (20) (19) New Jersey Corporate Business Tax ................................... 68 59 -- Other ............................................................... 11 (10) (20) ----- ----- ----- Subtotal ..................................................... 103 52 (18) ----- ----- ----- Total income tax provisions .................................. $510 $404 $256 ===== ===== ===== Effective income tax rate .................................................. 43.9% 40.2% 32.7%
(A) The provision for deferred income taxes represents the tax effects of the following items: 100 PUBLIC SERVICE ELECTRIC AND GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 1999 1998 1997 ---- ---- ---- (MILLIONS OF DOLLARS) Deferred Credits: Additional tax depreciation and amortization $18 $(28) $(12) Conservation Costs ......................... 29 36 27 Deferred Fuel Costs--net ................... (19) (60) (4) Pension Cost ............................... (34) 26 8 New Jersey Corporate Business Tax .......... (12) (8) -- Severance Pay .............................. 8 -- -- Other ...................................... (3) (2) (12) ---- ---- ---- Total ............................... $(13) $(36) $7 ==== ==== ==== SFAS 109 The following is an analysis of deferred income taxes: DECEMBER 31, --------------------- 1999 1998 ------ ------ (MILLIONS OF DOLLARS) DEFERRED INCOME TAXES Assets: Current (net) ................................. $33 $30 Non-current: Unrecovered Investment Tax Credits ......... 23 110 Nuclear Decommissioning .................... 26 26 Construction Period Interest and Taxes ..... 13 13 Deferred Electric Energy & Gas Costs ....... 18 -- New Jersey Corporate Business Tax .......... 493 15 Vacation Pay ............................... 6 6 Other ...................................... -- 17 ------ ------ Total Non-current ....................... 579 187 ------ ------ Total Assets ............................ 612 217 ------ ------ Liabilities: Non-current: Plant Related Items ........................ 654 2,212 Future Stranded Cost Recovery .............. 1,657 -- Conservation Costs ......................... 95 75 Hope Creek O&M Costs ....................... -- 19 Unamortized Debt Expense ................... 39 45 Taxes Recoverable Through Future Rates (Net) 87 242 Other ...................................... 13 127 ------ ------ Total Non-current ....................... 2,545 2,720 ------ ------ Total Liabilities ....................... 2,545 2,720 ------ ------ Summary--Deferred Income Taxes Net Current Assets ............................ 33 30 Net Non-current Liability ..................... 1,966 2,533 ------ ------ Total ................................... $1,933 $2,503 ====== ====== The balance of Federal income tax payable by (receivable from) PSE&G to PSEG was $19 million and $9 million as of December 31, 1999 and December 31, 1998, respectively. 101 PUBLIC SERVICE ELECTRIC AND GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED NOTE 18. SELECTED QUARTERLY DATA (UNAUDITED) The information shown below, in the opinion of PSE&G, includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the utility business, quarterly amounts vary significantly during the year.
CALENDAR QUARTER ENDED -------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ------------------ ------------------- ------------------- ------------------ 1999 1998 1999 1998 1999 1998 1999 1998 ------ ------ ------ ------ ------ ------ ------ ------ (MILLIONS OF DOLLARS) Operating Revenues ............. $1,666 $1,514 $1,297 $1,252 $1,458 $1,409 $1,469 $1,393 Operating Income ............... 406 374 369 287 463 474 360 276 Income before Extraordinary Item 172 157 157 111 205 217 119 117 Extraordinary Item ............. -- -- (790) -- (14) -- -- -- Net Income ..................... 172 157 (633) 111 191 217 119 117 Earnings Available to PSEG ........................ 169 155 (635) 108 189 215 117 115
102 FINANCIAL STATEMENT RESPONSIBILITY -- PSEG Management of PSEG is responsible for the preparation, integrity and objectivity of the consolidated financial statements and related notes of PSEG. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly PSEG's financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes. The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit PSEG's consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche's audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all the corporation's financial records and related data, as well as the minutes of directors' meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate. Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management's authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls. The Internal Auditing Department of Services conducts audits and appraisals of accounting and other operations of PSEG and its subsidiaries and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management has considered the internal auditors' and Deloitte & Touche's recommendations concerning the corporation's system of internal accounting controls and has taken actions that, in its opinion, are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 1999, the corporation's system of internal accounting controls was adequate to accomplish the objectives discussed herein. The Board of Directors of PSEG carries out its responsibility of financial overview through its Audit Committee, which presently consists of five directors who are not employees of PSEG or any of its affiliates. The Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that its respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche periodically meet alone with the Audit Committee and have free access to the Audit Committee, and its individual members, at all times. E. JAMES FERLAND ROBERT C. MURRAY Chairman of the Board, Vice President and President and Chief Executive Officer Chief Financial Officer PATRICIA A. RADO Vice President and Controller (Principal Accounting Officer) February 11, 2000 103 FINANCIAL STATEMENT RESPONSIBILITY -- PSE&G Management of PSE&G is responsible for the preparation, integrity and objectivity of the consolidated financial statements and related notes of PSE&G. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly PSE&G's financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes. The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit PSE&G's consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche's audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all the corporation's financial records and related data, as well as the minutes of directors' meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate. Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management's authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls. The Internal Auditing Department of Services conducts audits and appraisals of accounting and other operations and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management has considered the internal auditors' and Deloitte & Touche's recommendations concerning the corporation's system of internal accounting controls and has taken actions that are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 1999, the corporation's system of internal accounting controls was adequate to accomplish the objectives discussed herein. The Board of Directors carries out its responsibility of financial overview through the Audit Committee of PSEG, which presently consists of five directors who are not employees of PSE&G or any of its affiliates. The PSEG Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that their respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche, periodically meet alone with the Audit Committee and have free access to the Audit Committee, and its individual members, at all times. E. JAMES FERLAND ROBERT C. MURRAY Chairman of the Board and Executive Vice President--Finance Chief Executive Officer (Principal Financial Officer) PATRICIA A. RADO Vice President and Controller (Principal Accounting Officer) February 11, 2000 104 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Public Service Enterprise Group Incorporated: We have audited the consolidated balance sheets of Public Service Enterprise Group Incorporated and its subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the consolidated financial statement schedule listed in the Index in Item 14(B)(1). These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, the Company discontinued application of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation, for the electric generation portion of its business effective April 1, 1999. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of the Company as of December 31, 1997, 1996, and 1995, and the related consolidated statements of income, common stockholders' equity and cash flows for the years ended 1996 and 1995 (none of which are presented herein) and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Selected Financial Data for each of the five years in the period ended December 31, 1999 for the Company, presented in Item 6, is fairly stated in all material respects, in relation to the consolidated financial statements from which it has been derived. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 11, 2000 105 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Public Service Electric and Gas Company: We have audited the consolidated balance sheets of Public Service Electric and Gas Company and its subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the consolidated financial statement schedule listed in the Index in Item 14(B)(2). These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, the Company discontinued application of Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation, for the electric generation portion of its business effective April 1, 1999. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of the Company as of December 31, 1997, 1996, and 1995, and the related consolidated statements of income, common stockholder's equity and cash flows for the years ended 1996 and 1995 (none of which are presented herein) and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Selected Financial Data for each of the five years in the period ended December 31, 1999 for the Company, presented in Item 6, is fairly stated in all material respects, in relation to the consolidated financial statements from which it has been derived. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 11, 2000 106 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PSEG and PSE&G, none. 107 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS DIRECTORS OF THE REGISTRANTS PSEG The information required by Item 10 of Form 10-K with respect to present directors who are nominees for election as directors at PSEG's Annual Meeting of Stockholders to be held on April 18, 2000, and directors whose terms will continue beyond the meeting, is set forth under the heading "Election of Directors" in PSEG's definitive Proxy Statement for such Annual Meeting of Stockholders, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 1, 2000 and which information set forth under said heading is incorporated herein by this reference thereto. PSE&G There is shown as to each present director information as to the period of service as a director of PSE&G, age as of April 18, 2000, present committee memberships, business experience during the last five years and other present directorships. For discussion of certain litigation involving the directors of PSE&G, except Forrest J. Remick and Conrad K. Harper, see Part I--Business, Item 3--Legal Proceedings. LAWRENCE R. CODEY has been a director since 1988. Age 55. Member of Executive Committee. Has been President and Chief Operating Officer of PSE&G since 1991. Director of PSEG. Director of Sealed Air Corporation, The Trust Company of New Jersey, United Water Resources Inc. and Horizon Blue Cross Blue Shield of New Jersey. E. JAMES FERLAND has been a director since 1986. Age 58. Chairman of Executive Committee. Chairman of the Board, President and Chief Executive Officer of PSEG since July 1986, Chairman of the Board and Chief Executive Officer of PSE&G since September 1991 and Chairman of the Board and Chief Executive Officer of Energy Holdings since June 1989. Chairman of the Board and Chief Executive Officer of Power since June 1999. Director of Foster Wheeler Corporation and The HSB Group, Inc. CONRAD K. HARPER has been a director since May 1997. Age 59. Director of PSEG. Has been a partner in the law firm of Simpson Thacher & Bartlett, New York, New York since October 1996 and from 1974 to May 1993. Was Legal Adviser, U.S. Department of State from May 1993 to June 1996. Director of New York Life Insurance Company. IRWIN LERNER has been a director since 1993. Age 69. Was previously a director from 1981 to February 1988. Director of PSEG. Until retirement was Chairman, Board of Directors of Hoffmann-La Roche Inc., Nutley, New Jersey (prescription pharmaceuticals, vitamins and fine chemicals, and diagnostic products and services) from January 1993 to September 1993 and President and Chief Executive Officer from 1980 to December 1992. Director of Humana Inc., AXYS Pharmaceuticals, Inc., Medarex, Inc., VI Technologies, Inc. and Covance Inc. MARILYN M. PFALTZ has been a director since 1998 and was a Director of Energy Holdings from 1989 to 1998. Age 67. Director of PSEG. Has been a partner of P and R Associates, Summit, New Jersey (communication specialists), since 1968. Director of AAA National Association and Beacon Trust Company. FORREST J. REMICK has been a director since 1995. Age 69. Director of PSEG. Has been an engineering consultant since 1994. Was Commissioner, U.S. Nuclear Regulatory Commission, from December 1989 to June 1994. Was Associate Vice President--Research and Professor of Nuclear Engineering at Pennsylvania State University, from 1985 to 1989. 108 EXECUTIVE OFFICERS OF THE REGISTRANTS The following table sets forth certain information concerning the executive officers of PSEG and PSE&G, respectively. Lawrence R. Codey, President and Chief Operating Officer of PSE&G and a member of the Boards of Directors of PSEG and PSE&G, has announced that he will retire on February 29, 2000. Alfred C. Koeppe, currently Senior Vice President-Corporate Services and External Affairs of PSE&G, will succeed Mr. Codey as President and Chief Operating Officer at that time.
==================================================================================================================================== AGE EFFECTIVE DATE NAME DECEMBER 31, 1999 OFFICE FIRST ELECTED TO PRESENT POSITION - ------------------------------------------------------------------------------------------------------------------------------------ E. James Ferland 57 Chairman of the Board, President and July 1986 to present Chief Executive Officer (PSEG) Chairman of the Board and Chief July 1986 to present Executive Officer (PSE&G) Chairman of the Board and Chief June 1989 to present Executive Officer (Energy Holdings) - ------------------------------------------------------------------------------------------------------------------------------------ Lawrence R. Codey 55 President and Chief Operating Officer September 1991 to present (PSE&G) - ------------------------------------------------------------------------------------------------------------------------------------ Robert C. Murray 54 Vice President and Chief Financial January 1992 to present Officer (PSEG) Executive Vice President--Finance June 1997 to present (PSE&G) Senior Vice President and Chief January 1992 to June 1997 Financial Officer (PSE&G) - ------------------------------------------------------------------------------------------------------------------------------------ Robert J. Dougherty, Jr. 48 President and Chief Operating Officer January 1997 to present (Energy Holdings) President (Enterprise Ventures and February 1995 to December 1996 Services Corporation) Senior Vice President--Electric September 1991 to February 1995 (PSE&G) - ------------------------------------------------------------------------------------------------------------------------------------ Alfred C. Koeppe 53 Senior Vice President--Corporate October 1996 to present Services and External Affairs (PSE&G) Senior Vice President--External October 1995 to October 1996 Affairs (PSE&G) President and Chief Executive February 1993 to October 1995 Officer, Bell Atlantic--New Jersey - ------------------------------------------------------------------------------------------------------------------------------------ R. Edwin Selover 54 Vice President and General Counsel April 1988 to present (PSEG) Senior Vice President and General January 1988 to present Counsel (PSE&G) ====================================================================================================================================
109
==================================================================================================================================== AGE EFFECTIVE DATE NAME DECEMBER 31, 1999 OFFICE FIRST ELECTED TO PRESENT POSITION - ------------------------------------------------------------------------------------------------------------------------------------ Frank Cassidy 52 President July 1999 to present (Power) President November 1996 to June 1999 (Energy Technologies) Senior Vice President--Fossil February 1995 to November 1996 Generation (PSE&G) Vice President--Transmission November 1989 to February 1995 Systems (PSE&G) - ------------------------------------------------------------------------------------------------------------------------------------ Patricia A. Rado 57 Vice President and Controller April 1993 to present (PSEG) Vice President and Controller April 1993 to present (PSE&G) ====================================================================================================================================
ITEM 11. EXECUTIVE COMPENSATION PSEG The information required by Item 11 of Form 10-K is set forth under the heading "Executive Compensation" in PSEG's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 18, 2000 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 1, 2000 and such information set forth under such heading is incorporated herein by this reference thereto. PSE&G Information regarding the compensation of the Chief Executive Officer and the four most highly compensated executive officers of PSE&G as of December 31, 1999 is set forth below. Amounts shown were paid or awarded for all services rendered to PSEG and its subsidiaries and affiliates including PSE&G. - -------------------------------------------------------------------------------- SUMMARY COMPENSATION TABLE - --------------------------------------------------------------------------------
LONG TERM COMPENSATION ---------------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------ ------------------------------------ BONUS/ANNUAL LTIP ALL OTHER SALARY INCENTIVE RESTRICTED OPTIONS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR $ AWARD($)(1) STOCK ($) (#)(2) ($)(3) ($)(4) - ------------------------------------------------------------------------ ----------- ----------- -------------------------- E. James Ferland..................... 1999 815,000 733,500 0 215,000 304,720 29,292 Chairman of the Board and Chief 1998 762,070 621,400 5,184,375 (5) 150,000 92,684 28,647 Executive Officer of PSE&G 1997 712,261 425,200 0 118,000 108,702 15,747 Lawrence R. Codey.................... 1999 480,000 288,000 0 100,000 140,640 8,283 President and Chief Operating 1998 455,250 274,200 0 75,000 44,744 7,408 Officer of PSE&G (6) 1997 435,327 249,400 0 59,200 50,325 6,530 Robert C. Murray..................... 1999 390,000 234,000 0 75,000 93,760 4,802 Executive Vice President - Finance 1998 373,564 225,000 0 50,000 31,960 4,962 of PSE&G 1997 345,671 154,900 0 32,000 36,234 5,260 R. Edwin Selover..................... 1999 310,000 162,800 0 35,000 65,632 12,828 Senior Vice President and General 1998 293,871 154,900 0 25,000 22,372 19,210 Counsel of PSE&G 1997 278,928 117,900 0 14,300 26,169 9,065 Frank Cassidy........................ 1999 302,500 195,000 0 100,000 70,320 4,004 President and Chief Operating 1998 273,000 117,600 0 35,000 23,970 4,109 Officer of Power 1997 249,000 50,800 20,500 0 4,256
110 (1) Amount awarded in given year was earned under Management Incentive Compensation Plan (MICP) and determined in following year based on individual performance and financial and operating performance of PSEG and PSE&G, including comparison to other companies. (2) All grants of options to purchase shares of PSEG Common Stock were made under the Long-Term Incentive Plan (LTIP). For 1999 and 1998, all options granted were non-tandem. For 1997 of the options granted to Messrs. Ferland, Codey, Murray, Selover and Cassidy, respectively, 100,000; 50,000; 25,000; 10,000 and 15,000 were non-tandem and 18,000; 9,200; 7,000; 4,300 and 5,500 were tandem. Tandem grants are made with an equal number of performance units and dividend equivalents which may provide cash payments, dependent upon future financial performance of PSEG in comparison to other companies and dividend payments by PSEG, to assist recipients in exercising options granted. The tandem grant is made at the beginning of a three-year performance period and cash payment of the value of such performance units and dividend equivalents is made following such period in proportion to the options, if any, exercised at such time. Non-tandem grants are made without performance units and dividend equivalents. (3) Amount paid in proportion to options exercised, if any, based on value of previously granted performance units and dividend equivalents, each as measured during three-year period ending the year prior to the year in which payment is made. (4) Includes employer contribution to Thrift and Tax-Deferred Savings Plan and value of 5% discount on phantom stock dividend reinvestment under MICP:
FERLAND CODEY MURRAY SELOVER CASSIDY --------------- --------------- ---------------- --------------- ---------------- THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP ($) ($) ($) ($) ($) ($) ($) ($) ($) ($) ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- 1999....... 4,801 0 6,218 0 4,802 0 4,802 0 4,004 0 1998....... 4,801 383 4,802 241 4,805 157 4,806 112 4,003 106 1997....... 4,801 1,122 4,802 657 4,802 458 4,802 325 4,001 255
In addition, 1999, 1998 and 1997 amounts include for Mr. Ferland $24,491, $23,463 and $9,824, for Mr. Codey $2,065, $2,365 and $1,071 and for Mr. Selover $8,026, $14,292 and $3,938, respectively, representing earnings credited on compensation deferred under PSE&G's Deferred Compensation Plan in excess of 120% of the applicable Federal long-term interest rate as prescribed under Section 1274(d) of the Internal Revenue Code. Prior to January 1, 2000, under PSE&G's Deferred Compensation Plan, interest is paid at prime rate plus 1/2%, adjusted quarterly. Effective January 1, 2000, the Plan was amended to permit participants to select from among four additional investment options for compensation that is deferred. (5) Value as of original grant date, based on the closing price on the New York Stock Exchange on June 16, 1998, with respect to an award to Mr. Ferland of 150,000 shares of restricted stock, of which 60,000 shares vest in 2002; 20,000 shares vest in 2003; 30,000 shares vest in 2004 and 40,000 shares vest in 2005. Dividends on the entire grant are paid in cash from the date of grant. (6) Mr. Codey will retire effective February 29, 2000. - -------------------------------------------------------------------------------- OPTION GRANTS IN LAST FISCAL YEAR (1999) - --------------------------------------------------------------------------------
NUMBER OF % OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OR OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE NAME GRANTED FISCAL YEAR ($/SH) DATE PRESENT VALUE ($) (2) - ------------------------------------------------------------------------------------------------------------------- E. James Ferland ....... 215,000(1) 15.8 33.1250 12/21/09 761,100 Lawrence R. Codey ...... 100,000(1) 7.3 33.1250 12/21/09 354,000 Robert C. Murray ....... 75,000(1) 5.5 33.1250 12/21/09 265,500 R. Edwin Selover ....... 35,000(1) 2.6 33.1250 12/21/09 123,900 Frank Cassidy .......... 100,000(1) 7.3 33.1250 12/21/09 354,000
111 (1) Granted under LTIP not in tandem with performance units and dividend equivalents, with exercisability commencing December 21, 2000, December 21, 2001 and December 21, 2002, respectively, with respect to one-third of the options at each such date. (2) Determined using the Black-Scholes model, incorporating the following material assumptions and adjustments: (a) exercise price of $33.1250, equal to the fair market value of the underlying PSEG Common Stock on the date of grant; (b) an option term of ten years on all grants; (c) interest rate of 6.28% that represent the interest rate on U.S. Treasury securities on the date of grant with a maturity date corresponding to that of the option terms; (d) volatility of 19.01% calculated using daily PSEG Common Stock prices for the one-year period prior to the grant date; (e) dividend yield of 6.52% and (f) reductions of approximately 7.79% to reflect the probability of forfeiture due to termination prior to vesting, and approximately 5.49% to reflect the probability of a shortened option term due to termination of employment prior to the option expiration date. Actual values which may be realized, if any, upon any exercise of such options, will be based on the market price of PSEG Common Stock at the time of any such exercise and thus are dependent upon future performance of PSEG Common Stock. There is no assurance that any such value realized will be at or near the value estimated by the Black-Scholes model utilized. - -------------------------------------------------------------------------------- AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1999) AND FISCAL YEAR END OPTION VALUES (12/31/99) - --------------------------------------------------------------------------------
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FY-END(#)(1) AT FY-END($)(3) ---------------------------- ----------------------------- SHARES ACQUIRED VALUE ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE NAME (#)(1) ($)(2) (#) (#) ($) ($) - ------------------------------- ------------------------- ---------------------------- ----------------------------- E. James Ferland............... 6,500 49,969 116,680 366,320 350,017 647,795 Lawrence R. Codey.............. 3,000 23,062 58,340 175,860 175,009 312,679 Robert C. Murray............... 2,000 13,750 33,337 123,663 87,502 212,873 R. Edwin Selover............... 1,400 10,762 16,002 59,298 40,064 102,623 Frank Cassidy.................. 1,500 11,156 21,670 133,830 52,505 228,714
(1) Does not reflect any options granted and/or exercised after year end (12/31/99). The net effect of any such grants and exercises is reflected in the table appearing under Security Ownership of Directors and Management. (2) Represents difference between exercise price and market price of PSEG Common Stock on date of exercise. (3) Represents difference between market price of PSEG Common Stock and the respective exercise prices of the options at fiscal year end (12/31/99). Such amounts may not necessarily be realized. Actual values which may be realized, if any, upon any exercise of such options will be based on the market price of PSEG Common Stock at the time of any such exercise and thus are dependent upon future performance of PSEG Common Stock. EMPLOYMENT CONTRACTS AND ARRANGEMENTS PSEG has entered into an employment agreement dated as of June 16, 1998 with Mr. Ferland covering his employment as Chief Executive Officer through March 31, 2005. Under the Agreement, Mr. Ferland has agreed not to retire prior to March 31, 2002, but may retire thereafter. The Agreement provides that Mr. Ferland will be re-nominated for election as a Director during his employment under the Agreement. The Agreement provides that Mr. Ferland's base salary, target annual incentive bonus and long term incentive bonus will be determined based on compensation practices for CEO's of similar companies and that his annual salary will not be reduced during the term of the Agreement and awarded him 150,000 shares of restricted PSEG Stock, of which 60,000 shares vest 2002; 20,000 shares vest in 2003; 30,000 shares vest in 2004 and 40,000 shares vest in 2005. Any non-vested shares are forfeited upon his retirement unless the Board of Directors, in its discretion, determines to make payment. The Agreement provides for the granting of 22 years of pension credit for Mr. Ferland's prior service, which was awarded at the time of his employment. The Agreement further provides that if Mr. Ferland is terminated without 112 "Cause" or resigns for "Good Reason" (as those terms are defined in the Agreement) during the term of the Agreement, the entire stock award becomes vested, he will be paid a benefit of two times base salary and target bonus and welfare benefits will be continued for two years unless sooner employed. In the event such a termination occurs after a "Change in Control" (as defined), the payment to Mr. Ferland becomes three times the sum of salary and target bonus, continuation of welfare benefits for three years unless sooner reemployed, payment of the net present value providing three years additional service under PSEG's retirement plans, and a gross-up for excise taxes on any termination payments due under the Internal Revenue Code. The Agreement provides that Mr. Ferland is prohibited from competing with or recruiting employees from PSEG or its subsidiaries of affiliates for two years after termination of employment. Violation of these provisions requires a forfeiture of a portion of the restricted stock grant and certain other benefits. In 1999, PSE&G entered into an Employment Agreement with Mr. Codey, which provided for the granting of ten additional years of credited service for retirement purposes if Mr. Codey remains employed by PSE&G through February 28, 2000. The Agreement also provided that if PSEG or PSE&G so requests, Mr. Codey shall provide consulting services to PSEG during the period of twenty-four months following termination of employment at a rate to be agreed. The Agreement provided that Mr. Codey is prohibited from competing with or recruiting employees from PSE&G or its subsidiaries or affiliates for two years after termination of employment. Violation of these provisions requires a forfeiture of the additional retirement benefit provided by the Agreement. Mr. Codey will retire on February 29, 2000. The principal remaining applicable terms of an employment agreement entered into with Mr. Murray at the time of his employment, as modified in 1998, provide for the grant of additional years of credited service for retirement purposes in light of allied work experience of five years after completion of five years of employment, and up to seventeen years after completion of approximately nine years of employment. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION PSE&G does not have a compensation committee. Decisions regarding compensation of PSE&G's executive officers are made by the Organization and Compensation Committee of PSEG. Hence, during 1999 the PSE&G Board of Directors did not have, and no officer, employee or former officer of PSE&G participated in any deliberations of such Board, concerning executive officer compensation. COMPENSATION OF DIRECTORS AND CERTAIN BUSINESS RELATIONSHIPS A director who is not an officer of PSEG or its subsidiaries and affiliates, including PSE&G, is paid an annual retainer of $22,000 and a fee of $1,200 for attendance at any Board or committee meeting, inspection trip, conference or other similar activity relating to PSEG or PSE&G. Each committee Chair receives an additional annual retainer of $3,000. Each of the directors of PSE&G is also a director of PSEG. No additional retainer is paid for service as a director of PSE&G. Fifty percent of the annual retainer is paid in PSEG Common Stock. PSEG also maintains a Stock Plan for Outside Directors pursuant to which directors who are not employees of PSEG or its subsidiaries receive 600 shares of restricted stock for each year of service as a director. Such shares held by each non-employee director are included in the table in Item 12 below under the heading Security Ownership of Directors and Management. The restrictions on the stock granted under the Stock Plan for Outside Directors provide that the shares are subject to forfeiture if the director leaves service at any time prior to the Annual Meeting of Stockholders following his or her 70th birthday. This restriction would be deemed to have been satisfied if the director's service were terminated after a "Change in Control" as defined in the Plan or if the director were to die in office. PSEG also has the ability to waive this restriction for good cause shown. Restricted stock may not be sold or otherwise transferred prior to the lapse of the restrictions. Dividends on shares held subject to restrictions are paid directly to the director, and the director has the right to vote the shares. 113 Compensation Pursuant to Pension Plans The table below illustrates annual retirement benefits expressed in terms of single life annuities based on the average final compensation and service shown and retirement at age 65. A person's annual retirement benefit is based upon a percentage that is equal to years of credited service plus 30, but not more than 75%, times average final compensation at the earlier of retirement, attainment of age 65 or death. These amounts are reduced by Social Security benefits and certain retirement benefits from other employers. Pensions in the form of joint and survivor annuities are also available. ------------------------------------------------------------------------ PENSION PLAN TABLE ------------------------------------------------------------------------ LENGTH OF SERVICE AVERAGE FINAL ------------------------------------------------------- COMPENSATION 30 YEARS 35 YEARS 40 YEARS 45 YEARS -------------- ---------- ---------- ----------- ----------- $400,000 $240,000 $260,000 $280,000 $300,000 500,000 300,000 325,000 350,000 375,000 600,000 360,000 390,000 420,000 450,000 700,000 420,000 455,000 490,000 525,000 800,000 480,000 520,000 560,000 600,000 900,000 540,000 585,000 630,000 675,000 1,000,000 600,000 650,000 700,000 750,000 1,100,000 660,000 715,000 770,000 825,000 1,200,000 720,000 780,000 840,000 900,000 1,300,000 780,000 845,000 910,000 975,000 1,400,000 840,000 910,000 980,000 1,050,000 1,500,000 900,000 975,000 1,050,000 1,125,000 Average final compensation, for purposes of retirement benefits of executive officers, is generally equivalent to the average of the aggregate of the salary and bonus amounts reported in the Summary Compensation Table above under 'Annual Compensation' for the five years preceding retirement, not to exceed 130% of the average annual salary for such five year period. Messrs. Ferland, Murray, Selover and Cassidy will have accrued approximately 48, 41, 43 and 48 years of credited service, respectively, as of age 65. Mr. Codey will retire on February 29,2000 with 37 years of credited service. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PSEG The information required by Item 12 of Form 10-K with respect to directors, executive officers and certain beneficial owners is set forth under the heading `Security Ownership of Directors, Management and Certain Beneficial Owners' in PSEG's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 18, 2000 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 1, 2000 and such information set forth under such heading is incorporated herein by this reference thereto. PSE&G All of PSE&G's 132,450,344 outstanding shares of Common Stock are owned beneficially and of record by PSE&G's parent, PSEG, 80 Park Plaza, P.O. Box 1171, Newark, New Jersey. The following table sets forth beneficial ownership of PSEG Common Stock, including options, by the directors and executive officers named below as of January 31, 2000. None of these amounts exceed 1% of the PSEG Common Stock outstanding at such date. No director or executive officer owns any PSE&G Preferred Stock of any class. 114
AMOUNT AND NATURE OF NAME BENEFICIAL OWNERSHIP ---------------------------------------------------------------- -------------------- Frank Cassidy................................................... 160,317(1) Lawrence Codey.................................................. 252,756(2) E. James Ferland................................................ 699,227(3) Conrad K. Harper................................................ 1,843 Irwin Lerner.................................................... 12,630 Robert C. Murray................................................ 171,475(4) Marilyn M. Pfaltz............................................... 9,618 Forrest J. Remick............................................... 4,079 R. Edwin Selover................................................ 82,391(5) All directors and executive officers as a group (11 persons).... 1,545,761(6)
(1) Includes the equivalent of 1,600 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 153,000 shares, 21,670 of which are currently exercisable. (2) Includes the equivalent of 45 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 230,000 shares, 58,340 of which are currently exercisable. (3) Includes the equivalent of 12,180 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 475,000 shares, 116,680 of which are currently exercisable. Includes 150,000 shares of restricted stock, which vest as described in the Summary Compensation Table Note 5. (4) Includes the equivalent of 1,475 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 154,000 shares, 33,337 of which are currently exercisable. (5) Includes options to purchase 72,500 shares, 15,002 of which are currently exercisable. (6) Includes the equivalent of 21,095 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 1,220,600 shares, of which 262,698 are currently exercisable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PSEG The information required by Item 13 of Form 10-K is set forth under the heading "Executive Compensation" in PSEG's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 18, 2000, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 1, 2000. Such information set forth under such heading is incorporated herein by this reference thereto. PSE&G None. 115 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) Financial Statements: a. PSEG Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 on page 53. PSEG Consolidated Balance Sheets for the years ended December 31, 1999 and 1998 on pages 54 and 55. PSEG Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 on page 56. PSEG Statements of Common Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 on page 57. PSEG Notes to Consolidated Financial Statements on pages 64 through 98. b. PSE&G Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 on page 59. PSE&G Consolidated Balance Sheets for the years ended December 31, 1999 and 1998 on pages 60 and 61. PSE&G Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 on page 62. PSE&G Statements of Common Stockholder's Equity for the years ended December 31, 1999, 1998 and 1997 on page 63. PSE&G Notes to Consolidated Financial Statements on pages 99 through 102. (B) The following documents are filed as a part of this report: a. PSEG Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1999 (page 118). b. PSE&G Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1999 (page 118). Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. 116 (C) The following exhibits are filed herewith: (1) PSEG: Exhibit 10a(1): Directors' Deferred Compensation Plan Exhibit 10a(2): Deferred Compensation Plan for Certain Employees Exhibit 10a(3): Limited Supplemental Benefits Plan for Certain Employees Exhibit 10a(4): Mid Career Hire Supplemental Retirement Plan Exhibit 10a(5): Retirement Income Reinstatement Plan Exhibit 10a(7): Management Incentive Compensation Plan Exhibit 10a(18) Employment Agreement with Lawrence R. Codey dated November 17, 1999 Exhibit 12 Computation of Ratios of Earnings to Fixed Charges Exhibit 21: Subsidiaries of Registrant Exhibit 23: Independent Auditors' Consent Exhibit 27: Financial Data Schedule (See Exhibit Index on pages 121 through 129.) (2) PSE&G: Exhibit 10a(1): Directors' Deferred Compensation Plan Exhibit 10a(2): Deferred Compensation Plan for Certain Employees Exhibit 10a(3): Limited Supplemental Benefits Plan for Certain Employees Exhibit 10a(4): Mid Career Hire Supplemental Retirement Plan Exhibit 10a(5): Retirement Income Reinstatement Plan Exhibit 10a(7): Management Incentive Compensation Plan Exhibit 10a(13): Employment Agreement with Lawrence R. Codey dated November 17, 1999 Exhibit 12(a): Computation of Ratios of Earnings to Fixed Charges Exhibit 12(b): Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements Exhibit 23: Independent Auditors' Consent Exhibit 27: Financial Data Schedule (See Exhibit Index on pages 129 through 135.) (D) The following reports on Form 8-K were filed by the registrant(s) named below during the last quarter of 1999 and the 2000 period covered by this report under Item 5: REGISTRANT DATE OF REPORT ITEMS REPORTED ----------- -------------- -------------- PSEG and PSE&G October 14, 1999 Items 5 and 7 117 SCHEDULE II PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999 -- DECEMBER 31, 1997
COLUMN B COLUMN C COLUMN D COLUMN E ---------- ------------------------------ ----------- ---------- ADDITIONS ------------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COST AND OTHER ACCOUNTS DEDUCTIONS- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - ---------------------------------------------- ---------- ------------------------------ ----------- ---------- (MILLIONS OF DOLLARS) 1999: Allowance for Doubtful Accounts.............. $38 $40 $-- $38(A) $40 Discount on Property Abandonments............ 1 -- -- 1(B) -- Materials and Supplies Valuation Reserve..... 12 41 -- 42(C) 11 Other Valuation Allowances................... 11 11 -- -- 22 1998: Allowance for Doubtful Accounts.............. $41 $40 $-- $43(A) $38 Discount on Property Abandonments............ 2 -- -- 1(B) 1 Materials and Supplies Valuation Reserve..... 12 -- -- -- 12 Other Valuation Allowances................... 15 1 -- 5 11 1997: Allowance for Doubtful Accounts.............. $46 $44 $-- $49(A) $41 Discount on Property Abandonments............ 4 -- -- 2(B) 2 Materials and Supplies Valuation Reserve..... 16 -- -- 4 12 Other Valuation Allowances................... 10 5 -- -- 15
(A) Accounts Receivable/Investments written off. (B) Amortization of discount to income. (C) Inventory written off PUBLIC SERVICE ELECTRIC AND GAS COMPANY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999 -- DECEMBER 31, 1997
COLUMN B COLUMN C COLUMN D COLUMN E ------------- ----------------------------- ----------- ----------- ADDITIONS ----------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COST AND OTHER ACCOUNTS- DEDUCTIONS- END OF DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - --------------------------------------------- ------------- ----------------------------- ----------- ----------- (MILLIONS OF DOLLARS) 1999: Allowance for Doubtful Accounts.............. $34 $40 $-- $39(A) $35 Discount on Property Abandonments............ 1 -- -- 1(B) -- Materials and Supplies Valuation Reserve..... 12 41 -- 42(C) 11 1998: Allowance for Doubtful Accounts.............. $33 $39 $-- $38(A) $34 Discount on Property Abandonments............ 2 -- -- 1(B) 1 Materials and Supplies Valuation Reserve..... 12 -- -- -- 12 1997: Allowance for Doubtful Accounts.............. $40 $42 $-- $49(A) $33 Discount on Property Abandonments............ 4 -- -- 2(B) 2 Materials and Supplies Valuation Reserve..... 16 -- -- 4 12
(A) Accounts Receivable/Investments written off. (B) Amortization of discount to income. (C) Inventory written off. 118 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED By E. JAMES FERLAND ----------------------------------------- E. JAMES FERLAND CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: February 25, 2000 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- E. JAMES FERLAND Chairman of the Board, February 25, 2000 - ---------------------- President and Chief Executive E. JAMES FERLAND Officer and Director (Principal Executive Officer) ROBERT C. MURRAY Vice President and Chief February 25, 2000 - ---------------------- Financial Officer (Principal ROBERT C. MURRAY Financial Officer) PATRICIA A. RADO Vice President and Controller February 25, 2000 - ---------------------- (Principal Accounting Officer) PATRICIA A. RADO LAWRENCE R. CODEY Director February 25, 2000 - ---------------------- LAWRENCE R. CODEY ERNEST H. DREW Director February 25, 2000 - ---------------------- ERNEST H. DREW T. J. DERMOT DUNPHY Director February 25, 2000 - ---------------------- T. J. DERMOT DUNPHY RAYMOND V. GILMARTIN Director February 25, 2000 - ---------------------- RAYMOND V. GILMARTIN CONRAD K. HARPER Director February 25, 2000 - ---------------------- CONRAD K. HARPER IRWIN LERNER Director February 25, 2000 - ---------------------- IRWIN LERNER MARILYN M. PFALTZ Director February 25, 2000 - ---------------------- MARILYN M. PFALTZ FORREST J. REMICK Director February 25, 2000 - ---------------------- FORREST J. REMICK RICHARD J. SWIFT Director February 25, 2000 - ---------------------- RICHARD J. SWIFT 119 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. PUBLIC SERVICE ELECTRIC AND GAS COMPANY By E. JAMES FERLAND ------------------------------------- E. JAMES FERLAND CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Date: February 25, 2000 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- E. JAMES FERLAND Chairman of the Board and Chief February 25, 2000 - ----------------------- Executive Officer and Director E. JAMES FERLAND (Principal Executive Officer) ROBERT C. MURRAY Executive Vice President--Finance February 25, 2000 - ----------------------- (Principal Financial Officer) ROBERT C. MURRAY PATRICIA A. RADO Vice President and Controller February 25, 2000 - ----------------------- (Principal Accounting Officer) PATRICIA A. RADO LAWRENCE R. CODEY Director February 25, 2000 - ----------------------- LAWRENCE R. CODEY CONRAD K. HARPER Director February 25, 2000 - ----------------------- CONRAD K. HARPER IRWIN LERNER Director February 25, 2000 - ----------------------- IRWIN LERNER MARILYN M. PFALTZ Director February 25, 2000 - ----------------------- MARILYN M. PFALTZ FORREST J. REMICK Director February 25, 2000 - ----------------------- FORREST J. REMICK 120 EXHIBIT INDEX Certain Exhibits previously filed with the Commission and the appropriate securities exchanges are indicated as set forth below. Such Exhibits are not being refiled, but are included because inclusion is desirable for convenient reference. (a) Filed by PSE&G with Form 8-A under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (b) Filed by PSE&G with Form 8-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (c) Filed by PSE&G with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (d) Filed by PSE&G with Form 10-Q under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (e) Filed by PSEG with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-9120. (f) Filed with registration statement of PSE&G under the Securities Exchange Act of 1934, File No. 1-973, effective July 1, 1935, relating to the registration of various issues of securities. (g) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-4995, effective May 20, 1942, relating to the issuance of $15,000,000 First and Refunding Mortgage Bonds, 3% Series due 1972. (h) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-7568, effective July 1, 1948, relating to the proposed issuance of 200,000 shares of Cumulative Preferred Stock. (i) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-8381, effective April 18, 1950, relating to the issuance of $26,000,000 First and Refunding Mortgage Bonds, 2 3/4% Series due 1980. (j) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-12906, effective December 4, 1956, relating to the issuance of 1,000,000 shares of Common Stock. (k) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-59675, effective September 1, 1977, relating to the issuance of $60,000,000 First and Refunding Mortgage Bonds, 8 1/8% Series I due 2007. (l) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-60925, effective March 30, 1978, relating to the issuance of 750,000 shares of Common Stock through an Employee Stock Purchase Plan. (m) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-65521, effective October 10, 1979, relating to the issuance of 3,000,000 shares of Common Stock. (n) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-74018, filed on June 16, 1982, relating to the Thrift Plan of PSE&G. (o) Filed with registration statement of Public Service Enterprise Group Incorporated under the Securities Act of 1933, No. 33-2935 filed January 28, 1986, relating to PSE&G's plan to form a holding company as part of a corporate restructuring. (p) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 33-13209 filed April 9, 1987, relating to the registration of $575,000,000 First and Refunding Mortgage Bonds pursuant to Rule 415. 121
PSEG - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS ------------------------------------------------ FILING COMMISSION EXCHANGES ------ ---------- --------- 3a (o) 3a (o) 3a Certificate of Incorporation Public Service Enterprise Group Incorporated 3b (e) 3b (e) 3b By-Laws of Public Service Enterprise 4/11/88 Group Incorporated 3c (e) 3c (e) 3c Certificate of Amendment of Certificate of 4/11/88 Incorporation of Public Service Enterprise Group Incorporated, effective April 23, 1987 3d (f) (f) Trust Agreements for Enterprise Capital Trust I and III 12/24/97 3e (d) 3 (d) 3 Amended and Restated Trust Agreement for Enterprise Capital 8/14/98 8/14/98 Trust II 4a(1) (f) B-1 (c) 4b(1) 2/18/81 Indenture between PSE&G and Fidelity Union Trust Company, (now First Union National Bank) as Trustee, dated August 1, 1924, securing First and Refunding Mortgage Bonds Indentures between PSE&G and First Union National Bank as Trustee, supplemental to Exhibit 4a(1), dated as follows: 4a(2) (i) 7(1a) (c) 4b(2) April 1, 1927 2/18/81 4a(3) (k) 2b(3) (c) 4b(3) June 1, 1937 2/18/81 4a(4) (k) 2b(4) (c) 4b(4) July 1, 1937 2/18/81 4a(5) (k) 2b(5) (c) 4b(5) December 19, 1939 2/18/81 4a(6) (g) B-10 (c) 4b(6) March 1, 1942 2/18/81 4a(7) (k) 2b(7) (c) 4b(7) June 1, 1949 2/18/81 4a(8) (k) 2b(8) (c) 4b(8) May 1, 1950 2/18/81 4a(9) (k) 2b(9) (c) 4b(9) October 1, 1953 2/18/81 4a(10) (k) 2b(10) (c) 4b(10) May 1, 1954 2/18/81 4a(11) (j) 4b(16) (c) 4b(11) November 1, 1956 2/18/81 4a(12) (k) 2b(12) (c) 4b(12) September 1, 1957 2/18/81 4a(13) (k) 2b(13) (c) 4b(13) August 1, 1958 2/18/81 4a(14) (k) 2b(14) (c) 4b(14) June 1, 1959 2/18/81
122
PSEG - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS ------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(15) (k) 2b(15) (c) 4b(15) September 1, 1960 2/18/81 4a(16) (k) 2b(16) (c) 4b(16) August 1, 1962 2/18/81 4a(17) (k) 2b(17) (c) 4b(17) June 1, 1963 2/18/81 4a(18) (k) 2b(18) (c) 4b(18) September 1, 1964 2/18/81 4a(19) (k) 2b(19) (c) 4b(19) September 1, 1965 2/18/81 4a(20) (k) 2b(20) (c) 4b(20) June 1, 1967 2/18/81 4a(21) (k) 2b(21) (c) 4b(21) June 1, 1968 2/18/81 4a(22) (k) 2b(22) (c) 4b(22) April 1, 1969 2/18/81 4a(23) (k) 2b(23) (c) 4b(23) March 1, 1970 2/18/81 4a(24) (k) 2b(24) (c) 4b(24) May 15, 1971 2/18/81 4a(25) (k) 2b(25) (c) 4b(25) November 15, 1971 2/18/81 4a(26) (k) 2b(26) (c) 4b(26) April 1, 1972 2/18/81 4a(27) (a) 2 (c) 4b(27) March 1, 1974 3/29/74 2/18/81 4a(28) (a) 2 (c) 4b(28) October 1, 1974 10/11/74 2/18/81 4a(29) (a) 2 (c) 4b(29) April 1, 1976 4/6/76 2/18/81 4a(30) (a) 2 (c) 4b(30) September 1, 1976 9/16/76 2/18/81 4a(31) (k) 2b(31) (c) 4b(31) October 1, 1976 2/18/81 4a(32) (a) 2 (c) 4b(32) June 1, 1977 6/29/77 2/18/81 4a(33) (l) 2b(33) (c) 4b(33) September 1, 1977 2/18/81
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PSEG - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(35) (a) 2 (c) 4b(35) July 1, 1979 7/25/79 2/18/81 4a(36) (m) 2d(36) (c) 4b(36) September 1, 1979 (No. 1) 2/18/81 4a(37) (m) 2d(37) (c) 4b(37) September 1, 1979 (No. 2) 2/18/81 4a(38) (a) 2 (c) 4b(38) November 1, 1979 12/3/79 2/18/81 4a(39) (a) 2 (c) 4b(39) June 1, 1980 6/10/80 2/18/81 4a(40) (a) 2 (a) 2 August 1, 1981 8/19/81 8/19/81 4a(41) (b) 4e (b) 4e April 1, 1982 4/29/82 5/5/82 4a(42) (a) 2 (a) 2 September 1, 1982 9/17/82 9/20/82 4a(43) (a) 2 (a) 2 December 1, 1982 12/21/82 12/21/82 4a(44) (d) 4(ii) (d) 4(ii) June 1, 1983 7/26/83 7/27/83 4a(45) (a) 4 (a) 4 August 1, 1983 8/19/83 8/19/83 4a(46) (d) 4(ii) (d) 4(ii) July 1, 1984 8/14/84 8/17/84 4a(47) (d) 4(ii) (d) 4(ii) September 1, 1984 11/2/84 11/9/84 4a(48) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 1) 1/4/85 1/9/85 4a(49) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 2) 1/4/85 1/9/85 4a(50) (a) 2 (a) 2 July 1, 1985 8/2/85 8/2/85 4a(51) (c) 4a(51) (c) 4a(51) January 1, 1986 2/11/86 2/11/86 4a(52) (a) 2 (a) 2 March 1, 1986 3/28/86 3/28/86
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PSEG - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(53) (a) 2(a) (a) 2(a) April 1, 1986 (No. 1) 5/1/86 5/1/86 4a(54) (a) 2(b) (a) 2(b) April 1, 1986 (No. 2) 5/1/86 5/1/86 4a(55) (p) 4a(55) (p) 4a(55) March 1, 1987 4/9/87 4/9/87 4a(56) (a) 4 (a) 4 July 1, 1987 (No. 1) 8/17/87 8/17/87 4a(57) (d) 4 (d) 4 July 1, 1987 (No. 2) 11/13/87 11/20/87 4a(58) (a) 4 (a) 4 May 1, 1988 5/17/88 5/18/88 4a(59) (a) 4 (a) 4 September 1, 1988 9/27/88 9/28/88 4a(60) (a) 4 (a) 4 July 1, 1989 7/25/89 7/26/89 4a(61) (a) 4 (a) 4 July 1, 1990 (No. 1) 7/25/90 7/26/90 4a(62) (a) 4 (a) 4 July 1, 1990 (No. 2) 7/25/90 7/26/90 4a(63) (a) 4 (a) 4 June 1, 1991 (No. 1) 7/1/91 7/2/91 4a(64) (a) 4 (a) 4 June 1, 1991 (No. 2) 7/1/91 7/2/91 4a(65) (a) 4 (a) 4 November 1, 1991 (No. 1) 12/2/91 12/3/91 4a(66) (a) 4 (a) 4 November 1, 1991 (No. 2) 12/2/91 12/3/91 4a(67) (a) 4 (a) 4 November 1, 1991 (No. 3) 12/2/91 12/3/91 4a(68) (a) 4 (a) 4 February 1, 1992 (No. 1) 2/27/92 2/28/92 4a(69) (a) 4 (a) 4 February 1, 1992 (No. 2) 2/27/92 2/28/92 4a(70) (a) 4 (a) 4 June 1, 1992 (No. 1) 6/17/92 6/11/92 4a(71) (a) 4 (a) 4 June 1, 1992 (No. 2) 6/17/92 6/11/92
125
PSEG - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(72) (a) 4 (a) 4 June 1, 1992 (No. 3) 6/17/92 6/11/92 4a(73) (a) 4 (a) 4 January 1, 1993 (No.1) 2/2/93 2/2/93 4a(74) (a) 4 (a) 4 January 1, 1993 (No. 2) 2/2/93 2/2/93 4a(75) (a) 4 (a) 4 March 1, 1993 3/17/93 3/18/93 4a(76) (b) 4 (a) 4 May 1, 1993 5/27/93 5/28/93 4a(77) (a) 4 (a) 4 May 1, 1993 (No. 2) 5/25/93 5/25/93 4a(78) (a) 4 (a) 4 May 1, 1993 (No. 3) 5/25/93 5/25/93 4a(79) (b) 4 (b) 4 July 1, 1993 12/1/93 12/1/93 4a(80) (a) 4 (a) 4 August 1, 1993 8/3/93 8/3/93 4a(81) (b) 4 (b) 4 September 1, 1993 12/1/93 12/1/93 4a(82) (b) 4 (b) 4 September 1, 1993 (No. 2) 12/1/93 12/1/93 4a(83) (b) 4 (b) 4 November 1, 1993 12/1/93 12/1/93 4a(84) (a) 4 (a) 4 February 1, 1994 2/3/94 2/14/94 4a(85) (a) 4 (a) 4 March 1, 1994 (No. 1) 3/15/94 3/16/94 4a(86) (a) 4 (a) 4 March 1, 1994 (No. 2) 3/15/94 3/16/94 4a(87) (d) 4 (d) 4 May 1, 1994 11/8/94 12/2/94 4a(88) (d) 4 (d) 4 June 1, 1994 11/8/94 12/2/94 4a(89) (d) 4 (d) 4 August 1, 1994 11/8/94 12/2/94 4a(90) (d) 4 (d) 4 October 1, 1994 (No. 1) 11/8/94 12/2/94 4a(91) (d) 4 (d) 4 October 1, 1994 (No. 2) 11/8/94 12/2/94
126
PSEG - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(92) (a) 4 (a) 4 January 1, 1996 (No. 1) 1/26/96 1/26/96 4a(93) (a) 4 (a) 4 January 1, 1996 (No. 2) 1/26/96 1/26/96 4a(94) (e) 4 December 1, 1996 2/26/97 4a(95) (a) 4 (a) 4 June 1, 1997 6/17/97 6/17/97 4a(96) (a) 4 (a) 4 May 1, 1998 5/15/98 5/15/98 4b (b) 4 (b) 4 Indenture of Trust between PSE&G and The Chase Manhattan Bank 12/1/93 12/1/93 (National Association), as Trustee, providing for Secured Medium-Term Notes dated July 1, 1993 4c(1) (c) (c) Indenture between PSE&G and First Union National Bank, National 2/23/95 2/23/95 Association (now known as First Union National Bank), as Trustee, dated November 1, 1994, providing for Deferrable Interest Subordinated Debentures in Series 4c(2) (a) (a) Supplemental Indenture between PSE&G and First Fidelity Bank, 9/11/95 9/11/95 National Association (now known as First Union National Bank), (d) 4d (2) (d) 4d (2) as Trustee, dated September 1, 1995 providing for Deferrable 5/13/98 5/13/98 Interest Subordinated Debentures, Series B (relating to Monthly Preferred Securities) 4d(1) (d) 4e (1) (d) 4e(1) Indenture between PSE&G and First Union National Bank, as 5/13/98 5/13/98 Trustee, dated June 1, 1996 providing for Deferrable Interest Subordinated Debentures in Series (relating to Quarterly Preferred Securities) 4d(2) (d) 4e(2) (d) 4e(2) Supplemental Indenture between PSE&G and First Union National 5/13/98 5/13/98 Bank, as Trustee, dated February 1, 1997 providing for Deferrable Interest Subordinated Debentures, Series B (relating to Quarterly Preferred Securities) 4e(1) (d) 4f (d) 4f Indenture between Public Service Enterprise Group Incorporated 5/13/98 5/13/98 and First Union National Bank, as Trustee, dated January 1, 1998 providing for Deferrable Interest Subordinated Debentures in Series (relating to Quarterly Preferred Securities) 4e(2) (d) 4a (d) 4a First Supplemental Indenture to Indenture dated as of January 8/14/98 8/14/98 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank, as Trustee, dated June 1, 1998 providing for the issuance of Floating Rate Deferrable Interest Subordinated Debentures, Series B (relating to Trust Preferred Securities) 4e(3) (d) 4b (d) 4b Second Supplemental Indenture to Indenture dated as of January 8/14/98 8/14/98 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank, as Trustee, dated July 1, 1998 providing for the issuance of Deferrable Interest Subordinated Debentures, Series C (relating to Trust Preferred Securities) 4f Indenture dated as of November 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank providing for the issuance of Senior Debt Securities 9 Inapplicable
127
PSEG - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 10a(1) Directors' Deferred Compensation Plan 10a(2) Deferred Compensation Plan for Certain Employees 10a(3) Limited Supplemental Benefits Plan for Certain Employees 10a(4) Mid Career Hire Supplemental Retirement Plan 10a(5) Retirement Income Reinstatement Plan 10a(6) (e) 10a(6) (e) 10a(6) Long-Term Incentive Plan 2/22/99 2/22/99 10a(7) Management Incentive Compensation Plan 10a(8) (d) 10 (d) 10 Employment Agreement with E. James Ferland, dated June 16, 1998 8/14/98 8/14/98 10a(9) (c) 10a(15) (c) 10a(15) Letter Agreement with Robert C. Murray dated 2/10/93 2/11/93 December 17, 1991 10a(9)(i) (c) 10a(9)(i) (c) 10a(9)(i) Amendment to Letter Agreement with Robert C. Murray dated 2/23/98 2/23/98 January 6, 1998 10a(10) (c) 10a(14) (c) 10a(14) Letter Agreement with Patricia A. Rado dated 2/26/94 3/9/94 March 24, 1993 10a(11) (d) 10a(17) (d) 10a(17) Letter Agreement with Alfred C. Koeppe dated 11/14/95 11/14/95 August 23, 1995 10a(12) (e) 10a(14) (e) 10a(14) Directors' Stock Plan 2/22/99 2/22/99 10a(13) (c) 10a(16) (c) 10a(16) Letter Agreement with Harold W. Keiser dated January 5, 1998 2/23/98 2/23/98 10a(14) (e) 10a(16) (e) 10a(16) Global Deferred Compensation Plan 2/22/99 2/22/99 10a(15) (e) 10a(17) (e) 10a(17) Global Executive Incentive Compensation Plan 2/22/99 2/22/99 10a(16) (e) 10a(20) (e) 10a(20) Energy Technologies Executive Incentive Compensation Plan 2/22/99 2/22/99 10a(17) (e) 10a(22) (e) 10a(22) Resources Annual Incentive Compensation Plan 2/22/99 2/22/99 10a(18) Employment Agreement with Lawrence R. Codey, dated November 17, 1999 11 Inapplicable 12 Computation of Ratios of Earnings to Fixed Charges 13 Inapplicable 16 Inapplicable 18 Inapplicable 21 Subsidiaries of the Registrant
128
PSEG - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 22 Inapplicable 23 Independent Auditors' Consent 24 Inapplicable 27 Financial Data Schedule 28 Inapplicable 99 Inapplicable PSE&G - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 3a(1) (b) 3a (b) 3a Restated Certificate of Incorporation of PSE&G 8/28/86 8/29/86 3a(2) (c) 3a(2) (c) 3a(2) Certificate of Amendment of Certificate of Restated Certificate 4/10/87 of Incorporation of PSE&G filed February 18, 1987 with the State of New Jersey adopting limitations of liability provisions in accordance with an amendment to New Jersey Business Corporation Act 3a(3) (a) 3(a)3 (a) 3(a)3 Certificate of Amendment of Restated Certificate of 2/3/94 2/14/94 Incorporation of PSE&G filed June 17, 1992 with the State of New Jersey, establishing the 7.44% Cumulative Preferred Stock ($100 Par) as a series of the Preferred Stock 3a(4) (a) 3(a)4 (a) 3(a)4 Certificate of Amendment of Restated Certificate of 2/3/94 2/14/94 Incorporation of PSE&G filed March 11, 1993 with the State of New Jersey, establishing the 5.97% Cumulative Preferred Stock ($100 Par) as a series of Preferred Stock 3a(5) (a) 3(a)5 (a) 3(a)5 Certificate of Amendment of Restated Certificate of 2/3/94 2/14/94 Incorporation of PSE&G filed January 27, 1995 with the State of New Jersey, establishing the 6.92% Cumulative Preferred Stock ($100 Par) and the 6.75% Cumulative Preferred Stock -- $25 Par as series of Preferred Stock 3b (a) (a) Copy of By-Laws of PSE&G 2/23/95 2/23/95 4a(1) (f) B-1 (c) 4b(1) Indenture between PSE&G and Fidelity Union Trust Company, (now 2/18/81 First Union National Bank, National Association), as Trustee, dated August 1, 1924, securing First and Refunding Mortgage Bond Indentures between PSE&G and First Fidelity Bank, National Association, as Trustee, supplemental to Exhibit 4a(1), dated as follows: 4a(2) (i) 7(1a) (c) 4b(2) April 1, 1927 2/18/81 4a(3) (k) 2b(3) (c) 4b(3) June 1, 1937 2/18/81
129
PSE&G - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(4) (k) 2b(4) (c) 4b(4) July 1, 1937 2/18/81 4a(5) (k) 2b(5) (c) 4b(5) December 19, 1939 2/18/81 4a(6) (g) B-10 (c) 4b(6) March 1, 1942 2/18/81 4a(7) (k) 2b(7) (c) 4b(7) June 1, 1949 2/18/81 4a(8) (k) 2b(8) (c) 4b(8) May 1, 1950 2/18/81 4a(9) (k) 2b(9) (c) 4b(9) October 1, 1953 2/18/81 4a(10) (k) 2b(10) (c) 4b(10) May 1, 1954 2/18/81 4a(11) (j) 4b(16) (c) 4b(11) November 1, 1956 2/18/81 4a(12) (k) 2b(12) (c) 4b(12) September 1, 1957 2/18/81 4a(13) (k) 2b(13) (c) 4b(13) August 1, 1958 2/18/81 4a(14) (k) 2b(14) (c) 4b(14) June 1, 1959 2/18/81 4a(15) (k) 2b(15) (c) 4b(15) September 1, 1960 2/18/81 4a(16) (k) 2b(16) (c) 4b(16) August 1, 1962 2/18/81 4a(17) (k) 2b(17) (c) 4b(17) June 1, 1963 2/18/81 4a(18) (k) 2b(18) (c) 4b(18) September 1, 1964 2/18/81 4a(19) (k) 2b(19) (c) 4b(19) September 1, 1965 2/18/81 4a(20) (k) 2b(20) (c) 4b(20) June 1, 1967 2/18/81 4a(21) (k) 2b(21) (c) 4b(21) June 1, 1968 2/18/81 4a(22) (k) 2b(22) (c) 4b(22) April 1, 1969 2/18/81 4a(23) (k) 2b(23) (c) 4b(23) March 1, 1970 2/18/81
130
PSE&G - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(24) (k) 2b(24) (c) 4b(24) May 15, 1971 2/18/81 4a(25) (k) 2b(25) (c) 4b(25) November 15, 1971 2/18/81 4a(26) (k) 2b(26) (c) 4b(26) April 1, 1972 2/18/81 4a(27) (a) 2 (c) 4b(27) March 1, 1974 3/29/74 2/18/81 4a(28) (a) 2 (c) 4b(28) October 1, 1974 10/11/74 2/18/81 4a(29) (a) 2 (c) 4b(29) April 1, 1976 4/6/76 2/18/81 4a(30) (a) 2 (c) 4b(30) September 1, 1976 9/16/76 2/18/81 4a(31) (k) 2b(31) (c) 4b(31) October 1, 1976 2/18/81 4a(32) (a) 2 (c) 4b(32) June 1, 1977 6/29/77 2/18/81 4a(33) (l) 2b(33) (c) 4b(33) September 1, 1977 2/18/81 4a(34) (a) 2 (c) 4b(34) November 1, 1978 11/21/78 2/18/81 4a(35) (a) 2 (c) 4b(35) July 1, 1979 7/25/79 2/18/81 4a(36) (m) 2d(36) (c) 4b(36) September 1, 1979 (No. 1) 2/18/81 4a(37) (m) 2d(37) (c) 4b(37) September 1, 1979 (No. 2) 2/18/81 4a(38) (a) 2 (c) 4b(38) November 1, 1979 12/3/79 2/18/81 4a(39) (a) 2 (c) 4b(39) June 1, 1980 6/10/80 2/18/81 4a(40) (a) 2 (a) 2 August 1, 1981 8/19/81 8/19/81 4a(41) (b) 4e (b) 4e April 1, 1982 4/29/82 5/5/82 4a(42) (a) 2 (a) 2 September 1, 1982 9/17/82 9/20/82 4a(43) (a) 2 (a) 2 December 1, 1982 12/21/82 12/21/82 4a(44) (d) 4(ii) (d) 4(ii) June 1, 1983 7/26/83 7/27/83
131
PSE&G - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(45) (a) 4 (a) 4 August 1, 1983 8/19/83 8/19/83 4a(46) (d) 4(ii) (d) 4(ii) July 1, 1984 8/14/84 8/17/84 4a(47) (d) 4(ii) (d) 4(ii) September 1, 1984 11/2/84 11/9/84 4a(48) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 1) 1/4/85 1/9/85 4a(49) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 2) 1/4/85 1/9/85 4a(50) (a) 2 (a) 2 July 1, 1985 8/2/85 8/2/85 4a(51) (c) 4a(51) (c) 4a(51) January 1, 1986 2/11/86 2/11/86 4a(52) (a) 2 (a) 2 March 1, 1986 3/28/86 3/28/86 4a(53) (a) 2(a) (a) 2(a) April 1, 1986 (No. 1) 5/1/86 5/1/86 4a(54) (a) 2(b) (a) 2(b) April 1, 1986 (No. 2) 5/1/86 5/1/86 4a(55) (p) 4a(55) (p) 4a(55) March 1, 1987 4/9/87 4/9/87 4a(56) (a) 4 (a) 4 July 1, 1987 (No. 1) 8/17/87 8/17/87 4a(57) (d) 4 (d) 4 July 1, 1987 (No. 2) 11/13/87 11/20/87 4a(58) (a) 4 (a) 4 May 1, 1988 5/17/88 5/18/88 4a(59) (a) 4 (a) 4 September 1, 1988 9/27/88 9/28/88 4a(60) (a) 4 (a) 4 July 1, 1989 7/25/89 7/26/89 4a(61) (a) 4 (a) 4 July 1, 1990 (No. 1) 7/25/90 7/26/90 4a(62) (a) 4 (a) 4 July 1, 1990 (No. 2) 7/25/90 7/26/90 4a(63) (a) 4 (a) 4 June 1, 1991 (No. 1) 7/1/91 7/2/91 4a(64) (a) 4 (a) 4 June 1, 1991 (No. 2) 7/1/91 7/2/91 4a(65) (a) 4 (a) 4 November 1, 1991 (No. 1) 12/2/91 12/3/91
132
PSE&G - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(66) (a) 4 (a) 4 November 1, 1991 (No. 2) 12/2/91 12/3/91 4a(67) (a) 4 (a) 4 November 1, 1991 (No. 3) 12/2/91 12/3/91 4a(68) (a) 4 (a) 4 February 1, 1992 (No. 1) 2/27/92 2/28/92 4a(69) (a) 4 (a) 4 February 1, 1992 (No. 2) 2/27/92 2/28/92 4a(70) (a) 4 (a) 4 June 1, 1992 (No. 1) 6/17/92 6/11/92 4a(71) (a) 4 (a) 4 June 1, 1992 (No. 2) 6/17/92 6/11/92 4a(72) (a) 4 (a) 4 June 1, 1992 (No. 3) 6/17/92 6/11/92 4a(73) (a) 4 (a) 4 January 1, 1993 (No. 1) 2/2/93 2/2/93 4a(74) (a) 4 (a) 4 January 1, 1993 (No. 2) 2/2/93 2/2/93 4a(75) (a) 4 (a) 4 March 1, 1993 3/17/93 3/18/93 4a(76) (b) 4 (a) 4 May 1, 1993 5/27/93 5/28/93 4a(77) (a) 4 (a) 4 May 1, 1993 (No. 2) 5/25/93 5/25/93 4a(78) (a) 4 (a) 4 May 1, 1993 (No. 3) 5/25/93 5/25/93 4a(79) (b) 4 (b) 4 July 1, 1993 12/1/93 12/1/93 4a(80) (a) 4 (a) 4 August 1, 1993 8/3/93 8/3/93 4a(81) (b) 4 (b) 4 September 1, 1993 12/1/93 12/1/93 4a(82) (a) 4 (a) 4 September 1, 1993 (No. 2) 12/1/93 12/1/93 4a(84) (a) 4 (a) 4 February 1, 1994 2/3/94 2/14/94 4a(85) (a) 4 (a) 4 March 1, 1994 (No. 1) 3/15/94 3/16/94 4a(86) (a) 4 (a) 4 March 1, 1994 (No. 2) 3/15/94 3/16/94 4a(87) (d) 4 (d) 4 May 1, 1994 11/8/94 12/2/94
133
PSE&G - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(88) (d) 4 (d) 4 June 1, 1994 11/8/94 12/2/94 4a(89) (d) 4 (d) 4 August 1, 1994 11/8/94 12/2/94 4a(90) (d) 4 (d) 4 October 1, 1994 (No. 1) 11/8/94 12/2/94 4a(91) (d) 4 (d) 4 October 1, 1994 (No. 2) 11/8/94 12/2/94 4a(92) (a) 4 (a) 4 January 1, 1996 (No.1) 1/26/96 1/26/96 4a(93) (a) 4 (a) 4 January 1, 1996 (No. 2) 1/26/96 1/26/96 4a(94) (c) 4 December 1, 1996 2/26/97 4a(95) (a) 4 (a) 4 June 1, 1997 6/17/97 6/17/97 4a(96) (a) 4 (a) 4 May 1, 1998 5/15/98 5/15/98 4b (b) 4 (b) 4 Indenture of Trust between PSE&G and Chase Manhattan Bank 12/1/93 12/1/93 (National Association), as Trustee, providing for Secured Medium-Term Notes dated July 1, 1993 4c(1) (b) (c) Indenture between PSE&G and First Fidelity Bank, National 2/23/95 2/23/95 Association (now known as First Union National Bank), as Trustee, dated November 1, 1994, providing for Deferrable Interest Subordinated Debentures in Series 4c(2) (a) 4b(5) (a) 4b(5) Supplemental Indenture between PSE&G and First Fidelity Bank, National Association (now known as First Union National Bank), (d) 4d(2) (d) 4d(2) as Trustee, dated September 1, 1995 providing for Deferrable 5/13/98 5/13/98 Interest Subordinated Debentures, Series B (relating to Monthly Preferred Securities) 4d(1) (d) 4e(1) (d) 4e(1) Indenture between PSE&G and First Union National Bank, as 5/13/98 5/13/98 Trustee, dated June 1, 1996 providing for Deferrable Interest Subordinated Debentures in Series (relating to Quarterly Preferred Securities) 4d(2) (d) 4e(2) (d) 4e(2) Supplemental Indenture between PSE&G and First Union National 5/13/98 5/13/98 Bank, as Trustee, dated February 1, 1997 providing for Deferrable Interest Subordinated Debentures, Series B (relating to Quarterly Preferred Securities) 10a(1) Directors' Deferred Compensation Plan 10a(2) Deferred Compensation Plan for Certain Employees 10a(3) Limited Supplemental Benefits Plan for Certain Employees 10a(4) Mid Career Hire Supplemental Retirement Plan 10a(5) Retirement Income Reinstatement Plan
134
PSE&G - -------------------------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------------------------- PREVIOUS FILING THIS --------------------------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 10a(6) (e) 10a(6) (e) 10a(6) Long-Term Incentive Plan 2/22/99 2/22/99 10a(7) Management Incentive Compensation Plan 10a(8) (d) 10 (d) 10 Employment Agreement with E. James Ferland, dated June 16, 1998 8/14/98 8/14/98 10a(9) (c) 10a(12) (c) 10a(12) Letter Agreement with Robert C. Murray dated 2/10/93 2/11/93 December 17, 1991 10a(9)(i) (c) 10a(9)(i) (c) 10a(9)(i) Amendment to Letter Agreement with Robert C. Murray dated 2/23/98 2/23/98 January 6, 1998 10a(10) (c) 10a(13) (c) 10a(13) Letter Agreement with Patricia A. Rado dated 2/26/94 3/9/94 March 24, 1993 10a(11) (d) 10a(17) (d) 10a(17) Letter Agreement with Alfred C. Koeppe dated 11/14/95 11/14/95 August 23, 1995 10a(12) (e) 10a(14) (e) 10a(14) Directors' Stock Plan 2/22/99 2/22/99 10a(13) Employment Agreement with Lawrence R. Codey, dated November 17, 1999 11 Inapplicable 12(a) Computation of Ratios of Earnings to Fixed Charges 12(b) Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements 13 Inapplicable 16 Inapplicable 19 Inapplicable 21 Inapplicable 23 Independent Auditors' Consent 27 Financial Data Schedule
135 EX-10.(A)(1) 2 DEFERRED COMPENSATION PLAN FOR DIRECTORS PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED DEFERRED COMPENSATION PLAN FOR DIRECTORS AMENDED JANUARY 1, 2000 2 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED DEFERRED COMPENSATION PLAN FOR DIRECTORS January 1, 1988 1. PURPOSE. The Plan is designed to provide a method of deferring payment to non-employee Directors of their fees and annual retainers, as fixed from time to time by the Board of Directors, until termination of their services on the Board. 2. PLAN PERIODS. The first Plan Period shall commence upon the election of Directors at the 1987 Annual Stockholders' Meeting and terminate upon the election of Directors at the 1988 Annual Stockholders' Meeting. Subsequent Plan Periods shall relate to successive similar periods between Annual Stockholders Meetings. 3. ADMINISTRATION. The Plan shall be administered by a Committee consisting of the Chief Executive Officer of the Company and two other officers appointed by him. The Committee shall have the power to interpret the Plan and, subject to its provisions, to make all determinations necessary or desirable for the Plan's administration. 4. PARTICIPATION. (a) An individual who serves as a Director and is not otherwise employed by the Company or any of its subsidiaries shall be eligible to participate in the Plan if he elects to have payment of his annual retainer, his fees or his annual retainer and fees in respect of a Plan Period deferred as provided herein. (b) The election shall be made by written notice on Schedule A to the Plan filed with the Company's Secretary prior to the first day of such Plan Period or, in the case of a Director who first becomes eligible during a Plan Period, not later than 30 days after he first becomes eligible. Each such election shall be irrevocable. 5. DEFERRED COMPENSATION ACCOUNTS. (a) An account shall be established for each eligible, electing Director (a "Participant") which shall be designated as his Deferred Compensation Account. If a Participant elects to have payment deferred of his annual retainer, the amount of the annual retainer payable to him with respect to a 3 Plan Period shall be credited, in four equal installments on or about the last day of June, September, December and March in the Plan Period to which such retainer relates, to his Deferred Compensation Account, subject to the provisions of Section 5(c). If a Participant elects to have payment deferred of his fees, the amount of each fee payable to him for attendance at a meeting during a Plan Period shall be credited to his Deferred Compensation Account on or about the first business day following such meeting. The Company shall not be required to segregate any amounts credited to the Deferred Compensation Accounts, which shall be established merely as an accounting convenience. Amounts credited to the Deferred Compensation Accounts shall at all times remain solely the property of the Company subject to the claims of its general creditors and available for the Company's use for whatever purpose desired. (b) Earnings Credits on Assets in the Account - Each Director may direct investment of his or her Account among the fund or funds selected by the Committee from time to time and included in Schedule C of the Plan which shall serve as a means of measuring the increase or decrease of Director's Account (the "Investment Funds"). The Committee may, in its discretion, add or discontinue any Investment Fund available under the Plan. The Committee shall provide each affected Director with the opportunity, without limiting or otherwise impairing any other right of such Director regarding changes in investment directions, to redirect the allocation of his or her Account invested in any discontinued Investment Fund among the other Investment Funds available under the Plan, including any replacement investment vehicle (in the manner established by the Committee) in multiples of one percent; provided, however, that the Committee shall not be obligated to effectuate any such investment direction. In the case of a Director who fails to provide a designation of Investment Funds, such Director shall be deemed to have designated 100 percent of his or her Account to be invested in the Investment Fund that 4 determines income accrual with reference to the prime commercial lending rate of the Chase Manhattan Bank. Except with respect to an investment election related to (A) an election made within 30 days of January 1, 2000 and (B) any Investment Fund which is discontinued during a Plan Year, each of which shall be effective immediately, a Participant's investment election may be changed annually and will be effective from January 1 of the Plan Year next following receipt of the Employee's investment election form. Each Participant's Account shall be credited with a rate of return on the last day of March, June, September and December equal to the rate of return experienced by the Investment Fund selected by the Participant for the same period. The fair market value of each Investment Fund shall be determined by the Committee and shall represent the fair market value of all securities and other property held by the Investment Fund. (c) If, prior to the end of a Plan Period, a Participant becomes an employee of the Company or one of its subsidiaries or dies or ceases for any reason to be a Director, or if the effective date of participation by a Participant for any Plan Period shall be other than the first day thereof, he will be entitled to be credited with that proportion of the annual retainer for the full Plan Period which the number of days of his participation in the Plan during such Plan Period bears to the total number of days in such Plan Period. 6. PAYMENT. (a) Following termination of a Participant's service on the Board, the Company shall distribute his Deferred Compensation Account. (b) By written notice on Schedule A to the Plan filed with the Company's Secretary, a Participant may elect to have distribution of his Deferred Compensation Account commence either (l) within thirty (30) days after the date he ceases to be a Director of the Company, or, in the alternative, (2) in the month of January of any calendar year following termination of 5 the Participant's service on the Board, but not later than the month of January following the Participant's 71st birthday, unless the Participant is still a Director at such time, in which case distribution shall commence within thirty (30) days after the date he ceases to be a Director. Any such election, or any change in such election (by such subsequent written notice to the Secretary of the Company), shall apply only to future deferrals. In the event no election is made as to the commencement of distribution, such distribution shall commence within 30 days after the date the Participant ceases to be a Director of the Company. The actual date that distribution shall commence shall be a date within the appropriate period determined by the Committee in its sole discretion. (c) By written notice on Schedule A to the Plan filed with the Company's Secretary, a Participant may elect to receive the distribution of his Deferred Compensation Account in the form of (l) one lump-sum payment, or (2) monthly distributions over a period selected by the Participant of up to ten years. Any such election, or any change in such election (by such subsequent written notice to the Secretary of the Company), shall apply only to future deferrals. In the event a lump-sum payment is made under the Plan, the amount then standing to the Participant's credit in his Deferred Compensation Account, including interest at the rate provided in Section 5(b) to the date of distribution, shall be paid to the Participant on the date determined under Section 6(b). In the case of a distribution over a period of years, the Company shall pay to the Participant, commencing on the date determined under Section 6(b), monthly installments from the amount then standing to his credit in his Deferred Compensation Account, including interest on the unpaid balance at the rate provided in Section 5(b) to the date of distribution. The amount of each installment shall be determined by dividing the then unpaid balance, plus accrued interest, in the Participant's Deferred Compensation Account by the number of installments remaining to be paid. If a 6 Participant does not make an election as to the manner of distribution of his Deferred Compensation Account, such distribution shall be made in the form of monthly installments paid over a five-year period. Notwithstanding the above, a Participant may at any time elect, by written notice to the Secretary of the Company, to have the monthly payments scheduled to be made to him within a tax year paid to him in one installment within such year. (d) In the event of a Participant's death, the balance of the Participant's Deferred Compensation Account shall be distributed to the Participant's Beneficiary(ies) in annual installments over a period of not more than five years, in accordance with his election on Schedule B to the Plan filed with the Secretary of the Company. Any change in the period over which such payments are made shall only apply to future deferrals. Such distribution shall be made in a manner consistent with Section 6(c) of the Plan and shall commence within 30 days after the Participant's death, on a date within said month to be determined by the Committee in its sole discretion. Additional annual payments for distributions made over a period of more than one year shall be made on the yearly anniversaries of such date. In the event of a Participant's death after distribution of this Deferred Compensation Account has commenced, any election under this Section 6(d) shall not extend the time of payment of his Deferred Compensation Account beyond the time when distribution would have been completed if he had lived. A Participant may change Beneficiary designations by filing a subsequent Schedule B with the Secretary of the Company. If a Participant does not make an election as to the manner of distribution of his Deferred Compensation Account in the event of his death, any such distribution shall be made as a lump-sum payment to his estate within 30 days after the Participant's death. (e) Notwithstanding any other provision of the Plan, if the Committee shall determine in its sole discretion that the time of payment of a Participant's 7 Deferred Compensation Account should be advanced because of protracted illness or other undue hardship, then the Committee may advance the time or times of payment (whether before or after the Retirement Date) only if the Committee determines that an emergency beyond the control of the Participant exists and which would cause such Participant severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. A Participant who receives a hardship distribution may not reenter the Plan for twelve months after the date of such distribution. Any distribution for hardship under this Section 6(e) shall commence within thirty days after the Committee determines to make such hardship distribution. (f) Notwithstanding any other provision of the Plan if the Committee shall determine in its sole discretion that the time of payment of a Participant's Deferred Compensation Account should be advanced because it is important to terminate such Account in the interest of the Company, then the Committee may advance the time or times of payment whether before or after the Retirement Date). 7. ASSIGNMENT. No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Participant or Beneficiary or subject to attachment, garnishment or other legal process. 8. TERMINATION AND AMENDMENT. (a) The Board may terminate the Plan at any time so that no further amounts shall be credited to Deferred Compensation Accounts or may, from time to time, amend the Plan, without the consent of Participants or Beneficiaries; provided, however, that no such amendment or termination shall impair any rights, including rights to income credits pursuant to Section 5(b) hereof, which have accrued under the Plan without the consent of the Participant or Beneficiary, or the legal representative of such person, so affected. 8 (b) Notwithstanding any other provision of this Plan, upon the occurrence of a Change in Control (as defined below), the income credit calculated pursuant to Section 5(b) hereof may not be reduced below the prime commercial lending rate described therein. For purposes of this Plan, "Change in Control" shall mean the occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such person any securities acquired directly from the Corporation or its affiliates) representing 25% or more of the combined voting power of the Corporation's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (1) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board of Directors or nomination for election by the Corporation's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Corporation or any direct or indirect wholly owned subsidiary of the Corporation with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any subsidiary of the Corporation, at least 75% of the combined voting power of the securities of the Corporation or such 9 surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (2) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (iv) the stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets, other than a sale or disposition by the Corporation of all or substantially all of the Corporation's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Corporation in substantially the same proportions as their ownership of the Corporation immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Corporation immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Corporation immediately following such transaction or series of transactions. SCHEDULE A DEFERRED COMPENSATION PLAN FOR DIRECTORS OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED (THE "PLAN") Elections in Connection with Deferral of Compensation Section 1 Election as to Compensation to be Deferred Note: THIS SECTION IS TO BE USED TO MAKE OR TO CHANGE AN ELECTION UNDER SECTION 4 OF THE PLAN. ANY CHANGE IN ELECTION WILL ONLY APPLY TO SUBSEQUENT PLAN PERIODS. ---- I hereby elect to defer, in accordance with the provisions of the Plan: __________ (a) My retainer. __________ (b) My fees. __________ (c) My retainer and my fees. Section 2. Election as to Commencement of Distribution From Account Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING A DIRECTOR COVERED BY THE PLAN AND (B) PRIOR TO EACH ANNUAL MEETING IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. ---- I hereby elect, in accordance with the provisions of the Plan, to have distribution from my Account commence: __________ (a) Within thirty (30) days after I cease to be a director of the Company. __________ (b) In the month of January after I cease to be a director of the Company. __________ (c) In the month of January, _________, (which is not later than the January following my 71st birthday), unless I am a director of the Company at such time, in which case within 30 days after I cease to be a director of the Company. Participant's Initials__________ Date__________ SCHEDULE A-2 Section 3. Election as to the Timing of the Distribution Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING A DIRECTOR COVERED BY THE PLAN AND (B) PRIOR TO EACH ANNUAL MEETING IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. ---- I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid: __________ (a) In one lump sum. __________ (b) In monthly installments over a period of _____ years. Date:__________ - ------------------------------------ ------------------------------------ Witness Participant's Signature SCHEDULE B DEFERRED COMPENSATION PLAN FOR DIRECTORS OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED (THE "PLAN") Section 1. Election as to Method of Distribution in Case of Death In case of my death, I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Deferred Compensation Account paid over a period of _________ year(s) to my Beneficiary(ies) designated in Section 2 hereof. Section 2. Designation of Beneficiary(ies) In the event of my death, I hereby designate the following individuals, fiduciaries or other entities, in their own right or in their representative capacity, in the proportions and in the priority of interest designated, to be the beneficiaries of any benefits owing to me, under the Plan. PRIMARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder. If any one or more of the primary beneficiaries designated hereunder shall predecease me, such beneficiary's share(s) shall be divided equally among the remaining primary beneficiaries. PROPORTIONATE NAME AND PRESENT INTEREST OF RELATIONSHIP ADDRESS OF PRIMARY PRIMARY TO BENEFICIARY(IES) BENEFICIARY(IES) PARTICIPANT - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- -----------% -------------- - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- Participant's Initials__________ Date__________ SCHEDULE B-2 SECONDARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder only if all of my Primary Beneficiaries have predeceased me. If all Primary Beneficiaries have predeceased me and if any one or more of the Secondary Beneficiaries designated hereunder shall predecease me, such Secondary Beneficiary's share(s) shall be divided equally among the Secondary Beneficiaries. PROPORTIONATE NAME AND PRESENT INTEREST OF RELATIONSHIP ADDRESS OF SECONDARY SECONDARY TO BENEFICIARY(IES) BENEFICIARY(IES) PARTICIPANT - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- ESTATE - In the event I have declined to designate a Beneficiary hereunder or if all of the Beneficiaries that I have designated predecease me, then all benefits payable under the Plan shall be payable to my Estate. Date:__________ - ------------------------------------ ------------------------------------ Witness Participant's Signature EX-10.(A)(2) 3 DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND ITS AFFILIATES AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2000 2 DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATEDAND ITS AFFILIATES AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2000 1. PURPOSE. The purpose of this Plan is to provide a method to certain select and key employees of the Company and its Affiliates to defer compensation as provided herein. This Plan was formerly known as the Deferred Compensation Plan for Certain Employees of Public Service Electric and Gas Company. 2. DEFINITIONS OF TERMS USED IN THIS PLAN. As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Account" -- The Deferred Compensation Account described in Paragraph 4 of this Plan. (b) "Affiliate" -- any organization which is a member of a controlled group of corporations (as defined in Code section 414(b), as modified by Code section 415(h)) which includes the Company; or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code section 414(c), as modified by Code section 415(h)) with the Company; or a member of an affiliated service group (as defined in Code section 414(m)) which includes the Company or any other entity required to be aggregated with the Company pursuant to regulations under Code section 414(o). The term affiliate shall also include such entities which shall be specifically designated by the Committee. (c) "Assets" -- All Compensation and interest that have been credited to an Participant's Account in accordance with Paragraph 4 of this Plan. (d) "Beneficiary" -- The individual(s) and/or entity(ies) designated and defined by Schedule B of the Plan. (e) "Change in Control" -- The occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of the Company (not including in the securities 3 beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the board of directors of the Company ("Board") and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect wholly owned subsidiary of the Company with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or 4 disposition by the Company of all or substantially all of the Company's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. (v) Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (e) "Committee" -- The Employee Benefits Policy Committee of the Company. (f) "Company" -- Public Service Enterprise Group Incorporated. (g) "Compensation" -- The total remuneration paid to a Participant for services rendered to the Company or a Participating Affiliate, excluding the Company's or Participating Affiliate's cost for any public or private employee benefit plan, including this Plan, but including all elective contributions that are made by the Company or Participating Affiliate under Internal Revenue Code Sections 125 or 401(k). Compensation deferrable under this Plan shall specifically include any and all amounts transferred from the deferred compensation accounts of the Company's Management Incentive Compensation Plan, the Management Incentive Compensation Plan of Public Service Electric and Gas Company and any prior deferred compensation plan of an Affiliate. (h) "Deferred Compensation" -- The amount of Compensation deferred pursuant to Paragraph 3 of this Plan. (i) "Disability" -- Disability so as to be incapable of performing further work for the Company or Participating Affiliate that results in termination of employment. (j) "Employer" -- The Company and any Participating Affiliate. (k) "Investment Fund" -- The fund or funds selected by the Committee from time to time and included in Schedule C of the Plan which shall serve as a means of measuring the increase or decrease of each Participant's Account. The Committee may, in its discretion, add or discontinue any Investment 5 Fund available under the Plan. The Committee shall provide each affected Participant with the opportunity, without limiting or otherwise impairing any other right of such Participant regarding changes in investment directions, to redirect the allocation of his or her Account invested in any discontinued Investment Fund among the other Investment Funds available under the Plan, including any replacement investment vehicle. (l) "Participant" -- Each employee of the Company or any Participating Affiliate as may be designated by the Chief Executive Officer of the Company. (m) "Participating Affiliate" -- Any Affiliate of the Company which (a) adopts this Plan with the approval of the Company; (b) authorizes the Board of Directors and the Committee to act for it in all matters arising under or with respect to this Plan; and (c) complies with such other terms and conditions relating to this Plan as may be imposed by the Company. (n) "Pension Plan" -- The Pension Plan of Public Service Enterprise Group Incorporated (formerly known as the Pension Plan of Public Service Electric and Gas Company) or the Public Service Enterprise Group Incorporated Cash Balance Pension Plan (formerly known as the Public Service Electric and Gas Company Cash Balance Pension Plan). (o) "Plan" -- The Deferred Compensation Plan for Certain Employees of Public Service Enterprise Group Incorporated and its Affiliates, formerly known as the Deferred Compensation Plan for Certain Employees of Public Service Electric and Gas Company. 3. ELECTION AS TO THE AMOUNT OF COMPENSATION THAT IS TO BE DEFERRED. A Participant may elect to defer any portion of his Compensation otherwise payable for services rendered for his/her Employer after the date of adoption of this Plan. Any such election must be made by filing with the Committee an "Election in Connection with Deferral of Compensation", the form of which shall be designated by the Committee and is hereinafter referred to as "Schedule A". A Participant may change (using Schedule A for such purposes), not later than December 31 of any year, the amount of Compensation to be deferred by him/her with respect to the next succeeding calendar year or years. In the calendar year that a Participant first becomes eligible to participate in this Plan, such Participant may elect to defer Compensation for part of that calendar year but only if such election is made within thirty (30) days after the Participant first becomes eligible to participate in this Plan. Compensation may be 6 deferred prospectively only, and the amount of Compensation to be deferred may be changed only with respect to future calendar years. 4. HOW THE ACCOUNT IS TO BE MAINTAINED. (a) ESTABLISHMENT OF ACCOUNT -- The Company shall establish an Account for each Participant who elects to participate in the Plan. Each Participant's Account shall be credited at the end of each month with an amount equal to the Deferred Compensation which would have otherwise been payable to him/her that month. (b) EARNINGS CREDITS ON ASSETS IN THE ACCOUNT -- Each Participant, except Participants not actively employed by an Employer on January 1, 2000, may direct investment of his or her Account among the Investment Funds (in the manner established by the Committee) in multiples of one percent; provided, however, that the Committee shall not be obligated to effectuate any such investment direction. In the case of (i) Participants not actively employed by an Employer on January 1, 2000 and (ii) a Participant who fails to provide a designation of Investment Funds, such Participants shall be deemed to have designated 100 percent of his or her Account to be invested in the Investment Fund that determines income accrual with reference to the prime commercial lending rate of the Chase Manhattan Bank. Except with respect to an investment election related to (A) an election made within 30 days of January 1, 2000 and (B) any Investment Fund which is discontinued during a Plan Year, each of which shall be effective immediately, a Participant's investment election may be changed annually and will be effective from January 1 of the Plan Year next following receipt of the Employee's investment election form. Each Participant's Account shall be credited with a rate of return on the last day of March, June, September and December equal to the rate of return experienced by the Investment Fund selected by the Participant for the same period. The fair market value of each Investment Fund shall be determined by the Committee and shall represent the fair market value of all securities and other property held by the Investment Fund. 7 (c) TITLE TO AND BENEFICIAL OWNERSHIP OF ASSETS -- The Plan shall be unfunded. The Company shall not be required to segregate any amounts credited to any Participant's Account, which shall be established merely as an accounting convenience. Title to and beneficial ownership of any Assets, whether Deferred Compensation or earnings credited to a Participant's Account pursuant to Paragraphs 4(a) and (b) hereof, shall at all times remain in the Company, and no Participant nor Beneficiary shall have any interest whatsoever in any specific assets of the Company. All Assets shall at all times remain solely the property of the Company subject to the claims of its general creditors and available for the Company's use for whatever purpose desired. 5. DISTRIBUTION FROM THE ACCOUNT (a) ELECTION AS TO THE COMMENCEMENT OF THE DISTRIBUTION -- By election on Schedule A filed with the Committee, an Participant may elect to have distribution from his/her account commence either (i) within thirty (30) days after the date he ceases to be employed by an Employer or, in the alternative, (ii) in the month of January of any calendar year following termination of employment elected by the Participant, but in any event no later than the later of (A) the January of the year following the year of the Participant's 70th birthday or (B) the January following termination of employment or (iii) pursuant to the terms of any written employment agreement applicable to the Participant. A Participant may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. The actual date that distribution shall commence shall be a date within the elected period to be determined by the Committee in its sole discretion. (b) ELECTION AS TO THE TIMING OF THE DISTRIBUTION(S) -- By election on Schedule A filed with the Committee, a Participant may elect to receive the distribution of his/her Account in the form of (i) one lump-sum payment, (ii) annual distributions over a five-year period or (3) annual distributions over a 10-year period. A Participant may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. In the event a lump-sum payment is made under this Plan, the Assets credited to a Participant's Account, including earnings at the rate provided in Paragraph 4(b) of this Plan to the date of distribution, shall be paid to the Participant on the date 8 determined under Paragraph 5(a) of this Plan. In the case of a distribution over a period of years, the Company shall pay to the Participant on the date determined under Paragraph 5(a) of this Plan and on the yearly anniversaries of such date, annual installments of the unpaid balance of the Assets in the Participant's Account, including earnings on the unpaid balance at the rate provided in Paragraph 4(b) of this Plan to the date of distribution. The amount of each installment shall be determined by multiplying the then unpaid balance, plus accrued earnings, in the Participant's Account by a fraction, the numerator of which is one and the denominator of which is the number of annual installments remaining to be paid. (c) DISTRIBUTION IN CASE OF CERTAIN DISABILITY -- In the event of an Participant's Disability prior to a calendar year elected by the Participant under Paragraph 5(a)(ii) of this Plan for distribution to commence, distribution of the Participant's Account shall commence in the month following the month in which the Participant terminates employment for disability, in accordance with the Participant's election under Paragraph 5(b) of this Plan as to the form of distribution. The actual date that distribution shall commence shall be a date within such month determined by the Committee in its sole discretion. (d) DISTRIBUTION IN CASE OF DEATH -- In the event of an Participant's death, the balance of the Participant's Account shall be distributed to the Participant's Beneficiary(ies) over a period of not more than five (5) years, in accordance with his/her election on Schedules A and B (filed with the Committee) for distribution in case of death. Any change in the period over which such payments are made shall only apply to future deferrals. Such distribution shall be made in a manner consistent with Paragraph 5(b) of this Plan and shall commence in the month of January of the year after the year of the Participant's death, on a date within said month to be determined by the Committee in its sole discretion. Additional annual payments for distributions made over a period of more than one year shall be made on the yearly anniversaries of such date. In the event of an Participant's death after distribution of his Account has commenced, any election under this Paragraph 5(d) shall not extend the time of payment of his Account beyond the time when distribution would have been completed if he had lived. A Participant may change Beneficiary designations by filing a subsequent Schedule B with the Committee. (e) REQUEST FOR CHANGE IN DISTRIBUTION -- An Participant, Beneficiary or a legal representative may request a change in the timing, frequency or amount of payments made from an Participant's Account by filing a written request therefore with the Committee. The Committee may, in its sole discretion, grant such request only if the Committee determines that 9 an emergency beyond the control of the Participant, Beneficiary or legal representative exists and which would cause such Participant, beneficiary or legal representative severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. A Participant who makes a hardship withdrawal may not reenter this Plan for 12 months after the date of withdrawal. Any distribution under this Paragraph 5(e) shall commence within 30 days after the Committee grants such request for hardship withdrawal. (f) EMPLOYMENT NOT TERMINATED IF TRANSFERRED TO AN AFFILIATE -- For the purposes of this Paragraph 5, an Participant shall not be deemed to have terminated his/her employment if he/she is transferred to the employ of a corporation is an Affiliate of the Company. (g) COMPANY MAY DISTRIBUTE IN LUMP-SUM IF DISTRIBUTABLE AMOUNT LESS THAN $5,000 -- The Company reserves the right to make a lump-sum distribution, notwithstanding any other provision of this Plan, if the total Assets in an Participant's Account are $5,000 or less at any time after the Participant ceases to be employed by the Company. 6. ASSIGNMENT. No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Participant or Beneficiary under the Plan or subject to attachment, garnishment or other legal process. 7. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT. This Plan shall not constitute a contract f or the continued employment of any Participant by the Company. The Company reserves the right to modify a Participant's compensation at any time and from time to time as it considers appropriate and to terminate his employment for any reason at any time notwithstanding this Plan. 8. AMENDMENT OR TERMINATION OF THE PLAN BY THE COMPANY. The Company may, in its sole discretion and by action of its Board of Directors or Employee Benefit Policy Committee, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall adversely affect the right of a 10 Participant in respect of Deferred Compensation previously earned by him/her which has not been paid, unless such Participant or his/her legal representative shall consent to such change; provided, further, that notwithstanding any other provision of this Plan, upon the occurrence of a Change in Control, the earnings credit calculated pursuant to Paragraph 4 may not be reduced below the prime commercial lending rate described in Schedule C. 9. WHAT CONSTITUTES NOTICE. Any notice to an Participant, Beneficiary or legal representative hereunder shall be given either by delivering it or by depositing it in the United States mail, postage prepaid, addressed to his last known address. Any notice to the Company or the Committee hereunder (including the filing of Schedules A and B) shall be given either by delivering it, or depositing it in the United States mail, postage prepaid, to the Secretary of the Employee Benefits Policy Committee, Public Service Enterprise Group Incorporated, 80 Park Plaza, P. 0. Box 1170, Newark, New Jersey 07101. 10. ADVANCE DISCLAIMER OF ANY WAIVER ON THE PART OF THE COMPANY. Failure by the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 11. EFFECT ON INVALIDITY OF ANY PART OF THE PLAN. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 12. PLAN BINDING ON ANY SUCCESSOR OWNER. Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 11 13. LAWS GOVERNING THIS PLAN. Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 14. MISCELLANEOUS. The masculine pronoun shall mean the feminine wherever appropriate. 12 SCHEDULE A DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND ITS AFFILIATES ELECTIONS IN CONNECTION WITH DEFERRAL OF COMPENSATION SECTION 1. ELECTION AS TO COMPENSATION TO BE DEFERRED. Note: THIS SECTION IS TO BE USED TO MAKE OR TO CHANGE AN ELECTION UNDER PARAGRAPH 3 OF THE PLAN. ANY CHANGE IN ELECTION MUST BE MADE NO LATER THAN DECEMBER 31 OF THE YEAR PRECEDING THE YEAR IN WHICH YOU WISH THE CHANGE TO APPLY. I hereby elect to defer, in accordance with the provisions of the Plan: __________ (a) a month of my Compensation; or __________ (b) All of my Compensation in excess of $_________ per year. SECTION 2. ELECTION AS TO COMMENCEMENT OF DISTRIBUTION FROM ACCOUNT Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING A PARTICIPANT COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31ST OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have distribution from my Account commence: __________ (a) Within thirty (30) days after I cease to be employed by an Employer. __________ (b) In the month of January, __________, unless I am employed by an Employer at such time, in which case within 30 days after I cease to be employed by an Employer. __________ (c) Pursuant to the my employment contract dated ____________ . Participant's Initials __________ Date__________ 13 SCHEDULE A-2 SECTION 3. ELECTION AS TO THE TIMING OF THE DISTRIBUTION Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING A PARTICIPANT AND (B) PRIOR TO DECEMBER 31ST OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid: __________ (a) In one lump sum. __________ (b) In annual installments over a period of five (5) years. __________ (c) In annual installments over a period of ten (10) years. __________ (d) Pursuant to the terms of my employment agreement dated _______ SECTION 4. ELECTION AS TO METHOD OF DISTRIBUTION IN CASE OF DEATH Note: THIS SECTION TO BE USED TO SELECT THE METHOD OF DISTRIBUTION IN THE CASE OF DEATH. PERIOD SELECTED MAY NOT BE MORE THAN FIVE (5) YEARS. In case of my death, I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid over a period of _____ year(s) to my Beneficiary(ies) designated on Schedule B. ______________________, 19___ ____________________________________ ____________________________________ Witness Participant Signature 14 SCHEDULE B DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND AFFILIATES (THE "PLAN") DESIGNATION OF BENEFICIARY(IES) In the event of my death, I hereby designate the following individuals, fiduciaries or other entities, either in their own right or in their representative capacity, in the proportions and in the priority of interest designated, to be the beneficiaries of any benefits owing to me, under the Plan. PRIMARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder. If any one or more of the primary beneficiaries designated hereunder shall predecease me, such beneficiary's share(s) shall be divided equally among the remaining primary beneficiaries. PROPORTIONATE NAME AND PRESENT ADDRESS INTEREST OF PRIMARY RELATIONSHIP OF PRIMARY BENEFICIARY(IES) BENEFICIARY(IES) TO PARTICIPANT - --------------------------- ---------------- -------------- ______________________________ ______________________________ _________% _________ ______________________________ ______________________________ _________% _________ ______________________________ ______________________________ _________% _________ ______________________________ ______________________________ _________% _________ 15 SCHEDULE B SECONDARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder only if all of my Primary Beneficiaries have predeceased me. If all Primary Beneficiaries have predeceased me and if any one or more of the Secondary Beneficiaries designated hereunder shall predecease me, such Secondary Beneficiary's share(s) shall be divided equally among the Secondary Beneficiaries. PROPORTIONATE NAME AND PRESENT ADDRESS INTEREST OF PRIMARY RELATIONSHIP OF PRIMARY BENEFICIARY(IES) BENEFICIARY(IES) TO PARTICIPANT - --------------------------- ---------------- -------------- ______________________________ ______________________________ _________% _________ ______________________________ ______________________________ _________% _________ ______________________________ ______________________________ _________% _________ ______________________________ ______________________________ _________% _________ ESTATE -- In the event I have declined to designate a Beneficiary hereunder or if all of the Beneficiaries that I have designated predecease me, then all benefits payable under the Plan shall be payable to my Estate. Date:__________ ____________________________________ ____________________________________ Witness Participant's Signature 16 SCHEDULE C INVESTMENT FUND ELECTION OPTIONS The following options shall be available for selection pursuant to Section 4(b) of the Plan. 1) An annual rate equal to the rate charged by The Chase Manhattan Bank, N.A. on the first business day of each calendar quarter for prime commercial loans of 90 day maturity (based on actual number of days, 360 days to the year), plus 1/2 of 1%. 2) An annual rate equal to the rate of return of the Conservative Pre-Mixed Portfolio of the PSEG Thrift Plan. 3) An annual rate equal to the rate of return of the Moderate Pre-Mixed Portfolio of the PSEG Thrift Plan. 4) An annual rate equal to the rate of return of the Aggressive Pre-Mixed Portfolio of the PSEG Thrift Plan. 5) An annual rate equal to the return of the Large Cap Equity Fund of the PSEG Thrift Plan. Such earnings credit shall be computed on the average daily balance in the Participant's Account during each calendar quarter, excluding any Assets that have been distributed from the Participant's Account during such quarter, and shall be credited to the Participant's Account and compounded as provided for in the Plan. EX-10.(A)(3) 4 LIMITED SUPPLEMENTAL BENEFITS PLAN LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND ITS AFFILIATES AS AMENDED AND RESTATED, EFFECTIVE JANUARY 1, 2000 LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND ITS AFFILIATES TABLE OF CONTENTS Page ---- 1. PURPOSE................................................................. 1 2. DEFINITIONS OF TERMS USED IN THE PLAN................................... 1 3. DEATH BENEFIT........................................................... 7 4. RETIREMENT BENEFIT...................................................... 8 5. ADMINISTRATION OF ACCOUNTS.............................................. 15 6. DESIGNATION OF BENEFICIARIES............................................ 16 7. LIMITATION OF BENEFITS.................................................. 19 8. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT........................ 19 9. AMENDMENT OR TERMINATION OF THE PLAN.................................... 20 10. WHAT CONSTITUTES NOTICE................................................. 20 11. ADVANCE DISCLAIMER OF WAIVER............................................ 20 12. EFFECT OF INVALIDITY OF ANY PART OF THE PLAN............................ 20 13. PLAN BINDING ON ANY SUCCESSOR........................................... 21 14. FUNCTION OF THE COMMITTEE............................................... 21 15. COMPANY SHALL PAY LEGAL FEES............................................ 21 16. LAW GOVERNING THE PLAN.................................................. 21 17. MISCELLANEOUS........................................................... 22 APPENDIX A.................................................................. 23 i LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND ITS AFFILIATES 1. PURPOSE. Public Service Electric and Gas Company previously established and currently maintains the Limited Supplemental Benefits Plan for Certain Employees of Public Service Electric and Gas Company. Effective as of December 13, 1999, Public Service Electric and Gas Company transfers sponsorship of the plan to Public Service Enterprise Group Incorporated and renames the plan the Limited Supplemental Benefits Plan for Certain Employees of Public Service Enterprise Group Incorporated and Its Affiliates (the "Plan"). Furthermore, effective as of January 1, 2000, the Plan is amended as set forth in this document. The purpose of this Plan is to assist the Company in attracting and retaining a stable pool of key managerial talent and to encourage long-term key employee commitment to the Company and its Participating Affiliates by providing selected employees with certain limited supplemental death and retirement benefits as defined herein. The Plan is intended to provide such benefits to a select group of management or highly compensated employees within the meaning of ERISA. 2. DEFINITIONS OF TERMS USED IN THE PLAN. As used in the Plan, the following words and phrases shall have the meanings indicated: (a) "ACCOUNT" -- Any account established pursuant to Paragraph 3(b) or 4(f) of the Plan. (b) "AFFILIATE" -- Any organization which is a member of a controlled group of corporations (as defined in Code Section 414(b), as modified by Code Section 415(h)) which includes the Company, or any trades or businesses (whether or not 1 incorporated) which are under common control (as defined in Code Section 414(c), as modified by Code Section 415(h)) with the Company, or a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company or any other entity required to be aggregated with the Company as required by regulations promulgated pursuant to Code Section 414(o). (c) "ANNUITY" -- A fully-funded contract with an independent insurance company purchased by the Company pursuant to Paragraph 4(f) of the Plan. (d) "ASSETS" -- All amounts that have been credited to a Participant's Account in accordance with Paragraph 3(b), 4(e), or 5(b) of the Plan. (e) "BENEFICIARY" -- The individual(s) and/or entity(ies) designated in writing by a Participant in the form attached to the Plan as Schedule A. (f) "BOARD OF DIRECTORS" OR "BOARD" -- The Board of Directors of Public Service Enterprise Group Incorporated. (g) "CASH BALANCE PLAN" -- The Cash Balance Pension Plan of Public Service Enterprise Group Incorporated (formerly known as the "Cash Balance Pension Plan of Public Service Electric and Gas Company"), as amended and restated from time to time. (h) "CHANGE IN CONTROL" -- For the purposes of the Plan, a Change in Control of the Company shall mean the occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of the Company (not including in the 2 securities beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect wholly owned subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or 3 disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (i) "CODE" -- The Internal Revenue Code of 1986, as amended. (j) "COMMITTEE" -- The Employee Benefits Committee of the Company as selected by its Board of Directors. (k) "COMPANY" -- Public Service Enterprise Group Incorporated. (l) "COMPENSATION" -- (i) For the purposes of calculating the Death Benefit pursuant to Paragraph 3 of the Plan, as to any Participant, Compensation shall be equal to the annual rate of salary of the Participant in effect at the date of death; and (ii) For the purposes of calculating the Retirement Benefit pursuant to Paragraph 4 of the Plan, as to any Participant, Compensation shall be equal to the average of the total remuneration paid to such Participant for services rendered to his/her Employer, excluding the cost to the Employer for any public or private employee benefit plan (including, without limitation, the Long-Term Incentive Compensation Plan of the Company) but including all elective contributions that are made by the Employer on behalf of a Participant which are not includible in income under Code Sections 125 or 401(k), for the five years ending at the earlier of such Participant's date of Retirement or attainment of normal retirement age under the Pension Plan; provided, however, that for the 4 purposes of Paragraph 4 of the Plan, Compensation with respect to any Participant shall not exceed the amount which is 130% of the average annual base salary of the Participant for the applicable five-year period. (m) "EMPLOYER" -- The Company and its Participating Affiliates. (n) "ERISA" -- The Employee Retirement Income Security Act of 1974, as amended. (o) "PARTICIPANT" -- Each employee of an Employer nominated by the Chief Executive Officer and designated by the Employee Benefits Policy Committee of the Company. The Chief Executive Officer of the Company shall nominate such select and key employees upon such terms as he shall deem appropriate due to the employee's responsibilities and opportunity to contribute substantially to the financial and operating objectives of the Employer. Any individual who was an "Employee," as that term was defined in the "Limited Supplemental Death Benefits and Retirement Plan for Certain Employees of Public Service Electric and Gas Company," such plan having been amended and restated July 1, 1987 and terminated effective March 31, 1993, who participated in such plan and who retired prior to March 31, 1993 under the terms of such plan shall be deemed a "Participant" hereunder, subject only to the provisions of Appendix A and entitled to receive only those benefits as set forth in Appendix A. (p) "PARTICIPATING AFFILIATE" -- Any Affiliate of the Company which (a) is the sponsor or a Participating Affiliate of the Pension Plan or Cash Balance Plan; (b) adopts this Plan with the approval of the Board of Directors; (c) authorizes the Board of Directors and the Committee to act for it in all matters arising under or 5 with respect to this Plan; and (d) complies with such other terms and conditions relating to this Plan as may be imposed by the Board of Directors. (q) "PENSION PLAN" -- The Pension Plan of Public Service Enterprise Group Incorporated (formerly known as the "Pension Plan of Public Service Electric and Gas Company"), as amended and restated from time to time. (r) "PLAN" -- The Limited Supplemental Benefits Plan for Certain Employees of Public Service Enterprise Group Incorporated and its Affiliates (formerly known as the "Limited Supplemental Benefits Plan for Certain Employees of Public Service Electric and Gas Company"). (s) "RETIREMENT" -- For the purposes of the Plan, Retirement of a Participant shall be deemed to have occurred upon either (i) termination of the Participant's service with the Company with the right to an immediately payable periodic retirement benefit under the Pension Plan or the Cash Balance Plan or (ii) upon a Change in Control of the Company. Retirement shall not include termination of service with the right to a deferred pension under the Pension Plan or a deferred retirement benefit or early commencement of payment of a participant's Cash Balance Account under the Cash Balance Plan. (t) "RETIREMENT CHOICE PROGRAM" -- The Public Service Enterprise Group Incorporated Retirement Choice Program (formerly known as the "Public Service Electric and Gas Company Retirement Choice Program"), as amended and restated from time to time. (u) "RETIREMENT PLAN" -- Any pension plan within the meaning of ERISA, excluding (i) the Pension Plan, the Cash Balance Plan and all defined contribution plans 6 maintained by the Company or its Affiliates, except insofar as any such defined contribution plan may provide supplementary benefits to the Pension Plan or the Cash Balance Plan, (ii) this Plan and (iii) all deferred compensation plans, tax credit employee stock ownership plans and thrift plans, and all other profit-sharing plans which are not the principal retirement benefit of a plan sponsor, maintained by sponsors other than the Company. (v) "THRIFT PLAN" - The Public Service Enterprise Group Incorporated Thrift and Tax-Deferred Savings Plan (formerly known as the "Public Service Electric and Gas Company Thrift and Tax-Deferred Savings Plan"), as amended and restated from time to time. (w) "VOTING STOCK" -- Outstanding stock of a corporation entitled to vote in the election of the directors of that corporation. 3. DEATH BENEFIT. (a) AMOUNT OF BENEFIT -- If a Participant dies while in the active employment of an Employer, the Employer shall provide a death benefit to such Participant's Beneficiary in an amount equal to 150% of the Participant's Compensation, adjusted to the nearest $1,000, or to the next highest $1,000 if such Compensation is a multiple of $500 but not of $1,000. (b) ESTABLISHMENT OF ACCOUNT -- Upon the death of a Participant during employment with an Employer, the Company shall establish an Account for the benefit of such Participant's Beneficiary. Such Account shall initially be credited with an amount equal to the benefit provided under Paragraph 3(a) and shall be held and administered as provided in Paragraph 5 of the Plan. 7 4. RETIREMENT BENEFIT. (a) GENERAL -- At Retirement, each Participant shall be provided with a retirement benefit calculated as provided in this Paragraph 4. (b) DETERMINATION OF BENEFIT -- (i) PENSION PLAN PARTICIPANTS: (A) The Participant's Compensation shall be multiplied by an amount equal to one one-hundredth of the sum of (X) the number of the Participant's years of credited service under the Pension Plan at Retirement, (Y) the number of any additional years of service credit to which the Participant may be entitled under the Mid-Career Supplemental Retirement Income Plan of Public Service Enterprise Group Incorporated and its Affiliates or any written arrangement with his/her Employer, and (Z) 30; but, in no event, shall the multiple be greater than 0.75. (B) The amount determined under subparagraph (A) of this Paragraph 4(b)(i) shall be reduced by the sum of (X) the amount the Participant would be entitled to at Retirement as an annual pension benefit under the Pension Plan and any supplemental retirement plan (other than this Plan) maintained by an Employer calculated as a single life annuity without reduction for any pre-retirement survivor's option coverage or any reduction for early retirement, (Y) 100% of the amount of the unreduced annual Social Security benefit to which the Participant would be entitled at age 65 (or 8 such other age which may be established by the Social Security Administration from time to time as the earliest age at which a Participant may receive an unreduced benefit thereunder), assuming that the Participant has no earnings from the date of Retirement to age 65 (or such other applicable age), or, if greater, any disability benefit under Social Security to which the Participant may be entitled, and (Z) the aggregate of the annual benefits to which the Participant is entitled under all Retirement Plans as of the date the Participant is employed by an Employer, such Social Security benefits and benefits under all Retirement Plans to be calculated as single life annuities without any reductions, under rules, procedures and equivalents determined by the Committee. To determine the amounts referred to under (y) and (z) above, the Participant shall file a declaration of all such amounts with the Performance and Rewards Department of PSEG Services Corp. in such form as the Committee may require from time to time. No benefit shall be paid under the Plan until such a declaration, in satisfactory form, shall be filed with the Performance and Rewards Department. If a Participant is granted a disability Social Security benefit, he shall notify the Performance and Rewards Department thereof within 30 days thereof, and the Participant's retirement benefit under this Plan shall be adjusted accordingly. The Company shall be entitled to rely on such 9 statements in making payment, and if any such statement is incorrect or is not furnished, the Company shall be entitled to reimbursement from the Participant, the Beneficiary or their legal representatives for any overpayment and may reduce or suspend future payments to recover any such overpayment. In the event it is established to the satisfaction of the Committee, in its sole discretion, that any such statement was intentionally false or omitted, the Participant or Beneficiary shall be entitled to no further payments under the Plan, and the Company shall be entitled to recover any payments made hereunder. (ii) CASH BALANCE PLAN PARTICIPANTS: (A) The Participant's Compensation shall be multiplied by an amount equal to one one-hundredth of the sum of (X) the number of the Participant's years of service under the Pension Plan with which such Participant would have been credited at Retirement had the Participant participated in the Pension Plan from his/her date of hire, (Y) the number of any additional years of service credit to which the Participant may be entitled from the Company under the Mid-Career Supplemental Retirement Income Plan of Public Service Enterprise Group Incorporated and its Affiliates or any written arrangement with his/her Employer, and (Z) 30; but, in no event, shall the multiple be greater than 0.75. 10 (B) The amount determined under subparagraph (A) of this Paragraph 4(b)(ii) shall be reduced by the sum of (X) the amount the Participant would be entitled to at Retirement as an annual pension benefit under the Cash Balance Plan, including that portion of a Participant's account under the Thrift Plan attributable to age and service credits transferred from the Cash Balance Plan as a result of Participant elections made pursuant to the Cash Balance Plan and the Retirement Choice Program, and any supplemental retirement plan (other than this Plan) maintained by an Employer calculated as a single life annuity without reduction for any pre-retirement survivor's option coverage or any reduction for early retirement, (Y) 100% of the amount of the unreduced annual Social Security benefit to which the Participant would be entitled at age 65 (or such other age which may be established by the Social Security Administration from time to time as the earliest age at which a Participant may receive an unreduced benefit thereunder), assuming that the Participant has no earnings from the date of Retirement to age 65 (or such other applicable age), or, if greater, any disability benefit under Social Security to which the Participant may be entitled, and (Z) the aggregate of the annual benefits to which the Participant is entitled under all Retirement Plans as of the date the Participant is employed by an Employer, such Social Security benefits and benefits under all Retirement 11 Plans to be calculated as single life annuities without any reductions, under rules, procedures and equivalents determined by the Committee. To determine the amounts referred to under (y) and (z) above, the Participant shall file a declaration of all such amounts with the Performance and Rewards Department in such form as the Committee may require from time to time. No benefit shall be paid under the Plan until such a declaration, in satisfactory form, shall be filed with the Performance and Rewards Department. If a Participant is granted a disability Social Security benefit, he shall notify the Performance and Rewards Department thereof within 30 days thereof, and the Participant's retirement benefit under this Plan shall be adjusted accordingly. The Company shall be entitled to rely on such statements in making payment, and if any such statement is incorrect or is not furnished, the Company shall be entitled to reimbursement from the Participant, the Beneficiary or their legal representatives for any overpayment and may reduce or suspend future payments to recover any such overpayment. In the event it is established to the satisfaction of the Committee, in its sole discretion, that any such statement was intentionally false or omitted, the Participant or Beneficiary shall be entitled to no further payments under the Plan, and the Company shall be entitled to recover any payments made hereunder. 12 (c) FORMS OF BENEFIT -- The annual amount determined under Paragraph 4(b) shall be paid in one of the following forms: (i) a single life annuity in monthly installments equal to one twelfth of such annual amount; (ii) a joint and survivor annuity in monthly installments based upon such annual amount and calculated in accordance with any post-retirement survivorship option available under the Pension Plan or the Cash Balance Plan, as the case may be; (iii) a 10-year certain level payment annuity in monthly installments which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan or the Cash Balance Plan, as the case may be, according to mortality assumptions used for the Pension Plan or the Cash Balance Plan, as the case may be, on the basis of a current interest rate assumption determined from time to time by the Committee; or (iv) a 10-year certain increasing payment annuity paid in accordance with Paragraph 5(c) of the Plan based upon the lump-sum amount which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan or the Cash Balance Plan, as the case may be, according to mortality assumptions used for the Pension Plan or the Cash Balance Plan, as the case may be, on the basis of a current market rate interest assumption determined from time to time by the Committee; or 13 (v) a lump sum payment of the present value of any of the foregoing based upon the same assumptions used for lump sum payments under the Pension Plan or the Cash Balance Plan, as the case may be. The Committee in its sole discretion shall determine the form of benefit payment for each Participant; provided, however, that, notwithstanding any other provision of this Plan, the Participant shall determine the form of benefit from and after the occurrence of a Change in Control. (d) CHANGE IN CONTROL -- (i) If there shall occur a Change in Control, then each Participant who has not already retired under the Pension Plan or the Cash Balance Plan, as the case may be, shall be entitled to a retirement benefit under this Plan calculated as if such Participant had retired under the Pension Plan or the Cash Balance Plan, as the case may be, as of the date of such Change in Control. (ii) The retirement benefit to be paid pursuant to Paragraph 4(d)(i) shall be paid to the Participant in a 10-year certain level payment annuity paid in accordance with Paragraph 5(c) of the Plan based upon the lump-sum amount which is the actuarial equivalent to the single-life annuity under Paragraph 4(c)(i) of the Plan as determined by the actuary for the Pension Plan or the Cash Balance Plan, as the case may be, according to mortality assumptions used for the Pension Plan or the Cash Balance Plan, as the case may be, on the basis of a current market rate interest assumption determined from time to time by the Committee. 14 (iii) Notwithstanding anything contained in the Plan to the contrary, if a Change in Control shall occur, the Company shall purchase from an independent insurance company fully paid annuities which shall provide for the payment to all Participants and Beneficiaries of all accrued benefits under the Plan. (e) ESTABLISHMENT OF ACCOUNT -- If payment is made under either Paragraph 4(c)(iii) or 4(c)(iv) of the Plan, upon Retirement, the Company shall establish an Account for the benefit of the Participant and any Beneficiary. Such Account shall initially be credited with an amount equal to the amount of the lump-sum payment determined under Paragraph 4(c)(iii) or 4(c)(iv), as applicable, and shall be administered as provided in Paragraph 5 of the Plan. (f) DISABILITY RETIREMENT -- If a Participant retires for disability under the Pension Plan or the Cash Balance Plan, as the case may be, payment of the Participant's retirement benefit and any joint and survivor benefit under Paragraph 4(c)(ii) of the Plan shall be subject to the same conditions as the disability pension under the Pension Plan or the Cash Balance Plan, as the case may be. 5. ADMINISTRATION OF ACCOUNTS. (a) GENERAL -- Accounts shall be established under the Plan only pursuant to Paragraphs 3(b) and 4(e) hereof. All Accounts shall be administered in accordance with the provisions of this Paragraph 5. (b) INTEREST ON ASSETS IN THE ACCOUNT -- The Assets credited to a Participant's Account shall accrue interest at a market rate of interest as may be determined from time to time by the Committee. 15 (c) TIMING OF THE DISTRIBUTION(S) -- A Participant or Beneficiary shall receive the distribution of the Participant's Account in the form of monthly distributions over a ten-year period commencing in the month following the month of the Participant's death in the case of a death benefit, or over a ten-year period commencing in the month of the Participant's Retirement in the case of a retirement benefit. The amount of each installment shall be determined by dividing the then unpaid balance in the Participant's Account, including accrued and unpaid interest, by the number of installments remaining to be paid. (d) REQUEST FOR CHANGE IN DISTRIBUTION -- A Participant, Beneficiary or legal representative may request a change in the timing, frequency or amount of payments made from a Participant's Account by filing a written request therefor with the Committee. The Committee may, in its sole discretion, grant such request only if the Committee determines that an emergency beyond the control of the Participant, Beneficiary or legal representative exists and which would cause such Participant, Beneficiary or legal representative severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. The Committee shall inform the Participant, Beneficiary or legal representative of its decision within sixty (60) days of receipt of the written request. 6. DESIGNATION OF BENEFICIARIES (a) GENERAL -- To designate an individual(s) and/or entity(ies) to receive the benefits of the Plan with respect to a Participant, such Participant must file a written designation in the form of Schedule A to the Plan with the Committee. Subject to 16 the restrictions of this Paragraph 6, a Participant may change such designation by filing a subsequent written designation. (b) DEATH BENEFIT -- By designation on Section 1 of a Schedule A filed with the Committee, a Participant may name an individual(s) and/or entity(ies) to receive a death benefit under Paragraph 3 of the Plan with respect to such Participant. A Participant may change such designation by filing a subsequent notification in the form of Schedule A. (c) RETIREMENT BENEFITS -- (i) SINGLE LIFE ANNUITY. If a Participant's retirement benefit under the Plan is paid as a single life annuity under Paragraph 4(c)(i) of the Plan, there shall be no Beneficiary with respect to such benefit and all retirement benefits shall cease upon the Participant's death. (ii) JOINT AND SURVIVOR ANNUITY. If a Participant's retirement benefit under Paragraph 4(c)(ii) of the Plan and the Participant's pension under the Pension Plan or the Cash Balance Plan, as the case may be, are both paid as joint and survivor annuities, any survivor annuity under the Plan shall be paid to the same beneficiary entitled to any post-retirement survivorship benefit under the Pension Plan or the Cash Balance Plan, as the case may be. If the Participant's pension under the Pension Plan or the Cash Balance Plan, as the case may be, is paid as a single life annuity, any survivor annuity paid under Paragraph 4(c)(ii) of the Plan shall be paid to the Beneficiary designated in Section 2 of Schedule A to the Plan. If a Beneficiary designated by the Participant under Paragraph 4(c)(ii) of the 17 Plan predeceases the Participant within five years from the date of Participant's Retirement, the Participant's retirement benefit hereunder will automatically revert and return to a single life annuity commencing the first day of the month following the month in which the designated Beneficiary died. If, however, the Beneficiary predeceases the Participant more than five years after Participant's Retirement, the Participant's reduced retirement benefit shall continue during his life and no survivor benefit shall be paid. The election of such Beneficiary must be made prior to Retirement and may not be changed thereafter. (iii) 10-YEAR CERTAIN ANNUITIES. If a Participant's Retirement benefit is paid as a 10-year certain level payment annuity under Paragraph 4(c)(iii) or Paragraph 4(d)(ii) of the Plan, or a 10-year certain increasing payment annuity under Paragraph 4(c)(iv), the Beneficiary or Beneficiaries with respect to such benefit shall be as specified in Section 1 of the most recent Schedule A filed with the Committee. (d) DESIGNATION BY LAST REMAINING BENEFICIARY -- After a Participant's death, if there is only one remaining Beneficiary with respect to a death benefit under Paragraph 3 of the Plan or a 10-year certain annuity under Paragraph 4(c)(iii), 4(c)(iv) or 4(d)(ii) of the Plan, such Beneficiary shall be entitled to designate in writing to the Committee an individual to be paid any remainder of such benefit under the Plan at such Beneficiary's death. If no such further designation is made, such remainder shall be paid to such Beneficiary's estate. In the event of such Beneficiary's death, and regardless of whether any such further designation has 18 been made, the Committee in its sole discretion may require any such remainder to be paid as a lump sum. 7. LIMITATION OF BENEFITS. (a) The Plan shall be unfunded with respect to all benefits to be paid hereunder. In addition, except as provided in Paragraphs 4(d)(iii) and 16(b), the Company shall not be required to segregate any amounts credited to any Account, which shall be established merely as an accounting convenience; title to and beneficial ownership of any Assets credited to any Account shall at all times remain in the Company, and no Participant, Beneficiary or legal representative shall have any interest whatsoever in any specific assets of the Company. (b) The payment of any death or survivorship benefit under this Plan shall be contingent upon such evidence of death as may be required by the Committee. (c) If the Company should terminate the Plan pursuant to Paragraph 9 hereof, the Company's obligation to pay any benefits under the Plan shall likewise terminate; provided, however, that, except as otherwise provided in said Paragraph 9, the Company may not terminate the Plan with respect to any Participant subsequent to that Participant's Retirement or death. 8. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT. The Plan shall not constitute a contract for the continued employment of any Participant by any Employer. The Employer reserves the right to modify a Participant's Compensation at any time and from time to time as it considers appropriate and to terminate any Participant's employment for any reason at any time notwithstanding the Plan. 19 9. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate the Plan at any time, provided, however, that no such amendment, modification or termination shall deprive any Participant or Beneficiary of a previously acquired right unless such Participant or Beneficiary or his legal representative shall consent to such change. No right to a death benefit under the Plan shall accrue until a Participant's death and no right to a retirement benefit shall accrue until a Participant's Retirement. 10. WHAT CONSTITUTES NOTICE. Any notice to a Participant, a Beneficiary or any legal representative hereunder shall be given in writing, by personal delivery, overnight express service or by United States mail, postage prepaid, addressed to such person's last known address. Any notice to the Company or the Committee hereunder (including the filing of Schedule A) shall be given by delivering it in person or by overnight express service, or depositing it in the United States mail, postage prepaid, to the Secretary of the Employee Benefits Committee, Public Service Enterprise Group Incorporated, 80 Park Plaza, T10B, P.O. Box 1171, Newark, New Jersey, 07101. 11. ADVANCE DISCLAIMER OF WAIVER. Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 12. EFFECT OF INVALIDITY OF ANY PART OF THE PLAN. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision of the Plan. 20 13. PLAN BINDING ON ANY SUCCESSOR. Except as otherwise provided herein, the Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 14. FUNCTION OF THE COMMITTEE. The Plan shall be administered by the Committee and the Committee shall be the final arbiter of any question that may arise under the Plan. 15. COMPANY SHALL PAY LEGAL FEES. (a) In the event of a Change in Control, the Company shall pay the legal fees and expenses of any Participant, Beneficiary or legal representative thereof incurred in any action to enforce such person's right to receive a benefit under the Plan. (b) In the event of a Change in Control, the Company shall establish a trust for the benefit of Participants and persons claiming through them which shall be funded in an initial amount of $1,000,000 from which the Committee shall, according to reasonable rules that the Committee shall establish, pay the legal fees and expenses incurred by any Participant, Beneficiary or legal representative thereof in enforcing his rights under the Plan. The Company shall contribute such additional sums to such trust as shall be necessary to pay such legal fees and expenses. 16. LAW GOVERNING THE PLAN. Except to the extent federal law applies, the Plan shall be governed by the laws of the State of New Jersey without giving effect to principles of conflicts of law. 21 17. MISCELLANEOUS. (a) The masculine pronoun shall mean the feminine wherever appropriate. (b) The headings are for convenience only. In the event of a conflict between the headings of a paragraph and its contents, the contents shall control. 22 APPENDIX A Those Participants who retired prior to March 31, 1993 under the terms of the "Limited Supplemental Death Benefits and Retirement Plan for Certain Employees of Public Service Electric and Gas Company," such plan having been amended and restated effective July 1, 1987 and terminated effective March 31, 1993, are subject to the provisions of this Appendix A and shall receive the benefits as set forth below: 1. DEFINITIONS. As used in this Appendix A, the following words and phrases shall have the meanings indicated. Any terms used herein that are not defined in this Appendix A, shall have the meanings assigned such terms in the Plan document. (a) "ACCOUNT" -- Any account established pursuant to Paragraph 3(d) of this Appendix A. (b) "ASSETS" -- All amounts that have been credited to a Participant's Account in accordance with Paragraph 3(d) of this Appendix A and Paragraph 5(b) of the Plan. (c) "COMPANY" - Public Service Electric and Gas Company. (d) "COMPENSATION" -- (i) For purposes of calculating the post-retirement death benefit pursuant to Paragraph 2 of this Appendix A, "Compensation" is the annual rate of salary from the Company of each Participant in effect at any time; and 23 (ii) For purposes of calculating the Retirement Benefit pursuant to Paragraph 3 of this Appendix A, "Compensation" is the annual rate of salary from the Company of each Participant in effect at the earlier of such Participant's Retirement or attainment of normal retirement age under the Pension Plan; provided however, that "Compensation" for the purpose of such Paragraph 3(b) shall not be reduced below the annual rate of salary in effect on December 31, 1986 for each Participant employed by the Company on such date. (e) "RETIREMENT" -- The termination of service with the Company prior to March 31, 1993 with the right to an immediate benefit under the Pension Plan. Retirement shall not include termination of service with the right to a deferred pension except as provided in Paragraph 3(f) hereof. 2. POST-RETIREMENT DEATH BENEFIT. At Retirement, the Company shall provide each Participant with a certificate of coverage under a post-retirement group life insurance policy. Such certificate shall provide a post-retirement death benefit to be paid by the insurance company in the amount of the applicable following percentage of the Participant's Compensation adjusted to the nearest $1,000, or the next highest $1,000 if such Compensation is a multiple of $500 but not of $1,000: operating committee - 75%; management salary grades numbers 12 through 16 - 50%; and management salary grades numbers 10 and 11 - 25%. The insurance company to provide such post-retirement group life insurance coverage shall be selected from time to time by the Committee. 3. RETIREMENT BENEFIT. (a) GENERAL. At Retirement, the Company shall provide each Participant with a retirement benefit calculated as provided in this Paragraph 3. (b) DETERMINATION OF BENEFIT. (i) The Participant's Compensation shall be multiplied by an amount equal to one one hundredth of the sum of (A) the number of the Participant's years 24 of credited service under the Pension Plan at Retirement, (B) the number of any additional years of service credit to which the Participant may be entitled from the Company under any written arrangement, and (c) 30; but in no event more than 0.75. (ii) The amount determined under subparagraph (i) of this Paragraph 3(b) shall be reduced by the sum of (a) the amount the Participant would be entitled to at Retirement as an annual pension benefit under the Pension Plan calculated as a single life annuity without any reduction for any pre-retirement survivorship option coverage or any reduction for early retirement, (B) 100% of the amount of the unreduced annual Social Security benefit to which the Participant would be entitled at age 65 (or such other age which may be established by Social Security from time to time as the earliest age at which a participant may receive an unreduced benefit thereunder), assuming that the Participant has no earnings from the date of Retirement to age 65 (or such other age), or, if greater, any disability benefit under Social Security to which the Participant may be entitled, and (C) the aggregate of the annual benefits to which the Participant is entitled under all Retirement Plans as of the date the Participant is employed by the Company, such Social Security benefits and benefits under all Retirement Plans to be calculated as single life annuities without any reduction, under rules, procedures and equivalents determined by the Committee. To determine the amount referred to under (B) and (C) above, the Participant shall file a declaration of all such amounts with the Employee Benefits Department of the Company in such form as the Committee may require from time to time. No benefit shall be paid under this Appendix A until such a declaration, in satisfactory form, shall be filed with the Employee Benefits Department. If a Participant is granted a disability Social Security benefit, he shall notify the Employee Benefits Department thereof within 30 days, and the Participant's retirement benefit under this Appendix A shall be adjusted accordingly. The Company shall be entitled to rely on such statements in making payment, and if any such statement is incorrect or is not furnished, the Company shall be entitled to reimbursement by the Participant, the Beneficiary or their legal representatives for any overpayment and may reduce or suspend future payments to recover any such overpayment. In the event it is established to the satisfaction of the Committee, in its sole discretion, that any such statement was intentionally false or omitted, the Participant or Beneficiary shall be entitled to no further payments under this Appendix A, and the Company shall be entitled to recover any payments made hereunder. (c) FORMS OF BENEFIT. The annual amount determined under paragraph (b) of this Paragraph 3 shall be paid in one of the following forms: 25 (i) a single life annuity in monthly installments equal to one twelfth of such annual amount; (ii) a joint and survivor annuity in monthly installments based upon such annual amount and calculated in accordance with any post-retirement survivorship option available under the Pension Plan; (iii) a 10-year certain level payment annuity in monthly installments which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan on the basis of a current interest rate assumption determined from time to time by the Committee; or (iv) a 10-year certain increasing payment annuity paid in accordance with Paragraph 5(c) of the Plan based upon the lump-sum amount which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan on the basis of a current interest rate assumption determined from time to time by the Committee. The Committee in its sole discretion shall determine the form of benefit payment for each Participant. (d) ESTABLISHMENT OF ACCOUNT. If payment is made under Paragraph 3(c)(iv) of this Appendix A, upon Retirement, the Company shall establish an Account for the benefit of the Participant and any Beneficiary. Such Account shall initially be credited with an amount equal to the amount of the lump-sum payment determined under Paragraph 3(c)(iv) and shall be administered as provided in Paragraph 5 of the Plan. 26 (e) DISABILITY RETIREMENT. If a Participant retires for disability under the Pension Plan, payment of the Participant's retirement benefit and any joint and survivor benefit under Paragraph 3(c)(ii) of this Appendix A shall be subject to the same conditions as the disability pension under the Pension Plan. (f) VESTED BENEFIT. If a Participant, who is entitled to a deferred pension under the Pension Plan, terminates employment with the Company pursuant to the Company's Limited Incentive Separation Program on or after July 1, 1987, the Company shall provide such Participant with a retirement benefit calculated as provided in this Paragraph 3 upon commencement of the payment of benefits to the Participant under the Pension Plan. 4. ADMINISTRATION OF ACCOUNTS. Accounts shall be established under this Appendix A only pursuant to Paragraph 3(b) herein. All such Accounts shall be administered in accordance with the provisions of Paragraph 5(b) - (d) of the Plan document. 5. DESIGNATION OF BENEFICIARIES. (a) GENERAL. To designate an individual(s) and/or entity(ies) to receive the benefits of the Plan with respect to a Participant, such Participant must file a written designation in the form of Schedule A to the Plan with the Committee. Subject to the restrictions of this Paragraph 5, a Participant may change such designation by filing a subsequent written designation. (b) POST-RETIREMENT DEATH BENEFIT. The post-retirement death benefit under Paragraph 3 of this Appendix A shall be paid in accordance with Section 1 of the most recent Schedule A to the Plan filed with the Committee, or in accordance 27 with such other procedure for payment of post-retirement death benefits as may be established by the Committee or the insurance company providing post-retirement group life insurance pursuant to this Appendix A. (c) RETIREMENT BENEFITS. (i) SINGLE LIFE ANNUITY. If a Participant's retirement benefit is paid as a single life annuity under Paragraph 3(c)(i) of this Appendix A, there shall be no Beneficiary with respect to such benefit and all retirement benefits shall cease upon the Participant's death. (ii) JOINT AND SURVIVOR ANNUITY. If a Participant's retirement benefit under Paragraph 3(c)(ii) of this Appendix A and the Participant's pension under the Pension Plan are both paid as joint and survivor annuities, any survivor annuity under this Appendix A shall be paid to the same beneficiary entitled to any post retirement survivorship benefit under the Pension Plan. If the Participant's pension under the Pension Plan is paid as a single life annuity, any survivor annuity paid under Paragraph 3(c)(ii) of this Appendix A shall be paid to the Beneficiary designated in Section 2 of Schedule A to the Plan. If the Beneficiary predeceases the Participant after Retirement, the Participant's reduced retirement benefit shall continue during his life and no survivor benefit shall be paid. The election of such Beneficiary must be made prior to Retirement and may not be changed thereafter. (iii) 10-YEAR CERTAIN ANNUITIES. If a Participant's retirement benefit is paid as a 10-year certain level payment annuity under Paragraph 3(c)(iii) of this 28 Appendix A, or a 10-year certain increasing payment annuity under Paragraph 3(c)(iv) of this Appendix A, the Beneficiary or Beneficiaries with respect to such benefit shall be as specified in Section 1 of the most recent Schedule A to the Plan filed with the Committee. (d) DESIGNATION BY LAST REMAINING BENEFICIARY. After a Participant's death, if there is only one remaining Beneficiary with respect to a 10-year certain annuity under Paragraph 3(c)(iii) or 3(c)(iv) of this Appendix A, such Beneficiary shall be entitled to designate in writing to the Committee an individual to be paid any remainder of such benefit under the Plan at such Beneficiary's death. If no such further designation is made, such remainder shall be paid to such Beneficiary's estate. In the event of such Beneficiary's death, and regardless of whether any such further designation has been made, the Committee in its sole discretion may require any such remainder to be paid as a lump sum. 6. APPLICABILITY OF CERTAIN PLAN PROVISIONS. The provisions of Paragraphs 7, 8, 9, 10, 11, 12,13, 14, 16, and 17 of the Plan shall apply with full force and effect with respect to any Participant subject to this Appendix A as if each such Paragraph was set forth in its entirety herein. 29 EX-10.(A)(4) 5 MID-CAREER HIRE SUPPLMNT RETIREMNT INCOME P MID-CAREER HIRE SUPPLEMENTAL RETIREMENT INCOME PLAN FOR SELECTED EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND ITS AFFILIATES Effective January 1, 1996 As Amended January 1, 2000 TABLE OF CONTENTS Section 1. Definitions...................................................2 Section 2. Eligibility...................................................5 Section 3. Supplemental Retirement Benefit...............................5 Section 4. Supplemental Surviving Spouse Benefit.........................9 Section 5. Administration of the Plan...................................10 Section 6. Claims Procedure and Status Determination....................12 Section 7. Amendment or Termination.....................................13 Section 8. General Provisions...........................................13 Section 9. Miscellaneous................................................16 I MID-CAREER HIRE SUPPLEMENTAL RETIREMENT INCOME PLAN FOR SELECTED EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND ITS AFFILIATES Public Service Electric and Gas Company previously established effective as of January 1, 1997, and currently maintains, the Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Electric and Gas Company and its Affiliates. Effective December 13, 1999, Public Service Electric and Gas Company transferred sponsorship of the plan to Public Service Enterprise Group Incorporated (the "Company") and the plan was renamed the "Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Enterprise Group Incorporated and its Affiliates" (the "Plan"). Furthermore, effective as of January 1, 2000, the Plan is hereby amended as set forth in this document. This Plan was established for the purpose of assisting in attracting and retaining a stable pool of key managerial and professional talent and long-term key employee commitment by providing certain supplemental retirement benefits based upon additional service credit for a selected number of key employees who participate in the Pension Plan of Public Service Enterprise Group Incorporated. This Plan is intended to constitute an unfunded plan of deferred compensation for a select group of management or highly compensated employees for purposes of Title 1 of ERISA. 1 Section 1. Definitions When used herein, the words and phrases hereinafter defined shall have the following meanings unless a different meaning is clearly required by the context of the Plan: 1.1 "AFFILIATE" shall mean any organization which is a member of a controlled group of corporations (as defined in Code Section 414(b), as modified by Code Section 415(h)) which includes the Company; or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c), as modified by Code Section 415(h)) with the Company; or a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company or any other entity required to be aggregated with the Company as required by regulations promulgated pursuant to Code Section 414(o). 1.2 "BENEFICIARY" shall mean any person or persons selected by a Participant on a form provided by the Company who may become eligible to receive the benefits provided under this Plan in the event of such Participant's death. 1.3 "BOARD OF DIRECTORS" or "BOARD" shall mean the Board of Directors of the Company. 1.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended, and as same may be amended from time to time. 1.5 "COMPANY" shall mean Public Service Enterprise Group Incorporated. 1.6 "COMPENSATION" shall mean compensation as defined in the Reinstatement Plan. 1.7 "CREDITED SERVICE" shall mean the aggregate of all periods of employment with the Company or an Affiliate or former Affiliate and all periods of additional service credit granted by the Company for which a Participant will be given credit in computing his Supplemental Retirement Benefit. 2 1.8 "EMPLOYEE BENEFITS COMMITTEE" or "COMMITTEE" shall mean the Employee Benefits Committee of the Company. 1.9 "EMPLOYEE BENEFITS POLICY COMMITTEE" or "POLICY COMMITTEE" shall mean the Employee Benefits Policy Committee of the Company. 1.10 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and as the same may be amended from time to time. 1.11 "NORMAL RETIREMENT DATE" shall mean the first day of the month coinciding with or next following a Participant's attainment of age 65. 1.12 "PARTICIPANT" shall mean each employee or former employee of the Company or a Participating Affiliate who is selected by the Chief Executive Officer of the Company to participate in the Plan. The Chief Executive Officer of the Company shall select such key employees of the Company and Participating Affiliates upon such terms as he shall deem appropriate due to the employee's responsibilities and opportunity to contribute to the financial and operating objectives of the Company or Participating Affiliate. 1.13 "PARTICIPATING AFFILIATE" shall mean any Affiliate of the Company which (a) is the sponsor or a Participating Affiliate of the Reinstatement Plan; (b) adopts this Plan with the approval of the Board of Directors; (c) authorizes the Board of Directors and the Employee Benefits Committee to act for it in all matters arising under or with respect to this Plan; and (d) complies with such other terms and conditions relating to this Plan as may be imposed by the Board of Directors. 1.14 "PENSION PLAN" shall mean the Pension Plan of Public Service Enterprise Group Incorporated (formerly known as the "Pension Plan of Public Service Electric and Gas Company"), and each successor or replacement plan. 3 1.15 "PLAN" shall mean this Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Enterprise Group Incorporated and its Affiliates (formerly known as the "Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Electric and Gas Company and its Affiliates"). 1.16 "PLAN YEAR" shall mean the calendar year. 1.17 "REINSTATEMENT PLAN" shall mean the Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Enterprise Group Incorporated and its Affiliates (formerly known as the "Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and its Affiliates"). 1.18 "REINSTATEMENT PLAN RETIREMENT BENEFIT" shall mean the aggregate annual benefit payable to a Participant pursuant to the Reinstatement Plan by reason of his termination of employment with the Company and all Affiliates for any reason other than death. 1.19 "REINSTATEMENT PLAN SURVIVING SPOUSE BENEFIT" shall mean the aggregate annual benefit payable to the Surviving Spouse of a Participant pursuant to the Reinstatement Plan in the event of the death of the Participant at any time prior to commencement of payment of his Reinstatement Plan Retirement Benefit. 1.20 "SUPPLEMENTAL RETIREMENT BENEFIT" shall mean the benefit payable to a Participant pursuant to this Plan by reason of his termination of employment with the Company and all Affiliates for any reason other than death. 1.21 "SURVIVING SPOUSE" shall mean a person who is married to a Participant at the date of his death. 1.22 "YEAR OF SERVICE" shall mean Year of Service as defined in the Pension Plan. 4 1.23 "SUPPLEMENTAL SURVIVING SPOUSE BENEFIT" shall mean the benefit payable to a Surviving Spouse pursuant to this Plan. Section 2. Eligibility 2.1 A Participant who is selected by the Chief Executive Officer of the Company to participate in this Plan shall be eligible to receive a Supplemental Retirement Benefit. The Surviving Spouse of a Participant described in the preceding sentence who dies prior to commencement of payment of his Reinstatement Plan Retirement Benefit shall be eligible to receive a Supplemental Surviving Spouse Benefit. 2.2 Upon selection for participation in the Plan, the Chief Executive Officer shall designate the number of years of additional Credited Service to which such Participant shall be entitled to be credited in calculating his Supplemental Retirement Benefit under this Plan. The Chief Executive Officer shall notify the Vice President - Human Resources in writing of such selection and designation. Section 3. Supplemental Retirement Benefit 3.1 The Supplemental Retirement Benefit payable to an eligible Participant shall be equal to the excess of (a) over (b) where: (a) is the sum of the amount of Pension Plan Retirement Benefit and Reinstatement Plan Retirement Benefit to which the Participant would have been entitled under the Pension Plan and the Reinstatement Plan if such benefits were computed with the additional years of Credited Service provided for in this Plan; and (b) is the sum of the Pension Plan Retirement Benefit and Reinstatement Plan Retirement Benefit actually payable to the Participant or payable to a third party on the Participant's behalf. 5 The amounts described in (a) and (b) shall be computed as of the date of termination of employment of the Participant with the Company and all Affiliates in the form of a single life annuity payable over the lifetime of the Participant only commencing on his Normal Retirement Date. 3.2. The Supplemental Retirement Benefit payable to a Participant shall be paid in the same form under which the Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit, as applicable, is payable to the Participant (including the election to receive a lump sum distribution of the present value of any benefit). The Participant's election under the Pension Plan of any optional form of payment of his Pension Plan Retirement Benefit (with the valid consent of his spouse where required under the Pension Plan) shall also be applicable to the payment of his Supplemental Retirement Benefit hereunder. 3.3 Payment hereunder of the Supplemental Retirement Benefit to a Participant shall commence on the same date as payment of the Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit, as applicable, to the Participant commences. 3.4 (a) Notwithstanding the provisions of Sections 3.2 and 3.3 above, an election made by the Participant with respect to the form of payment of his retirement benefits under the Pension Plan and Reinstatement Plan, or the date for commencement of payment thereof, shall not be effective with respect to the form of payment or date for commencement of payment of his Supplemental Retirement Benefit hereunder unless such election is expressly approved by the Committee with respect to his Supplemental Retirement Benefit; provided, however, that notwithstanding any other provision of this Plan, no such approval shall be required from and after the occurrence of a Change in Control (as defined below). If the Committee shall not approve such election, then the form of payment or date for commencement of payment of the 6 Participant's Supplemental Retirement Benefit shall be selected by the Committee in its sole discretion. (b) For the purposes hereof, a "Change in Control" shall mean the occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect wholly owned subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the 7 ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. 3.5 A Supplemental Retirement Benefit which is payable in any form other than a single life annuity over the lifetime of the Participant, or which commences at any time prior to the Participant's Normal Retirement Date, shall be the actuarial equivalent of the Supplemental Retirement Benefit set forth in Subsection 3.1 above as determined by the same actuarial 8 adjustments as those specified in the Pension Plan with respect to determination of the amount of retirement benefits payable pursuant to the Pension Plan on the date for commencement of payment hereunder. Section 4. Supplemental Surviving Spouse Benefit 4.1 If a Participant dies prior to commencement of payment of his Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit under circumstances in which a Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit is payable to his Surviving Spouse, then a Supplemental Surviving Spouse Benefit shall be payable to his Surviving Spouse as hereinafter provided. The Supplemental Surviving Spouse Benefit payable to a Surviving Spouse shall be equal to the excess of (a) over (b) where: (a) is the sum of the amount of the Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit to which the Surviving Spouse would have been entitled under the Pension Plan and Reinstatement Plan, as applicable, if such benefits were computed with the additional years of Credited Service provided for in this Plan; and (b) is the sum of the Pension Plan Surviving Spouse Benefit and Reinstatement Plan Surviving Spouse Benefit actually payable to the Surviving Spouse. 4.2 A Supplemental Surviving Spouse Benefit shall be payable over the lifetime of the Surviving Spouse only in monthly installments commencing on the date for commencement of payment of the Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit, as applicable, (or if both are payable, the earlier to commence) to the Surviving Spouse and terminating on the date of the last payment of the Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit, as applicable, made before the Surviving Spouse's death. 9 Section 5. Administration of the Plan 5.1 The Committee shall be the named fiduciary of this Plan responsible for the general operation and administration of this Plan and for carrying out the provisions thereof. The Committee shall have discretionary authority to construe the terms of this Plan. 5.2 The Committee shall adopt such rules and procedures as it deems necessary and advisable to administer this Plan and to transact its business. Subject to the other requirements of this Section 5, the Committee may-- (a) employ agents to carry out non-fiduciary responsibilities; (b) employ agents to carry out fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA); (c) consult with counsel, who may be counsel to the Company or an Affiliate; and (d) provide for the allocation of fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA) among its members. However, any action described in sub-paragraphs (b) or (d) of this subsection 5.2, and any modification or rescission of any such action, may be effected by the Committee only by a resolution approved by a majority of the Committee. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to this Plan. 5.3 The Committee shall keep written minutes of all its proceedings, which shall be open to inspection by the Board of Directors. In the case of any decision by the Committee with 10 respect to a claim for benefits under this Plan, such Committee shall include in its minutes a brief explanation of the grounds upon which such decision was based. 5.4 In performing their duties, the members of the Committee shall act solely in the interest of the Participants in this Plan and their Beneficiaries and (a) for the exclusive purpose of providing benefits to Participants and their Beneficiaries; (b) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and (c) in accordance with the documents and instruments governing this Plan insofar as such documents and instruments are consistent with the provisions of Title I of ERISA. 5.5 In addition to any other duties the Committee may have, the Committee shall review the performance of all persons to whom the Committee shall have delegated or allocated fiduciary duties pursuant to the provisions of this Section 5. 5.6 The Company agrees to indemnify and reimburse, to the fullest extent permitted by law, members of the Committee, directors and employees of the Company and its Affiliates, and all such former members, directors and employees, for any and all expenses, liabilities or losses arising out of any act or omission relating to the rendition of services for or the management and administration of this Plan. 5.7 No member of the Committee nor any delegate thereof shall be personally liable by virtue of any contract, agreement or other instrument made or executed by him or on his behalf in such capacity. 11 Section 6. Claims Procedure and Status Determination 6.1 Claims for benefits under this Plan and requests for a status determination shall be filed in writing with the Company. 6.2 In the case of a claim for benefits, written notice shall be given to the claiming Participant or Beneficiary of the disposition of such claim, setting forth specific reasons for any denial of such claim in whole or in part. If a claim is denied in whole or in part, the notice shall state that such Participant or Beneficiary may, within sixty days of the receipt of such denial, request in writing that the decision denying the claim be reviewed by the Committee and provide the Committee with information in support of his position by submitting such information in writing to the Secretary of the Committee. 6.3 The Committee shall review each claim for benefits which has been denied in whole or in part and for which such review has been requested and shall notify, in writing, the affected Participant or Beneficiary of its decision and the reasons therefor. 6.4 In the case of a request for status determination, written notice shall be given to the requesting person within a reasonable time setting forth specific reasons for the decision. Section 7. Amendment or Termination 7.1 The Company reserves the right to amend or terminate this Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board or of the Employee Benefits Policy Committee and shall be effective as provided for in such resolution. 7.2 No amendment or termination of this Plan shall directly or indirectly deprive any current or former Participant, Beneficiary or Surviving Spouse of all or any portion of any Supplemental Retirement Benefit or Supplemental Surviving Spouse Benefit payment which has 12 commenced prior to the effective date of such amendment or termination or the right to which has accrued on such effective date. Section 8. General Provisions 8.1 This Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company or any Affiliate for payment of any benefits hereunder. No Participant, Beneficiary, Surviving Spouse or any other person shall have any interest in any particular assets of the Company or any Affiliate by reason of the right to receive a benefit under this Plan and any such Participant, Beneficiary, Surviving Spouse or other person shall have only the rights of a general unsecured creditor with respect to any rights under the Plan. 8.2 Except as otherwise expressly provided herein, all terms and conditions of the Pension Plan and the Reinstatement Plan applicable to a benefit paid to a Participant or a Surviving Spouse Benefit under such plans shall also be applicable to a Supplemental Retirement Benefit or a Supplemental Surviving Spouse Benefit payable hereunder. Any benefit payable under the Pension Plan or the Reinstatement Plan, shall be paid solely in accordance with the respective terms and conditions of the Pension Plan and the Reinstatement Plan and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan or the Reinstatement Plan. 8.3 Nothing contained in this Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company or any Affiliate will be sufficient to pay any benefit hereunder. 8.4 No Participant or Surviving Spouse shall have any right to a benefit under this Plan except in accordance with the terms of this Plan. Establishment of this Plan shall not be 13 construed to give any Participant the right to be retained in the service of the Company or any Affiliate. 8.5 No interest of any person or entity in, or right to receive a benefit under, this Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind; nor any such interest or right to receive a benefit be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 8.6 This Plan shall be construed and administered under the laws of the United States and the State of New Jersey to the extent not superseded by Federal law. 8.7 If the present value of any Supplemental Retirement Benefit or Supplemental Surviving Spouse benefit is less than $3,500 (or for Plan Years beginning on or after January 1, 1998, is less than $5,000), the Company may pay the present value of such Benefit to the Participant or Surviving Spouse in a single lump sum in lieu of any further benefit payments hereunder. 8.8 Actuarial assumptions to determine the present value of any benefit hereunder shall be the same as used to determine the present value of benefits under the Pension Plan. 8.9 If any person entitled to a benefit payment under this Plan is deemed by the Committee to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Committee may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for 14 the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and this Plan therefor. 8.10 This Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 8.11 Each Participant shall keep the Company informed of his current address and the current address of his spouse. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three (3) years after the date on which payment of the Participant's Supplemental Retirement Benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Company is unable to locate any Surviving Spouse of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Surviving Spouse or any other person, and such benefit shall be irrevocably forfeited. 8.12 Notwithstanding any of the preceding provisions of this Plan, none of the Company, the Committee or any individual acting as an employee or agent of the Company or the Committee shall be liable to any Participant, former Participant, Surviving Spouse or any other person for any claim, loss, liability or expense incurred in connection with this Plan. Section 9. Miscellaneous 9.1 As used herein, words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless otherwise required by the context. Any 15 headings used herein are included for ease of reference only and are not to be construed so as to alter the terms hereof. 16 EX-10.(A)(5) 6 RETIREMENT INCOME REINSTATEMENT PLAN RETIREMENT INCOME REINSTATEMENT PLAN FOR NON-REPRESENTED EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND ITS AFFILIATES As Amended and Restated, Effective January 1, 2000 TA6BLE OF CONTENTS Section 1. Definitions...................................................1 - ----------------------- Section 2. Eligibility...................................................5 - ----------------------- Section 3. Supplemental Retirement Benefit...............................6 - ------------------------------------------- Section 4. Supplemental Surviving Spouse Benefit........................10 - ------------------------------------------------- Section 5. Administration of the Plan...................................11 - -------------------------------------- Section 6. Claims Procedure and Status Determination....................13 - ----------------------------------------------------- Section 7. Amendment or Termination.....................................13 - ------------------------------------ Section 8. General Provisions...........................................14 - ------------------------------ Section 9. Miscellaneous................................................17 - ------------------------- I RETIREMENT INCOME REINSTATEMENT PLAN FOR NON-REPRESENTED EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND ITS AFFILIATES Public Service Electric and Gas Company previously established effective January 1, 1995, and currently maintains the Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and its Affiliates. Effective December 13, 1999, Public Service Electric and Gas Company transferred sponsorship of the plan to Public Service Enterprise Group Incorporated (the "Company") and renamed the plan the "Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Enterprise Group Incorporated and its Affiliates" (the "Plan"). Furthermore, effective as of January 1, 2000, the plan is hereby amended as set forth in this document. This Plan was established for the purpose of assisting in attracting and retaining a stable pool of key managerial and professional talent and long-term key employee commitment by providing certain supplemental retirement benefits for certain of their employees who participate in the Pension Plan of Public Service Enterprise Group Incorporated or the Cash Balance Pension Plan of Public Service Enterprise Group Incorporated. This Plan is intended to constitute an unfunded "excess benefit plan" as defined in Section 3(36) of ERISA, to the extent it provides benefits that would be paid under the Pension Plan of Public Service Enterprise Group Incorporated or the Cash Balance Pension Plan of Public Service Enterprise Group Incorporated but for the limitations of Section 415 of the Code, and an unfunded plan of deferred compensation for a select group of management or highly compensated employees for purposes of Title 1 of ERISA, to the extent it provides other benefits. 1 Section 1. Definitions When used herein, the words and phrases hereinafter defined shall have the following meanings unless a different meaning is clearly required by the context of the Plan: 1.1 "AFFILIATE" shall mean any organization which is a member of a controlled group of corporations (as defined in Code Section 414(b), as modified by Code Section 415(h)) which includes the Company; or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c), as modified by Code Section 415(h)) with the Company; or a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company or any other entity required to be aggregated with the Company as required by regulations promulgated pursuant to Code Section 414(o). 1.2 "BENEFICIARY" shall mean any person or persons selected by a Participant on a form provided by the Company who may become eligible to receive the benefits provided under this Plan in the event of such Participant's death. 1.3 "BENEFIT LIMITATION" shall mean the maximum annual benefit payable to a Participant under the Pension Plan or the Cash Balance Plan in accordance with Section 415 of the Code. 1.4 "BOARD OF DIRECTORS" or "Board" shall mean the Board of Directors of the Company. 1.5 "CASH BALANCE PLAN" shall mean the Cash Balance Pension Plan of Public Service Enterprise Group Incorporated (formerly known as the "Cash Balance Pension Plan of Public Service Electric and Gas Company") and each successor or replacement plan. 2 1.6 "CODE" shall mean the Internal Revenue Code of 1986, as amended, and as same may be amended from time to time. 1.7 "COMPANY" shall mean Public Service Enterprise Group Incorporated. 1.8 "COMPENSATION" shall mean compensation as defined in the Pension Plan or the Cash Balance Plan, as the case may be, except, for the purposes hereof, Compensation shall also include amounts which have been deferred under any Deferred Compensation Plan of the Company or any Participating Affiliate which would otherwise be excluded solely on account of Subsection 1.10(a) of the Pension Plan or, as the case may be, Subsection 1.1(m)(1) of the Cash Balance Plan. 1.9 "COMPENSATION LIMITATION" shall mean the maximum amount of annual compensation under Section 401(a)(17) of the Code that may be taken into account in any Plan Year for benefit accrual purposes under the Pension Plan or the Cash Balance Plan. 1.10 "EMPLOYEE" shall mean any individual in the employ of the Company or a Participating Affiliate who is not included within a unit of employees covered by a collective bargaining agreement. The term "Employee" shall not include a director of the Company or a Participating Affiliate who serves in no capacity other than as a director, a consultant or independent contractor doing work for the Company or a Participating Affiliate or a person employed by a consultant or independent contractor doing work for the Company or a Participating Affiliate. 1.11 "EMPLOYEE BENEFITS COMMITTEE" or "COMMITTEE" shall mean the Employee Benefits Committee of the Company. 3 1.12 "EMPLOYEE BENEFITS POLICY COMMITTEE" shall mean the Employee Benefits Policy Committee of the Company. 1.13 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and as the same may be amended from time to time. 1.14 "NORMAL RETIREMENT DATE" shall mean the first day of the month coinciding with or next following a Participant's attainment of age 65. 1.15 "PARTICIPANT" shall mean any Employee or former Employee of the Company or a Participating Affiliate who meets the requirements of Subsection 2.1 of the Plan. 1.16 "PARTICIPATING AFFILIATE" shall mean any Affiliate of the Company which (a) is the sponsor or a Participating Affiliate of the Pension Plan and/or the Cash Balance Plan; (b) adopts this Plan with the approval of the Board of Directors; (c) authorizes the Board of Directors and the Employee Benefits Committee to act for it in all matters arising under or with respect to this Plan; and (d) complies with such other terms and conditions relating to this Plan as may be imposed by the Board of Directors. 1.17 "PENSION PLAN" shall mean the Pension Plan of Public Service Enterprise Group Incorporated (formerly known as the "Pension Plan of Public Service Electric and Gas Company"), and each successor or replacement plan. 1.18 "PENSION PLAN RETIREMENT BENEFIT" shall mean the aggregate annual benefit payable to a Participant pursuant to the Pension Plan or the Cash Balance Plan, as the case may be, by reason of the Participant's termination of employment with the Company and all Affiliates for any reason other than death. 4 1.19 "PENSION PLAN SURVIVING SPOUSE BENEFIT" shall mean the aggregate annual benefit payable to the Surviving Spouse of a Participant pursuant to the Pension Plan or the Cash Balance Plan, as the case may be, in the event of the death of the Participant at any time prior to commencement of payment of the Participant's Pension Plan Retirement Benefit. 1.20 "PLAN" shall mean this Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Enterprise Group Incorporated and its Affiliates (formerly known as the "Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and Its Affiliates"). 1.21 "PLAN YEAR" shall mean the calendar year. 1.22 "SUPPLEMENTAL RETIREMENT BENEFIT" shall mean the benefit payable to a Participant pursuant to this Plan by reason of the Participant's termination of employment with the Company and all Affiliates for any reason other than death. 1.23 "SURVIVING SPOUSE" shall mean a person who is married to a Participant at the date of the Participant's death. 1.24 "SUPPLEMENTAL SURVIVING SPOUSE BENEFIT" shall mean the benefit payable to a Surviving Spouse pursuant to this Plan. Section 2. Eligibility 2.1 A Participant who is eligible to receive a Pension Plan Retirement Benefit, the amount of which is reduced by reason of (a) the application of the limitations on benefits imposed by application of any provisions of the Code, as in effect on the date for commencement of the Pension Plan Retirement Benefit or as in effect at any time thereafter, to the Pension Plan or the Cash Balance Plan, as the case may be, or (b) the restrictions of Subsection 1.10(a) of the 5 Pension Plan or Subsection 1.1(m)(1) of the Cash Balance Plan, shall be eligible to receive a Supplemental Retirement Benefit. The Surviving Spouse of a Participant described in the preceding sentence who dies prior to commencement of payment of his Pension Plan Retirement Benefit shall be eligible to receive a Supplemental Surviving Spouse Benefit. Section 3. Supplemental Retirement Benefit 3.1 The Supplemental Retirement Benefit payable to an eligible Participant shall be equal to the excess of (a) over (b) where: (a) is the amount of Pension Plan Retirement Benefit to which the Participant would have been entitled under the Pension Plan or the Cash Balance Plan, as the case may be, if such benefit were computed without regard to (i) the exclusion of any amounts pursuant to Subsection 1.10(a) of the Pension Plan, (ii) the exclusion of any amounts pursuant to Subsection 1.1(m)(1) of the Cash Balance Plan, (iii) the Benefit Limitation or (iv) the Compensation Limitation; and (b) is the amount of the Pension Plan Retirement Benefit actually payable to the Participant or payable to a third party on the Participant's behalf under the Pension Plan or the Cash Balance Plan, as the case may be. The amounts described in (a) and (b) shall be computed as of the date of termination of employment of the Participant with the Company and all Affiliates in the form of a single life annuity payable over the lifetime of the Participant only commencing on his Normal Retirement Date. 3.2. The Supplemental Retirement Benefit payable to a Participant shall be paid in the same form under which the Pension Plan Retirement Benefit is payable to the Participant 6 (including the election to receive a lump sum distribution of the present value of any benefit). The Participant's election under the Pension Plan or the Cash Balance Plan, as the case may be, of any optional form of payment of his Pension Plan Retirement Benefit (with the valid consent of his spouse where required under the Pension Plan or the Cash Balance Plan, as the case may be) shall also be applicable to the payment of his Supplemental Retirement Benefit. 3.3 Payment of the Supplemental Retirement Benefit to a Participant shall commence on the same date as payment of the Pension Plan Retirement Benefit to the Participant commences. Any election under the Pension Plan or the Cash Balance Plan, as the case may be, made by the Participant with respect to the commencement of payment of his Pension Plan Retirement Benefit shall also be applicable with respect to the commencement of payment of his Supplemental Retirement Benefit. 3.4 (a) Notwithstanding the provisions of Sections 3.2 and 3.3 above, an election made by the Participant under the Pension Plan or the Cash Balance Plan, as the case may be, with respect to the form of payment of his Pension Plan Retirement Benefit (with the valid consent of his spouse where required), or the date for commencement of payment thereof, shall not be effective with respect to the form of payment or date for commencement of payment of his Supplemental Retirement Benefit hereunder unless such election is expressly approved by the Committee with respect to his Supplemental Retirement Benefit; provided, however, that, notwithstanding any other provision of this Plan, no such approval shall be required from and after the occurrence of a Change in Control (as defined below). If the Committee shall not approve such election, then the form of payment or date for commencement of payment of the 7 Participant's Supplemental Retirement Benefit shall be selected by the Committee in its sole discretion. (b) "Change in Control. For the purposes hereof, a Change in Control shall mean the occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Company or any direct or indirect wholly owned subsidiary of the Company with any other Company, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent 8 thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. 3.5 A Supplemental Retirement Benefit which is payable in any form other than a single life annuity over the lifetime of the Participant, or which commences at any time prior to the Participant's Normal Retirement Date, shall be the actuarial equivalent of the Supplemental Retirement Benefit set forth in Subsection 3.1 above as determined by the same actuarial adjustments as those specified in the Pension Plan or the Cash Balance Plan, as the case may be, 9 with respect to determination of the amount of the Pension Plan Retirement Benefit on the date for commencement of payment hereunder. Section 4. Supplemental Surviving Spouse Benefit 4.1 If a Participant dies prior to commencement of payment of his Pension Plan Retirement Benefit under circumstances in which a Pension Plan Surviving Spouse Benefit is payable to his Surviving Spouse, then a Supplemental Surviving Spouse Benefit shall be payable to his Surviving Spouse as hereinafter provided. The Supplemental Surviving Spouse Benefit payable to a Surviving Spouse shall be equal to the excess of (a) over (b) where: (a) is the amount of Pension Plan Surviving Spouse Benefit to which the Surviving Spouse would have been entitled under the Pension Plan or the Cash Balance Plan, as the case may be, if such benefit were computed without regard to (i) the exclusion of any amounts pursuant to Subsection 1.10(a) of the Pension Plan, (ii) the exclusion of any amounts pursuant to Subsection 1.1(m)(1) of the Cash Balance Plan, (iii) the Benefit Limitation or (iv) the Compensation Limitation; and (b) is the amount of the Pension Plan Surviving Spouse Benefit actually payable to the Surviving Spouse under the Pension Plan or the Cash Balance Plan, as the case may be. 4.2 A Supplemental Surviving Spouse Benefit shall be payable over the lifetime of the Surviving Spouse only in monthly installments commencing on the date for commencement of payment of the Pension Plan Surviving Spouse Benefit to the Surviving Spouse and terminating on the date of the last payment of the Pension Plan Surviving Spouse Benefit made before the Surviving Spouse's death. 10 Section 5. Administration of the Plan 5.1 The Committee shall be the named fiduciary of this Plan responsible for the general operation and administration of this Plan and for carrying out the provisions thereof. The Committee shall have discretionary authority to construe the terms of this Plan. 5.2 The Committee shall adopt such rules and procedures as it deems necessary and advisable to administer this Plan and to transact its business. Subject to the other requirements of this Section 5, the Committee may-- (a) employ agents to carry out non-fiduciary responsibilities; (b) employ agents to carry out fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA); (c) consult with counsel, who may be counsel to the Company or an Affiliate; and (d) provide for the allocation of fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA) among its members. However, any action described in sub-paragraphs (b) or (d) of this subsection 5.2, and any modification or rescission of any such action, may be effected by the Committee only by a resolution approved by a majority of the Committee. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to this Plan. 5.3 The Committee shall keep written minutes of all its proceedings, which shall be open to inspection by the Board of Directors. In the case of any decision by the Committee with 11 respect to a claim for benefits under this Plan, such Committee shall include in its minutes a brief explanation of the grounds upon which such decision was based. 5.4 In performing their duties, the members of the Committee shall act solely in the interest of the Participants in this Plan and their Beneficiaries and (a) for the exclusive purpose of providing benefits to Participants and their Beneficiaries; (b) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and (c) in accordance with the documents and instruments governing this Plan insofar as such documents and instruments are consistent with the provisions of Title I of ERISA. 5.5 In addition to any other duties the Committee may have, the Committee shall review the performance of all persons to whom the Committee shall have delegated or allocated fiduciary duties pursuant to the provisions of this Section 5. 5.6 The Company agrees to indemnify and reimburse, to the fullest extent permitted by law, members of the Committee, directors and employees of the Company and its Affiliates, and all such former members, directors and employees, for any and all expenses, liabilities or losses arising out of any act or omission relating to the rendition of services for or the management and administration of this Plan. 12 5.7 No member of the Committee nor any delegate thereof shall be personally liable by virtue of any contract, agreement or other instrument made or executed by him or on his behalf in such capacity. Section 6. Claims Procedure and Status Determination 6.1 Claims for benefits under this Plan and requests for a status determination shall be filed in writing with the Company. 6.2 In the case of a claim for benefits, written notice shall be given to the claiming Participant or Beneficiary of the disposition of such claim, setting forth specific reasons for any denial of such claim in whole or in part. If a claim is denied in whole or in part, the notice shall state that such Participant or Beneficiary may, within sixty days of the receipt of such denial, request in writing that the decision denying the claim be reviewed by the Committee and provide the Committee with information in support of his position by submitting such information in writing to the Secretary of the Committee. 6.3 The Committee shall review each claim for benefits which has been denied in whole or in part and for which such review has been requested and shall notify, in writing, the affected Participant or Beneficiary of its decision and the reasons therefor. 6.4 In the case of a request for status determination, written notice shall be given to the requesting person within a reasonable time setting forth specific reasons for the decision. Section 7. Amendment or Termination 7.1 The Company reserves the right to amend or terminate this Plan when, in the sole opinion of the Company, such amendment or 13 termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board or of the Employee Benefits Policy Committee and shall be effective as provided for in such resolution. 7.2 No amendment or termination of this Plan shall directly or indirectly deprive any current or former Participant, Beneficiary or Surviving Spouse of all or any portion of any Supplemental Retirement Benefit or Supplemental Surviving Spouse Benefit payment which has commenced prior to the effective date of such amendment or termination or the right to which has accrued on such effective date. Section 8. General Provisions 8.1 This Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company or any Affiliate for payment of any benefits hereunder. No Participant, Beneficiary, Surviving Spouse or any other person shall have any interest in any particular assets of the Company or any Affiliate by reason of the right to receive a benefit under this Plan and any such Participant, Beneficiary, Surviving Spouse or other person shall have only the rights of a general unsecured creditor with respect to any rights under the Plan. 8.2 Except as otherwise expressly provided herein, all terms and conditions of the Pension Plan or the Cash Balance Plan, as the case may be, applicable to a Pension Plan Retirement Benefit or a Pension Plan Surviving Spouse Benefit shall also be applicable to a Supplemental Retirement Benefit or a Supplemental Surviving Spouse Benefits payable hereunder. Any Pension Plan Retirement Benefit or Pension Plan Surviving Spouse Benefit, or any other benefit payable under the Pension Plan or the Cash Balance Plan, as the case may be, shall be paid solely in accordance with the terms and conditions of the Pension Plan or the Cash 14 Balance Plan, as the case may be, and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan or the Cash Balance Plan, as the case may be. 8.3 Nothing contained in this Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company or any Affiliate will be sufficient to pay any benefit hereunder. 8.4 No Participant or Surviving Spouse shall have any right to a benefit under this Plan except in accordance with the terms of this Plan. Establishment of this Plan shall not be construed to give any Participant the right to be retained in the service of the Company or any Affiliate. 8.5 No interest of any person or entity in, or right to receive a benefit under, this Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind; nor any such interest or right to receive a benefits be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 8.6 This Plan shall be construed and administered under the laws of the United States and the State of New Jersey to the extent not superseded by Federal law. 8.7 If the present value of any Supplemental Retirement Benefit or Supplemental Surviving Spouse benefit is less than $3,500 (or for Plan Years beginning on or after January 1, 1998, is less than $5,000), the Company may pay the present value of such Benefit to the 15 Participant or Surviving Spouse in a single lump sum in lieu of any further benefit payments hereunder. 8.8 Actuarial assumptions to determine the present value of any benefit hereunder shall be the same as used to determine the present value of benefits under the Pension Plan or the Cash Balance Plan, as the case may be. 8.9 If any person entitled to a benefit payment under this Plan is deemed by the Committee to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Committee may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and this Plan therefor. 8.10 The Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets or businesses or with or into or which the Company may be consolidated or merged. 8.11 Each Participant shall keep the Company informed of his current address and the current address of his spouse. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three (3) years after the date on which payment of the Participant's Supplemental Retirement Benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, 16 within three years after the actual death of a Participant, the Company is unable to locate any Surviving Spouse of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Surviving Spouse or any other person and such benefit shall be irrevocably forfeited. 8.12 Notwithstanding any of the preceding provisions of this Plan, none of the Company, the Committee or any individual acting as an employee or agent of the Company or the Committee shall be liable to any Participant, former Participant, Surviving Spouse or any other person for any claim, loss, liability or expense incurred in connection with this Plan. Section 9. Miscellaneous 9.1 As used herein, words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless otherwise required by the context. Any headings used herein are included for ease of reference only and are not to be construed so as to alter the terms hereof. 17 EX-10.(A)(7) 7 MANAGEMENT INCENTIVE COMPENSATION PLAN MANAGEMENT INCENTIVE COMPENSATION PLAN FOR SELECTED EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND AFFILIATES AMENDED EFFECTIVE JANUARY 1, 2000 MANAGEMENT INCENTIVE COMPENSATION PLAN FOR SELECTED EMPLOYEES OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND AFFILIATES 1. PURPOSES The purposes of this Plan are to foster attainment of the financial and operating objectives of the Company and its Participating Affiliates which are important to customers and stockholders by providing incentive to members of management who contribute to attainment of these objectives; to supplement the Company's and Participating Affiliates' salary and benefit programs so as to provide overall compensation for such executives which is competitive with corporations with which the Company and its Participating Affiliates must compete for executive talent; and to assist the Company and its Participating Affiliates in attracting and retaining executives who are important to their continued success. 2. DEFINITIONS As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Affiliate" - any organization which is a member of a controlled group of corporations (as defined in Code section 414(b), as modified by Code section 415(h)) which includes the Company; or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code section 414(c), as modified by Code section 415(h)) with the Company; or a member of an affiliated service group (as defined in Code section 414(m)) which includes the Company or any other entity 1 required to be aggregated with the Company pursuant to regulations under Code section 414(o). (b) "Award" - the amount of final Incentive Award for a Participant approved by the Committee pursuant to Paragraphs 5 and 7 of the Plan. (c) "Award Year" - a Plan Year in which Incentive Awards are earned by Participants in the Plan. (d) "Code" - the Internal Revenue Code of 1986, as amended. (e) "Committee" - the Organization and Compensation Committee of the Board of Directors of the Company. (f) "Company" - Public Service Enterprise Group Incorporated. (g) "Corporate Factor" - the Corporate Factor is the number, ranging from 0 to 1.5, which is equal to the weighted average achievement of the Corporate Goals. (h) "Corporate Goals" one or more quantifiable, measurable business goals which shall be established pursuant to Subparagraph 7(c) of this Plan and the achievement of which shall be the basis upon which each Participant's Final Incentive Award shall be computed. (i) "Disability" - any physical or mental condition that renders a Participant incapable of performing further work for the Company and that results in termination of employment. (j) "Employer" - The Company and any Participating Affiliate. (k) "Employer Factor" - the Employer Factor is the number, ranging for 0 to 1.5, which is equal to the weighted average achievement of a Participant's Employer Goals. 2 (l) "Employer Goals" - up to three quantifiable, measurable business goals which shall be established pursuant to Subparagraph 7(a) of this Plan and the achievement of which shall be the basis upon which a portion of each Participant's Final Incentive Award shall be computed. (m) "Incentive Award" - the amount earned by a Participant in accordance with Paragraph 7. (n) "Individual Performance Goals" - one to three measurable goals and/or objectives which shall be established in accordance with Subparagraph 7(b) of this Plan, the achievement of which will be the basis upon which a portion of each Participant's Final Incentive Award will be computed. (o) "Individual Performance Factor" - the total of a Participant's achievement of his/her Individual Performance Goals as described in Paragraph 8. (p) "Participant" - each officer or other employee of the Company or Participating Affiliate as may be designated by the Committee pursuant to Paragraph 3 of the Plan. (q) "Participating Affiliate"- any Affiliate of the Company which adopts the Plan with the approval of the Board of Directors of the Company. As a condition to participating in the Plan, such Affiliate shall authorize the Board of Directors of the Company and the Committee to act for it in all matters arising under or with respect to the Plan and shall comply with such other terms and conditions as may be imposed by the Board of Directors of the Company. (r) "Plan" - the Management Incentive Compensation Plan for Selected Employees of Public Service Enterprise Group and Affiliates. 3 (s) "Plan Year" - the calendar year. (t) "Primary Award" - the amount determined under Paragraph 7(a)(1). (u) "Retirement" - the termination of service with the Company with the right to an immediately payable periodic normal or early retirement benefit under the Pension Plan of Public Service Enterprise Group Incorporated or the Cash Balance Pension Plan of Public Service Enterprise Group Incorporated. Retirement shall not include termination of service with the right to a deferred retirement benefits under either said plan. (v) "Target Incentive Award" - the amount determined under paragraph 6. 3. ELIGIBILITY (a) The Committee may select such employees of the Company or Participating Affiliate (individually or by position) for participation in the Plan upon such terms as it deems appropriate, due to the employee's responsibilities and his/her opportunity to contribute substantially to the attainment of financial and operating objectives of the Company or Participating Affiliate. A determination of participation for a Plan Year shall be made no later than the beginning of that Plan Year. Provided, however, that employees whose duties and responsibilities change significantly during a Plan Year may be added or deleted as a Participant by the Committee. Provided further, the Committee may prorate the Incentive Award of any Participant if appropriate to reflect any such change in employee responsibilities during a Plan Year. (b) Participation in the Plan in one Plan Year shall not guarantee participation in another Plan Year. (c) The Committee shall have sole discretion as to whether to suspend 4 operation of the Plan for any period of time. 4. ADMINISTRATION (a) The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have full and final authority to select Participants, to designate the Target Incentive Award for each Participant and to determine the performance objectives and the amount of all Incentive Awards. The Committee shall also have, subject to the provisions of the Plan, full and final authority to interpret the Plan, to establish and revise rules, regulations and guides relating to the Plan and to make any other determinations that it believes necessary or advisable for the administration of the Plan. The Committee may delegate such responsibilities, other than final approval of Awards or appeals of alleged adverse determinations under the Plan, to the Chief Executive Officer of the Company or to any other officer of the Company or any Participating Affiliate. (b) All decisions and determinations by the Committee shall be final and binding upon all parties, including stockholders, Participants, legal representatives and other employees. 5. DETERMINATION OF AWARD YEAR Not later than 120 days after the close of each Plan Year, the Committee shall, in its sole discretion, determine whether any Participants shall be eligible to earn Incentive Awards with respect to such Plan Year. The discretion of the Committee with respect to this final approval of Awards shall be total. 6. DETERMINATION OF TARGET INCENTIVE AWARDS For each Award Year, the Committee shall establish a Target Incentive Award for 5 each Participant based upon the Participant's position and potential for contribution to the attainment of the Company's and/or Participating Affiliate's financial and operating objectives. The Target Incentive Award shall be expressed as a percentage of the Participant's rate of base salary in effect as of the last day of the Plan Year to which such Target Incentive Award relates. 7. DETERMINATION OF PERFORMANCE GOALS (a) Employer Goals. Within 30 days of the beginning of each Plan Year, the Committee shall approve such Employer Goals as it deems to be appropriate. 70% (50% for PSEG Services Corp.) of each Participant's Target Incentive Amount shall be subject to the achievement of these Employer Goals. (b) Individual Performance Goals. Within 30 days of the beginning of each Plan Year, the Committee shall approve from one to three Individual Performance Goals for each Participant. 30% (50% for PSEG Services Corp.) of each Participant's Target Incentive Amount shall be subject to the achievement of these Individual Performance Goals. (c) Corporate Goals. Within 30 days of the beginning of each Plan Year, the Committee shall approve such Corporate Goals as it deems to be appropriate. (d) The Chief Executive Officer shall recommend to the Committee an Award for each Participant, except that the Committee shall have full responsibility for assessing the performance of the Chief Executive Officer and that the Committee shall make the final determination of all Awards. 8. DETERMINATION OF FINAL INCENTIVE AWARD A Participant's Final Incentive Award will be determined as follows: (a) Within 60 days of the end of each Plan Year, the Committee shall certify 6 the achievement of the several Employer Goals, the respective Individual Performance Goals and the Corporate Goals for the Plan Year. (b) The result of such certifications shall be the Employer Factor, the Individual Performance Factor and the Corporate Factor, respectively. (d) The respective portions (Employer and Individual Performance) of each Participant's Target Incentive Amount shall then be multiplied by the Employer Factor and the Individual Performance Factor and added together. The result of those calculations shall then be multiplied by the Corporate Factor to determine the Participant's Final Incentive Award. For example, assume (i) a Target Incentive Amount of 20.0%, (ii) an Employer Factor of 1.25, (iii) an Individual Performance Factor 0.75 and (iv) a Corporate Factor of 0.9: 1. Employer Portion = 1.25 x .70 x 20.0% = 17.5% 2. Individual Portion = 0.75 x .30 x 20.0% = 4.5% FINAL INCENTIVE AWARD = 17.5% + 4.5% = 22.0% x .9 = 19.8% x Salary (e) Unless otherwise determined by the Committee, the Employer Factor to be applied in determining a Participant's Final Incentive Award shall be that of the Employer of which the Participant was an employee on the last day of the Plan Year to which the Award relates. (f) Notwithstanding anything contained in this Plan to the contrary, a Participant's Final Incentive Award shall not exceed 1.5 times such Participant's Target Incentive Amount for the Plan Year to which it relates. (g) Also notwithstanding anything contained in this Plan to the contrary, the Committee may adjust a Participant's Final Incentive Award based upon any reasonable criteria it may determine. 7 9. AWARD PAYMENT Each Participant's Incentive Award shall be made in one lump sum cash payment as soon as practicable after the Determination Date. 10. TERMINATION (a) If the employment of a Participant by the Company is terminated by the Participant's death, Disability or Retirement, the Committee shall, if it determines that Incentive Awards may be earned for such year of termination, prorate an Award for that part of the year in which the Participant was participating prior to such termination and the Company shall pay the prorated Award as soon as practicable after determination, unless otherwise determined by the Committee. (b) If the employment of a Participant is terminated for any reason other than death, Disability or Retirement, the Participant shall not receive an Award for that part of the Plan Year in which the Participant was participating at the time of termination, unless otherwise determined by the Committee. (c) If a Participant becomes or ceases to be a Participant during a Plan Year, any Award to the Participant shall be appropriately prorated from the time the Participant entered or left the Plan to the end of the Plan Year. (d) In the case of a Participant's death, payment of any Award related to the Participant's final year of participation shall be made to the Participant's estate as a lump sum as soon as practicable after the Participant's death. 8 11. ASSIGNMENT No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Participant or be subject to attachment, garnishment or other legal process. 12. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT This Plan shall not constitute a contract for the continued employment of any Participant by the Company. The Company reserves the right to modify a Participant's compensation at any time and from time-to-time as it considers appropriate and to terminate his/her employment for any reason at any time notwithstanding this Plan. 13. AMENDMENT OR TERMINATION OF THE PLAN BY THE COMPANY The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of a Participant in respect of an Incentive Award previously earned by him/her which has not been paid, unless such Participant or his/her legal representative shall consent to such change. If this Plan is terminated during any Plan Year in which Participants have been selected to participate, the Board of Directors may authorize the Committee to prorate and make provision for payment of Awards for such period. 14. WHAT CONSTITUTES NOTICE Any notice hereunder to a Participant or his/her legal representative shall be given either by delivering it, or by depositing it in the United States mail, postage prepaid, addressed to his/her last-known address. Any notice to the Company or the Committee hereunder shall be given either by delivering it, or depositing it in the United States Mail, postage prepaid, to the 9 Secretary, Public Service Electric and Gas Company, 80 Park Plaza, T4B, P.O. Box 570, Newark, New Jersey 07101. 15. ADVANCE DISCLAIMER OF ANY WAIVER Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 16. EFFECT OF INVALIDITY OF ANY PART OF THE PLAN The invalidity or unenforceability of any provision hereof shall in no way affect the validity of enforceability of any other provision. 17. PLAN BINDING ON ANY SUCCESSOR OWNER Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 18. LAWS GOVERNING THIS PLAN Except to the extent that Federal laws applies, this Plan shall be governed by the laws of the State of New Jersey. 19. MISCELLANEOUS The masculine pronoun shall also mean the feminine wherever appropriate. 20. WITHHOLDING The Company shall have the right to deduct from any payment any sums to be 10 withheld by federal, state, or local tax law. There is no obligation hereunder that any Participant or other person be advised in advance of the existence of the tax or the amount so required to be withheld. 21. EFFECTIVE DATE This Plan was effective as of July 1, 1985 and was formerly known as the Management Incentive Compensation Plan of Public Service Electric and Gas Company. 11 EX-12 8 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31, ------ ------ ------ ------ ------ 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ Earnings as Defined in Regulation S-K (A): Income from Continuing Operations (B) $ 627 $ 588 $ 560 $ 644 $ 723 Income Taxes (C) 348 297 284 428 563 Fixed Charges 549 527 543 577 615 ------ ------ ------ ------ ------ Earnings $1,524 $1,412 $1,387 $1,649 $1,901 ====== ====== ====== ====== ====== Fixed Charges as Defined in Regulation S-K (D) Total Interest Expense (E) $ 464 $ 453 $ 470 $ 481 $ 506 Interest Factor in Rentals 12 12 11 11 10 Subsidiaries' Preferred Securities Dividend Requirements 16 28 44 71 85 Preferred Stock Dividends 34 22 12 9 9 Adjustment to Preferred Stock Dividends to state on a pre-income tax basis 23 12 6 5 5 ------ ------ ------ ------ ------ Total Fixed Charges $ 549 $ 527 $ 543 $ 577 $ 615 ====== ====== ====== ====== ====== Ratio of Earnings to Fixed Charges 2.78 2.68 2.55 2.86 3.09 ====== ====== ====== ====== ======
Notes: (A) The term "earnings" shall be defined as pre-tax income from continuing operations. Add to pre-tax income the amount of fixed charges adjusted to exclude (a) the amount of any interest capitalized during the period and (b) the actual amount of any preferred stock dividend requirements of majority-owned subsidiaries which were included in such fixed charges amount but not deducted in the determination of pre-tax income. (B) Excludes income from discontinued operations and extraordinary item. (C) Includes State income taxes and Federal income taxes for other income and excludes taxes applicable to extraordinary item. (D) Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense, (c) an estimate of interest implicit in rentals, and (d) preferred securities dividend requirements of subsidiaries and preferred stock dividends, increased to reflect the pre-tax earnings requirement for Public Service Enterprise Group Incorporated. (E) Excludes interest expense from discontinued operations. EX-12.(A) 9 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 (A) PUBLIC SERVICE ELECTRIC AND GAS COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31, ------ ------ ------ ------ ------ 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ Earnings as Defined in Regulation S-K (A): Net Income (B) $ 617 $ 535 $ 528 $ 602 $ 653 Income Taxes (C) 326 268 256 404 510 Fixed Charges 419 438 450 446 450 ------ ------ ------ ------ ------ Earnings $1,362 $1,241 $1,234 $1,452 $1,613 ====== ====== ====== ====== ====== Fixed Charges as Defined in Regulation S-K(D): Total Interest Expense $ 407 $ 399 $ 395 $ 390 $ 394 Interest Factor in Rentals 12 11 11 11 10 Subsidiaries' Preferred Securities Dividend Requirements -- 28 44 45 46 ------ ------ ------ ------ ------ Total Fixed Charges $ 419 $ 438 $ 450 $ 446 $ 450 ====== ====== ====== ====== ====== Ratio of Earnings to Fixed Charges 3.25 2.83 2.74 3.27 3.58 ====== ====== ====== ====== ======
Notes: (A) The term "earnings" shall be defined as pre-tax income from continuing operations. Add to pre-tax income the amount of fixed charges adjusted to exclude (a) the amount of any interest capitalized during the period and (b) the actual amount of any preferred stock dividend requirements of majority-owned subsidiaries which were included in such fixed charges amount but not deducted in the determination of pre-tax income. (B) Excludes extraordinary item. (C) Includes State income taxes and Federal income taxes for other income and excludes taxes applicable to extraordinary item. (D) Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense, (c) an estimate of interest implicit in rentals, and (d) Preferred Securities Dividend Requirements of subsidiaries. EX-12.(B) 10 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 (B) PUBLIC SERVICE ELECTRIC AND GAS COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS
YEARS ENDED DECEMBER 31, ------ ------ ------ ------ ------ 1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ Earnings as Defined in Regulation S-K (A): Net Income (B) $ 617 $ 535 $ 528 $ 602 $ 653 Income Taxes (C) 326 268 256 404 510 Fixed Charges 419 438 450 446 450 ------ ------ ------ ------ ------ Earnings $1,362 $1,241 $1,234 $1,452 $1,613 ====== ====== ====== ====== ====== Fixed Charges as Defined in Regulation S-K(D): Total Interest Expense $ 407 $ 399 $ 395 $ 390 $ 394 Interest Factor in Rentals 12 11 11 11 10 Subsidiaries' Preferred Securities Dividend Requirements -- 28 44 45 46 Preferred Stock Dividends 49 23 12 9 9 Adjustment to Preferred Stock Dividends to state on a pre-income tax basis 24 12 6 6 7 ------ ------ ------ ------ ------ Total Fixed Charges $ 492 $ 473 $ 468 $ 461 $ 466 ====== ====== ====== ====== ====== Ratio of Earnings to Fixed Charges 2.77 2.62 2.64 3.15 3.46 ====== ====== ====== ====== ======
Notes: (A) The term "earnings" shall be defined as pre-tax income from continuing operations. Add to pre-tax income the amount of fixed charges adjusted to exclude (a) the amount of any interest capitalized during the period and (b) the actual amount of any preferred stock dividend requirements of majority-owned subsidiaries which were included in such fixed charges amount but not deducted in the determination of pre-tax income. (B) Excludes extraordinary item. (C) Includes State income taxes and Federal income taxes for other income and excludes taxes applicable to extraordinary item. (D) Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense, (c) an estimate of interest implicit in rentals, and (d) preferred securities dividend requirements of subsidiaries and preferred stock dividends, increased to reflect the pre-tax earnings requirement for Public Service Electric and Gas Company. EX-21 11 SIGNIFICANT SUBSIDIARIES EXHIBIT 21 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED SIGNIFICANT SUBSIDIARIES STATE OF NAME OWNERSHIP % INCORPORATION - ---- ----------- ------------- Public Service Electric and Gas Company ............. 100 New Jersey Energy Holdings Inc. ................................ 100 New Jersey PSEG Resources Inc. ................................. 100 New Jersey The remaining subsidiaries of Public Service Enterprise Group Incorporated are not significant subsidiaries as defined in Regulation S-X. EX-23 12 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-44581, 33-44582 and 33-45491 of Public Service Enterprise Group Incorporated on Form S-8 and Registration Statement Nos. 33-49123 and 333-79101 of Public Service Enterprise Group Incorporated on Form S-3 of our report dated February 11, 2000, appearing in this Annual Report on Form 10-K of Public Service Enterprise Group Incorporated for the year ended December 31, 1999. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 25, 2000 EX-23.(A) 13 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23(A) PUBLIC SERVICE ELECTRIC AND GAS COMPANY INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-49367, 33-50199, 33-51309, 333-02763 and 333-44991 of Public Service Electric and Gas Company on Form S-3 of our report dated February 11, 2000, appearing in this Annual Report on Form 10-K of Public Service Electric and Gas Company for the year ended December 31, 1999. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 25, 2000 EX-10.(A)13 14 EMPLOYMENT AGREEMENT WITH LAWRENCE R. CODEY November 17, 1999 Lawrence R. Codey 1000 First Avenue Spring Lake, NJ 07762 Dear Mr. Codey: This is to confirm certain terms of your employment as President and Chief Operating Officer of Public Service Electric and Gas Company ("PSE&G"). The State of New Jersey has rewritten the rules applicable to the governance of the electric and gas industries, rules that had not been changed by the State in any material respect since they were enacted in 1911. On February 9, 1999, the Electric Discount and Competition Act was enacted, and on April 21, 1999, the New Jersey Board of Public Utilities ("BPU") issued its initial restructuring order relating to PSE&G. In order to effectively implement these broad industry decisions with respect to PSE&G, and its parent Public Service Enterprise Group Incorporated ("Enterprise"), further regulatory decisions, and possibly legislative actions, and effective business planning and execution will be required. Your efforts to achieve the best results for PSE&G and Enterprise in these proceedings have been instrumental in setting a positive platform for Enterprise and its subsidiaries to be successful energy companies in the future. You had previously indicated longstanding plans to retire at age 55 in August of 1999, but your agreement to continue your relationship with PSE&G through this critical restructuring period and your agreement to refrain from working with competitors for a limited time after retirement will help assure the future success of Enterprise. Accordingly, and in light of your related work experience prior to becoming employed by PSE&G, your terms of employment, to the extent that they differ from those of other senior officers of PSE&G, are as follows: 1. If you remain employed by PSE&G through February 28, 2000, unless earlier released by PSE&G, you shall be granted 10 additional years of service for the purpose of determining the amount of any pension benefits from PSE&G. 2. During the course of your relationship with Enterprise and PSE&G, you have access to and shall become familiar with "Confidential Information" as defined below. You agree that you shall not, directly or indirectly, disclose or use any Confidential Information, except as required in the course of your relationship with Enterprise or its affiliates and subsidiaries and consistent with their interests. All files, records, documents, or recordings, electronic or otherwise, containing or relating to Confidential Information, whether prepared by you or otherwise coming into your possession, shall remain the exclusive property of Enterprise or its affiliates and subsidiaries. You shall return all Confidential Information to Enterprise upon termination of employment. As used herein, the term "Confidential Information" means all trade secrets, proprietary and confidential business information belonging to, used by, or in the possession of Enterprise or its affiliates and subsidiaries, with respect to their respective business strategies, mergers and acquisitions, plans and financial information, purchase or sale of property, leasing, pricing, sales programs or tactics, actual or past sellers, purchasers, lessees, lessors or customers, those with whom Enterprise or its affiliates and subsidiaries have begun negotiations for new business, costs, employee compensation, marketing and development plans, inventions and technology, whether such Confidential Information is oral, written or electronically recorded or stored, except information in the public domain, information known to you prior to your employment with PSE&G, and information received by you from sources other than Enterprise or its affiliates and subsidiaries, without obligation of confidentiality. 2 You further agree that for the period of 24 months following your termination of employment with PSE&G, if Enterprise or PSE&G so requests, you shall make yourself available for consultation on any business matter and service as an agent of Enterprise or PSE&G in presenting information to individuals, customer groups, employees, government officials, public interest groups and other constituencies at a rate to be agreed. This consultation shall not constitute employment by Enterprise or its subsidiaries or affiliates. You agree that the knowledge and information, including, but not limited to, "Confidential Information" as defined above, gained in the performance of your duties hereunder may be valuable to those who are now, or might become, competitors of Enterprise or its affiliates and subsidiaries. Accordingly, you agree that you will not, for the period of two years after termination of employment, directly or indirectly, own, manage, operate, join, control, become employed (whether as an employee or a consultant) by or participate in the ownership, management, or control of, or become connected with, any business which is in direct competition with Enterprise and/or its affiliates and subsidiaries in New Jersey, New York, Pennsylvania, Maryland, Delaware, Connecticut, Massachusetts or Virginia. It is agreed that the foregoing restriction does not apply to your continued service as a director of Sealed Air Corporation, The Trust Company of New Jersey, United Water Resources, Inc., or Blue Cross and Blue Shield of New Jersey, provided that you recuse yourself from any decisions or transactions by those entities that are in competition with Enterprise or its affiliates and subsidiaries. In addition, you agree that for two years following termination of employment, you will not, directly or indirectly, solicit or hire, or encourage the solicitation or hiring of any person who was a managerial or higher level employee of Enterprise or its affiliates and subsidiaries at any time during the term of your employment with PSE&G by any employer other than PSE&G for any position as an employee, independent contractor, consultant or otherwise. Further, you shall not be entitled to pension or benefit payments related to the additional service credit provided for herein from and after the date of commencement of any such prohibited subsequent activity in violation of this Agreement. You further acknowledge and agree that in the event of a breach by you of any of the agreements set forth above, PSE&G shall suffer irreparable harm for which money damages are not an adequate remedy, and that, in the event of such breach, PSE&G shall be entitled to obtain an order of a court of competent jurisdiction for equitable relief from such breach, including, but not limited to, temporary restraining orders and preliminary and/or permanent injunctions against the breach of such agreements by you. If the foregoing is in accordance with your understanding, please sign the enclosed copy of this letter and return it to me. Sincerely, Agreed to this _____ day of ___________________, 1999 ____________________________ Lawrence R. Codey EX-27.A 15 FDS PSEG
UT This schedule contains summary information extracted from SEC Form 10-K and is qualified in its entirety by reference to such financial statements. 0000788784 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 1000000 YEAR DEC-31-1999 DEC-31-1999 PER-BOOK 6,962 4,743 2,043 5,267 0 19,015 3,007 0 1,193 3,996 1,113 95 4,575 0 0 1,972 1,073 0 52 2 6,137 19,015 6,497 563 4,660 5,223 1,274 33 1,307 584 (81) 94 (81) 474 439 1,232 (0.37) (0.37) Includes Treasury Stock of ($597). Includes Foreign Currency Translation Adjustment of ($201). Federal and State Income Taxes are included in this line for FDS purposes. Total interest expense includes Preferred Securities Dividends Requirements. Net Loss includes an extraordinary charge of $804 million, net of tax of $345 million. The extraordinary charge impacted EPS (basic and diluted) by $(3.66).
EX-27.B 16 FDS PSE&G
UT This schedule contains summary financial information extracted from Form 10-K and is qualified in its entirety by reference to such financial statements. 0000081033 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 1000000 YEAR DEC-31-1999 DEC-31-1999 PER-BOOK 6,962 878 1,743 5,141 0 14,724 2,563 594 597 3,751 588 95 3,099 0 0 1,475 623 0 52 2 5,039 14,724 5,890 510 4,292 4,802 1,088 (2) 1,086 433 (151) 9 (160) 629 335 1,150 0 0 Federal and State Income Taxes are included in this line for FDS purposes. Total interest expense includes Preferred Securities Dividend Requirements. Net Loss includes an extraordinary charge of $804 million, net of tax of $345 million.
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