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UNITED STATES FORM 10-Q (Mark One) S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF OR £ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
Commission
Registrants, State of Incorporation,
I.R.S. Employer
001-09120
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
22-2625848
000-49614
PSEG POWER LLC
22-3663480
001-00973
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
22-1212800 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 S No £ Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Public Service Enterprise Group Incorporated
Large accelerated filer S
Accelerated filer £
Non-accelerated filer £
Smaller reporting company £
PSEG Power LLC
Large accelerated filer £
Accelerated filer £
Non-accelerated filer S
Smaller reporting company £
Public Service Electric and Gas Company
Large accelerated filer £
Accelerated filer £
Non-accelerated filer S
Smaller reporting company £ Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S As of October 15, 2008, Public Service Enterprise Group Incorporated had outstanding 506,095,103 shares of its sole class of Common Stock, without par value. PSEG Power LLC is a wholly owned subsidiary of Public Service Enterprise Group Incorporated and meets the conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q and is filing its Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H. As of October 15, 2008, 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.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
File Number
Address, and Telephone Number
Identification No.
(A New Jersey Corporation)
80 Park Plaza, P.O. Box 1171
Newark, New Jersey 07101-1171
973 430-7000
http://www.pseg.com
(A Delaware Limited Liability Company)
80 Park PlazaT25
Newark, New Jersey 07102-4194
973 430-7000
http://www.pseg.com
(A New Jersey Corporation)
80 Park Plaza, P.O. Box 570
Newark, New Jersey 07101-0570
973 430-7000
http://www.pseg.com
TABLE OF CONTENTS
Page
ii
Item 1.
1
5
8
12
13 Note 3. Discontinued Operations, Dispositions and Impairments
16
18
19
30
33
34
35
36
37
39
40
43
46
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
49
50
53
57
65
70
70
Item 3.
71
Item 4.
77
Item 1.
78
Item 1A.
78
Item 2.
79
Item 5.
79
Item 6.
87
88 i
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 managements beliefs as well as assumptions made by and information currently available to management. When used herein, the words anticipate, intend, estimate, believe, expect, plan, hypothetical, potential, forecast, project, variations of such words and
similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Other factors that could cause actual results to differ materially from those contemplated in any forward-looking statements
made by us herein are discussed in Item 1. Financial StatementsNote 5. Commitments and Contingent Liabilities, Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, and in other filings we make with the United States Securities and Exchange Commission (SEC). These
factors include, but are not limited to:
Adverse changes in energy industry policies and regulation, including market rules, that may adversely affect our operating results. Any inability of our energy transmission and distribution businesses to obtain adequate and timely rate relief and/or regulatory approvals from federal and/or state regulators. Changes in federal and/or state environmental regulations that could increase our costs or limit operations of our generating units. Changes in nuclear regulation and/or developments in the nuclear power industry generally that could limit operations of our nuclear generating units. Actions or activities at one of our nuclear units that might adversely affect our ability to continue to operate that unit or other units at the same site. Any inability to balance our energy obligations, available supply and trading risks. Any deterioration in our credit quality. Availability of the capital and credit markets at reasonable pricing terms and the ability to meet cash needs. Any inability to realize anticipated tax benefits or retain tax credits. Increases in the cost of, or interruption in the supply of, fuel and other commodities necessary to the operation of our generating units. Delays or cost escalations in our construction and development activities. Adverse capital market performance of our decommissioning and defined benefit plan trust funds. Changes in technology and/or increased customer conservation. All of the forward-looking statements made in this report are qualified by these cautionary statements and we cannot assure you that the results or developments anticipated by management will be realized, or even if realized, will have the expected consequences to, or effects on, us or our business prospects,
financial condition or results of operations. Readers are cautioned not to place undue reliance on these forward-looking statements in making any investment decision. Forward-looking statements made in this report only apply as of the date of this report. Except as may be required by the federal securities laws, we
expressly disclaim any obligation or undertaking to release publicly any updates or revisions to these forward-looking statements to reflect events or circumstances that occur or arise or are anticipated to occur or arise after the date hereof. The forward-looking statements contained in this report are intended to
qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. ii
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
For The Quarters
Ended
For The Nine Months
Ended
2008
2007
2008
2007
(Millions) OPERATING REVENUES
$
3,718
$
3,347
$
10,060
$
9,561 OPERATING EXPENSES Energy Costs
1,899
1,588
5,552
4,885 Operation and Maintenance
610
559
1,857
1,727 Write-down of Assets
12
12 Depreciation and Amortization
214
209
597
587 Taxes Other Than Income Taxes
31
31
101
104 Total Operating Expenses
2,754
2,399
8,107
7,315 Income from Equity Method Investments
8
30
27
87 OPERATING INCOME
972
978
1,980
2,333 Other Income
95
61
285
187 Other Deductions
(107
)
(49
)
(288
)
(120
) Interest Expense
(149
)
(184
)
(448
)
(549
) Preferred Stock Dividends
(1
)
(1
)
(3
)
(3
) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
810
805
1,526
1,848 Income Tax Expense
(334
)
(315
)
(780
)
(742
) INCOME FROM CONTINUING OPERATIONS
476
490
746
1,106 Income from Discontinued Operations, including Gain on Disposal, net of tax expense of $160, $5, $174 and $27 for the quarters and nine months ended 2008 and 2007, respectively
180
16
208
4 NET INCOME
$
656
$
506
$
954
$
1,110 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS): BASIC
507,724
508,543
508,233
507,206 DILUTED
508,326
509,090
508,890
507,966 EARNINGS PER SHARE: BASIC INCOME FROM CONTINUING OPERATIONS
$
0.94
$
0.96
$
1.47
$
2.18 NET INCOME
$
1.29
$
0.99
$
1.88
$
2.19 DILUTED INCOME FROM CONTINUING OPERATIONS
$
0.94
$
0.96
$
1.47
$
2.18 NET INCOME
$
1.29
$
0.99
$
1.88
$
2.19 DIVIDENDS PAID PER SHARE OF COMMON STOCK
$
0.3225
$
0.2925
$
0.9675
$
0.8775 See Notes to Condensed Consolidated Financial Statements. 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
September 30,
September 30,
(Unaudited)
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
September 30,
December 31,
(Millions) ASSETS CURRENT ASSETS Cash and Cash Equivalents
$
229
$
380 Accounts Receivable, net of allowances of $52 and $46 in 2008 and 2007, respectively
1,370
1,537 Unbilled Revenues
263
353 Fuel
1,077
791 Materials and Supplies
306
293 Prepayments
286
88 Restricted Funds
144
114 Derivative Contracts
143
65 Assets of Discontinued Operations
122
1,323 Deferred Income Taxes
71
Other
55
30 Total Current Assets
4,066
4,974 PROPERTY, PLANT AND EQUIPMENT
20,310
19,190 Less: Accumulated Depreciation and Amortization
(6,304
)
(5,994
) Net Property, Plant and Equipment
14,006
13,196 NONCURRENT ASSETS Regulatory Assets
5,654
5,165 Long-Term Investments
2,742
3,221 Nuclear Decommissioning Trust (NDT) Funds
1,100
1,276 Other Special Funds
144
164 Goodwill and Other Intangibles
59
51 Derivative Contracts
98
52 Other
185
200 Total Noncurrent Assets
9,982
10,129 TOTAL ASSETS
$
28,054
$
28,299 See Notes to Condensed Consolidated Financial Statements. 2
CONDENSED CONSOLIDATED BALANCE SHEETS
2008
2007
(Unaudited)
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
September 30,
December 31,
(Millions) LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES Long-Term Debt Due Within One Year
$
1,039
$
1,123 Commercial Paper and Loans
181
65 Accounts Payable
1,043
1,080 Derivative Contracts
307
324 Accrued Interest
160
113 Accrued Taxes
73
204 Deferred Income Taxes
106 Clean Energy Program
140
135 Obligation to Return Cash Collateral
181
79 Liabilities of Discontinued Operations
68
596 Other
435
450 Total Current Liabilities
3,627
4,275 NONCURRENT LIABILITIES Deferred Income Taxes and Investment Tax Credits (ITC)
3,811
4,449 Regulatory Liabilities
380
419 Asset Retirement Obligations
568
542 Other Postretirement Benefit (OPEB) Costs
1,017
1,003 Accrued Pension Costs
145
203 Clean Energy Program
563
14 Environmental Costs
668
649 Derivative Contracts
173
198 Long-Term Accrued Taxes
1,200
423 Other
131
87 Total Noncurrent Liabilities
8,656
7,987 COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5) CAPITALIZATION LONG-TERM DEBT Long-Term Debt
6,315
6,782 Securitization Debt
1,396
1,530 Project Level, Non-Recourse Debt
301
346 Total Long-Term Debt
8,012
8,658 SUBSIDIARYS PREFERRED SECURITIES Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2008 and 2007795,234 shares
80
80 COMMON STOCKHOLDERS EQUITY Common Stock, no par, authorized 1,000,000,000 shares; issued, 2008 and 2007533,556,660 shares
4,753
4,732 Treasury Stock, at cost, 200827,461,557 shares; 200725,033,656 shares
(579
)
(478
) Retained Earnings
3,701
3,261 Accumulated Other Comprehensive Loss
(196
)
(216
) Total Common Stockholders Equity
7,679
7,299 Total Capitalization
15,771
16,037 TOTAL LIABILITIES AND CAPITALIZATION
$
28,054
$
28,299 See Notes to Condensed Consolidated Financial Statements. 3
CONDENSED CONSOLIDATED BALANCE SHEETS
2008
2007
(Unaudited)
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
For The Nine Months
2008
2007
(Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income
$
954
$
1,110 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: (Gain) Loss on Disposal of Discontinued Operations, net of tax
(187
)
Depreciation and Amortization
599
606 Amortization of Nuclear Fuel
75
73 Provision for Deferred Income Taxes (Other than Leases) and ITC
(71
)
45 Non-Cash Employee Benefit Plan Costs
126
138 Lease Transaction Reserves, Net of Taxes
490
Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes
20
46 Undistributed Earnings from Affiliates
(32
)
(5
) Realized and Unrealized (Gains) Losses on Energy Contracts and Other Derivatives
(77
)
16 Under Recovery of Electric Energy Costs (BGS and NTC) and Gas Costs
(21
)
(38
) Under Recovery of Societal Benefits Charge (SBC)
(42
)
(29
) Cost of Removal
(33
)
(28
) Net Realized (Gains) Losses and (Income) Expense from NDT Funds
22
(37
) Net Change in Certain Current Assets and Liabilities
(117
)
(326
) Employee Benefit Plan Funding and Related Payments
(122
)
(76
) Other
8
44 Net Cash Provided By Operating Activities
1,592
1,539 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment
(1,237
)
(973
) Proceeds from Sale of Discontinued Operations
772
325 Proceeds from Sale of Property, Plant and Equipment
3
55 Proceeds from the Sale of Capital Leases and Investments
37
17 Proceeds from NDT Funds Sales
1,839
1,275 Investment in NDT Funds
(1,864
)
(1,295
) Restricted Funds
(32
)
(4
) NDT Funds Interest and Dividends
37
35 Other
(14
)
(24
) Net Cash Used In Investing Activities
(459
)
(589
) CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Commercial Paper and Loans
116
(177
) Issuance of Long-Term Debt
700
350 Issuance of Non-Recourse Debt
163 Issuance of Common Stock
82 Purchase of Common Treasury Stock
(92
)
Redemptions of Long-Term Debt
(1,263
)
(488
) Repayment of Non-Recourse Debt
(38
)
(35
) Redemption of Securitization Debt
(127
)
(121
) Premium Paid on Early Extinguishment of Debt
(80
)
Cash Dividends Paid on Common Stock
(492
)
(445
) Other
(8
)
2 Net Cash Used In Financing Activities
(1,284
)
(669
) Effect of Exchange Rate Change
2 Net Increase (Decrease) in Cash and Cash Equivalents
(151
)
283 Cash and Cash Equivalents at Beginning of Period
380
100 Cash and Cash Equivalents at End of Period
$
229
$
383 Supplemental Disclosure of Cash Flow Information: Income Taxes Paid
$
865
$
460 Interest Paid, Net of Amounts Capitalized
$
375
$
478 See Notes to Condensed Consolidated Financial Statements. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Ended
September 30,
(Unaudited)
PSEG POWER LLC
For The Quarters
Ended
For The Nine Months
Ended
2008
2007
2008
2007
(Millions) OPERATING REVENUES
$
1,833
$
1,580
$
5,831
$
5,034 OPERATING EXPENSES Energy Costs
904
712
3,360
2,894 Operation and Maintenance
282
232
796
711 Depreciation and Amortization
42
36
121
104 Total Operating Expenses
1,228
980
4,277
3,709 OPERATING INCOME
605
600
1,554
1,325 Other Income
88
56
267
162 Other Deductions
(104
)
(42
)
(282
)
(105
) Interest Expense
(42
)
(43
)
(125
)
(119
) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
547
571
1,414
1,263 Income Tax Expense
(219
)
(233
)
(571
)
(519
) INCOME FROM CONTINUING OPERATIONS
328
338
843
744 Income (Loss) from Discontinued Operations, net of tax (expense) benefit of $(1) and $5 for the quarter and nine months ended 2007
1
(8
) EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
$
328
$
339
$
843
$
736 See disclosures regarding PSEG Power LLC included in the 5
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
September 30,
September 30,
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
PSEG POWER LLC
September 30,
December 31,
(Millions) ASSETS CURRENT ASSETS Cash and Cash Equivalents
$
22
$
11 Accounts Receivable
448
533 Accounts ReceivableAffiliated Companies, net
328
441 Fuel
1,077
791 Materials and Supplies
221
220 Derivative Contracts
124
46 Restricted Funds
28
50 Prepayments
36
26 Other
47
31 Total Current Assets
2,331
2,149 PROPERTY, PLANT AND EQUIPMENT
7,170
6,565 Less: Accumulated Depreciation and Amortization
(1,948
)
(1,814
) Net Property, Plant and Equipment
5,222
4,751 NONCURRENT ASSETS Nuclear Decommissioning Trust (NDT) Funds
1,100
1,276 Goodwill
16
16 Other Intangibles
34
35 Other Special Funds
28
45 Derivative Contracts
65
7 Other
67
57 Total Noncurrent Assets
1,310
1,436 TOTAL ASSETS
$
8,863
$
8,336 LIABILITIES AND MEMBERS EQUITY CURRENT LIABILITIES Long-Term Debt Due Within One Year
$
250
$
Accounts Payable
564
648 Short-Term Loan from Affiliate
168
238 Derivative Contracts
288
300 Accrued Interest
81
34 Other
165
118 Total Current Liabilities
1,516
1,338 NONCURRENT LIABILITIES Deferred Income Taxes and Investment Tax Credits (ITC)
300
176 Asset Retirement Obligations
328
309 Other Postretirement Benefit (OPEB) Costs
138
129 Derivative Contracts
120
158 Accrued Pension Costs
54
70 Environmental Costs
55
55 Long-Term Accrued Taxes
15
26 Other
40
12 Total Noncurrent Liabilities
1,050
935 COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5) LONG-TERM DEBT Total Long-Term Debt
2,653
2,902 MEMBERS EQUITY Contributed Capital
2,000
2,000 Basis Adjustment
(986
)
(986
) Retained Earnings
2,806
2,438 Accumulated Other Comprehensive Loss
(176
)
(291
) Total Members Equity
3,644
3,161 TOTAL LIABILITIES AND MEMBERS EQUITY
$
8,863
$
8,336 See disclosures regarding PSEG Power LLC included in the 6
CONDENSED CONSOLIDATED BALANCE SHEETS
2008
2007
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
PSEG POWER LLC
For The Nine Months
2008
2007
(Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income
$
843
$
736 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: Depreciation and Amortization
121
104 Amortization of Nuclear Fuel
75
73 Interest Accretion on Asset Retirement Obligations
19
17 Provision for Deferred Income Taxes and ITC
69
191 Net Realized and Unrealized (Gains) Losses on Energy Contracts and Other Derivatives
(45
)
28 Non-Cash Employee Benefit Plan Costs
18
21 Net Realized (Gains) Losses and (Income) Expense from NDT Funds
22
(37
) Net Change in Working Capital: Fuel, Materials and Supplies
(287
)
(49
) Margin Deposit Asset
146
(31
) Margin Deposit Liability
18
(2
) Accounts Receivable
45
(38
) Accounts Payable
(118
)
(179
) Accounts Receivable/Payable-Affiliated Companies, net
209
191 Accrued Interest Payable
47
46 Other Current Assets and Liabilities
5
(5
) Employee Benefit Plan Funding and Related Payments
(20
)
(13
) Other
42
(5
) Net Cash Provided By Operating Activities
1,209
1,048 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment
(677
)
(501
) Short-Term LoanAffiliated Company, net
(37
) Proceeds from Sale of Discontinued Operations
325 Sales of Property, Plant and Equipment
2
40 Proceeds from NDT Funds Sales
1,839
1,275 NDT Funds Interest and Dividends
37
35 Investment in NDT Funds
(1,864
)
(1,295
) Restricted Funds
22
Other
(12
)
(15
) Net Cash Used In Investing Activities
(653
)
(173
) CASH FLOWS FROM FINANCING ACTIVITIES Cash Dividend Paid
(475
)
(825
) Short-Term LoanAffiliated Company, net
(70
)
(54
) Net Cash Used In Financing Activities
(545
)
(879
) Net Increase (Decrease) in Cash and Cash Equivalents
11
(4
) Cash and Cash Equivalents at Beginning of Period
11
13 Cash and Cash Equivalents at End of Period
$
22
$
9 Supplemental Disclosure of Cash Flow Information: Income Taxes Paid
$
458
$
266 Interest Paid, Net of Amounts Capitalized
$
84
$
89 See disclosures regarding PSEG Power LLC included in the 7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Ended
September 30,
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
[THIS PAGE INTENTIONALLY LEFT BLANK]
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
For The Quarters
For The Nine
Months Ended
2008
2007
2008
2007
(Millions)
(Unaudited) OPERATING REVENUES
$
2,274
$
2,106
$
6,750
$
6,340 OPERATING EXPENSES Energy Costs
1,521
1,341
4,527
4,083 Operation and Maintenance
313
308
993
947 Depreciation and Amortization
161
161
443
449 Taxes Other Than Income Taxes
31
31
101
104 Total Operating Expenses
2,026
1,841
6,064
5,583 OPERATING INCOME
248
265
686
757 Other Income
2
2
9
12 Other Deductions
(2
)
(1
)
(3
)
(3
) Interest Expense
(82
)
(85
)
(244
)
(250
) INCOME BEFORE INCOME TAXES
166
181
448
516 Income Tax Expense
(68
)
(74
)
(161
)
(214
) NET INCOME
98
107
287
302 Preferred Stock Dividends
(1
)
(1
)
(3
)
(3
) EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
$
97
$
106
$
284
$
299 See disclosures regarding Public Service Electric and Gas Company included in the 8
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Ended
September 30,
September 30,
Notes to Condensed Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
September 30,
December 31,
(Millions) ASSETS CURRENT ASSETS Cash and Cash Equivalents
$
42
$
32 Accounts Receivable, net of allowances of $51 in 2008 and $45 in 2007
886
995 Unbilled Revenues
263
353 Materials and Supplies
65
53 Prepayments
214
57 Restricted Funds
6
7 Derivative Contracts
1 Deferred Income Taxes
43
44 Total Current Assets
1,519
1,542 PROPERTY, PLANT AND EQUIPMENT
12,033
11,531 Less: Accumulated Depreciation and Amortization
(4,065
)
(3,920
) Net Property, Plant and Equipment
7,968
7,611 NONCURRENT ASSETS Regulatory Assets
5,654
5,165 Long-Term Investments
156
153 Other Special Funds
47
57 Other
105
109 Total Noncurrent Assets
5,962
5,484 TOTAL ASSETS
$
15,449
$
14,637 See disclosures regarding Public Service Electric and Gas Company included in the 9
CONDENSED CONSOLIDATED BALANCE SHEETS
2008
2007
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
September 30,
December 31,
(Millions) LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES Long-Term Debt Due Within One Year
$
495
$
429 Commercial Paper and Loans
181
65 Accounts Payable
365
325 Accounts PayableAffiliated Companies, net
336
559 Accrued Interest
59
56 Accrued Taxes
3
29 Clean Energy Program
140
135 Derivative Contracts
21
20 Obligation to Return Cash Collateral
181
79 Other
204
239 Total Current Liabilities
1,985
1,936 NONCURRENT LIABILITIES Deferred Income Taxes and ITC
2,530
2,440 Other Postretirement Benefit (OPEB) Costs
821
821 Accrued Pension Costs
20
63 Regulatory Liabilities
380
419 Clean Energy Program
563
14 Environmental Costs
613
594 Asset Retirement Obligations
239
231 Derivative Contracts
57
36 Long-Term Accrued Taxes
75
75 Other
31
9 Total Noncurrent Liabilities
5,329
4,702 COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5) CAPITALIZATION LONG-TERM DEBT Long-Term Debt
3,088
3,102 Securitization Debt
1,396
1,530 Total Long-Term Debt
4,484
4,632 PREFERRED SECURITIES Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2008 and 2007795,234 shares
80
80 COMMON STOCKHOLDERS EQUITY Common Stock; 150,000,000 shares authorized; issued and outstanding, 2008 and 2007132,450,344 shares
892
892 Contributed Capital
170
170 Basis Adjustment
986
986 Retained Earnings
1,521
1,237 Accumulated Other Comprehensive Income
2
2 Total Common Stockholders Equity
3,571
3,287 Total Capitalization
8,135
7,999 TOTAL LIABILITIES AND CAPITALIZATION
$
15,449
$
14,637 See disclosures regarding Public Service Electric and Gas Company included in 10
CONDENSED CONSOLIDATED BALANCE SHEETS
2008
2007
(Unaudited)
the Notes to Condensed Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
For The Nine Months
Ended
2008
2007
(Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income
$
287
$
302 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: Depreciation and Amortization
443
449 Provision for Deferred Income Taxes and ITC
33
(114
) Non-Cash Employee Benefit Plan Costs
97
104 Non-Cash Interest Expense
11
9 Cost of Removal
(33
)
(28
) Employee Benefit Plan Funding and Related Payments
(92
)
(53
) Over Recovery of Electric Energy Costs (BGS and NTC)
32
1 Under Recovery of Gas Costs
(53
)
(39
) Under Recovery of SBC
(42
)
(29
) Other Non-Cash Charges
(3
)
(2
) Net Changes in Certain Current Assets and Liabilities: Accounts Receivable and Unbilled Revenues
198
9 Materials and Supplies
(12
)
(8
) Prepayments
(157
)
(184
) Accrued Taxes
(26
)
(1
) Accrued Interest
3
(3
) Accounts Payable
40
72 Accounts Receivable/Payable-Affiliated Companies, net
(264
)
(201
) Obligation to Return Cash Collateral
102
12 Other Current Assets and Liabilities
(19
)
(47
) Other
(5
) Net Cash Provided By Operating Activities
545
244 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment
(534
)
(421
) Proceeds from the Sale of Property, Plant and Equipment
1
3 Restricted Funds
(1
)
(1
) Net Cash Used In Investing Activities
(534
)
(419
) CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Short-Term Debt
116
173 Issuance of Long-Term Debt
700
350 Redemption of Long-Term Debt
(651
)
(113
) Redemption of Securitization Debt
(127
)
(121
) Deferred Issuance Costs
(4
)
(3
) Premium Paid on Early Retirement of Debt
(32
)
Cash Dividends Paid on Common Stock
(100
) Preferred Stock Dividends
(3
)
(3
) Net Cash (Used In) Provided By Financing Activities
(1
)
183 Net Increase In Cash and Cash Equivalents
10
8 Cash and Cash Equivalents at Beginning of Period
32
28 Cash and Cash Equivalents at End of Period
$
42
$
36 Supplemental Disclosure of Cash Flow Information: Income Taxes Paid
$
109
$
301 Interest Paid, Net of Amounts Capitalized
$
235
$
241 See disclosures regarding Public Service Electric and Gas Company 11
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30,
(Unaudited)
included in the Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS This combined Form 10-Q is separately filed by Public Service Enterprise Group Incorporated (PSEG), PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G). Information contained herein relating to any individual company is filed by such company on its own behalf. Power and
PSE&G each make representations only as to itself and make no representations as to any other company. Note 1. Organization and Basis of Presentation Organization PSEG PSEG has four principal direct wholly owned subsidiaries: Power, PSE&G, PSEG Energy Holdings L.L.C. (Energy Holdings) and PSEG Services Corporation (Services). Power Power is a multi-regional, wholesale energy supply company that integrates its generating asset operations and gas supply commitments with its wholesale energy, fuel supply, energy trading and marketing and risk management function through three principal direct wholly owned subsidiaries: PSEG Fossil LLC
(Fossil), PSEG Nuclear LLC (Nuclear), and PSEG Energy Resources & Trade LLC (ER&T). Fossil and Nuclear own and operate generation and generation-related facilities. ER&T is responsible for day-to-day management of Powers portfolio. Fossil, Nuclear and ER&T are subject to regulation by the Federal Energy
Regulatory Commission (FERC) and Nuclear is also subject to regulation by the Nuclear Regulatory Commission (NRC). PSE&G PSE&G is an operating public utility engaged principally in the transmission of electric energy and distribution of electric energy and natural gas in certain areas of New Jersey. PSE&G is subject to regulation by the New Jersey Board of Public Utilities (BPU) and FERC. PSE&G Transition Funding LLC (Transition Funding) and PSE&G Transition Funding II LLC (Transition Funding II), are wholly owned, bankruptcy-remote subsidiaries of PSE&G that purchased certain transition properties from PSE&G and issued transition bonds secured by such properties. The transition
properties consist principally of the statutory rights to receive electricity consumption-based per kilowatt-hour (kWh) charges from PSE&G electric distribution customers, which represent irrevocable rights to receive amounts sufficient to recover certain of PSE&Gs transition costs related to deregulation, as approved
by the BPU. Energy Holdings Energy Holdings has two principal direct wholly owned subsidiaries: PSEG Global L.L.C. (Global), which primarily develops, owns and operates domestic projects engaged in generation of energy and PSEG Resources L.L.C. (Resources), which has invested primarily in energy-related leveraged leases. Energy
Holdings also owns Enterprise Group Development Corporation (EGDC), a commercial real estate property management business. Global has reduced its international risk by monetizing the majority of its international investments. In July 2008, Global closed on the sale of its largest remaining international investment in the SAESA Group, and its sale of Bioenergie S.p.A. (Bioenergie), its investment in Italy, is pending. For additional
information, see Note 3. Discontinued Operations, Dispositions and Impairments. Globals remaining international investments in Venezuela and India had a total net book value of $52 million as of September 30, 2008. Services Services provides management and administrative and general services to PSEG and its subsidiaries. These include accounting, treasury, financial risk management, law, tax, planning, information technology, investor relations and certain other services. Services charges PSEG and its subsidiaries for the cost of
work performed and services provided pursuant to intercompany service agreements. 12
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation PSEG, Power and PSE&G The respective financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) applicable to Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements (Notes) should be read in conjunction
with, and update and supplement matters discussed in, PSEGs, Powers and PSE&Gs respective Annual Reports on Form 10-K for the year ended December 31, 2007 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008. The unaudited condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. The year-end Condensed Consolidated
Balance Sheets were derived from the audited Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2007. Reclassifications PSEG and Power Certain reclassifications have been made to the prior period financial statements to conform to the 2008 presentation. In accordance with a new policy established in the first quarter of 2008 resulting from the adoption of a new accounting standard, Power has adjusted its Condensed Consolidated Balance Sheet
as of December 31, 2007 to net the fair value of cash collateral receivables and payables with the corresponding net derivative balances. See Note 2. Recent Accounting Standards for additional information. In addition, operating results for the SAESA Group and Bioenergie were reclassified to Income (Loss) from
Discontinued Operations on the Condensed Consolidated Statements of Operations of PSEG for the quarter and nine months ended September 30, 2007. See Note 3. Discontinued Operations, Dispositions and Impairments. Note 2. Recent Accounting Standards The accounting standards discussed below were issued by the Financial Accounting Standards Board (FASB), but have not yet been adopted by PSEG, Power or PSE&G. PSEG, Power and PSE&G will adopt the following new standards effective January 1, 2009 and do not anticipate a material impact to their respective financial statements upon adoption.
Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business Combinations (SFAS 141(R))
In December 2007, the FASB issued SFAS 141(R) which will change financial accounting and reporting of business combination transactions. It is based on the principle that all assets acquired and liabilities assumed in a business combination should be measured at their acquisition date fair values, with limited
exceptions. This standard applies to all transactions and events in which an entity obtains control of one or more businesses of an acquiree. The standard also expands the definition of a business. A transaction formerly recorded as an asset acquisition may qualify as a business combination under SFAS 141(R). It
also requires that acquisition-related costs and certain restructuring costs be recognized separately from the business combination. Any business combinations for which the acquisition date is on or after January 1, 2009 will be accounted for under this new guidance. 13
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting Research Bulletin (ARB) No. 51 (SFAS 160)
In December 2007, the FASB issued SFAS 160 which significantly changes the financial reporting relationship between a parent and non-controlling interests (i.e. minority interests). SFAS 160 requires all entities to report minority interests in subsidiaries as a separate component of equity in the consolidated
financial statements. Accordingly, the amount of net income attributable to the noncontrolling interest is required to be included in consolidated net income on the face of the income statement. Further, SFAS 160 requires that transactions between a parent and noncontrolling interests should be treated as equity.
However, if a subsidiary is deconsolidated, a parent is required to recognize a gain or loss. SFAS 160 will be applied prospectively, except for presentation and disclosure requirements which are required to be applied retrospectively.
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS 161)
In March 2008, the FASB issued SFAS 161 which expands derivative disclosures by requiring an entity to disclose: i) an understanding of how and why an entity uses derivatives, ii) an understanding of how derivatives and related hedged items are accounted for and iii) transparency into the overall impact of
derivatives on an entitys financial statements.
FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3)
In April 2008, the FASB issued FSP FAS 142-3 to amend the factors an entity should consider in determining the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The FSP would allow an entity to consider its own experience regarding renewals and
extensions, as long as an entitys own experience is consistent with the intended use of similar assets. If an entity lacks such experience, it would look to market participant information that is consistent with the highest and best use of the asset and make adjustments for other entity-specific factors.
Emerging Issues Task Force (EITF) Issue No. 08-5, Issuers Accounting for Liabilities Measured at Fair Value with a Third-Party Guarantee (EITF 08-5)
In September 2008, the FASB ratified the EITF 08-5 consensus on fair valuing of liabilities that are recognized or disclosed at fair value and have third party guarantees or other third party credit enhancements. Under EITF 08-5, an issuer of a liability with third party guarantees or other third party credit
enhancements would not include the effect of the third party guarantees (or credit enhancements) in the fair value measurement of the liability. PSEG, Power and PSE&G will adopt the following new standard when effective. They do not anticipate a material impact to their respective financial statements upon adoption.
FSP FAS 133-1 and FASB Interpretation (FIN) 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (FSP FAS 133-1 and FIN 45-4)
In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4 to require enhanced disclosures for credit derivatives within the scope of SFAS 133 and all financial guarantees subject to FIN 45. The FSP amends FAS 133 to require sellers of credit derivatives, including credit derivatives embedded in hybrid instruments, to disclose information that would enable users of the financial information to assess the potential effect of the instruments on the reporting companys financial position. It also amends
FIN 45 to require guarantors to disclose the current status of the payment / performance risk. FSP FAS 133-1 and FIN 45-4 are effective for reporting periods ending after November 15, 2008. Earlier adoption is encouraged. PSEG, Power and PSE&G will include additional disclosures, as suggested by this FSP, in their annual financial statements for 2008 and subsequent interim and annual periods and do
not anticipate a material impact to their respective financial statements upon adoption. 14
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FSP FAS 133-1 and FIN 45-4 also clarify the effective date for SFAS 161, stating that the disclosure requirements of SFAS 161 will be effective for quarterly periods beginning after November 15, 2008 and fiscal years that include those periods. The following new accounting standards were adopted by PSEG, Power and PSE&G during 2008.
SFAS No. 157, Fair Value Measurements (SFAS 157)
PSEG, Power and PSE&G In September 2006, the FASB issued SFAS 157 which provides a single definition of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Prior to SFAS 157, guidance for applying fair value was incorporated into several accounting
pronouncements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources (observable inputs) and those based on an entitys own
assumptions (unobservable inputs). Under SFAS 157, fair value measurements are disclosed by level within that hierarchy, with the highest priority being quoted prices in active markets. PSEG, Power and PSE&G adopted SFAS 157 (except for certain non-financial assets and non-financial liabilities as described in FSP FAS 157-2) effective January 1, 2008. In accordance with the provisions of SFAS 157, PSEG recorded a cumulative effect adjustment of $22 million (after-tax) to January 1, 2008
Retained Earnings associated with the implementation of SFAS 157. In February 2008, the FASB issued FSP FAS 157-2 to partially defer the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities. In February 2008, the FASB issued FSP FAS 157-1 to exclude leasing transactions from
SFAS 157s scope. In October 2008, the FASB also issued FSP FAS 157-3 to address entities concerns about lack of observable markets or observable inputs in determining the fair value of a financial asset when the market for that asset is not active. For additional information, see Note 13. Fair Value Measurements.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159)
In February 2007, the FASB issued SFAS 159, which permits entities to measure many financial instruments and certain other items at fair value that would not otherwise be required to be measured at fair value. An entity would report unrealized gains and losses in earnings at each subsequent reporting date
on items for which the fair value option has been elected. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.
The decision whether to elect the fair value option is applied instrument by instrument, with a few exceptions. The decision is irrevocable and it is required to be applied only to entire instruments and not to portions of instruments. The statement requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities; and (b) between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and
liabilities. SFAS 159 was effective for financial statements issued for fiscal years beginning after November 15, 2007. Upon implementation, an entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of Retained Earnings. PSEG, Power and PSE&G adopted SFAS 159 effective January 1, 2008; however, to date, PSEG, Power and PSE&G have not elected to measure any of their respective assets or liabilities at fair value under this standard.
FSP FIN 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1)
PSEG and Power In April 2007, the FASB issued FSP FIN 39-1, which amends FIN 39, Offsetting of Amounts Related to Certain Contracts to permit an entity to offset cash collateral paid or received against fair value amounts recognized for derivative instruments held with the same counterparty under the same master
netting arrangement. 15
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PSEG and Power adopted the FSP effective January 1, 2008. In accordance with the provisions of FSP FIN 39-1, PSEG and Power established a policy of netting fair value cash collateral receivables and payables with the corresponding net derivative balances. The adoption of FSP FIN 39-1 resulted in PSEG
and Power including cash collateral received of $16 million in their net derivative positions as of September 30, 2008. Amounts in prior period statements have been retroactively adjusted, as required under the FSP. Note 3. Discontinued Operations, Dispositions and Impairments Discontinued Operations Power Lawrenceburg Energy Center (Lawrenceburg) In May 2007, Power completed the sale of Lawrenceburg, a 1,096-megawatt (MW), gas-fired combined cycle electric generating plant located in Lawrenceburg, Indiana, to AEP Generating Company, a subsidiary of American Electric Power Company, Inc. for a sale price of $325 million. Lawrenceburgs operating results for the quarter and nine months ended September 30, 2007, which are included in Discontinued Operations, are summarized below:
Quarter
Nine Months
(Millions) Operating Revenues
$
$
Income (Loss) Before Income Taxes
$
2
$
(13
) Net Income (Loss)
$
1
$
(8
) Energy Holdings Bioenergie In August 2008, Global entered into an agreement to sell its 85% ownership interest in Bioenergie, which owns three biomass generation plants in Italy through its ownership of 100% of San Marco Bioenergie S.p.A. and 50% of Biomasse for $42 million. A $4 million down payment was made by the purchaser
in conjunction with the execution of the agreement. The sale is pending. Bioenergies operating results for the quarters and nine months ended September 30, 2008 and 2007, which are included in Discontinued Operations, are summarized below:
Quarters
Nine Months
2008
2007
2008
2007
(Millions) Operating Revenues
$
13
$
10
$
35
$
10 Income (Loss) Before Income Taxes
$
(29
)
$
1
$
(28
)
$
(10
) Net Income (Loss)
$
(8
)
$
1
$
(9
)
$
(13
) Bioenergies operating results for the quarter and nine months ended September 30, 2008 include a pre-tax impairment charge of $33 million and related tax benefits of $13 million. 16
(UNAUDITED)
Ended
September 30,
2007
Ended
September 30,
2007
Ended
September 30,
Ended
September 30,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The carrying amounts of Bioenergies assets as of September 30, 2008 and December 31, 2007 are summarized in the following table:
As of
As of
(Millions) Current Assets
$
25
$
23 Noncurrent Assets
97
138 Total Assets of Discontinued Operations
$
122
$
161 Current Liabilities
$
21
$
21 Noncurrent Liabilities
47
55 Total Liabilities of Discontinued Operations
$
68
$
76 SAESA Group In June 2008, Global signed an agreement to sell its investment in the SAESA Group, which consists of four distribution companies, one transmission company and a generation facility located in Chile. The sale was completed in July 2008 for a total purchase price of $1.3 billion, including the assumption of
$413 million of the consolidated debt of the group. The sale resulted in an after-tax gain of $187 million, which is reported as Gain on Disposal of Discontinued Operations. Net cash proceeds, after Chilean and U.S. taxes of $269 million, were $612 million. A tax charge of $82 million was recognized in the fourth
quarter of 2007 relating to the discontinuation of applying Accounting Principle Board No. 23, Accounting for Income TaxesSpecial Areas. SAESA Groups operating results for the quarters and nine months ended September 30, 2008 and 2007, which are included in Discontinued Operations, are summarized below:
Quarters
Nine Months
2008
2007
2008
2007
(Millions) Operating Revenues
$
38
$
119
$
379
$
317 Income (Loss) Before Income Taxes
$
(5
)
$
11
$
36
$
40 Net Income
$
1
$
10
$
30
$
35 The carrying amounts of SAESA Groups assets as of December 31, 2007 are summarized in the following table:
As of
(Millions) Current Assets
$
191 Noncurrent Assets
971 Total Assets of Discontinued Operations
$
1,162 Current Liabilities
$
130 Noncurrent Liabilities
390 Total Liabilities of Discontinued Operations
$
520 Electroandes S.A. (Electroandes) On October 17, 2007, Global sold its investment in Electroandes, a hydro-electric generation and transmission company in Peru that owns and operates four hydro-generation plants with total capacity of 180 MW and 437 miles of electric transmission lines, for a total purchase price of $390 million, including the
assumption of approximately $108 million of debt. 17
(UNAUDITED)
September 30,
2008
December 31,
2007
Ended
September 30,
Ended
September 30,
December 31,
2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Electroandes operating results for the quarter and nine months ended September 30, 2007, which are included in Discontinued Operations, are summarized below:
Quarter
Nine Months
(Millions) Operating Revenues
$
14
$
38 Income Before Income Taxes
$
7
$
14 Net Income (Loss)
$
4
$
(10
) Dispositions Power In December 2006, Power recorded a pre-tax impairment loss of $44 million to write down four turbines to their estimated realizable value and reclassified them to Assets Held for Sale on Powers Condensed Consolidated Balance Sheet. In April 2007, Power sold the four turbines to a third party and received
proceeds of approximately $40 million, which approximated the recorded book value. Energy Holdings Chilquinta Energia S.A. (Chilquinta) and Luz del Sur S.A.A. (LDS) In December 2007, Global closed on the sales of its ownership interest in the Chilean electric distributor, Chilquinta and its affiliates, and in the Peruvian electric distributor, LDS and its affiliates, for $685 million. Net cash proceeds after taxes were approximately $480 million, which resulted in an after-tax loss
of $23 million. Thermal Energy Development Partnership, L.P. (Tracy Biomass) In January 2007, Global sold its interest in Tracy Biomass for approximately $7 million, resulting in a 2007 pre-tax gain of approximately $7 million ($6 million after-tax). Impairments Energy Holdings Venezuela PSEG has indirect ownership interests in two generating facilities in Maracay and Cagua, Venezuela that have a total capacity of 120 MW. The projects are owned and operated by Turboven Company Inc. (Turboven), an entity which is jointly-owned by Global (50%) and Corporacion Industrial de Energia
(CIE). Global also has a 9% indirect interest in Turbogeneradores de Maracay through a partnership with CIE. During 2007, the Venezuelan government announced its intention to nationalize certain sectors of Venezuelan industry and commerce, including Turboven. Global entered into valuation discussions with the government of Venezuela as part of the nationalization efforts and, based upon a review of the
circumstances in September 2007, recorded an impairment charge of $11 million ($7 million, after-tax), reflecting Globals estimated market valuation of the project. Note 4. Earnings Per Share (EPS) PSEG Diluted EPS is calculated by dividing Net Income by the weighted average number of shares of common stock outstanding, including shares issuable upon exercise of stock options outstanding or vesting of restricted stock awards granted under PSEGs stock compensation plans and upon payment of
performance units or restricted stock units. The following table shows the effect of these stock options, restricted stock awards, 18
(UNAUDITED)
Ended
September 30,
2007
Ended
September 30,
2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS performance units and restricted stock units on the weighted average number of shares outstanding used in calculating diluted EPS:
Quarters Ended September 30,
Nine Months Ended September 30,
2008
2007
2008
2007
Basic
Diluted
Basic
Diluted
Basic
Diluted
Basic
Diluted EPS Numerator: Continuing Operations
$
476
$
476
$
490
$
490
$
746
$
746
$
1,106
$
1,106 Discontinued Operations
180
180
16
16
208
208
4
4 Net Income
$
656
$
656
$
506
$
506
$
954
$
954
$
1,110
$
1,110 EPS Denominator: Weighted Average Common
507,724
507,724
508,543
508,543
508,233
508,233
507,206
507,206 Effect of Stock Options
369
547
435
711 Effect of Stock Performance
176
153
49 Effect of Restricted Stock
57
69
Total Shares
507,724
508,326
508,543
509,090
508,233
508,890
507,206
507,966 EPS: Continuing Operations
$
0.94
$
0.94
$
0.96
$
0.96
$
1.47
$
1.47
$
2.18
$
2.18 Discontinued Operations
0.35
0.35
0.03
0.03
0.41
0.41
0.01
0.01 Net Income
$
1.29
$
1.29
$
0.99
$
0.99
$
1.88
$
1.88
$
2.19
$
2.19 Dividend payments on common stock for the quarters ended September 30, 2008 and 2007 were $0.3225 and $0.2925 per share, respectively, and totaled $164 million and $149 million, respectively. Dividend payments on common stock for the nine months ended September 30, 2008 and 2007 were $0.9675 and
$0.8775 per share, respectively, and totaled $492 million and $445 million, respectively. Note 5. Commitments and Contingent Liabilities Guaranteed Obligations Power Power contracts for electricity, natural gas, oil, coal, pipeline capacity, transportation and emission allowances and engages in risk management activities through ER&T. These activities primarily involve the purchase and sale of energy and related products under transportation, physical, financial and forward
contracts at fixed and variable prices. These transactions are executed with numerous counterparties and brokers. Counterparties and brokers may require guarantees, cash or cash-related instruments to be deposited on these transactions as described below. Power has unconditionally guaranteed payments by its subsidiaries, ER&T and PSEG Power New York Inc. (Power New York), in commodity-related transactions to support current exposure, interest and other costs on sums due and payable in the ordinary course of business. These payment guarantees are
provided to counterparties in order to obtain credit. Under these agreements, guarantees cover lines of credit between entities and are often reciprocal in nature. The exposure between counterparties can move in either direction. The face value of the guarantees outstanding as of September 30, 2008 and December
31, 2007 was $1.8 billion and $1.5 billion, respectively. In order for Power to incur a liability for the face value of the outstanding guarantees, ER&T and Power New York would have to fully utilize the credit granted to them by every counterparty to whom Power has provided a guarantee and all of ER&Ts and Power New Yorks contracts would have to be out-of-
the-money (if the contracts are terminated, Power would owe money to the counterparties). The probability of all contracts at ER&T and Power New York being simultaneously out-of-the-money is highly unlikely due to offsetting positions within the portfolio. For this reason, the current exposure at any point in
time is a more meaningful representation of the potential liability to Power under these guarantees if ER&T and/or 19
(UNAUDITED)
Earnings (Millions)
(Thousands)
Shares Outstanding
Units
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Power New York were to default. This current exposure consists of the net of accounts receivable and accounts payable and the forward value on open positions, less any margins posted. The current exposure from such liabilities was $412 million and $521 million as of September 30, 2008 and December 31, 2007,
respectively. Power is subject to counterparty collateral calls related to commodity contracts and is subject to certain creditworthiness standards as guarantor under performance guarantees for ER&Ts agreements. Changes in commodity prices, including fuel, emissions allowances and electricity, can have a material impact
on margin requirements under such contracts, which are posted and received primarily in the form of letters of credit. Power also routinely enters into futures and options transactions for electricity and natural gas as part of its operations. Generally, such futures contracts require a deposit of cash margin with
brokers, the amount of which is subject to change based on market movement and in accordance with exchange rules. These margins decreased significantly in the third quarter of 2008 due to decreasing commodity prices. As of September 30, 2008 and December 31, 2007, Power had the following margin posted
and received no additional demands to satisfy collateral obligations:
As of
As of
(Millions) Letters of Credit Margin Posted
$
258
$
186 Letters of Credit Margin Received
$
109
$
42 Net Cash Margin Deposited
$
2
$
166 Power has established a policy of netting fair value cash collateral receivables and payables with the corresponding net energy contract balances. As a result, Power has included net cash collateral received of $16 million and net cash collateral paid of $86 million in its corresponding net energy contract positions
as of September 30, 2008 and December 31, 2007, respectively. The remaining balance of net cash margin deposited shown above is primarily included in Accounts Receivable on Powers Condensed Consolidated Balance Sheets. In the event of a deterioration of Powers credit rating to below investment grade, which would represent a two level downgrade from its current ratings, many of these agreements allow the counterparty to demand that ER&T provide further performance assurance. As of September 30, 2008, if Power were to
lose its investment grade rating, ER&T could be required to post additional collateral of approximately $825 million. Power has sufficient liquidity to post such collateral. As of September 30, 2008, there was $2.8 billion of available liquidity under PSEG and Powers credit facilities that could be used to post
collateral. In addition to amounts discussed above, Power had posted $52 million in letters of credit as of September 30, 2008 and $39 million in letters of credit as of December 31, 2007 to support various other contractual and environmental obligations. Environmental Matters PSEG, Power and PSE&G Passaic River The U.S. Environmental Protection Agency (EPA) has determined that a six-mile stretch of the Passaic River in the area of 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). PSE&G and certain of its predecessors conducted industrial operations at properties adjacent to the Passaic River facility. The operations included one operating electric generating station (Essex Site), one former generating station and four former manufactured gas plants (MGPs). PSE&Gs costs to clean up
former MGPs are recoverable from utility customers through the Societal Benefits Clause (SBC). PSE&G has sold the site of the former generating station and obtained releases and indemnities for liabilities arising out of the site in connection with the sale. The Essex Site was transferred to Power in August 2000.
Power assumed any environmental liabilities of PSE&G associated with the electric generating stations that PSE&G transferred to it, including the Essex Site. 20
(UNAUDITED)
September 30,
2008
December 31,
2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In 2003, the EPA notified 41 potentially responsible parties (PRPs), including Power and PSE&G, that it was expanding its assessment of the Passaic River Study Area to the entire 17-mile tidal reach of the lower Passaic River. The EPA further indicated, with respect to PSE&G, that it believed that hazardous
substances had been released from the Essex Site and a former MGP located in Harrison, New Jersey (Harrison Site), which also includes facilities for PSE&Gs ongoing gas operations. The EPA estimated that its study would require five to eight years to complete and would cost $20 million, of which it would seek
to recover $10 million from the PRPs, including Power and PSE&G. In 2006, the EPA notified the PRPs that the cost of its study will greatly exceed the $20 million initially estimated and after discussion, 73 PRPs, including Power and PSE&G, have agreed to assume responsibility for the study pursuant to an Administrative Order on Consent and to divide the associated costs
among themselves according to a mutually agreed-upon formula. The PRP group is presently executing the study. The percentage allocable to Power and PSE&G varies depending on the number of PRPs who have agreed to divide the costs but it currently approximates 6%, approximately 80% of which is
attributable to PSE&Gs former MGPs and approximately 20% to Powers generating station. Power has provided notice to insurers concerning this potential claim. In June 2007, the EPA announced a draft Focused Feasibility Study (FFS) that proposes six options with estimated costs ranging from $900 million to $2.3 billion to address contamination cleanup in the lower eight miles of the Passaic River in addition to a No Action alternative. The work contemplated by
the FFS is not subject to the Administrative Order on Consent or the cost sharing agreement. The EPA is reviewing comments received on the draft FFS. In 2005, the NJDEP filed suit against a PRP and related companies in New Jersey Superior Court seeking damages and reimbursement for costs expended by the State of New Jersey related to the PRPs former dioxin operations and its effects on the Passaic River. In September 2008, the Court issued a case
management order permitting the defendants to file third party complaints for contribution. The PRP and the other defendants have stated that they intend to join over 200 additional parties, including PSEG, Power and PSE&G. 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, causing an injury to natural resources. Pursuant to the Spill Act, the New Jersey Department
of Environmental Protection (NJDEP) requires persons conducting remediation to characterize injuries to natural resources and to address those injuries through restoration or damages. The NJDEP has regulations in effect concerning site investigation and remediation that require an ecological evaluation of
potential damages to natural resources in connection with an environmental investigation of contaminated sites. In 2003, PSEG, PSE&G and 56 other PRPs received a Directive and Notice to Insurers from the NJDEP that directed the PRPs to arrange for a natural resource damage assessment and interim
compensatory restoration of natural resource injuries along the lower Passaic River and its tributaries pursuant to the Spill Act. The NJDEP alleged in the Directive that it had determined that hazardous substances had been discharged from the Essex Site and the Harrison Site. The NJDEP announced that it had
estimated the cost of interim natural resource injury restoration activities along the lower Passaic River to approximate $950 million. In August 2007, the National Oceanic and Atmospheric Administration of the United States Department of Commerce sent a letter to PSE&G and other companies identified as PRPs
notifying them that it intended to perform an assessment of injuries to natural resources and inviting the PRPs to participate. The PRPs have not agreed to participate in either of these natural resource damage initiatives. In June 2008, an agreement was announced between the EPA and two PRPs for removal of a portion of the contaminated sediment in the Passaic River. The work will cost an estimated $80 million. The two PRPs have reserved their rights to seek contribution for the removal costs from the other PRPs,
including PSEG. Newark Bay Study Area The EPA established the Newark Bay Study Area, which it defined as Newark Bay and portions of the Hackensack River, the Arthur Kill and the Kill Van Kull. In August 2006, the EPA sent PSEG and 11 other entities notices that it considered each of the entities to be a PRP with respect to contamination in
the Newark Bay Study Area. The notice letter requested that the PRPs participate and fund the EPA-approved 21
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS study in the Newark Bay Study Area and encouraged the PRPs to contact Occidental Chemical Corporation (OCC) to discuss participating in the Remedial Investigation/Feasibility Study (RI/FS) that OCC is conducting in the Newark Bay Study Area. The EPA considers the Newark Bay Study Area, along with
the Passaic River Study Area, to be part of the Diamond Alkali Superfund Site. The notice states the EPAs belief that hazardous substances were released from sites owned by PSEG and located on the Hackensack River. Currently five of the entities, including PSEG, are participating and partially funding the
RI/FS study. The sites included two operating electric generating stations (Hudson and Kearny sites) and one former MGP. PSE&Gs costs to clean up former MGPs are recoverable from utility customers through the SBC. The Hudson and Kearny sites were transferred to Power in August 2000. Power assumed any
environmental liabilities of PSE&G associated with the electric generating stations that PSE&G transferred to it, including the Hudson and Kearny sites. Power has provided notice to insurers concerning this potential claim. Other In June 2007, the State of New Jersey filed multiple lawsuits in New Jersey Superior Court against parties, including PSE&G, who were alleged to be responsible for injuries to natural resources in New Jersey. Included in these lawsuits was a claim against PSE&G and others arising out of PSE&Gs former Camden
Coke facility, and a claim against PSE&G and others arising out of the cleanup of the Global Landfill Superfund site in Old Bridge, New Jersey. PSE&G has responded to the complaint in the natural resource damages case arising out of the former Camden Coke site and is in the process of remediating that site under its MGP
program, discussed below. In March 2008, Power executed an Amended Consent Decree, which obligates the settling parties (including PSE&G) to implement remediation of the Global Landfill site and resolves the natural resource damages claim. The Amended Consent Decree was entered by the court in
September 2008. PSEG, Power and PSE&G cannot predict what further actions, if any, or the costs or the timing thereof, that may be required with respect to the Passaic River, Newark Bay Study Area or other natural resource damages claims; however, such costs could be material. PSE&G MGP Remediation Program PSE&G is working with the NJDEP under a program to assess, investigate and remediate environmental conditions at PSE&Gs former MGP sites (Remediation Program). To date, 38 sites have been identified as sites requiring some level of remedial action. In addition, the NJDEP has announced initiatives to
accelerate the investigation and subsequent remediation of the riverbeds underlying surface water bodies that have been impacted by hazardous substances from adjoining sites. In 2005, the NJDEP initiated a program on the Delaware River aimed at identifying the 10 most significant sites for cleanup. One of the
sites identified is PSE&Gs former Camden Coke facility located in Camden. The Remediation Program is periodically reviewed, and the estimated costs are revised by PSE&G based on regulatory requirements, experience with the program and available remediation technologies. As of December 31, 2007, PSE&Gs estimate to remediate all MGP sites to completion, as well as the anticipated costs to address MGP-related material discovered in three rivers adjacent to two former MGP sites, resulted in a range between $639 million and $812 million through 2021. In the third quarter of
2008, PSE&G updated the estimated cost to remediate all MGP sites to completion and determined it could range between $644 million and $841 million from September 30, 2008 through 2021. Since no amount within the range was considered to be most likely, PSE&G recorded a liability of $644 million as of
September 30, 2008. Of this amount, $31 million was recorded in Other Current Liabilities and $613 million was reflected in Environmental Costs in Noncurrent Liabilities. The costs associated with the MGP Remediation Program have historically been recovered through the SBC charges to PSE&G ratepayers. As
such, PSE&G has recorded a $644 million Regulatory Asset. Power Prevention of Significant Deterioration (PSD)/New Source Review (NSR) The PSD/NSR regulations, promulgated under the Clean Air Act, require major sources of certain air pollutants to obtain permits, install pollution-control technology and obtain offsets, in some circumstances, 22
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS when those sources undergo a major modification, as defined in the regulations. The federal government may order companies that are not in compliance with the PSD/NSR regulations to install the best available control technology at the affected plants and to pay monetary penalties of up to $27,500 for each
day of continued violation. In November 2006, Power reached an agreement with the EPA and the NJDEP to achieve emissions reductions targets consistent with an earlier consent decree that resolved allegations of non-compliance with PSD/NSR programs at Powers Mercer, Hudson and Bergen generating stations. Under this
agreement and the consent decree, Power is required to undertake a number of technology projects, plant modifications and operating procedure changes at Hudson and Mercer designed to meet targeted reductions in emissions of sulfur dioxide (SO2), nitrogen oxide (NOx), particulate matter and mercury. Pursuant to this program, Power has installed selective catalytic reduction equipment at Mercer at a cost of $122 million. The cost of implementing the balance of the agreement is estimated at $475 million to $525 million for Mercer, to be completed by May 2010, and $700 million to $750 million for Hudson, to
be completed by the end of 2010. Fossil also purchased and retired emissions allowances by July 31, 2007, paid a $6 million civil penalty and has agreed to contribute $3 million for programs to reduce particulate emissions from diesel engines in New Jersey. Two particulate emissions reduction projects are in
development to meet the agreement criteria. In May 2007, Mercer Units 1 and 2 commenced construction of the emission control projects. In February 2008, Hudson Unit 2 commenced construction of the emission control projects. Mercury Regulation In March 2005, the EPA established a New Source Performance Standard limit for nickel emissions from oil-fired electric generating units and a cap-and-trade program for mercury emissions from coal-fired electric generating units. In February 2008, the United States Court of Appeals for the District of
Columbia Circuit issued a decision rejecting the EPAs mercury emissions program and requiring the EPA to develop standards for mercury and nickel emissions that do not rely on a cap-and-trade program. In October 2008, EPA filed a petition with the U.S. Supreme Court to review the lower courts decision.
Opposition briefs and reply briefs are permitted to be filed prior to the Supreme Court deciding whether it will review the case. The full impact, if any, of this development is uncertain. Compliance with the new mercury standards is not expected to have a material impact on Powers operations in New Jersey and
Connecticut given the stringent mercury-control requirements applicable in those states, as described below. Some uncertainty exists regarding the feasibility of achieving the reductions in mercury emissions required by the New Jersey regulations, discussed below. The estimated costs of technology believed to be capable of meeting these emissions limits at Powers coal-fired units in Connecticut, New Jersey and
Pennsylvania have been incurred or are included in Powers capital expenditure forecast. Total estimated costs for each project are between $150 million and $200 million. The costs for Mercer and Hudson are included in the cost estimates referred to in the PSD/NSR discussion above. New Jersey The regulations in New Jersey required coal-fired electric generating units to meet certain emissions limits or reduce emissions by approximately 90% by December 15, 2007, unless a one-year extension was granted by NJDEP. Companies that are parties to multi-pollutant reduction agreements are permitted to
postpone such reductions on half of their coal-fired electric generating capacity until December 15, 2012. Powers New Jersey facilities expected to achieve the remaining December 15, 2007 requirements through the installation of carbon injection technology at both Mercer Units. This was completed in January 2007; however, because there is some uncertainty as to whether the system can consistently achieve the
required reductions, Power applied for and received from NJDEP approval of a one-year extension through a facility-specific control plan that includes the installation of baghouses at the Mercer Units in 2008. Installation is scheduled to be completed by the end of 2008. With respect to the reductions required by December 15, 2012, Power anticipates compliance will be achieved through the installation of a baghouse at its Hudson Plant by the end of 2010. 23
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The mercury-control technologies are also part of Powers multi-pollutant reduction agreement, which resulted from earlier agreements that resolved issues arising out of the PSD/NSR air pollution control programs discussed above. Connecticut Mercury emissions control standards effective in July 2008 in Connecticut require coal-fired power plants to achieve either an emissions limit or 90% mercury removal efficiency through technology installed to control mercury emissions. Power has demonstrated compliance at its Bridgeport Harbor Station
resulting from the installation of a baghouse which was placed in operation in January 2008. The total costs for the installation were approximately $157 million. Pennsylvania In February 2007, Pennsylvania finalized its state-specific requirements to reduce mercury emissions from coal-fired electric generating units. The Keystone and Conemaugh generating stations will be positioned by 2010 to meet Phase I of the Pennsylvania mercury rule by benefiting from reductions realized
from the installation of controls for compliance with SO2 and NOx reductions. Phase II of the mercury rule will be addressed after a full evaluation of Phase I reductions. Emission Fees Section 185 of the Clean Air Act requires states (or in the absence of state action, the EPA) in severe and extreme non-attainment areas to adopt a penalty fee for major stationary sources if the area fails to attain the one-hour ozone National Ambient Air Quality Standard (NAAQS) set by the EPA. In June
2007, the U.S. Court of Appeals for the District of Columbia Circuit ruled against the EPA, which had sought to vacate imposition of fees for NOx emissions as part of the one-hour standard for ozone attainment implementation. Power operates electric generation stations, major stationary sources, in the New
Jersey-Connecticut severe non-attainment area that failed to meet the required NAAQS. Neither the EPA nor the states in the non-attainment areas in which Power operates have initiated the process for imposing fees in compliance with the court ruling; however, preliminary analysis suggests that penalty fees will
be approximately $6 million annually. This analysis could change if the EPA or the states issue additional guidance addressing the imposition of fees, or if Power is able to reduce its emissions of NOx in the future below the statutory threshold through the installation of control technologies at one or more of
Powers generation stations. NOx Reduction In August 2008, the NJDEP proposed revisions to NOx emission control regulations that would impose new NOx emission reduction requirements and limits for New Jersey fossil fuel fired electric generation units. Although this rule is proposed but not final, as written it could have significant impact on the
generation fleet, including the necessity to retire a significant portion of the peaking units by 2015 or 2016. If adopted as proposed, the rule could necessitate the retirement of up to 102 combustion turbines (approximately 2,000 MW) and five older New Jersey steam electric generating units (approximately 800
MW). New Jersey Industrial Site Recovery Act (ISRA) Potential environmental liabilities related to subsurface contamination at certain generating stations have been identified. In the second quarter of 1999, in anticipation of the transfer of PSE&Gs generation-related assets to Power, a study was conducted pursuant to ISRA, which applied to the sale of certain
assets. Power had a $50 million liability as of each of September 30, 2008 and December 31, 2007 related to these obligations, which is included in Environmental Costs on Powers and PSEGs Condensed Consolidated Balance Sheets. Permit Renewals In June 2001, the NJDEP issued a renewed New Jersey Pollutant Discharge Elimination System (NJPDES) permit for Salem, expiring in July 2006, allowing for the continued operation of Salem with its existing cooling water intake system. In January 2006, a renewal application prepared in accordance with
the Federal Water Pollution Control Acts (FWPCA) Section 316(b) and the Phase II 316(b) rules was filed with 24
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS the NJDEP. This allows Salem to continue operating under its existing NJPDES permit until a new permit is issued. In January 2007, the U.S. Court of Appeals for the Second Circuit issued a decision in litigation of the Phase II 316(b) regulations brought by several environmental groups, the Attorneys General of six Northeastern states, including New Jersey, the Utility Water Act Group and several of its members,
including Power. In its ruling, the Court:
remanded major portions of the regulations and determined that Section 316(b) of the FWPCA does not support the use of restoration and the site-specific cost-benefit test. instructed the EPA to reconsider the definition of best technology available without comparing the costs of the best performing technology to its benefits. Prior to this decision, Power had used restoration and/or a site-specific cost-benefit test in applications it had filed to renew the permits at its once-through cooled plants, including Salem, Hudson and Mercer. In May 2007, Power and other industry petitioners filed with the Second Circuit Court a request for a rehearing, which was denied. The parties, including Power, requested U.S. Supreme Court review of the matter. In April 2008, the U.S. Supreme Court granted the request of industry petitioners, including
Power, to review the question of whether Section 316(b) of the FWPCA allows EPA to compare costs with benefits in determining the best technology available for minimizing adverse environmental impact at cooling water intake structures. An Oral argument is currently scheduled for December 2, 2008. It is
anticipated that the U.S. Supreme Court will render a decision before the end of the 2008-2009 term. Although the rule applies to all of Powers electric generating units that use surface waters for once-through cooling purposes, the impact of the rule and the decision of the Second Circuit Court cannot be determined for all of Powers facilities. Depending on the final decision of the U.S. Supreme Court, and
subsequent actions by the EPA to promulgate a revised rule, the Second Circuits decision could have a material impact on Powers ability to renew permits at its larger once-through cooled plants in New Jersey and Connecticut, including Salem, Hudson, Mercer, Bridgeport and, possibly, Sewaren and New Haven,
without making significant upgrades to their existing intake structures and cooling systems. If the NJDEP and the Connecticut Department of Environmental Protection were to require installation of closed-cycle cooling or its equivalent at these once-through cooled facilities, the related costs and impacts would be material to Power and would require economic review to determine whether to
continue operations at these facilities. For example, Powers application to renew its Salem permit, filed in February 2006 with the NJDEP, estimated the costs associated with adding cooling towers for Salem to be approximately $1 billion, of which Powers share would be approximately $575 million. Potential costs associated with any closed-cycle
cooling requirements are not included in Powers forecasted capital expenditures. New Generation and Development Power Nuclear Power increased its generating capacity at Hope Creek and Salem Unit 2 in 2008. Phase I of the Hope Creek turbine replacement project increased the nominal capacity of the unit by 10 MW in 2005. Phase II added approximately 150 MW of nominal capacity in the second quarter of 2008. Phase I of the Salem
Unit 2 turbine upgrade increased Powers share of the nominal capacity by 14 MW in 2003. Phase II was completed and put in operation in the second quarter of 2008, concurrent with steam generator replacement and increased Powers share of the nominal capacity by approximately 23 MW. Powers total
expenditures for these projects were $215 million (including Interest Capitalized During Construction of $24 million). 25
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Power has approved the expenditure of $192 million for steam path retrofit and related upgrades at Peach Bottom Units 2 and 3. Completion of these upgrades is expected to result in an increase of 32 MW nominal (14 MW at Unit 3 in 2011 and 18 MW at Unit 2 in 2012). Expenditures for this project will
begin in the fourth quarter of 2008 and continue through 2013. Connecticut Power has been selected by the Connecticut Department of Public Utility Control in a regulatory process to build 130 MW of gas-fired peaking capacity. Final approval has been received and construction is expected to commence June 2011. The project is expected to be in-service by June 2012. Power
estimates the cost of these generating units to be $130 million to $140 million. Total capitalized expenditures to date are approximately $11 million which are included in Other Noncurrent Assets on Powers and PSEGs Condensed Consolidated Balance Sheets. Basic Generation Service (BGS) and Basic Gas Supply Service (BGSS) Power and PSE&G PSE&G obtains its electric supply requirements for customers who do not purchase electric supply from third-party suppliers through the annual New Jersey BGS auctions. Pursuant to applicable BPU rules, PSE&G enters into the Supplier Master Agreement (SMA) with the winners of these BGS auctions within
three business days following the BPUs approval of the auction results. PSE&G has entered into contracts with Power, as well as with other winning BGS suppliers, to purchase BGS for PSE&Gs load requirements. The winners of the auction are responsible for fulfilling all the requirements of a PJM Interconnection
L.L.C. (PJM) Load Serving Entity including capacity, energy, ancillary services, transmission and any other services required by PJM. BGS suppliers assume all customer migration risk and must satisfy New Jerseys renewable portfolio standards. Power seeks to mitigate volatility in its results by contracting in advance for the sale of most of its anticipated electric output as well as its anticipated fuel needs. As part of its objective, Power has entered into contracts to directly supply PSE&G and other New Jersey electric distribution companies (EDCs) with
a portion of their respective BGS requirements through the New Jersey BGS auction process, described above. In addition to the BGS-related contracts, Power also enters into firm supply contracts with EDCs, as well as other firm sales and commitments. PSE&G has contracted for its anticipated BGS-Fixed Price load, as follows:
Auction Year
2005
2006
2007
2008 36 Month Terms Ending
May 2008
May 2009
May 2010
May 2011
(a) Load (MW)
2,840
2,882
2,758
2,840 $per kWh
$
0.06541
$
0.10251
$
0.09888
$
0.1115
(a)
Prices set in the February 2008 BGS Auction became effective on June 1, 2008 when the 2005 Auction Year agreements expired.
PSE&G has a full requirements contract with Power to meet the gas supply requirements of PSE&Gs gas customers. The contract extends through March 31, 2012, and year-to-year thereafter. Power has entered into hedges for a portion of these anticipated BGSS obligations, as permitted by the BPU. The BPU
permits PSE&G to recover the cost of gas hedging up to 115 billion cubic feet or approximately 80% of its residential gas supply annual requirements through the BGSS tariff. For additional information, see Note 14. Related-Party Transactions. The BPU has conducted an audit of the gas procurement practices of all four New Jersey gas utilities, including PSE&G. A final report on the audit is forthcoming. The outcome of this proceeding cannot be predicted. 26
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Minimum Fuel Purchase Requirements Power Power has fuel purchase commitments for coal and oil for certain of its fossil generation stations through various long-term commitments, for supply of nuclear fuel for the Salem and Hope Creek nuclear generating stations and for firm transportation and storage capacity for natural gas. Powers various multi-year contracts for firm transportation and storage capacity for natural gas are primarily to meet its gas supply obligations to PSE&G. These purchase obligations are consistent with Powers strategy to enter into contracts for its fuel supply in comparable volumes to its sales contracts. Powers strategy is to maintain certain levels of uranium concentrates and uranium hexafluoride in inventory and to make periodic purchases to support such levels. As such, the commitments referred to below include estimated quantities to be purchased that are in excess of contractual minimum quantities. Powers nuclear fuel commitments cover approximately 100% of its estimated uranium, enrichment and fabrication requirements through 2011 and a portion for 2012 at Salem, Hope Creek and Peach Bottom. As of September 30, 2008, the total minimum purchase requirements included in these commitments are as follows:
Fuel Type
Commitments
Powers share Nuclear Fuel Uranium
$
594
$
372 Enrichment
$
397
$
245 Fabrication
$
199
$
126 Natural Gas
$
829
$
829 Coal/Oil
$
1,001
$
1,001 Energy Holdings The generation facilities of PSEG Texas, LP (PSEG Texas), a wholly owned subsidiary of Global, have entered into gas supply agreements for its anticipated fuel requirements to satisfy obligations under their forward energy sales contracts. As of September 30, 2008, PSEG Texas fuel purchase commitments
were $45 million which support its contracted energy sales. Regulatory Proceedings PSEG and PSE&G Electric Discount and Energy Competition Act (Competition Act) In April 2007, PSE&G and Transition Funding were served with a copy of a purported class action complaint (Complaint) in New Jersey Superior Court challenging the constitutional validity of certain stranded cost recovery provisions of the Competition Act, seeking injunctive relief against continued collection
from PSE&Gs electric customers of the Transition Bond Charge (TBC) of Transition Funding, as well as recovery of TBC amounts previously collected. Notice of the filing of the Complaint was also provided to New Jerseys Attorney General. Under New Jersey law, the Competition Act, enacted in 1999, is
presumed constitutional. In July 2007, the same plaintiff filed an amended Complaint to also seek injunctive relief from continued collection of related taxes as well as recovery of such taxes previously collected. In July 2007, PSE&G filed a motion to dismiss the amended Complaint, or, in the alternative, for summary judgment. In
October 2007, PSE&Gs and Transition Fundings motion to dismiss the Amended Complaint was granted. In November 2007, the plaintiff filed a notice of appeal with the Appellate Division of the New Jersey Superior Court. Briefing of the appeal has been completed. 27
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through 2012
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In July 2007, the same plaintiff also filed a petition with the BPU requesting review and adjustment to PSE&Gs recovery of the same stranded cost charges. In September 2007, PSE&G filed a motion with the BPU to dismiss the petition. PSE&Gs motion to dismiss the BPU petition is pending. Investment Tax Credits (ITC) The Internal Revenue Service (IRS) has issued several private letter rulings (PLRs) that concluded that the refunding of excess deferred tax and ITC balances to utility customers was permitted only over the related assets regulatory lives, which for PSE&G, was terminated upon New Jerseys electric industry
deregulation in 1999. Based on this fact, in 1999, PSE&G reversed the deferred tax and ITC liability relating to the generation assets that were transferred to Power, and recorded a $235 million reduction of the extraordinary charge due to such restructuring of the industry in New Jersey. In May 2006, the IRS issued
a PLR to PSE&G, which concluded that none of the generation ITC could be passed to utility customers without violating the IRS normalization rules. In March 2008, the U.S. Treasury Department issued final regulations that confirmed that none of the generation-related ITC could be passed to utility customers
without violating the normalization rules. PSE&G has advised the BPU of these regulations and awaits the BPUs determination on this matter. While the issuance of the regulations is a favorable development for PSE&G, no assurance can be given as to final outcome of this issue. BPU Deferral Audit The BPU Energy and Audit Division conducts audits of deferred balances under various adjustment clauses. A draft Deferral AuditPhase II report relating to the 12-month period ended July 31, 2003 was released by the consultant to the BPU in April 2005. The draft report addresses the SBC, Market
Transition Charge (MTC) and Non-Utility Generation deferred balances. The BPU released the report in May 2005. While the consultant to the BPU found that the Phase II deferral balances complied in all material respects with the BPU Orders regarding such deferrals, the consultant noted that the BPU Staff had raised certain questions with respect to the reconciliation method PSE&G had employed in calculating the
overrecovery of its MTC and other charges during the Phase I and Phase II four-year transition period. The amount in dispute is $114 million, which if required to be refunded to customers with interest through September 2008, would be $129 million. At PSE&Gs request, the matter was transmitted to the Office of Administrative Law for the development of an evidentiary record and an initial decision. The BPU granted the request in February 2007. In May 2007, PSE&G filed a motion for Summary Judgment requesting dismissal of the matter. In September
2007, the Administrative Law Judge issued an initial decision denying PSE&Gs motion to dismiss the matter and ordering the filing of testimony and evidentiary hearings. Hearings were held in July 2008 and briefs were filed in September 2008. The BPU Staff and New Jersey Division of Rate Counsel have both
asserted in briefs that the disputed amount should be refunded to customers. While PSE&G believes the MTC methodology it used was fully litigated and resolved by the prior BPU Orders in its previous electric base rate case, deferral audit and deferral proceedings, PSE&G cannot predict the outcome of this proceeding. New Jersey Clean Energy Program In the third quarter of 2008, the BPU approved funding requirements for each New Jersey utility applicable to its Renewable Energy and Energy Efficiency programs for the years 2009 to 2012. The aggregate funding amount is $1.2 billion for all years. PSE&Gs share of the $1.2 billion program is $705 million,
bringing the total liability through 2012 to $748 million. PSE&G has recorded a discounted liability of $703 million as of September 30, 2008. Of this amount, $140 million was recorded as a current liability and $563 million as a noncurrent liability. The liability has been recorded with an offsetting Regulatory Asset,
since the costs associated with this program are expected to be recovered from PSE&G ratepayers through the SBC. 28
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Energy Holdings Leveraged Lease Investments In November 2006, the IRS issued its Revenue Agents Report with respect to its audit of PSEGs federal corporate income tax returns for tax years 1997 through 2000, which disallowed all deductions associated with certain lease transactions that are similar to a type that the IRS publicly announced its
intention to challenge. In addition, the IRS Report proposed a 20% penalty for substantial understatement of tax liability. In February 2007, PSEG filed a protest of these findings with the Office of Appeals of the IRS. In April 2008, the IRS issued its Revenue Agents Report for tax years 2001 through 2003, which disallowed all deductions associated with lease transactions similar to those disallowed in its 1997 through 2000 Report. As in its prior report, the IRS proposed a 20% penalty. PSEG also filed a protest to this
report with the Office of Appeals of the IRS. As of September 30, 2008 and December 31, 2007, Resources total gross investment in such transactions was $1 billion and $1.5 billion, respectively. PSEG has been in discussions with the Office of Appeals of the IRS concerning the deductions that have been disallowed. PSEG believes that its tax position related to these transactions was proper based on applicable statutes, regulations and case law in effect at the time that the deductions were taken. There are several tax cases involving other taxpayers with similar leveraged lease investments that are pending. To date, three cases have been decided at the trial court level, two of which were decided in favor of the government. An appeal of one of these decisions was recently affirmed. The third case
involves a jury verdict that is currently being challenged by both parties on inconsistency grounds. In August 2008, the IRS publicly announced that it was issuing letters to a number of taxpayers with these types of lease transactions containing a generic settlement offer. PSEG did not accept the IRS settlement offer and will likely proceed to litigation. Earnings Impact As a result of the recent court decisions regarding these types of leveraged lease transactions, PSEG evaluated its unrecognized tax benefits under FIN 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement 109 (FIN 48), and recorded an after-tax increase to the interest reserve
of $135 million in the second quarter of 2008. This charge is recorded in Income Tax Expense in PSEGs Condensed Consolidated Statements of Operations. The after-tax increase to the interest reserve charged to income in the third quarter was $10 million. Assuming all rental payments are made pursuant to the original lease agreement, and there are no changes in tax legislation and rates, the total cash and income included in a leveraged lease transaction will not change over the lease term. However, the timing of the cash flow can change due to changes in the
timing of tax deductions. Changes in the timing of cash flows affect the overall return, or yield, that is recorded as income at a constant rate throughout the lease term. If there is a change in cash flow timing, pursuant to FSP 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating
to Income Taxes Generated by a Leveraged Lease Transaction, the lease must be recalculated from inception assuming the new lease yield. Differences between the current gross lease investment and the gross lease investment per the recalculated lease must be recognized immediately in income. In the second quarter of 2008, PSEG recalculated its lease transactions, incorporating potential cash payments (discussed below) consistent with the FIN 48 reserve position, and recorded an after-tax charge of $355 million. This charge is reflected as a reduction in Operating Revenues of $485 million with a
partially offsetting reduction in Income Tax Expense of $130 million in PSEGs Condensed Consolidated Statement of Operations. The $355 million will be recognized as income over the remaining term of the affected leases. In the third quarter, the additional reduction of operating revenues was $10 million with a
partially offsetting reduction in income tax expense of $2 million, resulting in a net after-tax income reduction of $8 million. This represents PSEGs view of most of the financial statement exposure related to these lease transactions, although a total loss, consistent with the broad settlement offer recently proposed by the IRS, would result in an additional earnings charge of $110 million to $130 million. 29
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Cash Impact As of September 30, 2008, an aggregate $1.2 billion would become currently payable if PSEG conceded 100% of deductions taken through that date. In December 2007, PSEG deposited $100 million with the IRS to defray potential interest costs associated with this disputed tax liability. In September 2008,
PSEG deposited an additional $80 million bringing to $180 million the total cash deposited with the IRS. In the event PSEG is successful in defense of its position, the deposit is fully refundable with interest. These deposits reduce the $1.2 billion cash exposure noted above to approximately $1 billion. As of
September 30, 2008, penalties of $151 million would also become payable if the IRS was successful in its deficiency claims against PSEG, and asserted and successfully litigated a case against PSEG regarding penalties. PSEG has not established a reserve for penalties because it believes it has strong defenses to the
assertion of penalties under applicable law. Interest and penalty exposure grow at the rate of $15 million per quarter. Should PSEG lose its case in litigation, and the IRS is successful in a litigated case consistent with the positions it has taken in the generic settlement offer recently proposed, an additional $130
million to $150 million of tax would be due for tax positions through September 30, 2008. Based on the status of discussions with the IRS, and considering developments in other cases, PSEG currently anticipates that it will pay between $230 million and $360 million in tax, interest and penalties for the tax years 1997-2000 during the first half of 2009 and subsequently commence litigation to recover
these amounts. Further it is possible that an additional payment of between $270 million and $550 million could be required in late 2009 for tax years 2001-2003 followed by further litigation to recover those taxes. Theses amounts are in addition to tax deposits made to date for the years referenced above. The actions described above concerning the leveraged lease investments are not expected to violate any covenant or result in a default under either Energy Holdings credit facility or Senior Notes indenture. Note 6. Financial Risk Management The operations of PSEG, Power and PSE&G are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices that could affect their results of operations and financial conditions. PSEG, Power and PSE&G manage exposure to these market risks
through their regular operating and financing activities and, when deemed appropriate, hedge these risks through the use of derivative financial instruments. PSEG, Power and PSE&G use the term hedge to mean a strategy designed to manage risks of volatility in prices or rate movements on certain assets, liabilities
or anticipated transactions and by creating a relationship in which gains or losses on derivative instruments are expected to counterbalance the gains or losses on the assets, liabilities or anticipated transactions exposed to such market risks. Each of PSEG, Power and PSE&G uses derivative instruments as risk
management tools consistent with its respective business plan and prudent business practices. Derivative Instruments and Hedging Activities Energy Contracts Power Power actively trades energy and energy-related products, including electricity, natural gas, electric capacity, firm transmission rights (FTRs), coal, oil and emission allowances in the spot, forward and futures markets, primarily in PJM, New York and New Jersey and natural gas in the producing region. Power maintains a strategy of entering into positions to optimize the value of its portfolio and reduce earnings volatility of generation assets, gas supply contracts and its electric and gas supply obligations. Power engages in physical and financial transactions in the electricity wholesale markets and executes an
overall risk management strategy seeking to mitigate the effects of adverse movements in the fuel and electricity markets. These contracts also involve financial transactions including swaps, options and futures. For contracts not qualifying for hedge accounting, Power marks its derivative energy contracts to market
in accordance with SFAS 133 Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) with changes in fair value charged to the Consolidated Statements of Operations. Wherever possible, fair values for these contracts are obtained from quoted market sources. For contracts where no quoted
market 30
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS exists, modeling techniques are employed using assumptions reflective of current market rates, yield curves and forward prices, as applicable, to interpolate certain prices. The effect of using such modeling techniques is not material to Powers financial results. The availability and price of energy commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market conditions, transmission availability and other events. Power manages its risk of fluctuations of energy
price and availability through derivative instruments, such as forward purchase or sale contracts, swaps, options, futures and FTRs. Cash Flow Hedges Power uses forward sale and purchase contracts, swaps and FTR contracts to hedge forecasted energy sales from its generation stations and to hedge related load obligations. Power also enters into swaps and futures transactions to hedge the price of fuel to meet its fuel purchase requirements. These derivative
transactions are designated and effective as cash flow hedges under SFAS 133. As of September 30, 2008, the fair value of these hedges was $(88) million. These hedges resulted in a $(69) million after-tax impact on Accumulated Other Comprehensive Loss. As of December 31, 2007, the fair value of these hedges
was $(427) million. These hedges, along with realized losses on hedges of $(4) million retained in Accumulated Other Comprehensive Loss, resulted in a $(250) million after-tax impact on Accumulated Other Comprehensive Loss. During the 12 months ending September 30, 2009, $(23) million of after-tax
unrealized losses on these commodity derivatives is expected to be reclassified to earnings with another $(48) million of after-tax unrealized losses to be reclassified to earnings for the 12 months ending September 30, 2010. Ineffectiveness associated with these hedges, as defined in SFAS 133, was a gain of $11
million, pre-tax, at September 30, 2008. The expiration date of the longest-dated cash flow hedge is in 2011. Other Derivatives Power also enters into certain other contracts that are derivatives, but do not qualify for cash flow hedge accounting under SFAS 133. Most of these contracts are used for fuel purchases for generation requirements and for electricity purchases for contractual sales obligations and a portion is used in Powers
Nuclear Decommissioning Trust Funds (NDT). Therefore, the changes in fair market value of these derivative contracts are recorded in Energy Costs, Operating Revenues, Other Income or Other Deductions, as appropriate, on the Consolidated Statements of Operations. The net fair value of these instruments was
$5 million and $(10) million as of September 30, 2008 and December 31, 2007, respectively. Energy Holdings Cash Flow Hedges Energy Holdings uses forward sale and purchase contracts and swaps to hedge forecasted energy sales from one of the generation stations of its subsidiary, PSEG Texas. Energy Holdings also enters into swap transactions to hedge the price of fuel. These derivative transactions are designated and effective as
cash flow hedges under SFAS 133. As of September 30, 2008, the fair value of these hedges was $4 million. During the 12 months ending September 30, 2009, substantially all of the after-tax unrealized gains on these commodity derivatives are expected to be reclassified to earnings. There was no ineffectiveness
associated with these hedges, as defined in SFAS 133. These hedges resulted in an after-tax impact of $2 million on Accumulated Other Comprehensive Loss. The expiration date of the longest-dated cash flow hedge is in 2009. Other Derivatives The generation facilities of PSEG Texas enter into electricity forward and capacity sales contracts to sell a portion of their 2,000 MW capacity with the balance sold into the daily spot market. They also enter into gas purchase contracts to specifically match the generation requirements to support the electricity
forward sales contracts. Although these contracts fix the amount of revenue, fuel costs and cash flows, and thereby provide financial stability to PSEG Texas, these contracts are, based on their terms, derivatives that do not meet the specific accounting criteria in SFAS 133 to qualify for the normal purchases and
normal sales exception, or to be designated as a hedge for accounting purposes. As a result, these contracts must be 31
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS recorded at fair value through the Consolidated Statements of Operations. The net fair value of the open positions was $60 million as of September 30, 2008 and $63 million as of December 31, 2007. Interest Rates PSEG, Power and PSE&G PSEG, Power and PSE&G are subject to the risk of fluctuating interest rates in the normal course of business. PSEGs policy is to manage interest rate risk through the use of fixed and floating rate debt and interest rate derivatives. Fair Value Hedges PSEG and Power PSEG uses an interest rate swap to convert Powers fixed-rate debt of $250 million of 3.75% Senior Notes due April 2009 into variable-rate debt. The interest rate swap is designated and effective as a fair value hedge. The fair value changes of the interest rate swap are fully offset by the fair value changes in
the underlying debt. As of September 30, 2008 and December 31, 2007, the fair value of the hedge was $(1) million and $(2) million, respectively. Cash Flow Hedges PSE&G PSE&G uses interest rate swaps and other interest rate derivatives to manage its exposure to the variability of cash flows, primarily related to variable-rate debt instruments. The interest rate derivatives used are designated and effective as cash flow hedges. As of September 30, 2008 the fair value of these cash
flow hedges was $(2) million and $(4) million, respectively. The $(2) million and $(4) million as of September 30, 2008 and December 31, 2007 are deferred as Regulatory Assets and are expected to be recovered from PSE&Gs customers. As of September 30, 2008, there was no hedge ineffectiveness associated with
these hedges. Other Derivatives Energy Holdings Energy Holdings uses interest rate swaps at PSEG Texas to manage its exposure to variability of cash flows, primarily related to variable-rate debt instruments. The interest rate derivatives were previously effective as cash flow hedges; however as of September 30, 2008 they were de-designated due to a change
in their underlying interest basis. The fair value of these swaps recorded in Accumulated Other Comprehensive Loss as of September 30, 2008 was ($6) million and will be amortized to earnings over the remaining life of the underlying debt. The fair value changes of the swap beginning October 2008 will be marked
to market through earnings. 32
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 7. Comprehensive Income (Loss), Net of Tax
Power (A)
PSE&G
Other (B)
Consolidated
(Millions) For the Quarter Ended September 30, 2008: Net Income
$
328
$
98
$
230
$
656 Other Comprehensive Income (Loss)
775
(75
)
700 Comprehensive Income
$
1,103
$
98
$
155
$
1,356 For the Quarter Ended September 30, 2007: Net Income
$
339
$
107
$
60
$
506 Other Comprehensive Income
52
34
86 Comprehensive Income
$
391
$
107
$
94
$
592 For the Nine Months Ended September 30, 2008: Net Income (Loss)
$
843
$
287
$
(176
)
$
954 Other Comprehensive Income (Loss)
115
(95
)
20 Comprehensive Income (Loss)
$
958
$
287
$
(271
)
$
974 For the Nine Months Ended September 30, 2007: Net Income
$
736
$
302
$
72
$
1,110 Other Comprehensive Income (Loss)
(73
)
54
(19
) Comprehensive Income
$
663
$
302
$
126
$
1,091
(A)
Changes at Power primarily relate to changes in SFAS 133 unrealized gains and losses on derivative contracts that qualify for hedge accounting in 2008 and 2007, as detailed below. (B) Other consists of activity at PSEG (as parent company), Energy Holdings, Services and intercompany eliminations. Changes for 2008 and 2007 primarily relate to the sale of Globals investment in SAESA Group. Refer to Note 3. Discontinued Operations, Dispositions and Impairments. Accumulated Other Comprehensive Income (Loss)
Balance as of
Power
PSE&G
Other
Balance as of
(Millions) For the Nine Months Ended September 30, 2008: Derivative Contracts
$
(259
)
$
181
$
$
5
$
(73
) Pension and OPEB Plans
(167
)
1
(166
) Currency Translation Adjustment
107
(99
)
8 NDT Funds
97
(67
)
30 Other
6
(1
)
5
$
(216
)
$
115
$
$
(95
)
$
(196
)
Balance as of
Power
PSE&G
Other
Balance as of
(Millions) For the Nine Months Ended September 30, 2007: Derivative Contracts
$
(114
)
$
(92
)
$
$
(1
)
$
(207
) Pension and OPEB Plans
(214
)
8
2
(204
) Currency Translation Adjustment
110
52
162 NDT Funds
108
11
119 Other
2
1
3
$
(108
)
$
(73
)
$
$
54
$
(127
) 33
(UNAUDITED)
Total
December 31,
2007
September 30,
2008
December 31,
2006
September 30,
2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 8. Changes in Capitalization PSEG In October 2008, PSEG paid $49 million of its 6.89% Senior Notes. As of September 30, 2008, 2,382,200 shares were repurchased at a total price of $92 million. In July 2008, the Board of Directors of PSEG authorized the repurchase of up to $750 million of PSEG Common Stock to be executed over 18 months beginning August 1, 2008. PSEG is not obligated to acquire any
specific number of shares and may suspend or terminate its share repurchases at any time. Power In September 2008, Power paid a cash dividend to PSEG of $225 million and in each of June 2008 and March 2008, Power paid a cash dividend to PSEG of $125 million. PSE&G In May 2008, PSE&G redeemed its outstanding $157 million of 6.375% First and Refunding Mortgage Bonds Remarketable Series YY Due 2023 Mandatorily Tendered 2008. PSE&G paid approximately $32 million in cash to settle the remarketing option held by the remarketing dealer. In April 2008, PSE&G issued $400 million of 5.30% Medium-Term Notes, Series E due May 1, 2018. In March 2008, PSE&G issued $300 million of Floating Rate (3-month Libor + 0.875%) Bonds due 2010. As of December 31, 2007, PSE&G had $494 million of variable rate pollution control bonds outstanding which serviced and secured a like amount of insured tax-exempt variable rate bonds of the Pollution Control Authority of Salem County (Salem County Authority). Through April 2008, PSE&G purchased $494
million of the Salem County Authority bonds which were either being held by the broker/dealer or tendered by bondholders upon conversion of the bonds to a weekly interest rate mode. These purchases were recorded as a reduction to PSE&Gs Long-Term Debt included in its Condensed Consolidated Balance
Sheets. PSE&G intends to hold these bonds until they can be remarketed or refinanced. In September 2008, June 2008 and March 2008, Transition Funding repaid $45 million, $37 million and $40 million, respectively, of its transition bonds. In June 2008, PSE&G Transition Funding II LLC repaid $5 million of its transition bonds. Energy Holdings In March 2008, Energy Holdings repurchased $5 million of its $530 million then outstanding 8.50% Senior Notes due 2011. In February 2008, Energy Holdings repaid at maturity $207 million of its 8.625% Senior Notes. In January 2008, Energy Holdings redeemed its outstanding $400 million of 10% Senior Notes due 2009. During the first nine months of 2008, Energy Holdings paid $48 million in premiums related to the early redemption of its outstanding debt. During the first nine months of 2008, Energy Holdings subsidiaries repaid $38 million of non-recourse debt, primarily related to the PSEG Texas generation facilities. 34
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 9. Other Income and Deductions
Power
PSE&G
Other (A)
Consolidated
(Millions) Other Income: For the Quarter Ended September 30, 2008: Interest and Dividend Income
$
1
$
1
$
4
$
6 NDT Fund Realized Gains
74
74 NDT Interest and Dividend Income
12
12 Other
1
1
1
3 Total Other Income
$
88
$
2
$
5
$
95 For the Quarter Ended September 30, 2007: Interest and Dividend Income
$
5
$
2
$
(1
)
$
6 NDT Fund Realized Gains
37
37 NDT Interest and Dividend Income
12
12 Change in Derivative Fair Value
4
4 Other
2
2 Total Other Income
$
56
$
2
$
3
$
61 For the Nine Months Ended September 30, 2008: Interest and Dividend Income
$
5
$
5
$
7
$
17 NDT Fund Realized Gains
221
221 NDT Interest and Dividend Income
37
37 Other
4
4
2
10 Total Other Income
$
267
$
9
$
9
$
285 For the Nine Months Ended September 30, 2007: Interest and Dividend Income
$
20
$
8
$
(1
)
$
27 NDT Fund Realized Gains
102
102 NDT Interest and Dividend Income
37
37 Change in Derivative Fair Value
3
3 Arbitration Award (Konya-Ilgin)
9
9 Other
3
4
2
9 Total Other Income
$
162
$
12
$
13
$
187
(A)
Other primarily consists of activity at PSEG (parent company), Energy Holdings, Services and intercompany eliminations.
35
(UNAUDITED)
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Power
PSE&G
Other (A)
Consolidated
(Millions) Other Deductions: For the Quarter Ended September 30, 2008: NDT Fund Realized Losses and Expenses
$
39
$
$
$
39 Other-Than-Temporary Impairment of Investments
65
65 Donations
2
1
3 Total Other Deductions
$
104
$
2
$
1
$
107 For the Quarter Ended September 30, 2007: NDT Fund Realized Losses and Expenses
$
26
$
$
$
26 Other-Than-Temporary Impairment of Investments
16
16 Change in Derivative Fair Value
5
5 Donations
1
1
2 Total Other Deductions
$
42
$
1
$
6
$
49 For the Nine Months Ended September 30, 2008: NDT Fund Realized Losses and Expenses
$
145
$
$
$
145 NDT Fund Unrealized Losses.
1
1 Other-Than-Temporary Impairment of Investments
135
135 Donations
3
1
4 Loss on Early Extinguishment of Debt.
2
2 Other
1
1 Total Other Deductions
$
282
$
3
$
3
$
288 For the Nine Months Ended September 30, 2007: NDT Fund Realized Losses and Expenses
$
62
$
$
$
62 Other-Than-Temporary Impairment of Investments
40
40 Change in Derivative Fair Value
5
5 Donations
2
6
8 Other
3
1
1
5 Total Other Deductions
$
105
$
3
$
12
$
120
(A)
Other primarily consists of activity at PSEG (parent company), Energy Holdings, Services and intercompany eliminations.
Note 10. Pension and Other Postretirement Benefits (OPEB) PSEG PSEG sponsors several qualified and nonqualified pension plans and OPEB plans covering PSEGs and its participating affiliates current and former employees who meet certain eligibility criteria. The following table provides the components of net periodic benefit costs relating to all qualified and
nonqualified pension and OPEB plans on an aggregate basis. OPEB costs are presented net of the federal subsidy expected for prescription drugs under the Medicare Prescription Drug Improvement and Modernization Act of 2003. 36
(UNAUDITED)
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pension Benefits
OPEB
Pension Benefits
OPEB
Nine Months
Ended
Nine Months
Ended
Quarters Ended
Quarters Ended
2008
2007
2008
2007
2008
2007
2008
2007
(Millions) Components of Net Periodic Benefit Costs: Service Cost
$
19
$
20
$
4
$
4
$
58
$
62
$
11
$
12 Interest Cost
56
55
18
18
170
163
54
54 Expected Return on Plan Assets
(72
)
(72
)
(4
)
(3
)
(217
)
(216
)
(11
)
(10
) Amortization of Net Transition Obligation
7
7
21
21 Prior Service Cost
2
2
4
3
7
8
10
9 Loss (Gain)
4
5
2
10
15
(1
)
6 Net Periodic Benefit Costs
9
10
29
31
28
32
84
92 Effect of Regulatory Asset
4
4
14
14 Total Benefit Costs.
$
9
$
10
$
33
$
35
$
28
$
32
$
98
$
106 PSEG, Power and PSE&G Pension costs and OPEB costs for PSEG and its subsidiaries are detailed as follows:
Pension Benefits
OPEB
Pension Benefits
OPEB
Nine Months
Ended
Nine Months
Ended
Quarters Ended
September 30,
Quarters Ended
September 30,
2008
2007
2008
2007
2008
2007
2008
2007
(Millions) Power
$
2
$
3
$
4
$
4
$
8
$
9
$
10
$
12 PSE&G
4
4
28
30
12
14
85
90 Energy Holdings
1
1
Services
3
3
1
1
7
8
3
4 Total PSEG Consolidated Benefit Costs
$
9
$
10
$
33
$
35
$
28
$
32
$
98
$
106 PSEG contributed $75 million into its qualified pension plans and postretirement healthcare plan in 2008. An analysis of the tax provision expense is as follows:
Power
PSE&G
Other (A)
Consolidated
(Millions) For the Quarter Ended September 30, 2008: Income Before Income Taxes
$
547
$
166
$
97
$
810 Tax Computed at the Statutory Rate
191
58
34
283 Increase (Decrease) Attributable to Flow Through of Certain Tax Adjustments: State Income Taxes after Federal Benefit
34
11
45 Uncertain Tax Positions
(1
)
12
11 Other
(5
)
(1
)
1
(5
) Total Income Tax Expense
$
219
$
68
$
47
$
334 Effective Income Tax Rate
40.0
%
41.0
%
48.5
%
41.2
% For the Quarter Ended September 30, 2007: Income Before Income Taxes
$
571
$
181
$
53
$
805 37
(UNAUDITED)
September 30,
September 30,
September 30,
September 30,
September 30,
September 30,
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Power
PSE&G
Other (A)
Consolidated
(Millions) Tax Computed at the Statutory Rate
200
63
19
282 Increase (Decrease) Attributable to Flow Through of Certain Tax Adjustments: State Income Taxes after Federal Benefit
35
12
(2
)
45 Foreign Operations
(13
)
(13
) Uncertain Tax Positions
1
5
6 Other
(3
)
(1
)
(1
)
(5
) Total Income Tax Expense
$
233
$
74
$
8
$
315 Effective Income Tax Rate
40.8
%
40.9
%
15.1
%
39.1
% For the Nine Months Ended September 30, 2008: Income (Loss) Before Income Taxes
$
1,414
$
448
$
(336
)
$
1,526 Tax Computed at the Statutory Rate
495
157
(117
)
535 Increase (Decrease) Attributable to Flow Through of Certain Tax Adjustments: State Income Taxes after Federal Benefit
89
32
34
155 Uncertain Tax Positions
(22
)
131
109 Other
(13
)
(6
)
(19
) Total Income Tax Expense
$
571
$
161
$
48
$
780 Effective Income Tax Rate
40.4
%
35.9
%
N/A
51.1
% For the Nine Months Ended September 30, 2007: Income Before Income Taxes
$
1,263
$
516
$
69
$
1,848 Tax Computed at the Statutory Rate
442
181
24
647 Increase (Decrease) Attributable to Flow Through of Certain Tax Adjustments: State Income Taxes after Federal Benefit
76
36
(7
)
105 Foreign Operations
(19
)
(19
) Uncertain Tax Positions
4
11
15 Other
(3
)
(3
)
(6
) Total Income Tax Expense
$
519
$
214
$
9
$
742 Effective Income Tax Rate
41.1
%
41.5
%
13.0
%
40.2
%
(A)
PSEGs other activities include amounts applicable to PSEG (as parent corporation) that primarily relate to financing and certain administrative and general costs and amounts applicable to Energy Holdings that reflect interim period distortion due to asset sales and other one-time adjustments.
Each of PSEG, Power and PSE&G provide 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 PSE&Gs customers in the future. Accordingly, an offsetting Regulatory Asset was established. As of September 30, 2008, PSE&G had a Regulatory Asset of $418 million
representing the tax costs 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%. PSEG and its subsidiaries adopted FIN 48 effective January 1, 2007, which prescribes a model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. 38
(UNAUDITED)
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On December 17, 2007 and September 15, 2008, PSEG made tax deposits with the IRS in the amount of $100 million and $80 million, respectively, to defray interest costs associated with disputed tax assessments associated with certain lease investments (see Note 5. Commitments and Contingent Liabilities).
The $180 million of deposits are fully refundable and are recorded as a reduction to the Unrecognized Tax Benefit liability on PSEGs Condensed Consolidated Balance Sheets. It is reasonably possible that the total unrecognized tax benefits (including interest) at PSEG will decrease by approximately $29 million within the next 12 months due to either agreement with various taxing authorities upon audit or the expiration of the Statute of Limitations. This amount includes a $9
decrease for Power, a $22 million increase for PSE&G, a $24 million decrease for Services, a $23 million decrease for Energy Holdings and a $5 million increase for PSEG parent. As a result of a change in accounting method for the capitalization of indirect costs, during the first nine months of 2008, PSEG reduced the net amount of its unrecognized tax benefits (including interest) by $86 million, approximately $45 million of which related to PSE&G. Because the IRS agreed with PSE&Gs
change in accounting method, it is reasonably possible that PSE&Gs claim related to this matter will be settled with the IRS in the next 12 months, resulting in an increase in the unrecognized tax benefits. Note 12. Financial Information by Business Segments Information related to the segments of PSEG and its subsidiaries is detailed below:
Power
PSE&G
Resources
Global
Other (A)
Consolidated
(Millions) For the Quarter Ended September 30, 2008: Total Operating Revenues
$
1,833
$
2,274
$
18
$
332
$
(739
)
$
3,718 Income (Loss) From Continuing Operations
328
98
(11
)
67
(6
)
476 Loss from Discontinued Operations, net of tax
(7
)
(7
) Gain on Disposal of Discontinued Operations, net of tax
187
187 Net Income (Loss)
328
98
(11
)
247
(6
)
656 Preferred Securities Dividends
(1
)
1
Segment Earnings (Loss)
328
97
(11
)
247
(5
)
656 Gross Additions to Long-Lived Assets
293
189
1
1
14
498 For the Quarter Ended September 30, 2007: Total Operating Revenues
$
1,580
$
2,106
$
40
$
209
$
(588
)
$
3,347 Income (Loss) From Continuing Operations
338
107
15
41
(11
)
490 Income from Discontinued Operations, net of tax
1
15
16 Net Income (Loss)
339
107
15
56
(11
)
506 Preferred Securities Dividends
(1
)
1
Segment Earnings (Loss)
339
106
15
56
(10
)
506 Gross Additions to Long-Lived Assets
178
125
5
6
314 For the Nine Months Ended September 30, 2008: Total Operating Revenues
$
5,831
$
6,750
$
(408
)
$
645
$
(2,758
)
$
10,060 Income (Loss) From Continuing Operations
843
287
(466
)
101
(19
)
746 Income from Discontinued Operations, net of tax
21
21 Gain on Disposal of Discontinued Operations, net of tax
187
187 Net Income (Loss)
843
287
(466
)
309
(19
)
954 Preferred Securities Dividends
(3
)
3
Segment Earnings (Loss)
843
284
(466
)
309
(16
)
954 Gross Additions to Long-Lived Assets
677
534
2
4
20
1,237 For the Nine Months Ended September 30, 2007: Total Operating Revenues
$
5,034
$
6,340
$
119
$
510
$
(2,442
)
$
9,561 39
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Power
PSE&G
Resources
Global
Other (A)
Consolidated
(Millions) Income (Loss) From Continuing Operations
744
302
46
62
(48
)
1,106 Income (Loss) from Discontinued Operations, net of tax
(8
)
12
4 Net Income (Loss)
736
302
46
74
(48
)
1,110 Preferred Securities Dividends
(3
)
3
Segment Earnings (Loss)
736
299
46
74
(45
)
1,110 Gross Additions to Long-Lived Assets
501
421
1
33
17
973 As of September 30, 2008: Total Assets
$
8,863
$
15,449
$
2,475
$
1,652
$
(385
)
$
28,054 Investments in Equity Method Subsidiaries
$
28
$
$
$
195
$
$
223 As of December 31, 2007: Total Assets
$
8,336
$
14,637
$
2,992
$
2,340
$
(6
)
$
28,299 Investments in Equity Method Subsidiaries
$
14
$
$
$
208
$
$
222
(A)
PSEGs other activities include amounts applicable to PSEG (as parent corporation) and Energy Holdings (as parent company) and EGDC and intercompany eliminations, primarily relating to intercompany transactions between Power and PSE&G. No gains or losses are recorded on any intercompany
transactions; rather, all intercompany transactions are at cost or, in the case of the BGS and BGSS contracts between Power and PSE&G, at rates prescribed by the BPU. For a further discussion of the intercompany transactions between Power and PSE&G, see Note 14. Related-Party Transactions. The net losses
primarily relate to financing and certain administrative and general costs at PSEG, as parent corporation.
Note 13. Fair Value Measurements PSEG, Power and PSE&G Effective January 1, 2008, PSEG, Power and PSE&G adopted SFAS 157 except for non-financial assets and liabilities as described in FSP FAS 157-2 and discussed in Note 2. Recent Accounting Standards. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and
establishes a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources and those based on an entitys own assumptions. The hierarchy prioritizes the inputs to fair value measurement into three levels: Level 1measurements utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that PSEG, Power and PSE&G have the ability to access. These consist primarily of listed equity securities, exchange traded derivatives and certain U.S. government treasury securities. Level 2measurements include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable inputs such as interest rates and yield curves that are observable at commonly quoted intervals. These
consist primarily of non-exchange traded derivatives such as forward contracts or options and most fixed income securities. Level 3measurements use unobservable inputs for assets or liabilities, are based on the best information available and might include an entitys own data. In some valuations, the inputs used may fall into different levels of the hierarchy. In these cases, the financial instruments level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair value measurement. These consist mainly of various FTRs, other longer term capacity and transportation contracts and certain commingled securities. 40
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In addition to establishing a measurement framework, SFAS 157 nullifies the guidance of EITF 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities, which did not allow an entity to recognize an
unrealized gain or loss at the inception of a derivative instrument unless the fair value of that instrument was obtained from a quoted market price in an active market or was otherwise evidenced by comparison to other observable current market transactions or based on a valuation technique incorporating
observable market data. Under EITF 02-3, PSEG Texas had a deferred inception loss of $34 million, pre-tax, as of December 31, 2007 related to a five-year capacity contract at its generation facilities, which was being amortized at $11 million per year through 2010. In accordance with the provisions of SFAS 157,
PSEG Texas recorded a cumulative effect adjustment of $22 million after-tax to January 1, 2008 Retained Earnings in its Condensed Consolidated Balance Sheet associated with the implementation of SFAS 157. The following table presents information about PSEGs, Powers, and PSE&Gs respective assets and (liabilities) measured at fair value on a recurring basis at September 30, 2008, including the fair value measurements and the levels of inputs used in determining those fair values. Amounts shown for PSEG
include the amounts shown for Power and PSE&G.
Recurring Fair Value Measurements as of September 30, 2008
Description
Total as of
Cash
Quoted Market Prices
Significant Other
Significant
(Millions) PSEG Assets: Derivative Contracts: Energy Contracts (A)
$
162
$
(40
)
$
$
115
$
87 Other Commodity Contracts (B)
$
81
$
$
$
18
$
63 NDT Funds (D)
$
1,182
$
$
525
$
634
$
23 Rabbi Trusts (D)
$
137
$
$
12
$
111
$
14 Other Long-Term Investments (E)
$
1
$
$
1
$
$
Liabilities: Derivative Contracts: Energy Contracts (A)
$
(381
)
$
24
$
$
(428
)
$
23 Other Commodity Contracts (B)
$
(92
)
$
$
$
(15
)
$
(77
) Interest Rate Swaps (C)
$
(8
)
$
$
$
(8
)
$
Power Assets: Derivative Contracts: Energy Contracts (A)
$
189
$
(40
)
$
$
142
$
87 NDT Funds (D)
$
1,182
$
$
525
$
634
$
23 Rabbi Trusts (D)
$
28
$
$
2
$
23
$
3 Liabilities: Derivative Contracts: Energy Contracts (A)
$
(408
)
$
24
$
$
(455
)
$
23 PSE&G Assets: Derivative Contracts: Other Commodity Contracts (B)
$
2
$
$
$
$
2 Rabbi Trusts (D)
$
47
$
$
4
$
38
$
5 Liabilities: Other Commodity Contracts (B)
$
(77
)
$
$
$
$
(77
) Interest Rate Swaps (C)
$
(1
)
$
$
$
(1
)
$
(A)
Whenever possible, fair values for energy contracts are obtained from quoted market sources in active markets. When this pricing is unavailable, contracts are valued using broker or dealer quotes or auction prices. For contracts where no observable market exists, modeling techniques are employed using
assumptions reflective of current market rates, yield curves and forward prices, as applicable, to interpolate certain prices.
41
(UNAUDITED)
September 30,
2008
Collateral
Netting (F)
for Identical Assets
(Level 1)
Observable Inputs
(Level 2)
Unobservable Inputs
(Level 3)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (B) Other commodity contracts primarily include more complex agreements for which limited pricing information is available. These contracts are valued using modeling techniques and assumptions reflective of contractual terms, current market rates, forward price curves, discount rates and risk factors, as
applicable. (C) Interest rate swaps are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment. (D) The NDT Funds and the Rabbi Trusts maintain investments in various equity and fixed income securities classified as available for sale under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. These securities are valued using quoted market prices, broker or dealer
quotations, or alternative pricing sources with reasonable levels of price transparency. All fair value measurements for the fund securities are provided by the trustees of these funds. Most equity securities are priced utilizing the principal market close price or in some cases midpoint, bid or ask price (primarily
Level 1). Fixed income securities are priced using an evaluated pricing approach or the most recent exchange or quoted bid (primarily Level 2). Short-term investments are valued based upon internal matrices using observable market prices or market parameters such as time-to-maturity, coupon rate, quality
rating and current yield (primarily Level 2). Certain commingled cash equivalents included in temporary investment funds are measured with significant unobservable inputs and internal assumptions (primarily Level 3). The NDT Funds exclude net receivables/payables of $82 million related to pending security
sales/purchases. (E) Other long-term investments consist of equity securities and are valued using a market based approach based on quoted market prices. (F) Cash collateral netting represents collateral amounts netted against derivative assets and liabilities as permitted under FIN 39-1. For further discussion, see Note 2. Recent Accounting Standards. A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities follows: Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis
Balance as of
Total Gains or (Losses)
Purchases and
Balance as of
Included in
Included in
(Millions) PSEG Derivative Assets
$
133
$
15
$
(1
)
$
3
$
150 PSEG Derivative Liabilities
$
(69
)
$
$
15
$
$
(54
) PSEG NDT Funds
$
32
$
(2
)
$
$
(7
)
$
23 PSEG Rabbi Trust Funds
$
14
$
$
$
$
14 Power Derivative Assets
$
83
$
1
$
$
3
$
87 Power Derivative Liabilities
$
23
$
$
$
$
23 Power NDT Funds
$
32
$
(2
)
$
$
(7
)
$
23 Power Rabbi Trust Funds
$
3
$
$
$
$
3 PSE&G Derivative Assets
$
3
$
$
(1
)
$
$
2 PSE&G Derivative Liabilities
$
(92
)
$
$
15
$
$
(77
) PSE&G Rabbi Trust Funds
$
5
$
$
$
$
5 42
(UNAUDITED)
for the Quarter Ending September 30, 2008
July 1,
2008
Realized/Unrealized
(Sales)
September 30,
2008
Income (A)
Regulatory Assets/
Liabilities (B)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis
Balance as of
Total Gains or (Losses)
Purchases
Balance as of
Included in
Included in
(Millions) PSEG Derivative Assets
$
44
$
53
$
(1
)
$
54
$
150 PSEG Derivative Liabilities
$
(49
)
$
20
$
(25
)
$
$
(54
) PSEG NDT Funds
$
27
$
(3
)
$
$
(1
)
$
23 PSEG Rabbi Trust Funds
$
16
$
$
$
(2
)
$
14 Power Derivative Assets
$
13
$
20
$
$
54
$
87 Power Derivative Liabilities
$
3
$
20
$
$
$
23 Power NDT Funds
$
27
$
(3
)
$
$
(1
)
$
23 Power Rabbi Trust Funds
$
3
$
$
$
$
3 PSE&G Derivative Assets
$
3
$
$
(1
)
$
$
2 PSE&G Derivative Liabilities
$
(52
)
$
$
(25
)
$
$
(77
) PSE&G Rabbi Trust Funds
$
6
$
$
$
(1
)
$
5
(A)
PSEGs gains and losses are mainly attributable to changes in derivative assets and liabilities of which $26 million is included in Operating Revenues and $(11) million is included in Other Comprehensive Income. Of the $26 million in Operating Revenues, $14 million (unrealized) is at PSEG Texas and $12
million (unrealized) is at Power. The $(11) million included in Other Comprehensive Income is at Power. (B) Mainly includes losses on PSE&Gs derivative contracts that are not included in either earnings or Other Comprehensive Income, as they are deferred as a Regulatory Asset and are expected to be recovered from PSE&Gs customers. (C) PSEGs gains and losses are mainly attributable to changes in derivative assets and liabilities of which $76 million is included in Operating Revenues and $(3) million is included in Other Comprehensive Income. Of the $76 million in Operating Revenues, $33 million (unrealized) is at PSEG Texas and $43
million (unrealized) is at Power. The $(3) million included in Other Comprehensive Income is at Power. As of September 30, 2008, PSEG carried approximately $1.1 billion of net assets that are measured at fair value on a recurring basis, of which approximately $130 million were measured using unobservable inputs and classified as level 3 within the fair value hierarchy. These Level 3 net assets represent less than
1% of PSEGs total assets and there were no significant transfers in or out of Level 3 during the nine months ended September 30, 2008. Note 14. Related-Party Transactions The majority of the following discussion relates to intercompany transactions. These transactions were properly recognized on each companys stand-alone financial statements and were eliminated during the consolidation process in accordance with GAAP when preparing PSEGs Condensed Consolidated
Financial Statements. BGS and BGSS Contracts Power and PSE&G PSE&G has entered into a requirements contract with Power under which Power provides the gas supply services needed to meet PSE&Gs BGSS and other contractual requirements through March 2012 and year-to-year thereafter. 43
(UNAUDITED)
for the Nine Months Ending September 30, 2008
January 1,
2008
Realized/Unrealized
and (Sales)
September 30,
2008
Income (C)
Regulatory Assets/
Liabilities (B)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Power has also entered into contracts to supply energy, capacity and ancillary services to PSE&G through the BGS auction process. The amounts which Power charged to PSE&G for BGS and BGSS are presented below:
Powers Billings for the
Quarters Ended
Nine Months Ended
2008
2007
2008
2007
(Millions) BGS
$
506
$
408
$
1,113
$
889 BGSS
$
210
$
173
$
1,606
$
1,537 As of September 30, 2008 and December 31, 2007, Power had net receivables from PSE&G of $215 million and $451 million, respectively, primarily related to the BGS and BGSS contracts. In addition, as of September 30, 2008 and December 31, 2007, PSE&G had a payable to Power of $164 million and $55 million, respectively, related to gas supply hedges Power entered into for BGSS. Services Power and PSE&G Services provides and bills administrative services to Power and PSE&G. In addition, Power and PSE&G have other payables to Services, including amounts related to certain common costs, such as pension and OPEB costs, which Services pays on behalf of each of the operating companies. The billings for administrative services and payables are presented below:
Services Billings for the
Payable to Services as of
Quarters
Nine Months
September 30,
December 31,
2008
2007
2008
2007
(Millions) Power
$
41
$
34
$
122
$
101
$
23
$
24 PSE&G
$
61
$
58
$
194
$
165
$
40
$
57 PSEG, Power and PSE&G believe that the costs of services provided by Services approximate market value for such services. Tax Sharing Agreements PSEG, Power and PSE&G PSE&G and Power had payables to or receivables from PSEG related to taxes as follows:
Receivable/(Payable) to PSEG as of
September 30,
December 31,
(Millions) Power
$
(32
)
$
(43
) PSE&G
$
17
$
(5
) As a result of the adoption of FIN 48, PSE&G and Power each recorded current and non-current payables to or receivables from PSEG related to uncertain tax positions. Such amounts are as follows:
Current
September 30,
December 31,
(Millions) Power
$
4
$
8 PSE&G
$
64
$
(3
) 44
(UNAUDITED)
September 30,
September 30,
Ended
September 30,
Ended
September 30,
2008
2007
2008
2007
Receivable/(Payable) to PSEG as of
2008
2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Non-Current
September 30,
December 31,
(Millions) Power
$
(15
)
$
(26
) PSE&G
$
(75
)
$
(75
) Affiliate Loans and Advances PSEG and Power As of September 30, 2008 and December 31, 2007, Power had a demand note payable of $168 million and $238 million, respectively, to PSEG for short-term funding needs. PSE&G and Services As of each of September 30, 2008 and December 31, 2007, PSE&G had advanced working capital to Services of $33 million. This amount is included in Other Noncurrent Assets on PSE&Gs Condensed Consolidated Balance Sheets. Power and Services As of each of September 30, 2008 and December 31, 2007, Power had advanced working capital to Services of $17 million. This amount is included in Other Noncurrent Assets on Powers Condensed Consolidated Balance Sheets. Other PSEG and Power As of September 30, 2008, Power had a net payable to PSEG of less than $1 million. As of December 31, 2007, Power had a net payable to PSEG of $5 million related to amounts that PSEG had paid to suppliers on Powers behalf. PSEG and PSE&G As of September 30, 2008 and December 31, 2007, PSE&G had net receivables from PSEG of $2 million and $11 million, respectively, related to amounts that PSEG had collected on PSE&Gs behalf. 45
(UNAUDITED)
Receivable/(Payable) to PSEG as of
2008
2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Power Each series of Powers Senior Notes, Pollution Control Notes and revolving Letters of Credit are fully and unconditionally and jointly and severally guaranteed by Fossil, Nuclear and ER&T. The following table presents condensed financial information for the guarantor subsidiaries, as well as Powers non-
guarantor subsidiaries.
Power
Guarantor
Other
Consolidating
Consolidated
(Millions) For the Quarter Ended September 30, 2008: Operating Revenues
$
$
2,129
$
31
$
(327
)
$
1,833 Operating Expenses
3
1,522
31
(328
)
1,228 Operating Income
(3
)
607
1
605 Equity Earnings (Losses) of Subsidiaries
328
(10
)
(318
)
Other Income
38
110
(60
)
88 Other Deductions
(104
)
(104
) Interest Expense
(44
)
(43
)
(15
)
60
(42
) Income Tax Benefit (Expense)
9
(232
)
5
(1
)
(219
) Net Income (Loss)
$
328
$
328
$
(10
)
$
(318
)
$
328 For the Quarter Ended September 30, 2007: Operating Revenues
$
$
1,830
$
23
$
(273
)
$
1,580 Operating Expenses
1,227
25
(272
)
980 Operating Income (Loss)
603
(2
)
(1
)
600 Equity Earnings (Losses) of Subsidiaries
339
(8
)
(331
)
Other Income
48
71
(63
)
56 Other Deductions
(42
)
(42
) Interest Expense
(47
)
(46
)
(13
)
63
(43
) Income Tax Benefit (Expense)
(239
)
5
2
(233
) Income (Loss) from Discontinued Operations, net of tax
(1
)
2
(1
)
1 Net Income (Loss)
$
339
$
339
$
(8
)
$
(331
)
$
339 For the Nine Months Ended September 30, 2008: Operating Revenues
$
$
6,661
$
90
$
(920
)
$
5,831 Operating Expenses
8
5,100
90
(921
)
4,277 Operating Income (Loss)
(8
)
1,561
1
1,554 Equity Earnings (Losses) of Subsidiaries
858
(30
)
(828
)
Other Income
111
317
(161
)
267 Other Deductions
(282
)
(282
) Interest Expense
(150
)
(92
)
(43
)
160
(125
) Income Tax Benefit (Expense)
32
(616
)
13
(571
) Net Income (Loss)
$
843
$
858
$
(30
)
$
(828
)
$
843 46
(UNAUDITED)
Subsidiaries
Subsidiaries
Adjustments
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Power
Guarantor
Other
Consolidating
Consolidated
(Millions) For the Nine Months Ended September 30, 2007: Operating Revenues
$
$
5,789
$
77
$
(832
)
$
5,034 Operating Expenses
4,464
77
(832
)
3,709 Operating Income
1,325
1,325 Equity Earnings (Losses) of Subsidiaries
744
(30
)
(714
)
Other Income
148
202
(188
)
162 Other Deductions
(105
)
(105
) Interest Expense
(156
)
(114
)
(36
)
187
(119
) Income Tax Benefit (Expense)
(534
)
14
1
(519
) Loss from Discontinued Operations, net of tax
(7
)
(1
)
(8
) Net Income (Loss)
$
736
$
744
$
(29
)
$
(715
)
$
736 For the Nine Months Ended September 30, 2008: Net Cash Provided By (Used In) Operating Activities
$
(297
)
$
1,692
$
(104
)
$
(82
)
$
1,209 Net Cash Provided By (Used In) Investing Activities
$
774
$
(1,926
)
$
(20
)
$
519
$
(653
) Net Cash Provided By (Used In) Financing Activities
$
(475
)
$
244
$
124
$
(438
)
$
(545
) For the Nine Months Ended September 30, 2007: Net Cash Provided By (Used In) Operating Activities
$
1,175
$
1,393
$
(45
)
$
(1,475
)
$
1,048 Net Cash Provided By (Used In) Investing Activities
$
(335
)
$
(648
)
$
(55
)
$
865
$
(173
) Net Cash Provided By (Used In) financing Activities
$
(840
)
$
(749
)
$
100
$
610
$
(879
) 47
(UNAUDITED)
Subsidiaries
Subsidiaries
Adjustments
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Power
Guarantor
Other
Consolidating
Consolidated
(Millions) As of September 30, 2008: Current Assets
$
2,419
$
5,191
$
435
$
(5,714
)
$
2,331 Property, Plant and Equipment, net
39
4,252
931
5,222 Investment in Subsidiaries
4,321
138
(4,459
)
Noncurrent Assets
131
1,250
44
(115
)
1,310 Total Assets
$
6,910
$
10,831
$
1,410
$
(10,288
)
$
8,863 Current Liabilities
$
387
$
5,678
$
1,166
$
(5,715
)
$
1,516 Noncurrent Liabilities
226
833
105
(114
)
1,050 Long-Term Debt
2,653
2,653 Members Equity
3,644
4,320
139
(4,459
)
3,644 Total Liabilities and Members Equity
$
6,910
$
10,831
$
1,410
$
(10,288
)
$
8,863 As of December 31, 2007: Current Assets
$
2,553
$
3,541
$
360
$
(4,305
)
$
2,149 Property, Plant and Equipment, net
149
3,669
934
(1
)
4,751 Investment in Subsidiaries
3,538
168
(3,706
)
Noncurrent Assets
156
1,506
30
(256
)
1,436 Total Assets
$
6,396
$
8,884
$
1,324
$
(8,268
)
$
8,336 Current Liabilities
$
99
$
4,489
$
1,057
$
(4,307
)
$
1,338 Noncurrent Liabilities
234
858
98
(255
)
935 Long-Term Debt
2,902
2,902 Members Equity
3,161
3,537
169
(3,706
)
3,161 Total Liabilities and Members Equity
$
6,396
$
8,884
$
1,324
$
(8,268
)
$
8,336 48
(UNAUDITED)
Subsidiaries
Subsidiaries
Adjustments
Total
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL PSEG, Power and PSE&G This combined MD&A is separately filed by Public Service Enterprise Group Incorporated (PSEG), PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G). Information contained herein relating to any individual company is filed by such company on its own behalf. Power and PSE&G
each make representations only as to itself and make no representations whatsoever as to any other company. The following discussion relates to the markets in which PSEG and its subsidiaries compete, the corporate strategy for the conduct of PSEGs businesses within these markets, significant events that have occurred during 2008 and the future outlook for Power, PSE&G and PSEG Energy Holdings L.L.C. (Energy
Holdings), as well as the key factors that will drive the future performance of these businesses. This discussion includes significant changes in or additions to information reported in the 2007 Annual Report on Form 10-K and refers to the Condensed Consolidated Financial Statements (Statements) and the related
Notes to Condensed Consolidated Financial Statements (Notes). This information should be read in conjunction with such Statements, Notes and the 2007 Annual Report on Form 10-K. PSEGs business consists of four reportable segments, which are Power, PSE&G and the two direct subsidiaries of Energy Holdings: PSEG Global L.L.C. (Global) and PSEG Resources L.L.C. (Resources). Power Power is an electric generation and wholesale energy marketing and trading company that is focused on generation markets in the Northeast and Mid Atlantic U.S. Through its subsidiaries, Power seeks to produce low-cost energy through efficient operations of its nuclear, coal and gas-fired generation facilities.
Power seeks to balance this generation production with its fuel requirements and supply obligations through energy portfolio management. In addition to the electric generation business, Powers revenues also include gas supply sales under the Basic Gas Supply Service (BGSS) contract with PSE&G and to other
customers. PSE&G PSE&G operates as an electric and gas public utility in New Jersey under cost-based regulation by the New Jersey Board of Public Utilities (BPU) for its distribution operations and under regulation by the Federal Energy Regulatory Commission (FERC) for its electric transmission and wholesale sales
operations. Consequently, the earnings of PSE&G are largely determined by the regulation of its rates by those agencies. Global Domestically, Global owns two 1,000 MW combined cycle generation facilities in the Electric Reliability Council of Texas (ERCOT) market, and has investments in power producers that own and operate electric generation in California and Hawaii, with smaller investments in New Hampshire and
Pennsylvania. Global has reduced its international risk by monetizing most of its international investments. Global is also pursuing the development of renewable energy projects. Resources Resources primarily has invested in energy-related leveraged leases. Resources is focused on maintaining its current investment portfolio and does not expect to make any new investments. 49
CONDITION AND RESULTS OF OPERATIONS (MD&A)
Overview of 2008 Financial Results PSEG, Power and PSE&G The results for PSEG, PSE&G, Power and Energy Holdings for the quarter and nine months ended September 30, 2008 and 2007 are presented below:
Earnings (Losses)
Quarters Ended
Nine Months Ended
2008
2007
2008
2007
(Millions) Power
$
328
$
338
$
843
$
744 PSE&G
98
107
287
302 Global
67
41
101
62 Resources (A)
(11
)
15
(466
)
46 Other (B)
(6
)
(11
)
(19
)
(48
) PSEG Income from Continuing Operations
476
490
746
1,106 Income from Discontinued Operations
180
16
208
4 PSEG Net Income
$
656
$
506
$
954
$
1,110
Earnings (Loss) Per Share (Diluted)
Quarters Ended
Nine Months Ended
2008
2007
2008
2007 PSEG Income from Continuing Operations
$
0.94
$
0.96
$
1.47
$
2.18 Income from Discontinued Operations
0.35
0.03
0.41
0.01 PSEG Net Income
$
1.29
$
0.99
$
1.88
$
2.19
(A)
In the second quarter of 2008, Resources recorded after-tax charges of $490 million related to the disallowance of deductions taken in prior years tax filings associated with certain types of leveraged lease transactions. See Note 5. Commitments and Contingent Liabilities for additional information. (B) Other activities include non-segment amounts of PSEG (as parent company) and its subsidiaries and intercompany eliminations. Specific amounts include interest on certain financing transactions and certain administrative and general expenses at PSEG and Energy Holdings (as parent companies). The quarter-over-quarter decrease in PSEGs Income from Continuing Operations principally reflected decreases at Power and PSE&G. Powers Operating Revenues increased due to higher sales prices on re-contracted BGS contracts and in PJM, exceeding the increase in its generation costs that primarily
resulted from increased prices for natural gas purchases. However, these favorable results were more than offset by higher losses recognized in 2008 on certain securities in the Nuclear Decommissioning Trust (NDT) Funds and higher Operation and Maintenance Costs related to outages at certain facilities of PSEG
Fossil LLC (Fossil) and PSEG Nuclear LLC (Nuclear). PSE&Gs decrease was principally due to lower sales and higher depreciation. The quarter-over-quarter increase in PSEGs Net Income was primarily due to the gain of $187 million recognized in 2008 on the sale of the SAESA Group, which was included in
Income from Discontinued Operations. The nine month over nine month decrease in PSEGs Income from Continuing Operations reflected a significant decrease at Resources, largely due to after-tax charges of $490 million recorded in June 2008 associated with deductions taken for tax purposes on certain types of leveraged lease transactions that
are being challenged by the IRS. See Note 5. Commitments and Contingent Liabilities for additional information. Earnings were also slightly lower at PSE&G due to lower sales and higher depreciation. These decreases were somewhat offset by improved earnings at Power and to a lesser degree at Global. Powers
Operating Revenues increased due to higher prices and higher sales volumes, partially offset by higher generation costs as well as higher losses in the NDT Fund and Operation and Maintenance Costs. Globals earnings increased primarily due to improved operations and higher mark to market (MTM) gains at its
Texas generation facilities. 50
September 30,
September 30,
September 30,
September 30,
Business Developments PSEG, Power and PSE&G First Quarter PSEGs Board of Directors approved a two-for-one stock split of PSEGs outstanding shares of common stock. The BPU approved the results of New Jerseys annual BGS-Fixed Price (FP) and BGS-Commercial and Industrial Energy Price auctions and PSE&G successfully secured contracts to provide the anticipated electricity requirements for its customers. As a result of the February 2008 auction, new BGS-FP rates
increased the average residential customers bill by approximately 12% effective June 2008. FERC approved the classification of new 69 kV facilities as transmission rather than distribution which PSE&G expects to result in improvements in reliability and more expeditious rate treatment for these facilities. The U.S. Department of Treasury issued final regulations regarding Investment Tax Credit (ITC) normalization, referring to deferred tax balances that were to be refunded to utility customers but were terminated upon New Jerseys electric industry deregulation in 1999. The ruling confirmed that none of the
generation-related ITC could be passed to utility customers without violating the normalization rules. Second Quarter The U.S. Supreme Court granted the request of industry petitioners, including Power, to review the question of whether Section 316(b) of the Federal Water Pollution Control Act allows the U.S. Environmental Protection Agency (EPA) to compare costs with benefits in determining the best technology
available for minimizing adverse environmental impact at cooling water intake structures. This matter could have a material impact on Powers ability to renew Clean Water Act permits at a number of its larger plants without making significant equipment upgrades involving material expenditures. The BPU approved a settlement agreement allowing PSE&G to invest approximately $105 million in a solar energy pilot program designed to spur investment in solar power in New Jersey and meet energy goals under the EMP. PSE&G will provide loans to customers in its electric service territory for the
installation of solar photovoltaic systems on the customers premises. The program is open to commercial, industrial and residential customers. As of September 30, 2008, PSE&G has received applications for approximately 34% of the 30 MW program. FERC approved incentive rate treatment for PSE&Gs Susquehanna-Roseland transmission line project, which will enable PSE&G to earn an adequate return on investment, full recovery of construction costs and the authority to transfer certain incentives to affiliates that are members of Regional Transmission
Organizations (RTOs). A complaint was filed with FERC with respect to PJMs Reliability Pricing Model (RPM) on the grounds that the capacity prices set in the first three RPM auctions were not just and reasonable. In September 2008, the FERC issued an order dismissing this complaint. If upheld on rehearing and on appeal, this
order eliminates the potential for the payment of refunds with respect to transitional auction payments made to generators in PJM, including Power. PSE&G submitted a request to the BPU for an increase in annual BGSS revenues of $376 million to be effective October 1, 2008, representing approximately a 20% increase on a typical residential gas customers bill. This request was revised to $267 million on August 27, 2008 and approved by the BPU on
October 3, 2008. Power completed turbine replacement projects at Hope Creek and Salem Unit 2, increasing its nuclear generating capacity at those facilities.
Hope CreekPhase I increased the nominal capacity of the unit by 10 MW in 2005. Phase II added approximately 150 MW of nominal capacity in the second quarter of 2008. Salem Unit 2Phase I increased Powers share of the nominal capacity by 14 MW in 2003. Phase II was completed and put in operation in the second quarter of 2008, concurrent with steam generator replacement and increased Powers share of the nominal capacity by approximately 23 MW. In June 2008, as a result of the recent court decisions regarding certain types of leveraged lease transactions, PSEG evaluated its unrecognized tax benefits under FIN 48, Accounting for Uncertainty in 51
Income Taxesan Interpretation of FASB Statement 109 (FIN 48), and recorded an after-tax increase to the interest reserve of $135 million in the second quarter of 2008. This charge is recorded in Income Tax Expense in PSEGs Condensed Consolidated Statement of Operations. PSEG also recorded a charge of
$355 million under FSP 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction. This charge is reflected as a reduction in Operating Revenues of $485 million with a partially offsetting reduction in Income Tax
Expense of $130 million in PSEGs Condensed Consolidated Statement of Operations. As the tax benefits associated with these lease transactions are timing differences, total cash flows and net income in a leveraged lease transaction remain the same after a change in the timing of the cash flows. The charges
related to FSP 13-2 will therefore be recognized as income over the remaining terms of the affected leases. Third Quarter In July 2008, PSE&G filed a petition with FERC to implement a cost-of-service formula rate for its existing and future transmission investment. On September 30, 2008, the FERC approved PSE&Gs request for formula transmission rates, effective October 1, 2008. Under this formula, PSE&G will put rates into
effect in January of each year based upon its internal forecast of annual expenses and capital expenditures, and rates will be trued up to reflect actual annual expenses/capital expenditures in the following year. The order provides for an ROE of 11.68% on existing and new transmission investment. The Clean Air Interstate Rule (CAIR), enacted by the EPA in 2005, would have required 28 eastern states to reduce nitrogen oxide (NOx) and sulfur dioxide (SO2) in the 2009, 2010 and 2015 timeframe. In July 2008, CAIR was vacated by the United States Court of Appeals for the District of Columbia
Circuit. Subsequent to that ruling, market prices for SO2 allowances have declined significantly, and a decline in electricity prices in certain states has occurred. In September 2008, the EPA, certain industry groups and certain environmental groups filed a petition for rehearing with the Court. By order dated
October 21, 2008 the Court requested additional briefings from various aligned petitioners, by November 5, 2008, directing them to address:
whether any party is seeking the repeal of CAIR, and whether the Court should stay its mandate to vacate CAIR until EPA promulgates a revised rule. Any significant decrease in electricity prices could adversely affect Powers revenues. PSEG and Power cannot predict the ultimate resolution of CAIR, nor the ultimate effect on their results of operations. Power foresees no change in its existing construction response to controlling NOx and SO2. The Board of Directors of PSEG authorized the repurchase of up to $750 million of PSEG Common Stock to be executed over 18 months beginning August 1, 2008. PSEG is not obligated to acquire any specific number of shares and may suspend or terminate its share repurchases at any time. The amount and
timing of any stock repurchases would be based on various factors such as managements assessment of PSEGs capital structure and liquidity, the market price of PSEGs common stock and the opportunity to grow the business if investments are available. As of September 30, 2008, approximately two million
common shares were repurchased at a cost of $92 million. See Liquidity and Capital Resources for more information. Global closed on the sale of its investment in the SAESA Group for a total purchase price of $1.3 billion, including the assumption of $413 million of the consolidated debt of the group. The sale resulted in an after-tax gain of $187 million. Net cash proceeds, after Chilean and U.S. taxes of $275 million, were
$600 million. In August 2008, Global entered into an agreement to sell its 85% ownership interest in Bioenergie, which consists of generation facilities in Italy. The sale is pending. Bioenergies operating results for the quarter and nine months ended September 30, 2008 include a pre-tax impairment charge of $33 million and
related tax benefits of $22 million which are included in Discontinued Operations. The Emergency Economic Stabilization Act of 2008, which was passed in October 2008, provides for:
an eight year extension of the tax credits for solar and other renewable energy sources removal of the $2,000 limit on residential solar credits utility eligibility for the 30% solar credit 10 year accelerated tax depreciation of smart metering and smart grids PSEG, Power and PSE&G believe that the Emergency Economic Stabilization Act of 2008 will ease their ability to reach New Jerseys aggressive Energy Master Plan goals and spur additional development of 52
renewables. PSE&G believes that it will also provide company-owned solar installations with the same economic advantage as private development and support the expected upgrade of its distribution and metering systems. PSE&G, PSEG Energy Resources & Trade LLC (ER&T), Power Connecticut, Fossil and Nuclear submitted market-based rate (MBR) filings to FERC in which they asserted that they either lack market power or, that market power is being effectively mitigated in various markets. On September 2, 2008, PSE&G,
ER&T, Power Connecticut, Fossil and Nuclear filed a revised MBR analysis based on recent FERC orders. On October 16, 2008, the FERC accepted the updated market power analysis of PSE&G, ER&T and Power Connecticut, concluding that they had satisfied the standards for MBR authority. The FERC also
granted MBR authorization to Fossil and Nuclear. The final New Jersey Energy Master Plan (EMP) rule was issued in October 2008. The final plan identifies a number of actions to improve energy efficiency, increase the use of renewable resources, ensure a reliable supply of energy and stimulate investment in clean energy technologies. For additional information, see Item 5. Other Information and Note 5. Commitments and Contingent Liabilities. Future Outlook PSEG, Power and PSE&G PSEGs future success will depend on the ability of Power, PSE&G and Energy Holdings to achieve their respective objectives and earnings expectations, as well as the successful completion of various construction projects and their respective growth initiatives, discussed below. There is no guarantee that such initiatives will be achieved since many issues need to be considered, such as system reliability concerns, regulatory approvals and construction or development costs. In general, PSEG believes it has growth opportunities in the following three key areas:
responding to climate change and continuing to improve environmental performance through investments in energy efficiency, renewables and clean central station power; upgrading critical energy infrastructure; and providing new energy supplies. There are challenges for 2009 resulting from the turmoil in the capital and credit markets and volatility in the commodity markets which could place downward pressure on earnings resulting from:
increasing pension expense due to significantly lower pension asset values; increasing cost of borrowing due to tightening capital and credit markets and higher risk premiums sought by investors and lenders; and increasing coal costs resulting from a potential renegotiation with a key supplier. Power As a merchant generator, Powers primary profit is derived from selling under contract or on the spot market a range of diverse products such as energy, capacity, emissions credits, and a series of energy-related products used to optimize the operation of the energy grid. A key factor for success is Powers
ability to operate its nuclear and fossil stations at sufficient capacity factors to limit the need to purchase higher-priced electricity to satisfy its obligations. Historically, Powers nuclear and coal-fired facilities have produced over 50% and 25% of Powers production, respectively. Power seeks to sell a portion of this
anticipated low-cost nuclear and coal-fired generation over a multi-year forward horizon, normally over a period of two to four years. With the vast majority of its power sourced from these lower-cost units, rising electric prices have yielded higher margins for Power. Recent market prices for electricity, fuels and
other commodities related to Powers business have been increasingly volatile, dramatically increasing during the second quarter of 2008, and falling sharply in the third quarter. The prices of various commodities that affect Powers business, including natural gas, coal and electricity, have also changed relative to
one another during this volatile period, which also can impact Powers business results positively or negatively, especially if sustained over the long term (beyond the two to four year contracted period). 53
In addition, the recent financial crisis may have a negative effect on economic growth in our markets which also may have a negative effect on Powers results, including demand reduction and depressed equity markets which would lower the market value of Powers NDT Funds. Decreases in the market value
below the cost of investments in the NDT Funds result in losses that are reflected in Powers results of operations. These developments and general economic conditions have increased Powers cost of borrowing. In view of changes such as these, as well as strong competition, market complexity and constantly changing forward prices, there is no assurance that Power will be able to contract its output at attractive prices. While higher forward prices may have a potentially significant beneficial impact on margins, they
could also raise any replacement power costs that Power may incur in the event of unanticipated outages, and could also further increase liquidity requirements as a result of contract obligations. For additional information on liquidity requirements, see Liquidity and Capital Resources. Power contracts for the future delivery of nuclear fuel and coal to support its contracted sales. Powers estimated fuel needs are subject to change based upon the level of its operations as well as upon market demands for and on the price of coal, both of which have increased recently. Earlier in the year, Power
revised the pricing for one of its coal supply agreements for the Mercer station through 2008. A second supplier for about 15% of Mercers coal requirements declared a force majeure and reduced shipments of coal. A settlement was reached with this supplier pursuant to which shipments were reinstated at the
contract volumes with no net increase in price over the terms of the coal supply agreement. An Indonesian supplier of coal for the Bridgeport and Hudson generating units has notified PSEG that it has received a letter from the Indonesian government, as the rights holder for coal resources in Indonesia, requesting
that the supplier renegotiate its contracts with PSEG to reflect currently effective market prices based on certain coal indexes. The letter states that in the event that no agreement is reached for the renegotiation of the contracts, the supplier should temporarily discontinue deliveries of coal until agreement is
reached. The agreement currently provides for approximately 2.7 million tons for 2009 and 2010 and about half of that annual amount in 2011. Power is currently in negotiations with the supplier. Resolution of this issue cannot be predicted, but any renegotiation of the Indonesian coal contracts would likely result
in a material increase in coal costs. Power believes it can continue to manage its fuel sourcing needs in this dynamic market but changes in prices and demand could impact its future operations or financial results. Power could be impacted by a number of events, including regulatory or legislative actions favoring non-competitive markets, energy efficiency/demand response initiatives and regulatory policies favoring generation that may be subject to less stringent environmental regulation. Further, some of the market-
based mechanisms in which Power participates, including BGS auctions and the RPM capacity payments, are at times the subject of review or discussion by some of the participants in the New Jersey and federal regulatory and political arenas, including FERC and the BPU, and the PJM market monitor.
Accordingly, Power can provide no assurance that any or all of these mechanisms will continue to exist in their current form. For additional information, see Item 5. Other InformationRegulatory Issues. In addition, Power must be able to effectively manage its construction projects and continue to economically operate its generation facilities under increasingly stringent environmental requirements, including legislation, regulation and voluntary restrictions that address:
the control of carbon dioxide (CO2) emissions to reduce the effects of global climate change and greenhouse gas, and the cost of complying with the Regional Greenhouse Gas Initiative (RGGI), including the cost of CO2 emission allowances;
The first auction related to CO2 allowances for the RGGI region was conducted in September 2008. Future auctions are anticipated on a quarterly basis.
other emissions such as NOx, SO2 and mercury; and the potential need for significant upgrades to existing water intake structures and cooling systems at its larger once-through cooled plants, including Salem, Hudson, Mercer, Sewaren, New Haven and Bridgeport. Power recently completed two projects to increase the generating capacity of its Hope Creek and Salem Unit 2 facilities and has several other projects included in its forecasted capital expenditures. Power has two large environmental back-end technology projects underway at its Mercer and Hudson coal plants scheduled to be completed by the end of 2010. Power is focused on completing these projects on schedule and within the established budgets, but faces many risks typically involved in managing
large construction projects. 54
Power has been selected by the Connecticut Department of Public Utility Control in a regulatory process to build 130 MW of gas-fired peaking capacity. Power estimates the cost of these generating units to be $130 million to $140 million. Construction is expected to commence in June 2011. Power has initiated planning activities with respect to the construction of new gas-fired peaking capacity. Powers final decision whether or not to proceed with construction of these units would depend on numerous items, including estimated capital and interconnection costs, available siting and Powers ability
to meet environmental permitting requirements. Power is also currently exploring the potential to build new nuclear generation and in addition may also seek growth from acquisition opportunities. PSE&G PSE&Gs results primarily depend on the treatment of the various rate and other issues by the BPU and FERC, as well as other state and federal regulatory agencies. Therefore, PSE&Gs success will depend on its ability to:
attain an adequate return on the investments it plans to make in its electric and gas transmission and distribution system; continue cost containment initiatives; maintain system reliability and safety levels, and continue recovery of the regulatory assets it has deferred. Under the terms of the settlement of PSE&Gs most recent electric and gas base rate cases, PSE&G is required to file joint electric and gas petitions for future base rate increases and no base rate changes may become effective before November 15, 2009. PSE&G expects to file a joint electric and gas rate case in
2009 with rates effective in 2010. As noted previously, the FERC has recently approved PSE&Gs petition to implement a cost of service formula rate for its existing and future transmission investments. This forward-looking formula rate mechanism allows PSE&G to update its transmission rates annually based on forecasted Operation and
Maintenance Expense and capital expenditures for the coming year, with no lag of recovery, and will provide for a true-up to actual expenditures in the subsequent year. PSE&Gs results will also be impacted by the level of recovery of distribution revenues in light of customer demand and conservation efforts. PSE&G has noticed a decline in the electric sales growth by its customers in response to a decline in economic activity. PSE&G does not expect this decline to have a material impact on its results during the remainder of 2008. However, PSE&G has reduced its forecasted long term sales growth rate from 1% down
to 0.5% per year. In order to meet the growing demand for electricity in the region in a safe, reliable and economically efficient manner, PJM has identified the need for several transmission projects as part of its Regional Transmission Expansion Plan (RTEP). One project is the Susquehanna-Roseland 500 kV transmission
project that was approved by PJM and is currently in the permitting and siting phase with construction expected to begin in the spring of 2009 to meet the 2012 in-service date. PSE&G has the responsibility to build and own a portion of this transmission line and has been granted incentive rate treatment for this
project. PSE&G will also be responsible for constructing and owning a portion of the Mid-Atlantic Pathway Project (MAPP), another 500 kV transmission line, when approved. The in-service date has not been finalized. There are several other 500 kV transmission projects, as well as 230 kV transmission project
options, actively under consideration by PJM to address future reliability criteria violations in the PJM region. These projects have not yet been approved by PJM. For additional information, see Item 5. Other Information. PSE&G has proposed various initiatives to meet energy goals under the EMP. As discussed above, PSE&G has received BPU approval allowing PSE&G to invest approximately $105 million over two years to help finance the installation of solar energy systems throughout its service area. PSE&G will be allowed to
earn a return on and of its investment and partially recover its administrative costs to implement the Solar Energy Program through regulated rates. The program will support 30 MW of solar power in the next two years, fulfilling approximately 50% of the BPUs Renewal Portfolio Standard requirements of 57 MW
in PSE&Gs service area by May 2009 and May 2010. 55
Energy Holdings Energy Holdings earnings are primarily comprised of the results of operations at Global and Resources. Globals largest investment is in two 1,000 MW generating facilities in Texas, and, as such, its success will be largely driven by the operation of those plants and by changes in market conditions, particularly projected market prices and weather. A large deployment of new renewable (wind) generating facilities in west Texas, coupled with limited transmission capacity and the intermittent nature of the resource, has created congestion and is believed to be a primary driver for lower forward energy prices in ERCOTs west zone where one of Globals
facilities is located. Globals results from its investments in Texas are also impacted by the recognition of unrealized mark-to-market (MTM) gains and losses on its fixed-price capacity option covering 350 MW of the west Texas facilitys generating output. The lower forward prices and increased volatility, discussed above, have
resulted in an increase to the fair value of the capacity option which was $61 million as of September 30, 2008. Future earnings will be reduced as this amount is reversed to earnings over the remaining life of the contract, which expires in December 2010. Global is also pursuing the potential development of wind, biomass, solar and other renewable projects, primarily in PSEGs core markets. In August 2008, Global invested in a joint venture to further develop compressed air energy storage (CAES). CAES technology stores energy in the form of compressed air by injection into underground caverns which can then be released to generate electricity through specialized turbine equipment. This
technology could be used to optimize an intermittent energy source, such as wind, by storing energy at night and releasing this stored energy during the day when customers need power. Global expects to use the technology and expertise to develop and design CAES power plants and sell licenses to third parties to
implement CAES technology. In
October 2008, the New Jersey Office of Clean Energy (OCE) awarded a $4 million
grant to a joint venture owned equally by a subsidiary of Global and an unaffiliated
private developer, to advance the development of a 350 MW wind farm approximately
16 miles off the shore of southern New Jersey. An offshore wind farm has
not yet been developed and constructed in the United States. Numerous issues,
including federal and state permitting, environmental impacts, power output
sale arrangements, construction approach and expected maintenance costs,
will need to be worked through in order to successfully develop such a
project. If these issues are satisfactorily addressed and the joint venture
decides to proceed, the wind farm could be fully operational in 2013. Resources maintains a portfolio of investments which is designed to provide a fixed rate of return. However, its future performance is subject to tax risks, such as the impacts of changes to uncertain tax positions as determined by changes in substantive tax law and tax audit results, including resolution of
significant tax audit claims associated with its leveraged lease transactions. See Note 5. Commitments and Contingent Liabilities for further discussion. PSEG, Power and PSE&G As PSEG and its subsidiaries go through their annual planning process, considering the recent market turmoil, they are reviewing projected capital expenditures. As a result PSE&G anticipates decreasing planned capital spending for 2009 by approximately $125 million as compared to the amounts reflected in
the 2007 Form 10-K. PSEG and Power do not anticipate any material change to planned capital spending for 2009. PSEG expects that continued strong cash from operations, when combined with cash on hand and other available liquidity, will be sufficient to:
support the projected capital expenditure program, fund shareholder dividends, fund additional contributions to the pension funds, and provide for potential payments to address significant income tax claims related to certain leveraged lease transactions at Energy Holdings, discussed in Note 5. Commitments and Contingent Liabilities. 56
Any funds remaining after satisfying these obligations, when combined with potential additional financing capacity, would be discretionary cash that could be used to pursue growth and the stock repurchase program. During this period of market turmoil, any additional financing would be dependent on the availability of the capital markets at reasonable pricing terms to PSEG and its subsidiaries. For additional information see Liquidity and Capital Resources. PSEG
For the Quarters
Increase
%
For the Nine Months
Increase
%
2008
2007
2008
2007
(Millions)
(Millions) Operating Revenues
$
3,718
$
3,347
$
371
11
$
10,060
$
9,561
$
499
5 Energy Costs
$
1,899
$
1,588
$
311
20
$
5,552
$
4,885
$
667
14 Operation and Maintenance
$
610
$
559
$
51
9
$
1,857
$
1,727
$
130
7 Depreciation and Amortization
$
214
$
209
$
5
2
$
597
$
587
$
10
2 Income from Equity Method
$
8
$
30
$
(22
)
(73
)
$
27
$
87
$
(60
)
(69
) Other Income and Deductions
$
(12
)
$
12
$
(24
)
N/A
$
(3
)
$
67
$
(70
)
N/A Interest Expense
$
(149
)
$
(184
)
$
(35
)
(19
)
$
(448
)
$
(549
)
$
(101
)
(18
) Income Tax Expense
$
(334
)
$
(315
)
$
19
6
$
(780
)
$
(742
)
$
38
5 Income from Discontinued Operations, including Gain on
$
180
$
16
$
164
N/A
$
208
$
4
$
204
N/A Net Income
$
656
$
506
$
150
30
$
954
$
1,110
$
(156
)
(14
) PSEGs results of operations are primarily comprised of the results of operations of its operating subsidiaries, Power, PSE&G and Energy Holdings, excluding changes related to intercompany transactions, which are eliminated in consolidation, and certain financing costs at the parent company. For additional
information on intercompany transactions, see Note 14. Related-Party Transactions. For a discussion of the causes for the variances at PSEG in the table above, see the discussions for Power, PSE&G and Energy Holdings that follow. Power For the quarter ended September 30, 2008, Power had Net Income of $328 million, a decrease of $11 million as compared to the same period in the prior year. For the nine months ended September 30, 2008, Power had Net Income of $843 million, an increase of $107 million as compared to the same period in
the prior year. The primary reasons for the decrease in the three months ended September 30, 2008, as compared to the same period in 2007, were higher Operations and Maintenance costs and lower Other Income and Deductions related to net losses on investments in NDT Funds, partially offset by higher margins. Margins
were driven by sales prices realized on re-contracted BGS contracts, and prices realized in PJM, partially reduced by higher generation costs primarily due to higher prices for natural gas. Operation and Maintenance Costs increased largely due to outages at certain of Fossils and Nuclears facilities. Investments in
NDT Funds resulted in net losses of $18 million compared with net gains of $7 million in the same period in 2007. The primary reasons for the increase for the nine month period ended September 30, 2008, as compared to the same period in 2007, were higher net Margins, partially offset by higher Operations and Maintenance costs and Other Income and Deductions related to net losses on investments in NDT Funds. Net
Margins were driven by higher prices on higher sales volumes in PJM and from recontracted BGS contracts. Operation and Maintenance Costs increased due to outages at certain of Fossils and Nuclears facilities. Investments in NDT Funds resulted in an increase in net losses of $60 million compared with the
same period in 2007. Net Income for the three month periods included the effects of MTM losses of $20 million, after-tax, in 2008 as compared to $4 million of gains, after-tax, in 2007. Net Income for the nine month periods included 57
Ended
September 30,
(Decrease)
Ended
September 30,
(Decrease)
Investments
Disposal, net of Tax Expense
the effects of MTM gains of $10 million, after-tax, in 2008 as compared to losses of $6 million, after-tax, in 2007.
For the Quarters
Increase
%
For the Nine Months
Increase
%
2008
2007
2008
2007
(Millions)
(Millions) Operating Revenues
$
1,833
$
1,580
$
253
16
$
5,831
$
5,034
$
797
16 Energy Costs
$
904
$
712
$
192
27
$
3,360
$
2,894
$
466
16 Operation and Maintenance
$
282
$
232
$
50
22
$
796
$
711
$
85
12 Depreciation and Amortization
$
42
$
36
$
6
17
$
121
$
104
$
17
16 Other Income and Deductions
$
(16
)
$
14
$
(30
)
N/A
$
(15
)
$
57
$
(72
)
N/A Interest Expense
$
(42
)
$
(43
)
$
(1
)
(2
)
$
(125
)
$
(119
)
$
6
5 Income Tax Expense
$
(219
)
$
(233
)
$
(14
)
(6
)
$
(571
)
$
(519
)
$
52
10 Income (Loss) from Discontinued
$
$
1
$
(1
)
(100
)
$
$
(8
)
$
8
(100
) Net Income
$
328
$
339
$
(11
)
(3
)
$
843
$
736
$
107
15 Variances are all related to the same period in the prior year. The detail is discussed below: Operating Revenues The $253 million increase for the quarter ended September 30, 2008 was due to increases of $171 million in generation revenues, $77 million in gas revenues and $5 million in trading revenues. The $797 million increase for the nine months ended September 30, 2008 was due to increases of $675 million in generation revenues, $97 million in gas supply revenues and $25 million in trading revenues. Generation Generation revenues increased $171 million for the quarter ended September 30, 2008 due to an increase of $126 million resulting from higher prices on a higher volume of BGS-FP contracts and an increase of $79 million due to higher prices on generation being sold into the PJM and the New York energy
pools. These increases were partially offset by decreases of $13 million due to the expiration of certain wholesale power contracts and $10 million due to lower RPM pricing in PJM for the 2008/2009 delivery year and $7 million of net losses on financial hedging transactions. Generation revenues increased $675 million for the nine months ended September 30, 2008 due to an increase of $367 million resulting from a higher volume of generation being sold at higher prices into PJM and $44 million from higher prices in the New York power pool. The increase was also due to $280
million from higher prices on a higher volume of BGS contracts. Also contributing to the increase was $80 million from higher capacity prices mainly due to the Reliability Pricing Model, which also resulted in $10 million of lower Reliability-Must-Run revenues. The increases were also partially offset by net losses
of $63 million on financial hedging transactions and a decrease of $18 million due to the roll off of certain wholesale power contracts. Gas Supply Gas supply revenues increased $77 million for the quarter ended September 30, 2008 principally due to a net increase of $51 million from sales under the BGSS contract, comprised of $62 million from higher prices partly offset by lower sales volumes of $11 million resulting from customer conservation in 2008.
The increase was also due to $18 million from sales to third party customers and $8 million of higher net gains on financial hedging transactions in 2008 as compared to the same period in 2007. Gas supply revenues increased $97 million for the nine months ended September 30, 2008 principally due to a net increase of $85 million from sales under the BGSS contract, comprised of $168 million from higher prices partly offset by lower sales volumes of $83 million due to customer conservation and
milder average temperatures in 2008. Higher prices on sales to third party customers partly offset by reduced sales volumes also contributed $54 million to the increase. These increases were partially offset by $42 million in lower net gains on financial hedging transactions in 2008 as compared to the first nine
months of 2007. 58
Ended
September 30,
(Decrease)
Ended
September 30,
(Decrease)
Operations, net of Tax Benefit
(Expense)
Trading Revenues Trading revenues increased $5 million for the quarter ended September 30, 2008 due mainly to gains on electric-related contracts. Trading revenues increased $25 million for the nine months ended September 30, 2008 due primarily to gains on electric-related and firm transmission rights contracts. Operating Expenses Energy Costs Energy Costs increased $192 million for the quarter ended September 30, 2008. Generation costs increased $132 million, of which $153 million was primarily due to higher prices on modestly reduced volumes of natural gas and coal used for fuel. The increase was also attributable to $11 million of higher
transmission costs and $10 million in net losses on financial hedging transactions mainly related to contracts to purchase gas. The increase in generation costs was partly offset by a $26 million reduction in energy purchases at PJM due to lower load being served as a result of the roll off of certain wholesale contracts
and $15 million in lower congestion costs. Gas costs for BGSS increased $60 million, reflecting a net increase of $41 million due to higher inventory costs of $52 million partly offset by $11 million due to a reduced volume of gas sold to satisfy Powers obligations under the BGSS contract and a net increase of $18
million on sales to third party customers due primarily to higher inventory costs. Energy Costs increased $466 million for the nine months ended September 30, 2008. Generation costs increased $360 million, of which $459 million was mainly due to higher fuel costs related to higher prices and higher volumes of natural gas and coal. This increase was partly offset by net gains of $67 million
from financial hedging transactions, mainly related to contracts to purchase gas, and $27 million of lower congestion and transmission costs. Gas costs increased $106 million, reflecting net increases of $60 million and $59 million related to Powers obligations under the BGSS contract and sales to third party
customers, respectively, reflecting higher inventory costs partially offset by reduced volumes. These increases were partially offset by a reduction of $13 million in losses on financial hedging transactions in 2008 as compared to the same period in 2007. Operation and Maintenance Operation and Maintenance expense increased $50 million for the quarter ended September 30, 2008 due to an increase at Fossil of $25 million, primarily related to planned outages at its Linden, Mercer, Bergen and Bridgeport facilities and an increase at Nuclear of $19 million related to planned outages at the
Peach Bottom and Salem stations. Labor costs increased $6 million mainly due to filling staff positions that had been open in 2007. Operation and Maintenance expense increased $85 million for the nine months ended September 30, 2008 primarily due to a net increase at Fossil of $45 million due to planned outages in 2008 at the Hudson, Linden and Bridgeport facilities partially offset by the absence of maintenance costs incurred in 2007
for planned outages at certain other fossil stations. There was an increase of $26 million at Nuclear related to the aforementioned planned outages in 2008. Labor costs increased $14 million mainly due to filling staff positions that had been open in 2007. Depreciation and Amortization The $6 million and $17 million increases for the quarter and nine month periods ended September 30, 2008, respectively, were primarily due to a larger depreciable nuclear and fossil asset base in 2008. Increases of $2 million for the third quarter and $7 million for the first nine months of 2008 were attributable
to depreciation of pollution-control equipment being placed into service on January 1, 2008 at Powers coal-fired Bridgeport, Connecticut generating facility and $2 million for the third quarter and $3 million for the first nine months of 2008 were due to depreciation of the Salem 2 steam generator replacement
being placed into service in May 2008. Other Income and Deductions Other Income and Deductions decreased $30 million for the quarter ended September 30, 2008. OTTI recognized on certain securities in the NDT Funds increased $49 million from $16 million in the third quarter of 2007 to $65 million in the third quarter of 2008, reflecting difficult market conditions in 2008.
Interest income received from PSEG decreased by $4 million due to a change in the short-term funding positions. 59
These decreases were partially offset by an increase of $23 million from net realized gains related to the NDT Funds. Other Income and Deductions decreased $72 million for the nine months ended September 30, 2008 as a result of an increase in OTTI of $95 million and lower interest income of $15 million from PSEG partially offset by a net increase of $35 million from net realized gains related to the NDT Funds. Interest Expense Interest Expense increased $6 million for the nine months ended September 30, 2008 due primarily to the reclassification in 2007 of $13 million of Interest Expense to Discontinued Operations of the Lawrenceburg facility, which was sold in May 2007, partially offset by higher capitalized interest costs of $8
million in 2008 related to various fossil and nuclear capital projects in process. Income Taxes Income Taxes decreased $14 million for the quarter ended September 30, 2008 due primarily due to lower pre-tax income. Income Taxes increased $52 million for the nine months ended September 30, 2008 due primarily to higher pre-tax income. Loss from Discontinued Operations, net of tax In May 2007, Power completed the sale of its Lawrenceburg generation facility. The sale price for the facility and inventory was $325 million. The transaction resulted in an after-tax charge to Powers earnings of $208 million and was reflected as a charge to Discontinued Operations in the fourth quarter of
2006. Income from Discontinued Operations of Lawrenceburg was $1 million in the third quarter of 2007 and the Loss from Discontinued Operations of Lawrenceburg was $8 million for the nine months ended September 30, 2007. PSE&G For the quarter ended September 30, 2008, PSE&G had Net Income of $98 million, a decrease of $9 million as compared to the same period in 2007. For the nine months ended September 30, 2008, PSE&G had Net Income of $287 million, a decrease of $15 million as compared to the same period in 2007.
For the Quarters
Increase
%
For the Nine Months
Increase
%
2008
2007
2008
2007
(Millions)
(Millions) Operating Revenues
$
2,274
$
2,106
$
168
8
$
6,750
$
6,340
$
410
6 Energy Costs
$
1,521
$
1,341
$
180
13
$
4,527
$
4,083
$
444
11 Operation and Maintenance
$
313
$
308
$
5
2
$
993
$
947
$
46
5 Depreciation and Amortization
$
161
$
161
$
$
443
$
449
$
(6
)
(1
) Other Income and Deductions
$
$
1
$
(1
)
(100
)
$
6
$
9
$
(3
)
(25
) Interest Expense
$
(82
)
$
(85
)
$
(3
)
(4
)
$
(244
)
$
(250
)
$
(6
)
(2
) Income Tax Expense
$
(68
)
$
(74
)
$
(6
)
(8
)
$
(161
)
$
(214
)
$
(53
)
(25
) Net Income
98
$
107
$
(9
)
(8
)
$
287
$
302
$
(15
)
(5
) Variances are all related to the same period in the prior year. The detail is discussed below: Operating Revenues PSE&G has three sources of revenue: commodity revenues from the sales of energy to customers and in the PJM spot market; delivery revenues from the transmission and distribution of energy through its system; and other operating revenues from the provision of various services. PSE&G makes no margin on gas commodity sales as the costs are passed through to customers. The difference between the gas costs paid under the requirements contract for residential customers and the revenues received from residential customers is deferred and collected from or returned to customers in
future periods. Gas commodity prices fluctuate monthly for commercial and industrial (C&I) customers and annually through the BGSS tariff for residential customers. In addition, for residential gas customers, 60
Ended
September 30,
(Decrease)
Ended
September 30,
(Decrease)
PSE&G has the ability to adjust rates upward two additional times and downward at any time, if warranted, between annual BGSS proceedings. PSE&G makes no margin on electric commodity sales as the costs are passed through to customers. PSE&G secures its electric commodity through the annual BGS auction. Electric commodity supply prices are set based on the results of these auctions for residential and smaller C&I customers, and are translated
into seasonally-adjusted fixed rates. Electric supply for larger C&I customers is provided at a rate principally based on the hourly PJM real-time energy price. Customers may obtain their electric supply through either the BGS default electric supply service or through competitive third-party electric suppliers, and the
majority of the customers subject to hourly pricing are currently receiving electric supply from third-party suppliers. Any differences between amounts paid by PSE&G to BGS suppliers for electric commodity, and the amounts of electric commodity revenue collected from customers is deferred and collected or
returned to customers in subsequent months. The $168 million increase in operating revenues for the quarter ended September 30, 2008 was due to an increase of $180 million in commodity revenues offset by decreases of $11 million in delivery revenues and $1 million in other operating revenues, primarily related to appliance service contracts. The $410 million increase for the nine months ended September 30, 2008 was due to increases of $443 million in commodity revenues offset by decreases of $28 million in delivery revenues, described below and $5 million in other operating revenues, primarily related to appliance service contracts. Commodity The $180 million increase in commodity-related revenues for the quarter ended September 30, 2008 was due to increases of $148 million and $32 million in electric and gas revenues, respectively. The electric increase was due to $122 million in higher BGS revenues (higher auction prices of $148 million offset
by decreased volumes of $26 million) and $26 million in higher non-utility generation (NUG) revenues (higher prices of $30 million offset by $4 million in lower volumes). The gas increase was primarily due to $38 million in price variances for C&I customers offset by $6 million in lower volumes due to weather.
Prices charged to C&I customers are market-based. The $443 million increase in commodity related revenues for the nine months ended September 30, 2008 was due to increases in electric revenues of $378 million and gas revenues of $65 million. The increase in electric revenues was primarily due to $313 million in higher BGS revenues (higher auction prices of
$373 million offset by decreased sales of $60 million) and $82 million in higher NUG revenues, due to higher prices, offset by $17 million in lower non-utility generation clause (NGC) revenues, due to lower prices. The increase in gas revenues was primarily due to $163 million in higher BGSS prices offset by $98
million in lower volumes due to weather. Delivery The $11 million decrease in delivery revenues for the quarter ended September 30, 2008 was due to decreases of $8 million in electric revenues and $3 million in gas revenues. The electric decrease was due primarily to $11 million in decreased volumes due to weather offset by $3 million in higher prices. The
gas decrease was due to $3 million in lower volumes primarily due to weather. The $29 million decrease in delivery revenues for the nine months ended September 30, 2008 was due to a $37 million decrease in gas revenues offset by a $9 million increase in electric revenues. The gas decrease was due to $15 million in decreased sales primarily due to weather and $22 million due to the
Societal Benefits Clause (SBC) rate decrease in March 2007. The electric increase was due primarily to $29 million for increased SBC rates offset by $21 million in decreased volumes due to weather. PSE&G retains no margins from SBC collections as the revenues are offset in operating expenses. Operating Expenses Energy Costs The $180 million increase for the quarter ended September 30, 2008 was comprised of increases of $147 million and $33 million in electric and gas costs, respectively. The electric increase was due to $179 million in higher prices for BGS and NUG purchases offset by $32 million in lower volumes due to
weather. The gas increase was caused by $39 million in higher BGSS prices offset by $6 million in lower volumes, primarily due to weather. 61
The $444 million increase for the nine months ended September 30, 2008 was comprised of increases of $378 million in electric costs and $66 million in gas costs. The increase in electric costs was primarily due to $438 million in higher prices for BGS and NUG purchases offset by $60 million in lower BGS
volumes due to weather. The increase in gas costs was caused by a $164 million increase in prices offset by $98 million in lower volumes due to weather. Operation and Maintenance The $5 million increase for the quarter ended September 30, 2008 was primarily due to increased amortization of deferred expenses, resulting from a $6 million increase in the SBC in March 2007. The $46 million increase for the nine months ended September 30, 2008 was due primarily to $27 million in increased amortization of deferred expenses, including a $23 million increase in the SBC in March 2007. Gas bad debt expenses have increased $2 million or about 8%. Injuries and damages decreased by
$3 million. The remaining $20 million represents a 3% increase as a result of wage increases, the impact of higher commodity costs on materials and increased use of contract labor. Depreciation and Amortization The $6 million decrease for the nine months ended September 30, 2008 was due primarily to a $6 million decrease in Regulatory Asset amortization, a $5 million reduction in software amortization and a $4 million decrease in the amortization of DOE enrichment facility decommissioning costs. These decreases
were offset by an $8 million increase due to increased plant in service and $1 million due to transmission general plant rate changes approved by FERC. Other Income and Deductions The $3 million decrease for the nine months ended September 30, 2008 was due to a $3 million decrease in investment interest income and a $2 million decrease in gains on the sale of property, plant and equipment. Offsetting these decreases was a $2 million increase in income tax gross-up on contributions in
aid of construction (CIAC). CIAC are taxable and PSE&G recognizes the gross-up as income when collected. Interest Expense The $6 million decrease for the nine months ended September 30, 2008 was due primarily to decreases of $7 million resulting from lower short-term average interest rates and average debt balances outstanding and $2 million in lower interest on regulatory clauses. This was offset by $2 million resulting from
higher long-term debt balances outstanding. Income Taxes The $6 million decrease for the quarter ended September 30, 2008 was primarily due to lower pre-tax income. The $53 million decrease for the nine months ended September 30, 2008 was primarily due to decreased taxes of $28 million on lower pre-tax income, a $22 million decrease related to a one-time remeasurement of the FIN 48 reserves resulting from an IRS approved refund claim at PSEG for earlier tax years
and $3 million in various tax adjustments. Energy Holdings For the quarter ended September 30, 2008, Energy Holdings had Net Income of $236 million, an increase of $165 million as compared to the same period in the prior year. For the nine months ended September 30, 2008, Energy Holdings had a Net Loss of ($159) million, a decrease of ($277) million as
compared to the same period in the prior year. The primary reason for the increase for the quarter was the net gain of $187 million on the sale of the SAESA Group included in Income from Discontinued Operations, partially offset by a $7 million Loss from Discontinued Operations in 2008, compared to $15 million of Income from Discontinued
Operations in the same quarter of 2007. The primary reason for the decrease for the nine months ended September 30, 2008, as compared to the same period in 2007, was the recognition of a charge of $490 million (after-tax) in the second quarter of 2008 associated with certain types of leveraged lease transactions at Resources. See Note 5.
Commitments and 62
Contingent Liabilities. Also contributing to the decrease was a decrease in Income from Equity Method Investments. The decreases were partially offset by the net gain of $187 million on the sale of the SAESA Group included in Income from Discontinued Operations, $9 million of additional Income from
Discontinued Operations, increased earnings from the Texas generation facilities, primarily due to an increase in spark spread (the difference between the market price of electricity and the costs of natural gas fuel) of $52 million ($34 million, after-tax) and the recognition of MTM gains of $15 million ($10 million,
after-tax).
For the Quarters
Increase
%
For the Nine Months
Increase
%
2008
2007
2008
2007
(Millions)
(Millions) Operating Revenues
$
354
$
251
$
103
41
$
245
$
635
$
(390
)
(61
) Energy Costs
$
214
$
127
$
87
69
$
427
$
354
$
73
21 Operation and Maintenance
$
28
$
27
$
1
4
$
95
$
90
$
5
6 Write-down of Assets
$
$
12
$
(12
)
(100
)
$
$
12
$
(12
)
(100
) Depreciation and Amortization
$
7
$
7
$
N/A
$
22
$
23
$
(1
)
(4
) Income from Equity Method
$
8
$
30
$
(22
)
(73
)
$
27
$
87
$
(60
)
(69
) Other Income and Deductions
$
7
$
$
7
100
$
14
$
16
$
(2
)
(13
) Interest Expense
$
(18
)
$
(37
)
$
(19
)
(51
)
$
(60
)
$
(113
)
$
(53
)
(47
) Income Tax Expense
$
(46
)
$
(15
)
$
31
N/A
$
(49
)
$
(40
)
$
9
23 Income from Discontinued Operations,
$
180
$
15
$
165
N/A
$
208
$
12
$
196
N/A Net Income (Loss)
$
236
$
71
$
165
N/A
$
(159
)
$
118
$
(277
)
N/A Variances are all related to the same period in the prior year. The detail is discussed below: Operating Revenues Operating Revenues were higher for the quarter ended September 30, 2008 by $103 million due to an increase in generation revenue at Global of $123 million, partially offset by lower lease revenue at Resources. The higher generation revenue was due to increases at the PSEG Texas facilities of $77 million
from unrealized MTM gains, $37 million from higher electricity prices and $9 million from higher sales volumes. Operating Revenues were lower for the nine months ended September 30, 2008 by $390 million mainly due to a $485 million pre-tax charge in June 2008. This charge related to the IRS disallowance of deductions taken in prior years associated with certain types of leveraged lease transactions at Resources. See
Note 5. Commitments and Contingent Liabilities. Excluding the lease transaction charge, Operating Revenues increased by $95 million for the nine months ended September 30, 2008. The increase was largely due to higher generation revenues of $142 million for Global operations at PSEG Texas facilities, resulting from a $181 million increase in electricity
prices, higher unrealized MTM gains of $16 million and higher gas sales of $3 million, partially offset by $58 million of lower electricity sales volumes. The increase in generation revenues was partially offset by lower lease revenue and lower gains on investments of $40 million at Resources, and the absence of a $7
million gain on the sale of Globals interest in Tracy Biomass in January 2007. Operating Expenses Energy Costs Costs were higher in the quarter ended September 30, 2008 by $87 million due to increases at the Texas generation facilities. This resulted from increases in unrealized MTM losses of $48 million, fuel prices of $33 million and volume due to higher dispatch of $6 million. Costs were higher for the nine months ended September 30, 2008 by $73 million due to increases at the Texas generation facilities. This resulted from increases in fuel prices of $106 million, and higher gas resale and power purchase of $6 million, partially offset by lower fuel consumption due to lower
generation of $40 million. 63
Ended
September 30,
(Decrease)
Ended
September 30,
(Decrease)
Investments
net of Tax Expense
Operation and Maintenance Costs were higher for the nine months ended September 30, 2008 by $5 million primarily due to an increase at the Texas generation facilities for a scheduled maintenance outage as well as higher general and administrative expenses relating primarily to outside services at Global and additional severance and
retention accruals. Write-down of Assets The amounts recorded for the quarter and nine months ended September 30, 2008 are for Globals write-down of its investment in Turboven in September 2007. See Note 3. Discontinued Operations, Dispositions and Impairments for additional information. Depreciation and Amortization Costs were lower for the nine months ended September 30, 2008, by $1 million due to lower depreciation at the Texas Generation facilities. Income from Equity Method Investments Income decreased for the quarter and nine months ended September 30, 2008 by $22 million and $60 million, respectively, primarily due to the absence of income from Globals 50% ownership interest in the Chilean electric distributor, Chilquinta and Globals 37.9% ownership interest in the Peruvian electric
distributor, Luz Del Sur (LDS). These assets were sold in December 2007. Income from Chilquinta was $10 million and $28 million for the quarter and nine months ended September 30, 2007, respectively. Income from LDS was $6 million and $19 million for the quarter and nine months ended September 30, 2007,
respectively. In addition, there was lower income from other equity investments for the quarter and nine months ended September 30, 2008 of $6 million and $11 million, respectively, primarily due to higher fuel costs and lower generation. Other Income and Deductions The $7 million increase for the quarter ended September 30, 2008 was primarily due to an increase in interest and dividend income of $5 million in 2008 and an MTM loss adjustment taken in 2007 for a Chilquinta loan. The $2 million decrease for the nine months ended September 30, 2008 was primarily due to the absence of a $9 million pre-tax gain in the first quarter of 2007 relating to the receipt of an arbitration award regarding the construction of a power plant in the Konya-Ilgin region of Turkey, partially offset by an
increase in interest and dividend income of $7 million. Interest Expense The $19 million and $53 million decreases for the quarter and the nine months ended September 30, 2008, respectively, were primarily due to lower debt balances. See Note 8. Changes in Capitalization for more information. Income Taxes Taxes were higher for the quarter ended September 30, 2008 by $31 million due to a $30 million increase in taxes at Global resulting from a higher pre-tax income, combined with FIN 48 adjustments, and a $1 million increase in taxes at Resources. Taxes were higher for the nine months ended September 30, 2008 by $9 million due to a $29 million increase at Global and a $20 million decrease at Resources. The increase at Global was due to a higher pre-tax income, adjustments to 2007 federal and state taxes, partially offset by a lower FIN 48 expense in
2008. The decrease at Resources was primarily due to an increase of $126 million relating to the leverage lease transactions, which was more than offset by a $130 million reduction in taxes due to a charge against revenues related to such leases and a $16 million decrease attributable to lower pre-tax income. 64
Income from Discontinued Operations, net of tax Bioenergie In August 2008, Energy Holdings entered into an agreement to sell its 85% ownership interest in Bioenergie, which consists of generation facilities in Italy. The Loss from Discontinued Operations related to Bioenergie for the quarter ended September 30, 2008 was $8 million as compared to Income from
Discontinued Operations in 2007 of $1 million. The Losses from Discontinued Operations related to Bioenergie for the nine months ended September 30, 2008 and 2007 were $9 million and $13 million, respectively. See Note 3. Discontinued Operations, Dispositions and Impairments for additional information. SAESA Group In December 2007, Energy Holdings reclassified its investment in the SAESA Group of companies to Discontinued Operations. Income from Discontinued Operations related to the SAESA Group for each of the quarters ended September 30, 2008 and 2007 were $1 million and $10 million, respectively.
Income from Discontinued Operations related to the SAESA Group for the nine months ended September 30, 2008 and 2007 were $30 million and $35 million, respectively. The sale was completed in July 2008 for a total purchase price of $1.3 billion, including the assumption of $413 million of the consolidated
debt of the group. The sale resulted in an after-tax gain of $187 million, which is reported as Gain on Disposal of Discontinued Operations. See Note 3. Discontinued Operations, Dispositions and Impairments for additional information. Electroandes In June 2007, Energy Holdings reclassified its investment in Electroandes to Discontinued Operations. This resulted in a $19 million income tax expense at Global in the second quarter of 2007 related to the discontinuation of applying APB 23, because the income generated by Electroandes was no longer
expected to be indefinitely reinvested. Income from Discontinued Operations for the quarter ended September 30, 2007 was $4 million and Loss from Discontinued Operations for the nine months ended September 30, 2007 was $10 million. On October 17, 2007, Global completed the sale of Electroandes for a total purchase price of $390 million,
including the assumption of approximately $108 million of debt. See Note 3. Discontinued Operations, Dispositions and Impairments for additional information. LIQUIDITY AND CAPITAL RESOURCES The following discussion of liquidity and capital resources is on a consolidated basis for PSEG, noting the uses and contributions of PSEGs three direct operating subsidiaries, Power, PSE&G and Energy Holdings. Operating Cash Flows PSEG For the nine months ended September 30, 2008, PSEGs operating cash flow increased by $53 million from $1,539 million to $1,592 million, as compared to the same period in 2007, due to changes from its subsidiaries as discussed below. Power Powers operating cash flow increased $161 million from $1,048 million to $1,209 million for the nine months ended September 30, 2008, as compared to the same period in 2007, primarily resulting from a decrease of $197 million in cash collateral requirements, an increase of $83 million from net collections of
customer receivables and an increase in accounts payable of $61 million generally reflecting higher commodity costs in the first nine months of 2008 as compared to the same period in 2007, partially offset by $238 million of buildup of gas and coal inventories in anticipation of the winter heating season at higher
2008 prices, and other miscellaneous items. PSE&G PSE&Gs operating cash flow increased $301 million from $244 million to $545 million for the nine months ended September 30, 2008, as compared to the same period in 2007. The increase was primarily due 65
to a $90 million increase in cash collateral held by PSE&G, primarily under BGS contracts, a $189 million improvement in customer accounts receivable, and a $132 million increase in cash flow from income taxes. Through the first nine months of 2008, PSE&G experienced a normal seasonal decline in the accounts
receivable balance while in the comparable period in 2007 the cash collections from customers were lower due to very mild weather in December 2006. The increase in cash flow from income taxes was a combination of bonus accelerated depreciation on 2008 property and the absence of a tax adjustment paid in
2007. Offsetting the increase were higher outflows of $73 million for higher gas and electric commodity costs in 2008 due to higher prices and a $39 million in increased pension fund payments. Energy Holdings Energy Holdings operating cash flow decreased $458 million from $251 million to $(207) million for the nine months ended September 30, 2008, as compared to the same period in 2007. The decrease was mainly attributable to increased tax payments in 2008 related to asset sales, lower distributions from
Globals equity method investments in 2008, and an $80 million tax deposit made with the IRS in September 2008 associated with disputed tax assessments on certain lease investments. See Note 5. Commitments and Contingent Liabilities for additional information. Common Stock Dividends Dividend payments on common stock for the quarters ended September 30, 2008 and 2007 were $0.3225 and $0.2925 per share, respectively, and totaled $164 million and $149 million, respectively. Dividend payments on common stock for the nine months ended September 30, 2008 and 2007 were $0.9675 and
$0.8775 per share, respectively, and totaled $492 million and $445 million, respectively. On July 15, 2008, PSEGs Board of Directors approved a common stock dividend of $0.3225 per share for the third quarter of 2008, reflecting an indicated annual dividend rate of $1.29 per share. PSEG expects to continue to pay
cash dividends on its common stock; however, the declaration and payment of future dividends to holders of PSEG common stock will be at the discretion of the Board of Directors and will depend upon many factors, including PSEGs financial condition, earnings, cash flows, capital and credit requirements of its
business, alternate investment opportunities, legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors deems relevant. Financial Markets Update Due to the failures and weakening financial condition of several major institutions in the financial sector since late in the third quarter of 2008, the global financial markets have experienced unprecedented volatility. Liquidity in the capital markets has eroded as a result of tightening credit capacity by lenders
and significantly higher risk premiums sought by investors. This recent crisis has been severe in nature and has resulted in government intervention in an attempt to create sustainability of the financial markets. Although PSE&G anticipates accessing the capital markets, PSEG and Power do not expect to need to access the capital markets in the near term as they believe that their current level of projected operating cash flows and liquidity available under their credit facilities will be sufficient to:
fund necessary capital expenditures; pay upcoming debt maturities; provide any additional funding for the pension or NDT funds; and maintain dividend payments. However, if long-term capital is economically available and depending on their cash and liquidity positions, PSEG and its subsidiaries would issue longer term securities to meet some of these capital needs. Liquidity PSEG, Power, PSE&G and their subsidiaries have been managing their liquidity situations to assure that they have sufficient access to cash to operate their businesses in the event the capital markets do not allow for near term financing at reasonable terms. They are also closely monitoring the financial condition
and concentration of lenders in their respective bank facilities. There is no provision in any of the credit facilities that would require other lenders in the facility to assume loan commitments of any financial institution that fails to meet its loan commitments. No single institution is committing more than 9% of the
total. 66
Recently, margin posting requirements have decreased due to a drop in commodity prices relative to where Power and Energy Holdings hedged their energy and fuel purchases. As a result, there is significant liquidity available under the credit facilities. As shown in the table below, PSEG, Power, PSE&G and
Energy Holdings had available liquidity of $1.1 billion, $1.7 billion, $447 million and $115 million, respectively, as of September 30, 2008. Each of the facilities is restricted as to availability and use to the specific companies as listed below, however if necessary, the PSEG facilities can also be used to support Powers
liquidity needs. PSEG, Power and PSE&G continually monitor their liquidity and seek to add capacity as needed to meet their liquidity requirements. During 2008, PSEG, Power and PSE&G added capacity of $147 million, $225 million and $28 million, respectively. Company
Expiration
Total
Primary
Usage
Available
(Millions) PSEG: 5-year Credit Facility (A)
Dec 2012
$
1,000
CP Support/
$
$
1,000 Bilateral Credit Facility (B)
June 2009
$
100
CP Support/
$
$
100 Uncommitted Bilateral Agreement
N/A
N/A
Funding
$
N/A Total for PSEG
$
1,100
$
1,100 Power: 5-year Credit Facility (A)
Dec 2012
$
1,600
Funding/Letters
$
225
(C)
$
1,375 Bilateral Credit Facility (D)
March 2009
$
150
Funding/Letters
$
59
(C)
$
91 Bilateral Credit Facility (B)
June 2009
$
100
Funding/Letters
$
$
100 Bilateral Credit Facility
March 2010
$
100
Funding/Letters
$
25
(C)
$
75 Bilateral Credit Facility (E)
Sept 2009
$
50
Funding
$
50 Total for Power
$
2,000
$
1,691 PSE&G: 5-year Credit Facility (A)
June 2012
$
600
CP Support/
$
153
$
447 Uncommitted Bilateral Agreement
N/A
N/A
Funding
$
28
N/A Total for PSE&G
$
600
$
447 Energy Holdings: 5-year Credit Facility
June 2010
$
136
Funding/Letters
$
21
$
115 Total All Companies
$
3,836
$
3,353
(A)
During June 2008, the credit facilities for PSEG, Power and PSE&G were increased by $47 million, $75 million and $28 million, respectively, when a new counterparty made a commitment to all three credit facilities. In 2012, the facilities will be reduced by these same incremental amounts. (B) During June 2008, PSEG and Power each entered into these bilateral credit facilities. (C) These amounts relate to letters of credit outstanding. (D) Power had a $200 million bilateral credit facility that expired in March 2008. In April 2008, Power entered into a new facility of $150 million with the same counterparty on similar terms. (E) During September 2008, Power entered into this bilateral credit facility. 67
Date
Facility
Purpose
as of
September 30,
2008
Liquidity
as of
September 30,
2008
Funding/Letters
of Credit
Funding
of Credit
of Credit
of Credit
of Credit
Funding/Letters
of Credit
of Credit
Power As of September 30, 2008, PSEG had loaned $168 million to Power. As discussed previously, Powers required margin postings for sales contracts entered into in the normal course of business decreased significantly during the quarter ended September 30, 2008. The required margin postings will fluctuate based on volatility in commodity prices. Should commodity prices rise,
additional margin calls may be necessary relative to existing power sales contracts. As Powers contract obligations are fulfilled, liquidity requirements are reduced. In addition, ER&T maintains agreements that require Power, as its guarantor under performance guarantees, to satisfy certain creditworthiness standards. In the event of a deterioration of Powers credit rating to below investment grade, which represents at least a two level downgrade from its current ratings,
many of these agreements allow the counterparty to demand that ER&T provide performance assurance, generally in the form of a letter of credit or cash. Providing this support would increase Powers costs of doing business and could restrict the ability of ER&T to manage and optimize Powers asset portfolio. As of September 30, 2008, Power believes it has sufficient liquidity required to meet its potential collateral requirements. See Note 5. Commitments and Contingent Liabilities for further information. Financing Following PSEGs principal repayment of $49 million on its 6.89% senior notes due 2009 on October 29, 2008, there is one remaining maturity in 2008 of $250 million at PSE&G in November. PSEG, Power and PSE&G also have $249 million, $250 million and $60 million, respectively, of debt maturities upcoming
in 2009, excluding securitized and non-recourse debt. The maturities are during the second quarter of 2009 for Power and PSE&G and during the third and fourth quarters for PSEG. Power also has $44 million of Pollution Control Bonds due 2042 that are subject to a mandatory tender on January 15, 2009, which it
plans to remarket on that date. PSEG and Power anticipate that they will be able to fund these maturities with expected cash generation and their current credit facilities based on current market and business conditions. If the capital market financing is available on economical terms, PSEG and Power would seek to refinance these
obligations using longer term financial vehicles. Over the longer term, PSEG and its subsidiaries will need to access the capital markets to fund their construction programs and to provide capital for new development opportunities. Pension and NDT Trust Assets The weakening financial markets have resulted in significant year-to-date losses in both PSEGs pension and NDT trust funds. PSEG had previously anticipated funding its pension trust with approximately $75 million in 2009. Due to the recent volatility and weakening of the financial markets, PSEG will likely make additional cash contribution of $55 million in 2009. PSEG believes that this incremental amount is manageable given
projected sources of cash flow from its businesses. The reduction in value of the pension trust fund in 2008 will also likely result in an increase to pension expense in 2009. The amount of the increment will depend on market performance and interest rates over the remainder of 2008. It is also possible that Power may be required to provide additional decommissioning assurance in 2009 to the NDT Funds as mandated by minimum fund performance requirements. This additional decommissioning assurance may be up to $100 million and could be in the form of a cash contribution, a letter of
credit or a parental guarantee. External Financings For information related to External Financings, see Note 8. Changes in Capitalization. Debt Covenants PSEGs, Powers and PSE&Gs respective credit agreements may contain maximum debt to total capitalization ratios and other restrictive covenants and conditions to borrowing. Compliance with applicable financial covenants will depend upon the respective future financial position, level of earnings and cash
flows of PSEG, Power and PSE&G, as to which no assurances can be given. The ratios presented below are for the 68
benefit of the investors of the related securities to which the covenants apply. They are not intended as financial performance or liquidity measures. PSEG Financial covenants contained in PSEGs note purchase agreements related to the private placement of debt include a ratio of total debt (excluding non-recourse project financings, securitization debt and debt underlying preferred securities and including commercial paper and loans and certain letters of
credit) to total capitalization (including preferred securities outstanding) covenant. This covenant requires that such ratio not be more than 70.0%. As of September 30, 2008, PSEGs ratio of debt to capitalization (as defined above) was 49.6%. PSEGs credit facilities contain a similar but less restrictive financial covenant where total debt excludes letters of credit related to collateral postings and total capitalization excludes any impacts for Accumulated Other Comprehensive Income/Loss adjustments related to marking energy contracts to market
and equity reductions from the funded status of pensions or benefit plans associated with Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This covenant requires that such ratio not be more than 70.0%. As of September
30, 2008, PSEGs ratio of debt to capitalization (as defined above) was 48.1%. Power Financial covenants contained in Powers credit facilities include a ratio of debt to total capitalization covenant. The Power ratio is the same debt to total capitalization calculation as set forth above for PSEG except common equity is adjusted for the $986 million Basis Adjustment (see Consolidated Balance
Sheets). This covenant requires that such ratio will not exceed 65.0%. As of September 30, 2008, Powers ratio of debt to total capitalization (as defined above) was 39.3%. PSE&G Financial covenants contained in PSE&Gs credit facility include a ratio of long-term debt (excluding securitization debt, long-term debt maturing within one year and short-term debt) to total capitalization covenant. This covenant requires that such ratio will not be more than 65.0%. As of September 30, 2008,
PSE&Gs ratio of long-term debt to total capitalization (as defined above) was 45.8%. In addition, under its First and Refunding Mortgage (Mortgage), PSE&G may issue new Mortgage Bonds against previous additions and improvements, provided that its ratio of earnings to fixed charges calculated in accordance with its Mortgage is at least 2 to 1, and/or against retired Mortgage Bonds. As of
September 30, 2008, PSE&Gs Mortgage coverage ratio was 3.9 to 1 and the Mortgage would permit up to $2.2 billion aggregate principal amount of new Mortgage Bonds to be issued against previous bondable additions and improvements to its property. Credit Ratings PSEG, Power and PSE&G If the rating agencies lower or withdraw the credit ratings, such revisions may adversely affect the market price of PSEGs, Powers and PSE&Gs securities and serve to materially increase those companies cost of capital and limit their access to capital. Outlooks assigned to ratings are as follows: stable, negative
(Neg) or positive (Pos). There is no assurance that the ratings will continue for any given period of time or that they will not be revised by the rating agencies, if, in their respective judgments, circumstances warrant. Each rating given by an agency should be evaluated independently of the other agencies ratings.
The ratings should not be construed as an indication to buy, hold or sell any security. In June 2008, Moodys affirmed the rating of Energy Holdings and changed the ratings outlook to Stable from Negative. In July 2008, Moodys affirmed the ratings of PSEG and PSE&G and changed the ratings outlook of both
companies to Stable from Negative. The rating and outlook of Power remained unchanged. 69
Moodys (A)
S&P (B)
Fitch (C) PSEG: Outlook
Stable
Stable
Stable Commercial Paper
P2
A2
F2 Power: Outlook
Stable
Stable
Stable Senior Notes
Baa1
BBB
BBB+ PSE&G: Outlook
Stable
Stable
Stable Mortgage Bonds
A3
A
A Preferred Securities
Baa3
BB+
BBB+ Commercial Paper
P2
A2
F2
(A)
Moodys ratings range from Aaa (highest) to C (lowest) for long-term securities and P1 (highest) to NP (lowest) for short-term securities. (B) S&P ratings range from AAA (highest) to D (lowest) for long-term securities and A1 (highest) to D (lowest) for short-term securities. (C) Fitch ratings range from AAA (highest) to D (lowest) for long-term securities and F1 (highest) to D (lowest) for short-term securities. Other Comprehensive Income PSEG, Power and PSE&G For information related to Other Comprehensive Income/Loss, see Note 7. Comprehensive Income (Loss), Net of Tax. PSEG, Power and PSE&G As noted previously, PSE&G has revised its anticipated capital expenditures as compared to amounts presented in the 2007 Form 10-K. PSE&G anticipates decreasing its planned capital spending for 2009 by approximately $125 million. The decrease at PSE&G is comprised of an increase in spending in
transmission of $100 million on approved capital projects, partially offset by a reduction in spending in electric and gas distribution and other areas of approximately $225 million. It is expected that the majority of funding for capital requirements of PSEG, Power and PSE&G will come from their respective internally generated funds. As discussed above under Liquidity and Capital Resources, depending on market conditions and the cash and liquidity position of each business, the balance
is expected to be provided by the issuance of debt at the respective subsidiary or project level and by equity contributions from PSEG. Power During the nine months ended September 30, 2008, Power made $598 million of capital expenditures (excluding $79 million for nuclear fuel), primarily related to various projects at Fossil and Nuclear. For additional information regarding current projects, see Note 5. Commitments and Contingent Liabilities. PSE&G During the nine months ended September 30, 2008, PSE&G made $534 million of capital expenditures, primarily for reliability of transmission and distribution systems. The $534 million does not include expenditures for cost of removal, net of salvage, of $33 million, which are included in operating cash flows. PSEG, Power and PSE&G For information related to recent accounting matters, see Note 2. Recent Accounting Standards. 70
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES PSEG, Power and PSE&G The market risk inherent in PSEGs, Powers and PSE&Gs market-risk sensitive instruments and positions is the potential loss arising from adverse changes in foreign currency exchange rates, commodity prices, equity security prices and interest rates as discussed in the Notes to Consolidated Financial
Statements (Notes). It is the policy of each entity to use derivatives to manage risk consistent with its respective business plans and prudent practices. PSEG, Power and PSE&G have a Risk Management Committee comprised of executive officers who utilize an independent risk oversight function to ensure
compliance with corporate policies and prudent risk management practices. Additionally, PSEG, Power and PSE&G are exposed to counterparty credit losses in the event of non-performance or non-payment. PSEG 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 PSEGs and its subsidiaries Condensed Consolidated Financial Statements. Except as discussed below, there were no material changes from the disclosures in the Annual Reports on Form 10-K of PSEG, Power and PSE&G for the year ended December 31, 2007 or Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008. Commodity Contracts The availability and price of energy-related commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market rules and other events. To reduce price risk caused by market fluctuations, Power enters into
supply contracts and derivative contracts, including forwards, futures, swaps and options with approved counterparties. These contracts, in conjunction with demand obligations, help reduce risk and optimize the value of owned electric generation capacity. Normal Operations and Hedging Activities Power enters into physical contracts, as well as financial contracts, including forwards, futures, swaps and options designed to reduce risk associated with volatile commodity prices. Commodity price risk is associated with market price movements resulting from market generation demand, changes in fuel costs
and various other factors. Under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133), changes in the fair value of qualifying cash flow hedge transactions are recorded in Accumulated Other Comprehensive Loss, and gains and losses are recognized in earnings when the underlying
transaction occurs. Changes in the fair value of derivative contracts that do not meet hedge criteria under SFAS 133 and the ineffective portion of hedge contracts are recognized in earnings currently. Additionally, changes in the fair value attributable to fair value hedges are similarly recognized in earnings. Many non-trading contracts qualify for the normal purchases and normal sales exemption under SFAS 133 and are accounted for upon settlement. Trading Power maintains a strategy of entering into positions to optimize the value of its portfolio of generation assets, gas supply contracts and its electric and gas supply obligations. Power engages in physical and financial transactions in the electricity wholesale markets and executes an overall risk management
strategy to mitigate the effects of adverse movements in the fuel and electricity markets. In addition, Power has non-asset based trading activities. These contracts also involve financial transactions including swaps, options and futures. These activities are marked to market in accordance with SFAS 133 with gains
and losses recognized in earnings. 71
ABOUT MARKET RISK
Value-at-Risk (VaR) Models Power Power uses VaR models to assess the market risk of its commodity businesses. The portfolio VaR model for Power includes its owned generation and physical contracts, as well as fixed price sales requirements, load requirements and financial derivative instruments. VaR represents the potential gains or losses,
under normal market conditions, for instruments or portfolios due to changes in market factors, for a specified time period and confidence level. Power estimates VaR across its commodity businesses. Power manages its exposure at the portfolio level. Its portfolio consists of owned generation, load-serving contracts (both gas and electric), fuel supply contracts and energy derivatives designed to manage the risk around generation and load. While Power manages its risk at the portfolio level, it also monitors
separately the risk of its trading activities and its hedges. Non-trading MTM VaR consists of MTM derivatives that are economic hedges, some of which qualify for hedge accounting. The MTM derivatives that are not hedges are included in the trading VaR. The VaR models used by Power are variance/covariance models adjusted for the delta of positions with a 95% one-tailed confidence level and a one-day holding period for the MTM trading and non-trading activities and a 95% one-tailed confidence level with a one-week holding period for the portfolio VaR.
The models assume no new positions throughout the holding periods, whereas Power actively manages its portfolio. Higher market prices and volatilities have lead to a higher non-trading VaR as compared to September 30, 2007 and December 31, 2007. As of September 30, 2008, trading VaR was $3 million and as of December 31, 2007, trading VaR was less than $1 million.
Trading VaR
Non-Trading
(Millions) For the Quarter Ended September 30, 2008 95% Confidence Level, One-Day Holding Period, One-Tailed: Period End
$
3
$
67 Average for the Period
$
1
$
80 High
$
3
$
117 Low
$
*
$
60 99% Confidence Level, One-Day Holding Period, Two-Tailed: Period End
$
5
$
104 Average for the Period
$
1
$
126 High
$
5
$
183 Low
$
*
$
93
*
less than $1 million
72
MTM VaR
Other Supplemental Information Regarding Market Risk Power The following tables describe the drivers of Powers energy trading and marketing activities and Operating Revenues included in its Condensed Consolidated Statement of Operations for the quarter and nine months ended September 30, 2008. Normal operations and hedging activities represent the marketing
of electricity available from Powers owned or contracted generation sold into the wholesale market. As the information in these tables highlight, MTM activities represent a small portion of the total Operating Revenues for Power. Activities accounted for under the accrual method, including normal purchases and
sales, account for the majority of the revenue. The MTM activities reported here are those relating to changes in fair value due to external movement in prices. For additional information, see Note 6. Financial Risk Management Activities. Operating Revenues
Normal
Trading
Total
(Millions) MTM Activities: Unrealized MTM Gains (Losses) Changes in Fair Value of Open Position
$
23
$
2
$
25 Realization at Settlement of Contracts
(1
)
3
2 Total Change in Unrealized Fair Value
22
5
27 Realized Net Settlement of Transactions Subject to MTM
1
(3
)
(2
) Net MTM Gains
23
2
25 Accrual Activities: Accrual ActivitiesRevenue, Including Hedge Reclassifications
1,808
1,808 Total Operating Revenues
$
1,831
$
2
$
1,833 Operating Revenues
Normal
Trading
Total
(Millions) MTM Activities: Unrealized MTM Gains (Losses) Changes in Fair Value of Open Position
$
28
$
22
$
50 Realization at Settlement of Contracts
(2
)
(12
)
(14
) Total Change in Unrealized Fair Value
26
10
36 Realized Net Settlement of Transactions Subject to MTM
2
12
14 Net MTM Gains
28
22
50 Accrual Activities: Accrual ActivitiesRevenue, Including Hedge Reclassifications
5,781
5,781 Total Operating Revenues
$
5,809
$
22
$
5,831
(A)
Includes derivative contracts that Power enters into to hedge anticipated exposures related to its owned and contracted generation supply, all asset-backed transactions (ABT) and hedging activities, but excludes owned and contracted generation assets.
73
For the Quarter Ended September 30, 2008
Operations and
Hedging (A)
For the Nine Months Ended September 30, 2008
Operations and
Hedging (A)
The following table indicates Powers energy contracts, including Powers hedging activity related to ABT and derivative instruments that qualify for hedge accounting under SFAS 133. This table and the one that follows present amounts segregated by portfolio that are then netted for those counterparties with
whom Power has the right to offset and therefore, are not necessarily indicative of amounts presented on the Condensed Consolidated Balance Sheets. The balances with counterparties with whom Power has master netting agreements may also be offset against collateral amounts with those counterparties. As of
September 30, 2008, $16 million of net cash collateral received included in a Net Derivative Contract Liability of $203 million resulted in a Net Derivative Contract Liability of $219 million as presented on the Condensed Consolidated Balance Sheet. Energy Contract Net Assets/Liabilities
Normal Operations
Trading
Total
(Millions) MTM Energy Assets Current Assets
$
134
$
84
$
218 Noncurrent Assets
6
25
31 Total MTM Energy Assets
140
109
249 MTM Energy Liabilities Current Liabilities
$
(361
)
$
(34
)
$
(395
) Noncurrent Liabilities
(35
)
(22
)
(57
) Total MTM Energy Liabilities
(396
)
(56
)
(452
) Total MTM Energy Contract Net Assets (Liabilities)
$
(256
)
$
53
$
(203
) The following table presents the maturity of net fair value of MTM energy contracts. Maturity of Net Fair Value of MTM Energy Trading Contracts
Maturities within
2008
2009
2010-2012
Total
(Millions) Trading
$
30
$
39
$
(15
)
$
54 Normal Operations and Hedging
(17
)
(161
)
(79
)
(257
) Total Net Unrealized Gains (Losses) on MTM Contracts
$
13
$
(122
)
$
(94
)
$
(203
) Wherever possible, fair values for these contracts were obtained from quoted market sources. For contracts where no quoted market exists, modeling techniques were employed using assumptions reflective of current market rates, yield curves and forward prices as applicable to interpolate certain prices. The
effect of using such modeling techniques is not material to Powers financial results. 74
As of September 30, 2008
and Hedging
As of September 30, 2008
Global The following table describes the drivers of Globals marketing activities and Operating Revenues included in PSEGs Condensed Consolidated Statement of Operations for the quarter and nine months ended September 30, 2008. Normal operations and hedging activities represent the marketing of electricity
available from Globals owned generation sold into the market. Activities accounted for under the accrual method account for the majority of the revenue. The MTM activities reported here are those relating to changes in fair value due to external movement in prices. Operating Revenues
Normal Operations
(Millions) MTM Activities: Unrealized MTM Gains Changes in Fair Value of Open Position
$
48 Realization at Settlement of Contracts
Total Change in Unrealized Fair Value
48 Accrual Activities: Accrual ActivitiesRevenue, Including Hedge Reclassifications
284 Total Operating Revenues
$
332 Operating Revenues
Normal Operations
(Millions) MTM Activities: Unrealized MTM Gains Changes in Fair Value of Open Position
$
31 Realization at Settlement of Contracts
Total Change in Unrealized Fair Value
31 Accrual Activities: Accrual ActivitiesRevenue, Including Hedge Reclassifications
614 Total Operating Revenues
$
645
(A)
Includes derivative contracts that Global enters into to hedge anticipated exposures related to its owned and contracted generation supply.
75
For the Quarter Ended September 30, 2008
and Hedging (A)
For the Nine Months Ended September 30, 2008
and Hedging (A)
The following table indicates Globals energy contract net assets. Energy Contract Net Assets/Liabilities
Normal Operations
(Millions) MTM Energy Assets Current Assets
$
28 Noncurrent Assets
35 Total MTM Energy Assets
63 MTM Energy Liabilities Current Liabilities
$
3 Noncurrent Liabilities
Total MTM Energy Liabilities
3 Total MTM Energy Contract Net Assets
$
60 The following table presents the maturity of net fair value of MTM energy contracts. Maturity of Net Fair Value of MTM Energy Contracts
Maturities within
2008
2009
2010-2012
Total
(Millions) Total Net Unrealized Gains on MTM Contracts
$
5
$
28
$
27
$
60 Wherever possible, fair values for these contracts were obtained from quoted market sources. For contracts where no quoted market exists, modeling techniques were employed using assumptions reflective of current market rates, yield curves and forward prices as applicable to interpolate. PSEG and Power The following table identifies losses on cash flow hedges that are currently in Accumulated Other Comprehensive Loss, a separate component of equity. Power uses forward sale and purchase contracts, swaps and firm transmission rights contracts to hedge forecasted energy sales from its generation stations and
its contracted supply obligations. Power also enters into swaps, options and futures transactions to hedge the price of fuel to meet its fuel purchase requirements for generation. PSEG and Power are subject to the risk of fluctuating interest rates in the normal course of business. PSEGs policy is to manage interest
rate risk through the use of fixed rate debt, floating rate debt and interest rate derivatives. The table also provides an estimate of the losses, net of taxes that are expected to be reclassified out of Accumulated Other Comprehensive Loss and into earnings over the next twelve months. Cash Flow Hedges Included in Accumulated Other Comprehensive Loss
Accumulated Other
Portion Expected
(Millions) Commodities
$
(66
)
$
(21
) Interest Rates
(7
)
3 Net Cash Flow Hedge Loss Included in Accumulated Other
$
(73
)
$
(18
) 76
As of September 30, 2008
and Hedging
As of September 30, 2008
As of September 30, 2008
Comprehensive Loss
to be Reclassified
in next 12 months
Comprehensive Loss
Power Credit Risk The following table provides information on Powers credit exposure, net of collateral, as of September 30, 2008. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value on open positions. It further delineates that exposure by the credit rating of
the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the maturity of a companys credit risk by credit rating of the counterparties. Schedule of Credit Risk Exposure on Energy Contracts Net Assets Rating
Current
Securities
Net
Number of
Net Exposure of
(Millions)
(Millions) Investment GradeExternal Rating
$
339
$
32
$
316
1
(A)
$
204 Non-Investment GradeExternal Rating
405
405
1
(B)
363 Investment GradeNo External Rating
2
2
Non-Investment GradeNo External Rating
38
1
37
Total
$
784
$
33
$
760
2
$
567
(A)
PSE&G is a counterparty with net exposure of $204 million. (B) Credit exposure is with a non-investment grade counterparty that is a coal supplier to Power. Therefore, this exposure relates to the risk of the counterpartys non-performance under its obligations rather than payment risk. Coal prices have risen sharply since the beginning of 2008. The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more collateral than the outstanding exposure, in which case there would not be exposure. As of September 30, 2008, Power had 127 active
counterparties. ITEM 4. CONTROLS AND PROCEDURES PSEG, Power and PSE&G Disclosure Controls and Procedures PSEG, Power and PSE&G have established and maintain disclosure controls and procedures as defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act) to provide reasonable assurance that information required to be disclosed in the
reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported and is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer of each respective company, as appropriate, by others within the entities to allow timely
decisions regarding required disclosure. PSEG, Power and PSE&G have established a disclosure committee which includes several key management employees and which reports directly to the Chief Financial Officer and Chief Executive Officer of each respective company. The committee monitors and evaluates the
effectiveness of these disclosure controls and procedures. The Chief Financial Officer and Chief Executive Officer of each company have evaluated the effectiveness of the disclosure controls and procedures and, based on this evaluation, have concluded that disclosure controls and procedures at each respective
company were effective at a reasonable assurance level as of the end of the period covered by the report. Internal Controls PSEG, Power and PSE&G continually review their respective disclosure controls and procedures and make changes, as necessary, to ensure the quality of their financial reporting. There have been no changes in internal control over financial reporting that occurred during the third quarter of 2008 that have
materially affected, or are reasonably likely to materially affect, each registrants internal control over financial reporting. 77
As of September 30, 2008
Exposure
Held as
Collateral
Exposure
Counterparties
>10%
Counterparties
>10%
PSEG, Power and PSE&G PSEG, Power and PSE&G are parties to various lawsuits and regulatory matters in the ordinary course of business. For information regarding material legal proceedings, including updates to information reported under Item 3 of Part I of the respective 2007 Annual Reports on Form 10-K of PSEG, Power and
PSE&G and Item 1 of Part II of the respective Quarterly Reports on Form 10-Q of PSEG, Power and PSE&G for the quarters ended March 31, 2008 and June 30, 2008, see Note 5. Commitments and Contingent Liabilities and Item 5. Other Information, Regulatory Issues. The risk factors discussed below should be read in conjunction with, and update and supplement the risk factors discussed in PSEGs, Powers and PSE&Gs respective Annual Reports on Form 10-K for the year ended December 31, 2007 and Quarterly Reports on Form 10-Q for the quarters ended March 31,
2008 and June 30, 2008. 2007 Form 10-K, Page 35 and March 31, 2008 and June 30, 2008 Quarterly Reports on Form 10-Q. We may be adversely affected by changes in energy deregulation policies, including market design rules. The energy industry continues to experience significant change. Our business has been impacted by
rules established that create locational capacity markets in each of PJM, New England and New York. Under these rules, generators located in constrained areas are paid more for their capacity so there is an incentive to locate in those areas where generation capacity is most needed. While the existence of these
rules has had a positive impact on Powers revenues, as its generation in PJM and New England is located in constrained areas, both PJMs and New Englands locational capacity market design rules have been challenged in court. Any changes to these rules may have an adverse impact on our financial condition,
results of operations and cash flows. In May 2008, several state commissions, customer groups and certain federal agencies filed a complaint with FERC against PJM with respect to its RPM, which was recently dismissed by the FERC. PJM, however, is in the process of conducting a stakeholder proceeding with an aggressive time schedule to
develop prospective changes and enhancements to RPM. PJM is expected to make a filing at FERC in the fourth quarter of 2008 to propose these prospective changes. In July 2008, Power and PSE&G filed a brief with the United States Court of Appeals for the District of Columbia Circuit due to concerns regarding the manner in which the Cost of New Entry (CONE) under RPM is calculated. Other petitioners, including the BPU, also filed briefs. PSE&G filed a reply brief in
this proceeding on October 30, 2008. For additional information on Capacity Market Issues see Item 5. Other Information. 2007 Form 10-K, Page 37 and March 31, 2008 and June30, 2008 Quarterly Reports on Form 10-Q. Certain of our leveraged lease transactions at Resources may be successfully challenged by the IRS, which would have a material adverse effect on our taxes, operating results and cash flows. The IRS has
disallowed all deductions associated with certain lease transactions that are similar to a type that the IRS publicly announced its intention to challenge, for tax years 1997 through 2000, and 2001 through 2003. As of September 30, 2008 and December 31, 2007, Resources total gross investment in such transactions
was $1 billion and $1.5 billion, respectively. There are several tax cases involving other taxpayers with similar leveraged lease investments that are pending. To date, three cases have been decided at the trial court level, two of which were decided in favor of the government. An appeal of one of these decisions was recently affirmed. The third case
involves a jury verdict that is currently being challenged by both parties on inconsistency grounds. In August 2008, the IRS publicly announced that it was issuing letters to a number of taxpayers with these types of lease transactions containing a generic settlement offer. PSEG did not accept the IRS settlement offer and will likely proceed to litigation. As of September 30, 2008, $1.2 billion in the aggregate, would become currently payable if PSEG conceded 100% of deductions taken through that date. In December 2007, PSEG deposited $100 million with 78
the IRS to defray potential interest costs associated with this disputed tax liability. In September 2008, PSEG deposited an additional $80 million bringing to $180 million the total cash deposited with the IRS. In the event PSEG is successful in defense of its position, the deposit is fully refundable with interest.
These deposits reduce the $1.2 billion cash exposure noted above to approximately $1 billion. As of September 30, 2008, penalties of $151 million would also become payable if the IRS was successful in its deficiency claims against PSEG, and asserted and successfully litigated a case against PSEG regarding
penalties. We have not established a reserve for penalties because we believe we have strong defenses to the assertion of penalties under applicable law. Interest and penalties grow at the rate of $15 million per quarter. Should PSEG lose its case in litigation, and the IRS is successful in a litigated case consistent
with the positions it has taken in the generic settlement offer recently proposed, an additional $130 million to $150 million of tax would be due for tax positions through September 30, 2008. Based on the status of discussions with the IRS, and considering developments in other cases, PSEG currently anticipates that it will pay between $230 million and $360 million in tax, interest and penalties for the tax years 1997-2000 during the first half of 2009 and subsequently commence litigation to recover
these amounts. Further it is possible that an additional payment of between $270 million and $550 million could be required in late 2009 for tax years 2001-2003 followed by further litigation to recover those taxes. Theses amounts are in addition to tax deposits made to date for the years referenced above. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND In July 2008, the Board of Directors of PSEG authorized the repurchase of up to $750 million of PSEG Common Stock to be executed over 18 months beginning August 1, 2008. PSEG is not obligated to acquire any specific number of shares and may suspend or terminate its share repurchases at any time. As
of September 30, 2008, 2,382,200 shares were repurchased at a total price of $92 million. 2008
Total Number of Shares
Average Price
Total Number of
Approximate Dollar Value July 1July 31
8,000
$
46.57
N/A
N/A August 1August 31 (A)
1,137,500
$
40.14
1,129,500
$
704 September 1September 30 (A)
1,256,700
$
37.06
1,252,700
$
658
(A)
Includes repurchases of shares in the open market to satisfy the exercise of stock option awards.
Certain information reported under the 2007 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008 is updated below. Additionally, certain information is provided for new matters that have arisen subsequent to the filing of the 2007 Annual
Report on Form 10-K and Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and June 30, 2008. References are to the related pages on the Form 10-K, and Form 10-Q as printed and distributed. REGULATORY ISSUES Federal Regulation FERC PSEG, Power and PSE&G Regulation of Wholesale SalesGeneration/Market Issues 2007 Form 10-K, Page 15 and March 31, 2008 Form 10-Q, page 65 and June 30, 2008 Form 10-Q, page 74. Under FERC regulations, public utilities must receive FERC authorization to sell power in interstate commerce. Public utilities may sell power at cost-based rates or may apply to FERC for authority 79
USE OF PROCEEDS
Purchased (A)
Paid
Per Share
Shares Purchased
as Part of Publicly
Announced Plan
of Shares that May Yet be
Purchased Under the Plan
(in millions)
to sell power at market-based rates (MBR). In order to obtain approval to sell power at MBR, FERC must first make a determination that the requesting company lacks market power in the relevant markets. Once this determination is made, and MBR authority is granted, the public utilitys individual sales made
under the MBR authority are not reviewed or approved by FERC but are reported to FERC in quarterly reports. PSE&G, ER&T, Power Connecticut, Fossil and Nuclear submitted MBR filings in January 2008 to FERC in which they asserted that they either lack any generation market power or, if they do possess any market power, that market power is being effectively mitigated. They further asserted that, to the extent that
FERC analyzes market power held in the small sub-market of Northern PSEG, PJM mitigation rules (including price capping for bids) eliminate the potential for the exercise of market power in this sub-market. On October 16, 2008, the FERC accepted the updated market power filing of PSE&G, ER&T and Power Connecticut concluding that the applicants had satisfied the FERCs standards for market-based rate authority. In addition, the FERC granted market-based rate authorization to Fossil and Nuclear. Capacity Market Issues 2007 Form 10-K, Page 16 and March 31, 2008 Form 10-Q, page 66 and June 30, 2008 Form 10-Q, page 74. RPM is a locational installed capacity market design for the PJM region, including a forward auction for installed capacity. Under RPM, generators located in constrained areas within PJM are paid
more for their capacity so that they are incented to locate in those areas where generation capacity is most needed. Four PJM capacity auctions covering commitment periods extending from June 1, 2007 through May 31, 2011 have been held to date. Cost of New Entry (CONE) On July 21, 2008, Power and PSE&G filed a brief with the United States Court of Appeals for the District of Columbia Circuit due to concerns regarding the manner in which the CONE is calculated. Other petitioners briefs, including the BPU, were also filed. Reply briefs will be filed by the end of October. Power and PSE&G strongly support the RPM design but believe that certain components of the design, particularly the CONE mechanism, should be modified. If the CONE is set too low, generators in the PJM markets may not be adequately compensated for existing capacity and may not have sufficient incentives to construct new generating units. RPM Auction On May 30, 2008, several state commissions, including the BPU and consumer advocate agencies, as well as customer groups and certain federal agencies (RPM Buyers) filed a complaint with FERC against PJM with respect to RPM. The complaint challenged the results of the RPM capacity auctions held for the 2008/2009, 2009/2010 and 2010/2011 delivery years. The RPM Buyers asserted that various RPM rules permitted suppliers to reduce the amount of capacity offered into the auctions, thereby increasing prices, and that PJMs
mitigation measures were inadequate to restrain the exercise of market power in the capacity auctions. The RPM Buyers requested that FERC find that the clearing prices produced are unlawful and thus should not be charged to capacity buyers or paid to capacity sellers such as Power, and requested refunds, with
a refund effective date of May 30, 2008. On September 18, 2008, the FERC issued an order dismissing the RPM Buyers complaint. In dismissing the complaint, the FERC concluded that:
The RPM Buyers had failed to allege or prove that any party violated PJMs Tariff and market rules; There was no showing of market power, and mitigation rules exist to address any potential violations; and The prices determined for the transition period were set in accordance with PJMs FERC-approved Tariff. FERCs dismissal of the complaint, if upheld on rehearing and on appeal, eliminates the potential for the payment of refunds with respect to transitional auction payments made to generators in PJM, including Power. In October 2008, the RPM Buyers sought rehearing of this dismissal order at the FERC. 80
RPM Model PJM is evaluating ways to improve RPM. PJM retained the Brattle Group, an outside consultant, to prepare a report evaluating the efficacy of the RPM model. This report, which was issued on June 30, 2008, recommends maintaining the basic design elements of RPM but also proposes changes to RPM that
would, among other things:
increase the pool of resources that can be bid into RPM, e.g. enhancing the ability of efficiency and demand response resources to bid in; revise the penalty structure for deficiencies and unavailability of capacity resources, perhaps increasing the penalties levied on demand resources; redesign the incremental auction process by creating a single type of incremental auction; and evaluate and refine the process for calculating the net CONE. PJM has initiated a stakeholder process to address some or all of the recommendations proposed in the Brattle Group report, and has been directed by the FERC to file proposed changes in certain areas with the FERC by December 15, 2008. The FERC has also directed its Staff to convene a technical
conference in February 2009 on the issues raised in the RPM Buyers complaint and related issues raised by PJM stakeholders, with the objective of implementing any necessary changes to RPM in time for the May 2009 auction. Reactive Power June 30, 2008 Form 10-Q, page 75. Reactive power encompasses certain ancillary services necessary to maintain voltage support and operate the system. In May 2008, ER&T filed with FERC to increase its annual fixed revenues by $18 million to reflect its provision of reactive power support in PJM. No
protests were filed regarding the filing, though PJM filed to challenge the proposed effective date. PJM filed comments asking FERC not to make the rates effective in May, due to concerns with retroactive billing adjustments, but rather to make the rates effective the first day of the month that FERC approves the
filing. As requested by FERC, ER&T provided additional support for its filing in July 2008. No protests were filed by the comment date. In September 2008, ER&T made a supplemental filing as directed by the FERC. The FERC is expected to act in November 2008 on the filing. FERC Transmission Regulation PSE&G Transmission Rate Case Filing In July 2008, PSE&G filed a petition with FERC to implement a cost of service formula rate for PSE&Gs existing and future transmission investment. Formula-type rates provide a method of rate recovery where the transmission owner annually determines its revenue requirements through a fixed formula which takes O&M expenditures and capital investments and applies an approved Return on Equity (ROE). PSE&G proposed a forward-looking formula rate
mechanism, which would allow PSE&G to update its transmission rates annually based on forecasted O&M and capital expenditures for the coming year, with no lag of recovery, and would provide for a true-up to actual expenditures in the subsequent year. PSE&G also proposed an ROE of 11.68%. While PSE&G did
not request approval in this petition of any incentive rates, the formula rate mechanism would provide for recovery of previously-approved transmission rate incentives as well as a mechanism for recovery of any transmission incentives authorized in the future. On September 30, 2008, the FERC approved PSE&Gs request for formula transmission rates, effective October 1, 2008. Under this formula, PSE&G will put rates into effect each January for that year based upon its internal forecast of annual expenses and capital expenditures. Rates will be trued up to reflect the
actual annual expense/capital expenditures the following year. The order provides for an ROE of 11.68% on existing and new transmission investment as requested. The approved formula also provides a mechanism to flow through incentives to transmission customers; the incentive rates, however, are separately
approved by the FERC on a project-by-project basis. Thus, since PSE&G has already obtained FERC approval for incentive transmission rates for its Susquehanna-Roseland project, the authorized incentives will be added to the approved base ROE, yielding an ROE of 12.93% for this particular project. 81
Transmission Rates and Cost Allocation 2007
Form 10-K, Page 17 and June 30, 2008 Form 10-Q, page 76. In 2007,
PJM and its members reached a settlement regarding how to allocate costs
for new lower voltage (below 500 kilovolts (kV)) transmission expansion.
Specifically, PJM will use a beneficiary pays methodology,
identifying the beneficiaries of a particular expansion and allocating
costs to those beneficiaries. On July 29, 2008, FERC issued an order
approving this settlement. While the settlement is quite comprehensive
in establishing how to determine the beneficiaries of a particular transmission
expansion and allocating the costs to those beneficiaries, the parties
did not reach agreement on certain issues related to whether and how
merchant transmission facilities that have firm rights to export power
out of PJM to another region should be included in the beneficiary pays
analysis and be responsible for a share of the costs of the transmission
upgrades. These issues were set for hearing before FERC. On September 18, 2008, following the conclusion of a hearing, a FERC Administrative Law Judge (ALJ) issued an initial decision agreeing with PSEGs position that merchant transmission facilities should be required to pay a load ratio share of all future transmission projects in PJM, such as PSE&Gs
Susquehanna-Roseland project. Thus, merchant transmission facilities holding a firm right to withdraw power from PJM will be treated like load in PJM for purposes of future cost allocations. On October 20, 2008, the merchant transmission projects filed exceptions to this decision with the FERC, thereby ensuring
review of the ALJ decision by the FERC. Transmission Expansion 2007 Form 10-K, Page 17 and March 31, 2008 Form 10-Q, page 67 and June 30, 2008 Form 10-Q, page 76. In June 2007, PSE&G endorsed the construction of three new 500 kV transmission lines intended to address reliability issues of the electrical grid serving New Jersey customers. Also in June 2007, PJM
approved construction of one of the proposed lines (Susquehanna-Roseland line) and in April 2008, FERC approved incentive rate treatment for the line. In May 2008, seven state consumer advocates, including the New Jersey Division of Rate Counsel (Rate Counsel), sought rehearing of FERCs April 2008 order approving the incentive rate treatment. In June 2008, PSE&G and PPL Corporation (PPL) filed an answer to this rehearing request, urging FERC to
deny the request for rehearing. On September 5, 2008, the FERC denied the rehearing request and confirmed the rate incentives it granted PSE&G and PPL for the Susquehanna-Roseland project. Through the RTEP process, PJM has identified the need for the construction of a 500kV transmission line running from Virginia through Maryland and Delaware and terminating in Salem Township. PSE&G will be responsible for constructing and operating a portion of this line, known as the Mid-Atlantic
Pathway Project (MAPP), when approved. Consolidated Edison Company of New York, Inc (Con Ed) June 30, 2008 Form 10-Q, page 76. In November 2001, Con Ed filed a complaint with FERC against PSE&G, PJM and NYISO asserting a failure to comply with agreements between PSE&G and Con Ed covering 1,000 MW of transmission. Both PSE&G and Con Ed have sought judicial review of FERC orders
addressing these contracts before the U.S. Court of Appeals for the District of Columbia Circuit. The matter remains pending. The agreements expire in May 2012. On April 22, 2008, pursuant to FERC rules that permit holders of long-term transmission rights to extend their entitlements, PJM filed contracts with FERC which would extend until 2017 the transmission service that is the subject of the disputed agreements between PSE&G
and Con Ed. PSE&G has protested PJMs filing. On August 26, 2008, FERC issued an order setting for hearing and settlement procedures most of the issues raised by PSE&G in its protest. A settlement conference was held on October 29, 2008. If the parties are unable to settle, the matter will proceed to hearing. PSE&G is unable to predict the outcome of these proceedings. 82
Compliance Reliability Standards One of FERCs tasks in the compliance area is to ensure compliance with reliability standards developed by the North American Electric Reliability Corporation (NERC) and approved by the FERC. Congress has required FERC to put in place, through NERC, national and regional reliability standards to
ensure the reliability of the U.S. electric transmission grid and to prevent major system blackouts. NERC has developed, and FERC has approved, many reliability standards, compliance with which is mandatory by all those entities (including transmission owners, generation owners and generation operators) that
have the ability to impact upon the reliability of the bulk electric transmission system (100 kV and above). PSEG, PSE&G, Power and Energy Holdings (or their operating subsidiaries) are obligated to comply with the standards and to ensure continuing compliance. FERC has the ability to impose penalties of up to
$1 million per day per violation for any violation of NERC Reliability Standards. In August 2008, Energy Holdings Texas generating plants were audited for NERC Reliability Standards compliance by the Texas Regional Entity (TRE), NERCs regional arm in Texas. On October 27, 2008, TRE issued its final audit report for the plants, concluding that both plants were in compliance with
the NERC Reliability Standards for which they were audited. In November 2008, PSE&G will be audited by ReliabilityFirst Corporation, NERCs regional arm in PJM. Standards of Conduct In March 2008, FERC initiated a rulemaking proceeding, seeking industry comment on whether FERCs then-existing Standards of Conduct regulationsgoverning the interaction between Transmission Provider employees and wholesale merchant employeesshould be revised to make them clearer, less
restrictive and easier to follow. PSEG, along with many other industry participants, filed comments in this proceeding. On October 16, 2008, FERC issued a Final Rule in this proceeding, which revises FERCs Standards of Conduct by abandoning the corporate separation approach to regulating these interactions
and instead adopting an employee function approach, which focuses on an individual employees job functions in determining how the rules will apply. PSEG is presently analyzing the Final Rule to determine all of its impacts, and will then take all necessary steps to ensure compliance with these new rules. State Regulation PSE&G SBC Filing 2007 Form 10-K, Page 20 and June 30, 2008 Form 10-Q, page 77. The SBC is a mechanism designed to insure recovery of costs associated with activities required to be accomplished to achieve specific government mandated public policy determinations. The programs that are covered by the SBC (gas and
electric) are energy efficiency and renewable energy programs, Manufactured Gas Plant RAC and the USF. In addition, the electric SBC includes a Social Programs component. All components include interest on both over and under recoveries. In May 2007, PSE&G filed a motion with the BPU seeking approval of changes in its electric and gas SBC rates and its electric non-utility generation charge (NGC) rates. A revised motion was filed in October 2007. In June 2008 PSE&G received the ALJs Initial Decision disallowing a portion of its claimed lost
revenues. The ALJ granted an electric increase of $89.7 million compared to $89.8 million requested and a gas increase of $15.2 million compared to PSE&Gs request of $16.7 million. Exceptions and reply exceptions were filed in July 2008. In September 2008, the BPU voted to modify the ALJs initial decision, which had recommended a total rate increase of $105 million. This BPU ruling affirms the disallowance of $1.4 million of lost revenues. As of October 22, 2008, the BPU had not issued its written Order. Upon reviewing the BPUs Order,
PSE&G will determine what actions to take in regard to the decision. RAC Filing 2007 Form 10-K, Page 20. In December 2007, PSE&G submitted its RAC 15 filing with the BPU, seeking recovery of $36 million of RAC program costs incurred during the twelve-month period from 83
August 1, 2006 through July 31, 2007 and a determination that these costs were reasonable and available for recovery. On October 3, 2008, the BPU issued an Order approving the settlement of the matter and affirming recovery of PSE&Gs RAC 15 costs of $36 million. Amortization of the program costs is equal to revenues with no impact on Net Income. Power and PSE&G BGSS 2007 Form 10-K, Page 21 and March 31, 2008 Form 10-Q, page 68 and June 30, 2008 Form 10-Q, page 77.. BGSS is the mechanism approved by the BPU designed to recover all gas costs related to the supply for residential customers. BGSS filings are made annually by June 1 of each year, with an
effective date of October 1. Revenues are matched with costs using deferred accounting, with the goal of achieving a zero cumulative balance by September 30 of each year. In May 2008, PSE&G requested an increase in annual BGSS revenues of $376 million, excluding Sales and Use Tax, to be effective October 1, 2008. This represents an approximate 20% increase on a typical residential gas customers bill. Based on discussions with the BPU Staff, PSE&G submitted a proposed
Stipulation of the Parties that would place the filed rate into effect on October 1, 2008 on a provisional basis, subject to refund. In August 2008, due to the significant downward trend in wholesale natural gas prices, PSE&G proposed a revised stipulation to the BPU reducing the requested BGSS increase from the filed $376 million or 20% to approximately $267 million or 14.3%. The BPU approved it on October 3, 2008 and the new
BGSS rates became effective immediately. Solar Initiative 2007 Form 10-K, Page 22 and March 31, 2008 Form 10-Q, page 68 and June 30, 2008 Form 10-Q, page 77. In April 2007, PSE&G filed a plan with the BPU designed to spur investment in solar power in New Jersey and meet energy goals under the EMP. This program received final BPU approval and a
written BPU order in April 2008. Under the plan, PSE&G will invest approximately $105 million over two years in a pilot program to help finance the installation of 30 MW of solar systems throughout its electric service area. PSE&G will provide loans to customers in its electric service territory for the installation of
solar photovoltaic systems on the customers premises. The borrowers can repay the loans over a period of either 10 years (for residential customer loans) or 15 years (for all other loans) by providing PSE&G with solar renewable energy certificates (SRECs). Borrowers will also have the option to repay the loans
with cash. The program will support 30 MW of solar power, fulfilling approximately 50% of the BPUs Renewal Portfolio Standard requirements in PSE&Gs service area in May 2009 and May 2010. PSE&G will be allowed a return of 11.11% on invested capital, including income tax effects. The program was opened up to non-residential customers on April 17, 2008. As of September 30, 2008, applications have been received for approximately 34% of the 30 MW program. Beginning July 2008, the program
became available to residential customers. The BPU, through a stakeholder working group, also spent several months considering whether additional measures are needed to stimulate solar development in New Jersey. In August 2008, the BPU issued an order directing PSE&G to commence discussions with BPU
Staff and the Division of Rate Counsel regarding the development of an SREC-based financing plan. Thus, PSE&G is currently working to modify its existing solar loan program for the Energy Years ending May 31, 2011 and May 31, 2012 in a manner that will stimulate a competitive market for SRECs, and plans to
make a filing with the BPU in January 2009. The August order does not change the terms of PSE&Gs existing pilot solar loan program. New Jersey Energy Master Plan (EMP) 2007 Form 10-K, Page 22 and March 31, 2008 Form 10-Q, page 68 and June 30, 2008 Form 10-Q, page 78. State law in New Jersey requires that an EMP be developed every three years, the purpose of which is to ensure safe, secure and reasonably-priced energy supply, foster economic growth and
development and protect the environment. A final EMP was released in October 2008. The final plan identifies a number of 84
the actions to improve energy efficiency, increase the use of renewable resources, ensure a reliable supply of energy and stimulate investment in clean energy technologies, including to:
maximize energy conservation and energy efficiency to reduce New Jerseys projected energy use by 20% by the year 2020; reduce prices by decreasing peak demand by 5,700 MW by 2020; strive to achieve 30% of the states electricity needs from renewable sources by 2020; develop at least 3000 MW of off-shore wind by 2020, develop new low carbon emitting, efficient power plants to help close the gap between the supply and demand of electricity; invest in innovative clean energy technologies and businesses to stimulate the industrys growth and green job development in New Jersey; work with electric and gas utilities to develop individual utility master plans through 2020 to evaluate options to modernize the electrical grid establish a state energy council; conduct a complete review of the BGS auction process; Consistent with the EMP, PSE&G has proposed several programs in filings with the BPU addressing different components of the EMP goals, has submitted a number of strategies designed to improve efficiencies in customer use and increase the level of renewable generation. PSEG and PSE&G participated in the
EMP roundtable discussions and outreach sessions conducted by the State of New Jersey from June through August 2008 to review the conclusions and recommendations of the EMP. Advanced Metering Infrastructure (AMI) Technologies 2007 Form 10-K, Page 22 and June 30, 2008 Form 10-Q, page 78. In December 2007, PSE&G filed a petition with the BPU requesting expedited approval to deploy and test AMI technologies, to enable customers to monitor energy use, conserve energy, reduce costs during peak periods and reduce CO2
emissions that contribute to global climate change. In June 2008, the BPU approved a pilot program. PSE&G is in the initial design stages. Carbon Abatement Program 2007 Form 10-K, Page 22 and June 30, 2008 Form 10-Q, page 78. In December 2007, PSE&G filed a petition with the BPU seeking expedited approval of a carbon abatement pilot program. This filing was withdrawn on May 1, 2008. A petition for approval for a small scale carbon abatement program was filed with the BPU in June 2008 seeking approval under the Regional Greenhouse Gas Initiative (RGGI) legislation which was signed into law in January 2008. The filing was found deficient by the BPU in July 2008. PSE&G supplemented
its filing to correct deficiencies on July 28, 2008. A discovery settlement conference was held on October 10, 2008. PSE&G proposes to invest up to $46 million over four years in programs across specific customer segments. The program is designed to support New Jerseys EMP goals and promote energy efficiency.
PSE&G has requested a return on this investment at its established rate. The matter is currently pending. This amount is not included in PSE&Gs projected capital expenditures. Demand Response In July 2008, the BPU directed that demand response (DR) programs be implemented by each of New Jerseys electric utilities beginning in June 2009. In its order, the BPU established target goals to increase DR by 300 MW for the first year of the program and a total increase of 600 MW of DR by the end of
the third year and stated that 55% of the target would be the responsibility of PSE&G. In response, PSE&G filed its program proposal in August and identified $93.4 million of investment in DR. PSE&Gs filing sought full recovery the costs of its DR program, including a return on its investment, through rates. In September 2008, the BPU voted to defer action on PSE&Gs DR program (and the proposed DR programs of the other New Jersey electric utilities) and to reconvene its Demand Response Working Group (DRWG), which will focus on enrolling, with additional incentives, more New Jersey-based DR in
already-existing DR programs of PJM, in which PSE&Gs role would be limited. It is not yet clear what impact the BPUs action in reconvening the DRWG will have on PSE&Gs pending DR filing. It is possible that the 85
BPU may still act to approve all, or at least a portion, of PSE&Gs DR filing by the end of 2008, but the exact outcome of this proceeding cannot be predicted. Universal Service Fund (USF) Filing The USF is an energy assistance program mandated by the BPU under the Competition Act to provide payment assistance to low-income customers. The Lifeline program is a separately mandated energy assistance program to provide payment assistance to elderly and disabled customers. On June 30, 2008, the
States electric and gas public utilities filed to reset statewide rates for the Permanent Universal Service Fund (USF) and the Lifeline program. The filed rates were set to recover $248 million on a statewide basis. Of this amount, the revised statewide electric rates will recover $151 million while the revised statewide
gas rates will recover $97 million. As part of this filing, the rates for the Lifeline program will recover a total of $77 million, $51 million for the electric program and $26 million for the gas program. PSE&Gs USF rates will recover $85 million and $61 million for electric and gas respectively. PSE&Gs Lifeline rates will
recover $28 million and $16 million for electric and gas respectively. PSE&G earns no margin on the collection of the USF and Lifeline programs, resulting in no impact on Net Income. PSE&G received a Written Order dated October 21, 2008 and the new rates were effective October 24, 2008. 86
A listing of exhibits being filed with this document is as follows:
a.
PSEG:
Exhibit 10:
Senior Management Incentive Compensation Plan, effective January 1, 2009
Exhibit 10.1:
Management Incentive Compensation Plan, effective January 1, 2009
Exhibit 10.2:
Key Executive Severance Plan, amended effective September 22, 2008
Exhibit 12:
Computation of Ratios of Earnings to Fixed Charges
Exhibit 31:
Certification by Ralph Izzo Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 (1934 Act)
Exhibit 31.1:
Certification by Thomas M. OFlynn Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 32:
Certification by Ralph Izzo Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
Exhibit 32.1:
Certification by Thomas M. OFlynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
b.
Power:
Exhibit 10:
Senior Management Incentive Compensation Plan, effective January 1, 2009
Exhibit 10.1:
Management Incentive Compensation Plan, effective January 1, 2009
Exhibit 10.2:
Key Executive Severance Plan, amended effective September 22, 2008
Exhibit 12.1:
Computation of Ratios of Earnings to Fixed Charges
Exhibit 31.2:
Certification by Ralph Izzo Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 31.3:
Certification by Thomas M. OFlynn Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 32.2:
Certification by Ralph Izzo Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
Exhibit 32.3:
Certification by Thomas M. OFlynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
c.
PSE&G:
Exhibit 10:
Senior Management Incentive Compensation Plan, effective January 1, 2009
Exhibit 10.1:
Management Incentive Compensation Plan, effective January 1, 2009
Exhibit 10.2:
Key Executive Severance Plan, amended effective September 22, 2008
Exhibit 12.2:
Computation of Ratios of Earnings to Fixed Charges
Exhibit 12.3:
Computation of Ratios of Earnings to Fixed Charges Plus Preferred Securities Dividend Requirements
Exhibit 31.4:
Certification by Ralph Izzo Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 31.5:
Certification by Thomas M. OFlynn Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 32.4:
Certification by Ralph Izzo Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
Exhibit 32.5:
Certification by Thomas M. OFlynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code 87
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. The signature of the undersigned company shall be deemed to relate only to matters having reference to
such company and any subsidiaries thereof. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
By: /s/ DEREK M. DIRISIO Derek M. DiRisio Date: October 31, 2008 88
(Registrant)
Vice President and Controller
(Principal Accounting Officer)
SIGNATURE 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. The signature of the undersigned company shall be deemed to relate only to matters having reference to
such company and any subsidiaries thereof. PSEG POWER LLC
By: /s/ DEREK M. DIRISIO Derek M. DiRisio Date: October 31, 2008 89
(Registrant)
Vice President and Controller
(Principal Accounting Officer)
SIGNATURE 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. The signature of the undersigned company shall be deemed to relate only to matters having reference to
such company and any subsidiaries thereof. PUBLIC SERVICE ELECTRIC AND GAS COMPANY
By: /s/ DEREK M. DIRISIO Derek M. DiRisio Date: October 31, 2008 90
(Registrant)
Vice President and Controller
(Principal Accounting Officer)
Exhibit 10
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
SENIOR MANAGEMENT INCENTIVE COMPENSATION PLAN
Amended effective January 1, 2009
TABLE OF CONTENTS
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I. |
PURPOSE |
1 |
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II. |
DEFINITIONS |
2 |
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III. |
ADMINISTRATION |
4 |
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IV. |
ELIGIBILITY |
5 |
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V. |
AWARD FUND |
6 |
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VI. |
TARGET INCENTIVE AWARDS |
6 |
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VII. |
AWARDS |
7 |
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VIII. |
LIMITATIONS |
8 |
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IX. |
LIMITATION OF ACTIONS |
8 |
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X. |
CLAIMS PROCEDURES |
9 |
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XI. |
PLAN AMENDMENT, SUSPENSION OR TERMINATION |
10 |
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XII. |
OTHER COMPENSATION PLANS |
10 |
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XIII. |
MISCELLANEOUS |
10 |
i
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
SENIOR MANAGEMENT INCENTIVE COMPENSATION PLAN
I. PURPOSE
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. This Plan is designed to provide for awards to selected salaried employees in executive or other important positions, who, individually or as members of a group, contribute in a substantial degree to the success of the Company and its Participating Affiliates, and who are in a position to have a direct and significant impact on the growth and success of the Company and its Participating Affiliates, thus affording to them a means of participating in that success and an incentive to contribute further to that success. This Plan also serves to supplement the Companys 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.
The Plan was adopted as the Management Incentive Compensation Plan effective January 1, 2001. It was amended, effective January 1, 2009, to change its name to the Senior Management Incentive Compensation Plan.
1
II. DEFINITIONS
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The following words and phrases shall have the meanings set forth below: |
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(a) Administrative Regulations shall mean the procedures and regulations established by the Committee pursuant to Section III hereof for the purpose of administering the Plan. |
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(b) 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 pursuant to regulations under Code section 414(o). |
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(c) Award shall mean the amount determined by the Committee pursuant to Section VII hereof. |
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(d) Award Fund shall mean the aggregate amount made available in any Plan Year pursuant to Section V hereof from which awards determined under Section VII hereof may be made. |
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(e) Code - the Internal Revenue Code of 1986, as amended, or as it may be amended from time to time. |
2
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(f) Committee shall mean the Organization and Compensation Committee of the Board of Directors of the Company, the membership on which shall be limited to directors of the Company who are not Employees. |
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(g) Company shall mean Public Service Enterprise Group Incorporated, a New Jersey corporation, or any successor thereto. |
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(h) Employee shall mean any person not included in a unit of employees covered by a collective bargaining agreement who is an employee (such term having its customary meaning) of the Company or a Participating Affiliate, whether full-time or part-time, and whether or not an officers or director, and who is receiving remuneration for personal services rendered to the Company or Participating Affiliate other than (i) solely as a director of the Company or a Participating Affiliate, (ii) as a temporary employee, (iii) as a consultant or (iv) as an independent contractor (regardless of whether a determination is made by the Internal Revenue Service or other governmental agency or court after the individual is engaged to perform such services that the individual is an employee of the Company or Participating Affiliate for the purposes of the Code or otherwise). |
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(i) Net Income shall mean the amount reported by the Company as consolidated income before extraordinary items and the cumulative effect of accounting changes, adjusted, however, by adding any amount that has been expensed (after taxes) for awards under this Plan in computing such Net Income. |
3
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(j) Participant shall mean an Employee who is subject to Section 16 of the Securities and Exchange Act of 1934, as amended, or who has been designated by the Committee to participate in the Plan pursuant to Section IV hereof. |
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(k) Participating Affiliate shall mean any Affiliate of the Company that adopts this Plan with the approval of the Board of Directors of the Company. As a condition to participating in this 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 this Plan and shall comply with such other terms and conditions as may be imposed by the Board of Directors of the Company. |
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(l) Plan shall mean this Public Service Enterprise Group Incorporated Senior Management Incentive Compensation Plan as amended from time to time. |
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(m) Plan Year shall mean the calendar year. |
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(n) Subsidiary shall mean any corporation, limited liability company or other entity, domestic or foreign (other than the Company), 50% or more of the total voting power of which is held by the Company and/or a Subsidiary for Subsidiaries. |
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(o) Target Incentive Awards shall mean the amounts determined by the Committee pursuant to Section VII hereof. |
III. ADMINISTRATION
(a) The Committee shall administer the Plan. Subject to the provisions of the Plan, the Committee shall have full and final authority to select Participants, to designate Target Incentive Awards for each Participant and to determine the performance objectives and the amount of all Awards under this Plan. The Committee may not, however, alter Award Fund
4
provided by Article V of this Plan or the maximum Award provided by Article VII of this Plan. The Committee shall also have, subject to the provisions of the Plan, full and final authority to interpret the Plan, to establish and revise such Administrative Regulations as it deems necessary for the proper administration of 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.
(c) The Committee may rely conclusively on the determinations made by the Companys independent public accountants.
IV. ELIGIBILITY
(a) Those Employees who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, and those Employees who are key officers or management Employees of the Company, a Subsidiary or an Affiliate who, in the opinion of the Committee, are in a position to have a direct and significant impact on achieving the Companys long-term objectives are eligible to participate in the Plan.
(b) 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 Employees responsibilities and his/her opportunity to contribute substantially to the attainment of financial and operating objectives of the Company or
5
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 an Employee 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 duties and responsibilities during a Plan Year.
(c) Participation in the Plan in one Plan Year shall not guarantee participation in another Plan Year.
(d) The Committee shall have sole discretion as to whether to suspend operation of the Plan for any period of time.
V. AWARD FUND
In each Plan Year, an Award Fund shall be established equal to 2.5% of Net Income. No amounts are paid under the Plan for any Plan Year unless the Company has Net Income. However, the Committee shall have the right to decrease the amount of the Award Fund in any Plan Year.
VI. TARGET INCENTIVE AWARDS
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(a) For each Plan Year, the Committee shall determine: |
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(i) |
Whether or not the Plan shall be in operation for such Plan Year. |
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(ii) |
The names of those Employees who will participate in the Plan for such Plan Year. |
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(iii) |
The Target Incentive Award for each Participant. For any Participant not subject to Section 162(m) of the Code, other performance measures or |
6
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objectives, whether quantitative or qualitative, may be established. The Committee shall establish the specific targets for any such selected measures. These targets may be set at a specific level or may be expressed as relative to the comparable measure at comparison companies or a defined index. |
(b) At any time after the commencement of a Plan Year, but prior to the close thereof, the Committee may, in its discretion, eliminate or add Participants, or increase or decrease the Target Award of any Participant; but the Committee may not alter Award Fund or the maximum Award provided by Articles V and VII of this Plan.
VII. AWARDS
(a) The chief executive officers of the Company may receive an award not to exceed 10% of the maximum Award Fund for that Plan Year.
(b) All other Participants may receive an award not to exceed that amount which is 90% of the maximum Award Fund for that Plan Year divided by the number of Participants, other than the chief executive officer, in the Plan for that Plan Year.
(c) The committee, however, shall have the right to pay to the chief executive officer less than 10% of the maximum Award Fund, and pay to the other Participants, less than that amount which is 90% of the maximum Award Fund divided by the number of Participants, other than the chief executive officer, in the Plan for that Plan Year.
All such determinations, except in the case of the award for the chief executive officer, shall be made after considering the recommendations of the chief executive officer and such
7
other matters as the Committee shall deem relevant. In making such determinations, the Committee may, in addition to achievement of short-term business objectives, take into account achievement by key executives of long-term goals of the Company. All awards shall be charged against the Award Fund and shall be made in one lump sum cash payment as soon as practicable after determined by the Committee.
VIII. LIMITATIONS
Although this Plan sets the maximum amount that may be paid to a Participant in any given year, the Committee shall retain the right to decrease the maximum or eliminate any Award to any Participants. No director, officer or Employee of the Company, its Subsidiaries or its Affiliates nor any other person shall have the authority to enter into any agreement with any person for the making or payment of an Award or to make any representation or warranty with respect thereto.
Neither the action of the Company in establishing the Plan, nor any action taken by it or by the Committee under the provisions hereof, nor any provision of the Plan, shall be construed as giving to any Employee the right to be retained in the employ of the Company, its Subsidiaries or its Affiliates.
The Company may offset against any payments to be made to a Participant or his/her beneficiary under this Plan any amounts owing to the Company, its Subsidiaries or its Affiliates from the Participant for any reason.
IX. LIMITATION OF ACTIONS
Every asserted right of action by or on behalf of the Company or by or on behalf of the stockholder against any past, present or future member of the Committee or director, officer of
8
Employee of the Company or any Subsidiary or Affiliate thereof, arising out of or in connection with this Plan, shall, irrespective of the place where such right of action may arise or be asserted and irrespective of the place of residence of any such member director, officer or Employee, cease and be barred upon the expiration of three years (i) from the date of the alleged act or omission in respect of which such right of action arises or (ii) from the date upon which the Companys Annual Report to Stockholders setting forth the aggregate amount of the awards to all or any part of which such action may relate is made generally available to stockholders, whichever date is earlier; and every asserted right of action by or on behalf of any Employee, past, present or future, or any beneficiary, spouse, child or legal representative thereof, against the Company or any Subsidiary or Affiliate thereof, arising out of or in connection with this Plan, shall, irrespective of the place where such right of action may arise or be asserted, cease and be barred by the expiration of three years from the date of the alleged act or omission in respect of which such right of action arises.
X. CLAIMS PROCEDURE
In the case of any Participant (whether active, retired or terminated) or beneficiary whose claim for an award under this Plan has been denied, the Company shall provide adequate notice in writing of such adverse determination setting forth the specific reasons for such denial in a manner calculated to be understood by the recipient thereof. Such Participant or beneficiary shall be afforded a reasonable opportunity for a full and fair review of the decision denying the claim by the Committee.
9
XI. PLAN AMENDMENT, SUSPENSION OR TERMINATION
The Board of Directors or the stockholders may discontinue the Plan at any time and may, from time to time, amend or revise the terms of the Plan as permitted by applicable statutes; provided, however, that no such discontinuance, amendment or revision shall materially adversely affect any right or obligation with respect to any award theretofore made. Any amendment or revision that increases the cost of the Plan by a substantial proportion may be made only by the stockholders. The Plan will continue in operation until discontinued as herein provided.
XII. OTHER COMPENSATION PLANS
The adoption of this Plan shall not affect any other incentive compensation plan, stock option plan or any other compensation plan in effect for the Company or any Affiliate, nor shall the Plan preclude the Company or any Affiliate from establishing any other form of incentive compensation plan, stock option plan or any other compensation plan.
XIII. MISCELLANEOUS
(a) The costs and expenses of administering the Plan shall be borne by the Company and its Affiliates and shall not be charged against any Award or to any Participant receiving an Award.
(b) To the extent not preempted by Federal law, this Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of New Jersey without reference to its Conflict of Laws principles.
(c) The captions and section numbers appearing in this Plan are inserted only as a matter of convenience. They do not define, limit or describe the scope or intent of the provisions
10
of the Plan. In this Plan, words in the singular number include the plural and in the plural include the singular; and words of the masculine gender include the feminine and the neuter, and when the sense so indicates, words of the neuter gender may refer to any gender. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
(d) Every direction, revocation or notice authorized or required by the Plan shall be deemed delivered to the Company (a) on the date it is personally delivered to its principal executive offices to the attention of the Compensation Manager of PSEG Services Corporation or (b) three business days after it is sent by registered or certified mail, postage prepaid, addressed to the Company (attn: Compensation Manager of PSEG Services Corporation) at such offices; and shall be deemed delivered to a Participant (a) on the date it is personally delivered to him or her, or (b) three business days after it is sent by registered or certified mail, postage prepaid, addressed to him or her at the last address shown for him or her on the records of the Company.
(e) 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 Companys assets and business or with or into which the Company may be consolidated or merged.
(f) 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.
11
(g) The Company shall have the right to deduct from any Award payment any sum required to be 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.
12
EXHIBIT 10.1
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
MANAGEMENT INCENTIVE COMPENSATION PLAN
Effective January 1, 2009
TABLE OF CONTENTS
|
|
|
|
I. |
PURPOSE |
1 |
|
|
|
|
|
II. |
DEFINITIONS |
1 |
|
|
|
|
|
III. |
ADMINISTRATION |
5 |
|
|
|
|
|
IV. |
ELIGIBILITY |
5 |
|
|
|
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|
V. |
TARGET INCENTIVE AWARDS |
6 |
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VI. |
PERFORMANCE GOALS |
7 |
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VII. |
DETERMINATION OF FINAL INCENTIVE AWARDS |
8 |
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VIII. |
DISTRIBUTION |
10 |
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IX. |
TERMINATION OF EMPLOYMENT |
10 |
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X. |
LIMITATIONS |
11 |
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XI. |
LIMITATION OF ACTIONS |
12 |
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XII. |
CLAIMS PROCEDURES |
13 |
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XIII. |
PLAN AMENDMENT, SUSPENSION OR TERMINATION |
13 |
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XIV. |
OTHER COMPENSATION PLANS |
13 |
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XV. |
MISCELLANEOUS |
14 |
|
i
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
MANAGEMENT INCENTIVE COMPENSATION PLAN
I. PURPOSE
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 certain key officers and executive-level employees who contribute to attainment of these objectives. This Plan is designed to provide for awards to selected salaried employees in executive or other important positions, who, individually or as members of a group, contribute in a substantial degree to the success of the Company and its Participating Affiliates, and who are in a position to have a direct and significant impact on the growth and success of the Company and its Participating Affiliates, thus affording to them a means of participating in that success and an incentive to contribute further to that success. This Plan also serves to supplement the Companys and Participating Affiliates salary and benefit programs so as to provide overall compensation for such executive-level employee that 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.
II. DEFINITIONS
The following words and phrases shall have the meanings set forth below:
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(a) 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 |
1
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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). |
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(b) Award shall mean the amount determined by the Committee pursuant to Section VII hereof. |
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(c) Award Fund shall mean the aggregate amount made available in any Plan Year pursuant to Section V hereof from which awards determined under Section VII hereof may be made. |
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(d) Cash Balance Plan shall mean the Cash Balance Pension Plan of Public Service Enterprise Group Incorporated. |
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(e) CEO shall mean the Chief Executive Officer of the Company. If the Board of Directors has not designated a Chief Executive Officer, CEO shall mean the President of the Company. |
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(f) Code shall mean the Internal Revenue Code of 1986, as amended, or as it may be amended from time to time. |
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(g) Committee shall mean the Organization and Compensation Committee of the Board of Directors of the Company, the membership on which shall be limited to directors of the Company who are not Employees. |
2
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(h) Company shall mean Public Service Enterprise Group Incorporated, a New Jersey corporation, or any successor thereto. |
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(i) Disability for the purposes of this Plan, a Participant shall be deemed to have terminated employment on account of Disability if such Participant qualifies for a disability pension under the Pension Plan or the Cash Balance Plan. |
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(j) Employee shall mean any person not included in a unit of employees covered by a collective bargaining agreement who is an employee (such term having its customary meaning) of the Company or a Participating Affiliate, whether full-time or part-time, and whether or not an officer or director, and who is receiving remuneration for personal services rendered to the Company or Participating Affiliate other than (i) solely as a director of the Company or a Participating Affiliate, (ii) as a temporary employee, (iii) as a consultant or (iv) as an independent contractor (regardless of whether a determination is made by the Internal Revenue Service or other governmental agency or court after the individual is engaged to perform such services that the individual is an employee of the Company or Participating Affiliate for the purposes of the Code or otherwise). |
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(k) Lay Off shall mean an involuntary termination of employment, other than for cause. |
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(l) Participant shall mean an Employee who has been designated by the Committee to participate in the Plan pursuant to Sections IV and V hereof. |
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(m) Participating Affiliate shall mean any Affiliate of the Company that adopts this Plan with the approval of the Board of Directors of the Company. As a |
3
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condition to participating in this 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 this Plan and shall comply with such other terms and conditions as may be imposed by the Board of Directors of the Company. |
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(n) Pension Plan shall mean the Pension Plan of Public Service Enterprise Group Incorporated. |
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(o) Plan shall mean this Public Service Enterprise Group Incorporated Management Incentive Compensation Plan, as it may be amended from time to time. |
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(p) Plan Year shall mean the calendar year. |
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(q) Retirement the voluntary termination of employment under circumstances entitling the Participant to an immediately payable periodic retirement benefit under the Pension Plan or the Cash Balance Plan. Retirement shall not include termination of service with a right to a deferred pension under the Pension Plan or a deferred retirement benefit or early commencement of a Participants cash balance account under the Cash Balance Plan; |
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(r) Subsidiary shall mean any corporation, limited liability company or other entity, domestic or foreign (other than the Company), 50% or more of the total voting power of which is held by the Company and/or a Subsidiary or Subsidiaries. |
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(s) Target Incentive Awards shall mean the amounts determined by the Committee pursuant to Section V hereof. |
4
III. ADMINISTRATION
(a) The Committee shall administer the Plan. Subject to the provisions of the Plan, the Committee shall have full and final authority to select Participants, to designate Target Incentive Awards for each Participant and to determine the performance objectives and the amount of all Awards under this Plan. The Committee shall also have, subject to the provisions of the Plan, full and final authority to interpret the Plan, to establish and revise such administrative regulations as it deems necessary for the proper administration of 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 CEO 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.
(c) The Committee may rely conclusively on the determinations made by the Companys independent public accountants.
IV. ELIGIBILITY
(a) Those Employees who are key officers or executive-level Employees of the Company, a Subsidiary or an Affiliate who, in the opinion of the Committee, are in a position to have a direct and significant impact on achieving the Companys long-term objectives are eligible to participate in the Plan.
5
(b) 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 Employees 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 newly hired Employees may be added and an Employee whose duties and responsibilities change significantly during a Plan Year may be added or deleted as a Participant by the Committee. The Committee may prorate the Incentive Award of any Participant if appropriate to reflect any such change in duties and responsibilities during a Plan Year.
(c) Any Employee who has been selected as a Participant in the Public Service Enterprise Group Incorporated Key Executive Incentive Compensation Plan for any Plan Year may not participate in this Plan for the same Plan Year.
(d) Participation in the Plan in one Plan Year shall not guarantee or require participation in another Plan Year.
(e) The Committee shall have sole discretion as to whether to suspend operation of the Plan for any period of time.
V. TARGET INCENTIVE AWARDS
(a) For each Plan Year, the Committee shall determine:
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(i) |
Whether or not the Plan shall be in operation for such Plan Year. |
6
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(ii) |
The names or positions of those Employees who will participate in the Plan for such Plan Year. |
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(iii) |
The Target Incentive Award for each Participant, expressed as a percentage of the Participants rate of base salary in effect as of the last day of the Plan Year to which such Target Incentive Award relates. |
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(b) |
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At any time after the commencement of a Plan Year, but prior to the close thereof, the Committee may, in its discretion, eliminate or add Participants or increase or decrease the Target Incentive Award of any Participant based upon such criteria as it shall deem appropriate. |
VI. PERFORMANCE GOALS
For each Plan Year, within 90 days of the beginning of the Plan Year (or, for Participants joining the Plan during a Plan year, within 90 days of participation), the CEO shall approve performance goals for each Participant which shall be performance measures or objectives, whether quantitative or qualitative, which must be achieved in order to earn an Award under this Plan. The CEO shall approve the specific targets for any such selected performance goals. These targets may be set at a specific level or may be expressed as relative to the comparable measure at comparison companies or to a defined index. Such performance goals shall include a corporate goal or goals related to the performance of the Company and may include (i) an employer goal or goals related to the performance of a Subsidiary or organizational business unit and (ii) an individual goal or goals related to the individual performance of the Participant in his/her position.
7
The CEO shall determine the substance and weighting of each goal of a subsidiary president. The CEO may determine the substance and weighting of each of the goals of other Participants or may delegate the determination of the substance and weighting of these goals to the Subsidiary presidents with their respective business units and direct reports.
Notwithstanding the foregoing, however, for any Plan Year, the Committee or the CEO may, as deemed to be appropriate, elect to adjust the applicable weightings of the corporate goal(s), the employer goal(s) and the individual goal(s) as part of the criteria for determining Awards for any Participant or group of Participants in this Plan.
VII. DETERMINATION OF FINAL INCENTIVE AWARDS
A Participants Final Incentive Award will be determined as follows:
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(a) |
Within 60 days of the end of each Plan Year, the CEO shall certify, subject to confirmation by the Committee, the achievement of the corporate goal(s), the several employer goals and the several individual goals for the Plan Year. |
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(b) |
The result of such certifications shall be the Corporate Factor, the Employer Factor and the Individual Performance Factor, respectively. |
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(c) |
The respective portions (employer and individual) of each Participants Target Incentive Amount shall then be multiplied by the Employer Factor and the Individual Performance Factor, as appropriate, added together. The result of those calculations shall be then multiplied by the Corporate Factor to determine the Participants Incentive Award. For example, assume (i) a Target Incentive Amount of 50.0%, (ii) a Corporate Factor of 0.95, (iii) an employer goal |
8
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weighting of 70%, (iv) an Employer Factor of 1.20, (v) an individual Goal weighting of 30% and (vi) an Individual Performance Factor of 0.80: |
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1. Employer Portion = |
1.20 |
x |
.70 |
x |
50.0% |
= |
42.00% |
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2. Individual Portion = |
0.80 |
x |
.30 |
x |
50.0% |
= |
12.00% |
INCENTIVE AWARD = 42.00% + 12.00% = 54.00% x 0.95 = 51.30% x Salary
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(e) |
Notwithstanding anything contained in this Plan to the contrary, unless the CEO shall specifically so determine and the Committee affirm, a Participants Final Incentive Award shall not exceed 1.5 times such Participants Target Incentive Amount for the Plan Year to which it relates. |
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(f) |
Unless otherwise determined by the Committee or the CEO, the Employer Factor to be applied in determining a Participants Final Incentive Award shall be that of the Subsidiary/ Business Unit of which the Participant was a member on the last day of (or, for terminated Participants eligible for Awards, on the last day of employment in) the Plan Year to which the Award relates. |
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(g) |
Unless otherwise determined by the CEO, to the extent that the Target Incentive Amount applicable to any Participant is changed during a Plan Year (e.g., downgrade of incumbent position, change in position, promotion to new position), such Participants Final Incentive Award shall be prorated on the basis of the Participants service in his/her respective positions. |
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(h) |
Also notwithstanding anything contained in this Plan to the contrary, the Committee or CEO may adjust a Participants Final Incentive Award based upon any criteria it/he/she may determine to be reasonable. |
9
VIII. DISTRIBUTION
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(a) |
All distributions of a Participants Final Incentive Award shall be made as of a distribution date which shall be no later than the 15th day of the third month following the close of the Plan Year to which such award relates. |
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(b) |
All distributions shall be in one lump sum in money by check. |
IX. TERMINATION OF EMPLOYMENT
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(a) |
If the employment of a Participant is terminated on account of the Participants death, Disability, Lay-Off or Retirement, and if the Committee determines that Awards under this Plan may be earned for the Plan Year of termination, such Participants Award shall be prorated for that part of the Plan Year in which the Participant was participating prior to such termination and the Company shall pay such prorated Award as soon as practicable after determination of the Final Incentive Award in accordance with Section VII, unless otherwise determined by the Committee; provided, however, that any Participant who has received a benefit under the Key Employee Severance Plan of Public Service Enterprise Group Incorporated shall not be entitled to a prorated payment provided for under this subsection. |
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(b) |
If, prior to the payment of any Award under this Plan, the employment of a Participant is terminated for any reason other than death, Disability, Lay-Off or Retirement, the Participant shall forfeit the right to payment of such Award, unless otherwise determined by the Committee. |
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(c) |
If a Participant becomes a Participant during a Plan Year, any Award under this Plan to the Participant may be appropriately prorated from the time the Participant entered the Plan to the end of the Plan Year, as determined by the CEO. |
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(d) |
In the case of a Participants death, any payment under this Plan shall be made to the Participants estate. Such payment shall be made as a lump sum as soon as practicable after determination of the Final Incentive Award in accordance with Section VII. |
X. LIMITATIONS
Neither the action of the Company in establishing the Plan, nor any action taken by it or by the Committee under the provisions hereof, nor any provision of the Plan, shall be construed as giving to any Employee the right to be retained in the employ of the Company, its Subsidiaries or its Affiliates.
The Company may offset against any payments to be made to a Participant or his/her beneficiary under this Plan any amounts owing to the Company, its Subsidiaries or its Affiliates from the Participant for any reason.
The invalidity or unenforceability of any provision of this Plan shall in no way affect the validity or enforceability of any other provision hereof.
XI. LIMITATION OF ACTIONS
Every asserted right of action by or on behalf of the Company or by or on behalf of the stockholder against any past, present or future member of the Committee or director, officer or Employee of the Company or any Subsidiary or Affiliate thereof, arising out of or in connection
11
with this Plan, shall, irrespective of the place where such right of action may arise or be asserted and irrespective of the place of residence of any such member director, officer or Employee, cease and be barred upon the expiration of three years (i) from the date of the alleged act or omission in respect of which such right of action arises or (ii) from the date upon which the Companys Annual Report to Stockholders setting forth the aggregate amount of the awards to all or any part of which such action may relate is made generally available to stockholders, whichever date is earlier; and every asserted right of action by or on behalf of any Employee, past, present or future, or any beneficiary, spouse, child or legal representative thereof, against the Company or any Subsidiary or Affiliate thereof, arising out of or in connection with this Plan, shall, irrespective of the place where such right of action may arise or be asserted, cease and be barred by the expiration of three years from the date of the alleged act or omission in respect of which such right of action arises.
XII. CLAIMS PROCEDURE
In the case of any Participant (whether active, retired or terminated) or beneficiary whose claim for an award under this Plan has been denied, the Company shall provide adequate notice in writing of such adverse determination setting forth the specific reasons for such denial in a manner calculated to be understood by the recipient thereof. Such Participant or beneficiary shall be afforded a reasonable opportunity for a full and fair review of the decision denying the claim by the Committee.
12
XIII. PLAN AMENDMENT, SUSPENSION OR TERMINATION
The Board of Directors may discontinue the Plan at any time and may, from time to time, amend or revise the terms of the Plan as permitted by applicable statutes; provided, however, that no such discontinuance, amendment or revision shall materially adversely affect any right or obligation with respect to any award theretofore made. The Plan will continue in operation until discontinued as herein provided.
XIV. OTHER COMPENSATION PLANS
The adoption of this Plan shall not affect any other incentive compensation plan, stock option plan or any other compensation plan in effect for the Company or any Affiliate, nor shall the Plan preclude the Company or any Affiliate from establishing any other form of incentive compensation plan, stock option plan or any other compensation plan.
XV. MISCELLANEOUS
(a) The costs and expenses of administering the Plan shall be borne by the Company and its Affiliates and shall not be charged against any Award or to any Participant receiving an Award.
(b) To the extent not preempted by Federal law, this Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of New Jersey without reference to its Conflict of Laws principles.
(c) The captions and section numbers appearing in this Plan are inserted only as a matter of convenience. They do not define, limit or describe the scope or intent of the provisions of the Plan. In this Plan, words in the singular number include the plural and in the plural
13
include the singular; and words of the masculine gender include the feminine and the neuter, and when the sense so indicates, words of the neuter gender may refer to any gender. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.
(d) Every direction, revocation or notice authorized or required by the Plan shall be deemed delivered to the Company (a) on the date it is personally delivered its principal executive offices to the attention of the Compensation Manager of PSEG Services Corporation or (b) three business days after it is sent by registered or certified mail, postage prepaid, addressed to the Company (attn: Compensation Manager of PSEG Services Corporation) at such offices; and shall be deemed delivered to a Participant (a) on the date it is personally delivered to him or her, or (b) three business days after it is sent by registered or certified mail, postage prepaid, addressed to him or her at the last address shown for him or her on the records of the Company.
(e) 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 Companys assets and business or with or into which the Company may be consolidated or merged.
(f) 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.
14
(g) The Company shall have the right to deduct from any Award payment any sum required to be 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.
(h) This Plan was originally adopted effective as of January 1, 2009.
15
EXHIBIT 10.2
KEY EXECUTIVE SEVERANCE PLAN OF
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
Amended effective September 22, 2008
TABLE OF CONTENTS
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Page |
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ARTICLE I |
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1.1 |
Purpose |
1 |
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ARTICLE II |
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2.1 |
Accrued Obligation |
1 |
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2.2 |
Affiliate |
1 |
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2.3 |
Annual Base Salary |
1 |
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2.4 |
Board |
1 |
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2.5 |
Cause |
1 |
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2.6 |
Change in Control |
2 |
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2.7 |
Code |
3 |
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2.8 |
Committee |
3 |
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2.9 |
Company |
3 |
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2.10 |
Confidential Information |
3 |
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2.11 |
Date of Termination |
4 |
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2.12 |
Disability |
4 |
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2.13 |
Disability Effective Date |
4 |
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2.14 |
Eligible Employee |
4 |
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2.15 |
Effective Date |
4 |
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2.16 |
Employer |
4 |
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2.17 |
Good Reason |
4 |
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2.18 |
Other Benefits |
5 |
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2.19 |
Participant |
5 |
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2.20 |
Plan |
5 |
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2.21 |
Prior Equity Awards |
5 |
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2.22 |
Retirement |
5 |
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2.23 |
Schedule A Participant |
5 |
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2.24 |
Schedule B Participant |
5 |
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2.25 |
Target Bonus |
5 |
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2.26 |
Target Long-Term Incentive |
6 |
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ARTICLE III |
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3.1 |
Eligible Employees |
6 |
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3.2 |
Participation |
6 |
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3.3 |
Release of Claims |
6 |
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ARTICLE IV |
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4.1 |
Termination by Employer Other than for Cause |
6 |
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ARTICLE V |
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5.1 |
Termination By Employer Other Than For Cause or By Participant For Good Reason (other than Good Reason as described in Subsection 2.17(d)) Within Two Years After a Change in Control |
9 |
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5.2 |
Termination By Participant For Good Reason as described in Subsection 2.17(d) Within Two Years After a Change in Control |
11 |
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5.3 |
Termination By Employer For Cause or By Participant Other Than For Good Reason |
13 |
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5.4 |
Death |
13 |
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5.5 |
Disability |
14 |
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5.6 |
Retirement |
14 |
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ARTICLE VI |
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6.1 |
Time of Payments |
14 |
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6.2 |
Payment Offsets |
14 |
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6.3 |
Cap on Excess Parachute Payments; Gross-Up Payments |
14 |
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6.4 |
Code Section 409A Compliance |
17 |
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6.5 |
Tax Withholding |
17 |
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ARTICLE VII |
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7.1 |
Confidentiality |
18 |
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7.2 |
Non-Compete |
18 |
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7.3 |
Non-Solicitation |
18 |
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7.4 |
Enforcement |
19 |
ii
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ARTICLE VIII |
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8.1 |
Amendment |
19 |
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8.2 |
Termination |
19 |
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ARTICLE IX |
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9.1 |
Plan Administrator |
19 |
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9.2 |
Responsibilities of Committee |
19 |
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9.3 |
Allocation or Delegation of Duties and Responsibilities |
20 |
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9.4 |
Expenses |
20 |
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9.5 |
Indemnification of Plan Administrator |
20 |
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9.6 |
Reliance Upon Others |
20 |
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9.7 |
Notification |
21 |
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9.8 |
Multiple Capacities |
21 |
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ARTICLE X |
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10.1 |
Submission of Claims |
21 |
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10.2 |
Computation and Review of Claims |
21 |
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ARTICLE XI |
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11.1 |
Construction |
22 |
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11.2 |
Unfunded Plan |
22 |
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11.3 |
No Right to Continued Employment |
22 |
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11.4 |
Partial Invalidity |
23 |
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11.5 |
Successors and Assigns |
23 |
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11.6 |
Waivers |
23 |
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11.7 |
Gender and Number |
23 |
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11.8 |
Headings |
23 |
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Schedule A |
Participants |
24 |
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Schedule B |
Participants |
25 |
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Exhibit I |
Form of Restrictive Covenant Agreement |
26 |
iii
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Exhibit II |
Form of Separation Agreement and General Release |
27 |
ii
ARTICLE I
PURPOSE OF THE PLAN
1.1 Purpose This Key Executive Severance Plan was established by the Company to provide severance benefits to certain key executive-level employees of the Company and its affiliates whose employment is terminated under the circumstances described herein.
The American Jobs Creation Act of 2004 (the AJCA), which became law on October 22, 2004, added new section 409A to the Code and imposes new restrictions on deferred compensation, including certain severance arrangements. It further provides that payments upon a separation from service will meet the requirements of Code Section 409A only to the extent provided by guidance issued by the Department of Treasury where such payments are made due to a change in the ownership or effective control of the Company. The AJCA and any Treasury guidance issued to implement the AJCA may result in additional restrictions on a Participants rights relating to compensation considered to be deferred under this Plan. This Plan automatically incorporates all applicable restrictions of the AJCA and such regulations, and the Company will amend the Plan from time to time to the extent necessary to comply with those requirements. The timing under which a Participant will have a right to receive any payment under this Plan will be deemed to be automatically modified, and a Participants rights under the Plan limited to conform to any requirements under the AJCA and such regulations.
ARTICLE II
DEFINITIONS
2.1 Accrued Obligation shall have the meaning set forth in Section 4.1(i)(A) or Section 5.1(i)(A), as applicable.
2.2 Affiliate means any corporation, trade or business if it or the Company are members of a controlled group of corporations, are under common control or are members of an affiliated service group, within the meanings of Sections 414(b), 414(c) and 414(m), respectively, of the Code. The term Affiliate shall also include any other entity required to be aggregated with the Company pursuant to regulations under Section 414(o) of the Code.
2.3 Annual Base Salary means the annual rate of base salary payable to a Participant for services performed for an Employer, as in effect immediately prior to the Participants Date of Termination.
2.4 Board means the board of directors of the Company.
2.5 Cause means (a) the willful and continued failure by a Participant to substantially perform his employment duties, (b) the willful engaging by the Participant in gross misconduct that is materially and demonstrably injurious to the Employer, (c) the willful violation of the Companys Standards of Integrity or other applicable corporate code of conduct, or (d) the conviction of the Participant of a felony. No act or failure to act on the part of the Participant shall be considered willful unless it is done, or omitted to be done, by the Participant in bad faith or without reasonable belief that the Participants action or omission was
in the best interests of the Employer. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board, or the advice of counsel for the Employer, shall be conclusively presumed to be done, or omitted to be done, by the Participant in good faith and in the best interests of the Employer.
Notwithstanding the forgoing, for purposes of the Plan, the termination of a Participants employment with an Employer shall not be deemed to be for Cause unless such termination is effected in accordance with the following procedures. The Employer shall give the Participant written notice (Notice of Termination for Cause) of its intention to terminate the Participants employment for Cause, setting forth in reasonable detail the specific conduct of the Participant that it considers to constitute Cause. Such notice shall be given no later than 60 days after the act or failure (or the last in a series of acts or failures) that the Employer alleges to constitute Cause. The Participant shall have 30 days after receiving the Notice of Termination for Cause in which to cure such act or failure, to the extent such cure is possible. In the case of a termination under clause (a), (b) or (c) above, if the Participant fails to cure such act or failure to the reasonable satisfaction of the Employer, the Employer shall give the Participant a second written notice stating that in the good faith opinion of the Employer, the Participant is guilty of the conduct described in the Notice of Termination for Cause and that such conduct constitutes Cause under the Plan.
2.6 Change in Control means the occurrence of any of the following events:
(a) any person (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Exchange 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 Companys then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (c) below; or
(b) the following individuals cease for any reason to constitute a majority of the number of directors of the Company then serving: individuals who, on the Effective Date, constitute the 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 Companys stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the Effective Date or whose appointment, election or nomination for election was previously so approved or recommended; or
(c) 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 (i) 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
2
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 of its Affiliates, 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 (ii) 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 Companys then outstanding securities; or
(d) the shareholders 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 Companys assets, other than a sale or disposition by the Company of all or substantially all of the Companys 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, 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.
2.7 Code means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.
2.8 Committee means the Organization and Compensation Committee of the Board or any successor of such Committee.
2.9 Company means Public Service Enterprise Group Incorporated and any successors thereto.
2.10 Confidential Information means all trade secrets, proprietary and confidential business information belonging to, used by, or in the possession of the Company or any of its Affiliates, including but not limited to information, knowledge or data related to business strategies, plans and financial information, mergers, acquisitions or consolidations, purchase or sale of property, leasing, pricing, sales programs or tactics, actual or past sellers, purchasers, lessees, lessors or customers, those with whom the Company or its Affiliates has begun negotiations for new business, costs, employee compensation, marketing and development plans, inventions and technology, whether such confidential information, knowledge or data is oral, written or electronically recorded or stored, except information in the public domain, information known by the Participant prior to employment with an Employer, and information received by the Participant from sources other than the Company or its Affiliates, without obligation of confidentiality.
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2.11 Date of Termination means the date of a Participants death, Disability Effective Date, or the date on which the termination of the Participants employment by an Employer for Cause or without Cause or by the Participant for Good Reason or without Good Reason, including Retirement, is effective, as the case may be.
2.12 Disability means that the Participant (a) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (b) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident or health plan covering employees of an Employer.
2.13 Disability Effective Date means the 30th day after the Participants receipt of written notice of the Employers intention to terminate the Participants employment on account of Disability, provided that, within the 30 days after the Participants receipt of such notice, the Participant shall not have returned to full-time performance of his employment duties.
2.14 Eligible Employee means an individual who is designated as such in accordance with Section 3.1.
2.15 Effective Date means the effective date of the Plan, December 20, 2004.
2.16 Employer means the Company and each Affiliate, and any successors thereto.
2.17 Good Reason means,
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(a) any reduction in the Participants Annual Base Salary, Target Bonus or Target Long-Term Incentive, other than reductions pursuant to a broad-based compensation reduction program or policy affecting the Participant and all similarly situated employees of the Employer; |
(b) any adverse change in the Participants title, authority, duties, or responsibilities or the assignment to the Participant of any duties or responsibilities inconsistent in any respect with those customarily associated with the position of the Participant immediately prior to the Change in Control;
(c) the failure of any successor to the Company to assume this Plan in accordance with Section 11.5(b);
(d) where the only comparable position offered to the Participant within the Employer following a change in control would not otherwise meet the requirements of subsections (a) and (b) of this section 2.17, but require the Participant to increase his or her one-way commuting distance from his or her principal residence by more than 50 miles; or
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(e) any other material breach of the terms of the Plan by the Company that either is not taken in good faith or, even if taken in good faith, is not remedied by the Company promptly after receipt of notice thereof from the Participant.
Notwithstanding the forgoing, for purposes of the Plan, the termination of a Participants employment with an Employer shall not be deemed to be for Good Reason unless such termination is effected in accordance with the following procedures. The Participant shall give his Employer a written notice (Notice of Termination for Good Reason) of the termination, setting forth in reasonable detail the specific acts or omissions of the Employer that constitute Good Reason and the specific provision(s) of the Plan on which the Participant relies. Unless the Committee determines otherwise, a Notice of Termination for Good Reason by the Participant must be made within 60 days after the Participant first has actual knowledge of the act or omission (or the last in a series of acts or omissions) that the Participant alleges to constitute Good Reason, and the Employer shall have 30 days from the receipt of such Notice of Termination for Good Reason to cure the conduct cited therein. A termination of employment by the Participant for Good Reason shall be effective on the final day of such 30-day cure period unless prior to such time the Employer has cured the specific conduct asserted by the Participant to constitute Good Reason to the reasonable satisfaction of the Participant.
For purposes of the Plan, a Participants determination that an act or failure to act constitutes Good Reason shall be presumed to be valid unless such determination is decided to be unreasonable by the Committee or its delegate pursuant to Article IX.
2.18 Other Benefits shall have the meaning set forth in Section 5.1, as applicable.
2.19 Participant means an Eligible Employee who has satisfied the conditions for participation in the Plan, as set out in Section 3.2, and is listed on either Schedule A or Schedule B hereto, as the same may be amended from time to time.
2.20 Plan means this Key Executive Severance Plan of Public Service Enterprise Group Incorporated, as set forth herein and as may be amended, modified or supplemented from time to time.
2.21 Prior Equity Awards shall have the meaning set forth in Section 5.1(ii).
2.22 Retirement means retirement under the terms of the Retirement Plan, as defined in Section 5.1(vi)(A).
2.23 Schedule A Participant shall mean a Participant listed on Schedule A hereto.
2.24 Schedule B Participant shall mean a Participant listed on Schedule B hereto.
2.25 Target Bonus means the Participants target annual bonus, if any, under the applicable annual incentive compensation plan of the Company for the fiscal year in which the Date of Termination occurs.
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2.26 Target Long-Term Incentive means the Participants target long-term incentive award, if any, under the applicable long-term incentive compensation plan of the Company.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 Eligible Employees. eligibility to participate in the Plan shall be limited to certain key executives of an Employer who (a) are not parties to individual employment or change in control agreements that provide for severance benefits, and (b) are designated, by duly adopted resolution of the Committee, as Eligible Employees.
3.2 Participation. As a condition to becoming a Participant and being entitled to the benefits and protections provided under the Plan, each Eligible Employee must execute and deliver to the Company, within 30 days after the later of the Effective Date and the date such individual is designated by the Committee as an Eligible Employee, a written agreement in the form attached hereto as Exhibit I (or in such other form as may be satisfactory to the Company) to be bound by the restrictive covenants set forth in Sections 7.1, 7.2 and 7.3. Schedules A and B hereto list the Eligible Employees who have satisfied the conditions for Plan participation and the date as of which each such Eligible Employee became a Participant. The Committee shall cause Schedules A and B to be updated from time to time to reflect the Participants who are currently participating in the Plan.
3.3 Release of Claims. Notwithstanding anything in the Plan to the contrary, payment of any benefits under the Plan is expressly contingent upon the Participants execution and delivery to the Company, within 45 days after the Participants Date of Termination, of a written agreement, in the form attached hereto as Exhibit II (or in such other form as may be satisfactory to the Company) wherein the Participant releases and discharges the Company and each of its Affiliates of any and all claims against the Company and its Affiliates related in any way to the Participants employment with an Employer and the termination of such employment.
ARTICLE IV
SEVERANCE BENEFITS IN GENERAL
4.1 Termination by Employer Other than for Cause. Subject to Section 3.3 and Article VI, if an Employer shall terminate a Participants employment other than for Cause, death or Disability:
(a) the Company shall pay to the Participant, in a lump sum in cash, the aggregate of the amounts set forth in clauses (i) and (ii) below:
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(i) The sum of: |
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the Participants base salary through the Date of Termination; |
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(2) |
the product of (x) the Participants Target Bonus and (y) a fraction, the numerator of which is the number of days in the current calendar year through the Date of Termination, and the denominator of which is 365; and |
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(3) |
any accrued vacation pay; |
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in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the Accrued Obligations); and |
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(ii) An amount equal to the product of 1.0 times (0.5 times if the Participant were employed less than one year) the sum of the Participants Annual Base Salary and Target Bonus. |
(b) Long-Term Incentive Awards Any stock awards, stock options, stock appreciation rights or other equity-based awards that were outstanding immediately prior to the Date of Termination (Prior Equity Awards) shall vest and/or become exercisable in accordance with the underlying plan for such Prior Equity Award;
(c) Annual Incentive Awards. As provided in subparagraph (a)(i)(2), Participant shall receive a prorated annual incentive award pursuant to the performance incentive program, if applicable, for the calendar year in which the Participants Termination of Employment occurs. The award shall be calculated based solely on 100 percent of the target incentive award and prorated based on the number of days of employment in the calendar year in which the participants Termination of Employment occurs through the employees Termination Date. Annual incentive awards with respect to the calendar year in which a Participants Termination Date occurs will be paid at the same time as awards for such calendar year are paid to active employees of the Employer.
(d) Outplacement Services. Outplacement services approved by the Committee, which may include individual or group counseling and administrative assistance or workshops, shall be available beginning on the participants Termination Date or such earlier date designated by the participants business unit leadership. Outplacement services shall continue to be available for the period up to 12 months.
(e) Educational Assistance. The Employer shall reimburse 90 percent of the costs (up to a total of $3,000) of tuition, required books and mandatory fees incurred for classes approved by the Committee that are successfully completed within two years after a Participants Termination Date. Successful completion shall mean the attainment of a final course grade of C or better. Reimbursement will be made only upon the submission of bills or receipts in such form as the Committee may require.
(f) Health Care Benefits.
Retiree Health Care Coverage. A Participant who has not otherwise satisfied the eligibility criteria for participation prior to his or her Termination Date, shall be entitled to
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elect retiree coverage under the Employers applicable retiree group health care plans as though he or she otherwise satisfied such plans eligibility requirements if:
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the Participant has attained age 50 and completed ten or more Years of Service as of his or her Termination Date but the sum of the Participants age and Years of Service is less than 80; or |
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the Participant has attained age 49 and completed 20 or more Years of Service as of his or her Termination Date but the sum of the Participants age and Years of Service is less than 80. |
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Such coverage shall commence no earlier than the Participants Termination Date. The Participant shall be charged the full cost of retiree coverage under these plans. |
COBRA Continuation Coverage. Each Participant who is not eligible for, or does not elect, the retiree health care coverage described in this subsection (f) shall be entitled, pursuant to any continuation coverage rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (COBRA), to continue individual and dependent coverage under the Companys group health care plans following the Participants Termination Date. If continuation coverage is elected, the Employer shall pay the same portion of the cost of medical coverage that it paid immediately prior to the Participants Termination Date for active employees during the one-year period following the participants termination date that the Participant is receiving severance pay under Section 4.1, and the Participant shall pay the balance. The Participant shall be charged the full expense of medical coverage (102 percent of the cost of coverage) during the remainder of the statutory coverage period, if any, and the full expense of dental and (if applicable) vision and hearing coverage (102 percent of the cost of coverage) during the entire statutory coverage period.
(g) Life Insurance. A Participant who is not eligible for coverage under the Employers retiree life insurance plan shall be entitled, for the one-year period following the Participants termination date to life insurance coverage at the Employers expense in an amount equal to the group term life insurance coverage in effect for such Participant under the Employers group term life insurance plan for active employees as of his or her Termination Date.
(h) Other Benefits. A Participant shall not be entitled to any severance, separation or early retirement incentive pay or benefits other than as provided hereunder or under any qualified or nonqualified retirement plan or deferred compensation arrangement maintained by the Employer. Except as provided in the foregoing sentence, a Participants rights under any other employee benefit plans maintained by the Company or an Affiliate shall be determined in accordance with the provisions of such plans, including the Companys right to amend or terminate such plans at any time. The amounts and benefits payable to the Participant pursuant to sub paragraphs (a) (iii), (b) (c), (d), (e), (f), and (g) shall be hereinafter referred to as the Other Benefits).
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ARTICLE V
SEVERANCE BENEFITS AFTER A CHANGE IN CONTROL
5.1 Termination By Employer Other Than For Cause or By Participant For Good Reason (other than Good Reason as described in Subsection 2.17(d)) Within Two Years After a Change in Control. Subject to Section 3.3 and Article VI, if, within two years following the occurrence of a Change in Control, either (a) an Employer shall terminate a Participants employment other than for Cause, death or Disability or (b) a Participant shall voluntarily terminate his employment for Good Reason pursuant to Subsections 2.17 (a), (b), (c) or (e):
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(i) the Company shall pay to the Participant, in a lump sum in cash, the aggregate of the amounts set forth in clauses A and B below: |
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The sum of: |
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the Participants base salary through the Date of Termination; |
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(2) |
the product of (x) the Participants Target Bonus and (y) a fraction, the numerator of which is the number of days in the current calendar year through the Date of Termination, and the denominator of which is 365; and |
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(3) |
any accrued vacation pay; |
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in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the Accrued Obligations); and |
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B. |
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in the case of a Schedule A Participant, the amount equal to the product of two times the sum of the Schedule A Participants Annual Base Salary and Target Bonus; or |
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(2) |
in the case of a Schedule B Participant, the amount equal to the product of three times the sum of the Schedule B Participants Annual Base Salary and Target Bonus. |
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(ii) any stock awards, stock options, stock appreciation rights or other equity-based awards that were outstanding immediately prior to the Date of Termination (Prior Equity Awards) shall vest and/or become exercisable in accordance with the underlying plan for such Prior Equity Award; |
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(iii) the Company shall pay the cost of the continued coverage of the Participant and/or the Participants family under the Companys medical and dental employee benefit plans for 18 months after the Date of Termination provided that the Participant makes an election to continue such coverage in the Companys medical and dental employee benefit plans under COBRA, subject to the requirements and limitations |
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thereof, and thereafter for an additional period of six months, in the case of a Schedule A Participant, or 18 months, in the case of a Schedule B Participant; provided however, that if the Participant becomes re-employed with another employer and is eligible to receive medical or dental benefits under another employer provided plan, the medical and dental benefits provided by the Company under this Plan shall be secondary to those provided under such other plan during the applicable period of eligibility; |
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(iv) for two years after the Date of Termination in the case of a Schedule A Participant or three years after the Date of Termination in the case of a Schedule B Participant (or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy), the Company shall continue benefits (other than medical and dental benefits, but including financial planning assistance) to the Participant and/or the Participants family at least equal to those which would have been provided to them in accordance with the welfare plans, programs, practices and policies maintained by the Company if the Participants employment had not been terminated or, if more favorable to the Participant, as in effect generally at any time thereafter with respect to other peer executives of the Employer and their families; |
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(v) the Participants eligibility (but not the time of commencement of such benefits) for retiree benefits pursuant to the welfare plans, programs, practices and policies maintained by the Company shall be determined as if the Participant had (A) remained employed until two years (in the case of a Schedule A Participant) or three years (in the case of a Schedule B Participant) after the Date of Termination and (B) retired on the last day of such period; |
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(vi) the Participant shall be paid, in a lump sum payment in cash, an amount equal to the excess of: |
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(A) the actuarial equivalent of the benefit under the Companys applicable qualified defined benefit retirement plan in which the Participant is participating immediately prior to his Date of Termination (the Retirement Plan) (utilizing the rate used to determine lump sums and, to the extent applicable, other actuarial assumptions no less favorable to the Participant than those in effect under the Retirement Plan immediately prior to the Effective Date), any supplemental executive retirement plans (SERPs) in which the Participant participates and, to the extent applicable, any other defined benefit retirement arrangement between the Participant and the Company (Other Pension Benefits) which the Participant would receive if the Participants employment continued for two or three additional years (for Schedule A Participants and Schedule B Participants, respectively) beyond the Date of Termination and, assuming that the Participants compensation for such deemed additional period was the Participants Annual Base Salary as in effect immediately prior to the Date of Termination and assuming a bonus in each year during such deemed additional period equal to the Target Bonus, over |
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(B) the actuarial equivalent of the Participants actual benefit (paid or payable), if any, under the Retirement Plan, the SERPs and Other Pension Benefits as of the Date of Termination (utilizing the rate used to determine lump sums and, to the extent applicable, other actuarial assumptions no less favorable to the Participant than those in effect under the Retirement Plan immediately prior to the effective date of the Change in Control); |
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(vii) any compensation previously deferred (other than pursuant to a tax-qualified plan) by or on behalf of the Participant (together with any accrued interest or earnings thereon), whether or not then vested, shall become vested on the Date of Termination and shall be paid in accordance with the terms of the plan, policy or practice under which it was deferred to the extent permitted by guidance issued by the U.S. Department of Treasury under Section 409A of the Code; |
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(viii) the Company shall, at its sole expense as incurred, provide the Participant with outplacement services suitable to the Participants position for a period not to exceed one year following the Date of Termination with a nationally recognized outplacement firm; and, |
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(ix) to the extent not theretofore paid or provided, the Company shall pay or provide to the Participant any other amounts or benefits required to be paid or provided or which the Participant is entitled to receive under any plan, program, policy, practice, contract or agreement of the Company (or other Employer), including earned but unpaid stock and similar compensation, but excluding medical or dental benefits if the Participant is eligible for such benefits to be provided by a subsequent employer, and benefits payable under any severance plan or policy (such other amounts and benefits that are payable to the Participant shall be hereinafter referred to as the Other Benefits). |
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5.2 Termination By Participant For Good Reason as described in Subsection 2.17(d) Within Two Years After a Change in Control. Subject to Section 3.3 and Article V, if, within two years following the occurrence of a Change in Control, a Participant shall voluntarily terminate his or her employment for Good Reason as described in Subsection 2.17(d): |
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(i) Severance Pay. The Participant shall receive, in bi-weekly payments concurrent with his or her Employers normal payroll cycle, an amount of severance pay from his or her Employer calculated based upon the amount of the Participants base salary, the number of Years of Service completed as of the Participants Termination Date, as indicated below: |
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(A) Less than Thirteen Years of Service: If, as of the Participants Termination Date he or she has completed fewer than thirteen Years of Service, the amount of severance pay shall equal 26 weeks of base salary. |
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(B) Thirteen or More Years of Service: If, as of the Participants Termination Date, he or she has completed thirteen or more Years of |
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Service, the amount of severance pay shall equal two weeks of base salary for each Year of Service, up to a maximum of 52 weeks of base salary. |
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(ii) Annual Incentive Awards. A Participant shall receive a prorated annual incentive award pursuant to the performance incentive program, if applicable, for the calendar year in which the Participants Termination of Employment occurs. The award shall be calculated based solely on 100 percent of the target incentive award and prorated based on the number of days of employment in the calendar year in which the participants Termination of Employment occurs through the employees Termination Date. Annual incentive awards with respect to the calendar year in which a Participants Termination Date occurs will be paid at the same time as awards for such calendar year are paid to active employees of the Employer. |
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(iii) Outplacement Services. Outplacement services approved by the Committee, which may include individual or group counseling and administrative assistance or workshops, shall be available beginning on the participants Termination Date or such earlier date designated by the participants business unit leadership. Outplacement services shall continue to be available for the period up to 12 months. |
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(iv) Educational Assistance. The Employer shall reimburse 90 percent of the costs (up to a total of $3,000) of tuition, required books and mandatory fees incurred for classes approved by the Committee that are successfully completed within two years after a Participants Termination Date. Successful completion shall mean the attainment of a final course grade of C or better. Reimbursement will be made only upon the submission of bills or receipts in such form as the Committee may require. |
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(v) Health Care Benefits. |
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Retiree Health Care Coverage. An Eligible Employee who has not otherwise satisfied the eligibility criteria for participation prior to his or her Termination Date, shall be entitled to elect retiree coverage under the Employers applicable retiree group health care plans as though he or she otherwise satisfied such plans eligibility requirements if: |
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(A) the Participant has attained age 50 and completed ten or more Years of Service as of his or her Termination Date but the sum of the Participants age and Years of Service is less than 80; or |
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(B) the Participant has attained age 49 and completed 20 or more Years of Service as of his or her Termination Date but the sum of the Participants age and Years of Service is less than 80. |
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Such coverage shall commence no earlier than the Participants Termination Date. The Participant shall be charged the full cost of retiree coverage under these plans. |
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COBRA Continuation Coverage. Each Participant who is not eligible for, or does not elect, the retiree health care coverage described in this subsection (v) shall be entitled, pursuant to any continuation coverage rights under COBRA to continue individual and dependent coverage under the Companys group health care plans following the Participants Termination Date. If continuation coverage is elected, the Employer shall pay the same portion of the cost of medical coverage that it paid immediately prior to the Participants Termination Date for active employees during the period that the Participant is receiving severance pay under Section 5.2, and the Participant shall pay the balance. The Participant shall be charged the full expense of medical coverage (102 percent of the cost of coverage) during the remainder of the statutory coverage period, if any, and the full expense of dental and (if applicable) vision and hearing coverage (102 percent of the cost of coverage) during the entire statutory coverage period. |
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(vi) Life Insurance. A Participant who is not eligible for coverage under the Employers retiree life insurance plan shall be entitled, during the period that the Participant is receiving severance pay under this Section 5.2, to life insurance coverage at the Employers expense in an amount equal to the group term life insurance coverage in effect for such Participant under the Employers group term life insurance plan for active employees as of his or her Termination Date. |
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(vii) Other Benefits. A Participant shall not be entitled to any severance, separation or early retirement incentive pay or benefits other than as provided under the Plan or under any qualified or nonqualified retirement plan or deferred compensation arrangement maintained by the Employer. Except as provided in the foregoing sentence, a Participants rights under any other employee benefit plans maintained by the Company or an Affiliate shall be determined in accordance with the provisions of such plans, including the Companys right to amend or terminate such plans at any time. |
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5.3 Termination By Employer For Cause or By Participant Other Than For Good Reason If, at any time after a Change in Control, either (a) an Employer shall terminate a Participants employment for Cause or (b) the Participant shall voluntarily terminate his employment other than for Good Reason, the Employer shall have no further payment obligations to the Participant other than for amounts described in Sections 5.1(i) (A) and 5.1(iii) and the timely payment or provision of Other Benefits. In such case, all such amounts shall be paid to the Participant in a lump sum. |
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5.4 Death. If a Participants employment terminates by reason of the Participants death after a Change in Control, all Accrued Obligations as of the time of death shall be paid to the Participants estate or beneficiary, as applicable, in a lump sum in cash and the Participants estate or beneficiary shall be entitled to any Other Benefits in accordance with their terms. Any |
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Prior Equity Awards shall vest and/or become exercisable, as the case may be, as of the Date of Termination and the Participants estate or beneficiary, as the case may be, shall have the right to exercise any such Prior Equity Award until the earlier of (a) one year from the Date of Termination (or such longer period as may be provided under the terms of any such Prior Equity Award) and (b) the normal expiration date of such Prior Equity Award. |
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5.5 Disability. If a Participants employment is terminated by reason of Disability after a Change in Control, all Accrued Obligations shall be paid to the Participant in a lump sum in cash. Any Prior Equity Awards shall vest immediately and/or become exercisable, as the case may be, and the Participant shall have the right to exercise any such Prior Equity Award until the earlier of (a) one year from the Date of Termination (or such longer period as may be provided under the terms of any such Prior Equity Award) and (b) the normal expiration date of such Prior Equity Award. |
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5.6 Retirement. If a Participants employment terminates as a result of Retirement after a Change in Control, the Participant shall be paid the Accrued Obligations in a lump sum in cash and the Participant shall be entitled to any Other Benefits in accordance with their terms. |
ARTICLE VI
TIMING OF, LIMITATIONS ON AND ADJUSTMENTS TO PLAN PAYMENTS
6.1 Time of Payments. Payments under the Plan shall be made as soon as practicable after the Participants Date of Termination, except, however, that any payment that is subject to the requirements of Section 409A of the Code shall be made as soon as practicable after the earlier of (i) the six-month anniversary of the Participants Date of Termination (other than by reason of death) and (ii) the date of the Participants death.
6.2 Payment Offsets. Notwithstanding anything in the Plan to the contrary, in the event a Participant is entitled to receive severance payments both under this Plan and under the terms of either (i) an individual change of control or employment agreement, (ii) another severance pay plan or policy of an Employer or (iii) any existing or future law or regulation, the benefits payable under this Plan shall be reduced by the amount of any severance benefits such Participant is entitled to receive under such individual agreement, plan, policy, law or regulation.
6.3 Cap on Excess Parachute Payments; Gross-Up Payments. Notwithstanding anything in the Plan to the contrary, if (i) a Participant is a disqualified individual (as defined in Section 280G(c) of the Code) and (ii) the severance benefits provided under Articles IV or V, as applicable, together with any other payments the Participant has the right to receive from an Employer, would constitute a parachute payment (as defined in Section 280G(b) of the Code) (Parachute Payments), the following provisions shall apply:
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Schedule A Participants |
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(i) In the case of a Schedule A Participant, the severance benefits under Articles IV or V shall not exceed an amount which, together with any other Parachute Payments the Participant has a right to receive from the Employer, would |
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be 2.99 times the Participants base amount (as defined in Section 280G of the Code) so that no portion of the amounts received by the Participant shall be subject to the excise tax imposed under Section 4999 of the Code. |
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(ii) The determination of whether any limitation on the severance benefits payable under Articles IV or V is necessary shall be made by the Companys independent auditor or such other certified public accounting firm as may be jointly designated by the Participant and the Company (the Accounting Firm), which shall provide detailed supporting calculations to the Participant and the Company. The determinations of the Accounting Firm shall be conclusive and binding on the Company and the Participant. All fees and expenses of the Accounting Firm shall be borne solely by the Company. |
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(iii) If through error or otherwise, a Schedule A Participant shall receive payments under the Plan, together with other Parachute Payments the Participant has the right to receive from an Employer, in excess of 2.99 times his base amount, the Participant shall immediately repay the excess to the Employer upon notification from the Employer that an overpayment has been made. If the Participant fails to repay the excess to the Employer within 10 business days of the date of the Employers notification, the Participant will become liable to the Employer for an amount equal to two (2) times the excess amount. |
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(b) Schedule B Participants |
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(i) In the event it shall be determined that any severance benefits payable to a Schedule B Participant under Articles IV or V (together with any other Parachute Payments the Participant has a right to receive from the Employer) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Participant with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the Excise Tax), then the Participant shall be entitled to receive an additional payment (a Gross-Up Payment) in an amount such that after payment by the Participant of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income and employment taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Participant retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Parachute Payments. |
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(ii) Subject to the provisions of Section 6.3(b)(iii), all determinations required to be made under this Section 6.3(b), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Accounting Firm, which shall provide detailed supporting calculations to the Participant and the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6.3(b), shall be paid by the Company to the Participant as soon as practicable after the receipt of the Accounting Firms |
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determination. Any determination by the Accounting Firm shall be binding upon the Participant and the Company. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (Underpayment), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 6.3(b)(iii) and the Participant thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Participant. |
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(iii) A Schedule B Participant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Participant is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Participant shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Participant in writing prior to the expiration of such period that it desires to contest such claim, the Participant shall: |
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(A) give the Company any information reasonably requested by the Company relating to such claim, |
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(B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, |
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(C) cooperate with the Company in good faith in order effectively to contest such claim, and |
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(D) permit the Company to participate in any proceedings relating to such claim; |
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provided however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Participant harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6.3(b)(iii), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Participant to pay the tax claimed and sue for a refund or contest the claim in any permissible |
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manner, and the Participant agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided however, that if the Company directs the Participant to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Participant, on an interest-free basis and shall indemnify and hold the Participant harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Participant with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Companys control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Participant shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. |
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(iv) If, after the receipt by a Schedule B Participant of an amount advanced by the Company pursuant to Section 6.3(b)(iii), the Participant becomes entitled to receive any refund with respect to such claim, the Participant shall (subject to the Companys complying with the requirements of Section 6.3(b)(iii)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Participant of an amount advanced by the Company pursuant to Section 6.3(b)(iii), a determination is made that the Participant shall not be entitled to any refund with respect to such claim and the Company does not notify the Participant in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. |
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6.4 Code Section 409A Compliance. Notwithstanding anything in the Plan to the contrary, all Plan benefit obligations and payments are subject to guidance issued by the U.S. Department of Treasury under Section 409A of the Code. To the extent required, the Company may modify the severance benefits payable hereunder to comply with such guidance; provided, however, that the present value of the aggregate Plan benefits payable to a Participant after such modification shall not be less than the present value of the Plan benefits payable to the Participant prior to the modification. |
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6.5 Tax Withholding. Notwithstanding any other provision of this Plan, the Company may withhold from any amounts payable under this Plan such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. |
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ARTICLE VII
RESTRICTIVE COVENANTS
7.1 Confidentiality. As a condition to participation in the Plan, each Participant agrees to hold in a fiduciary capacity for the benefit of the Company and its Affiliates all Confidential Information which shall have been obtained by the Participant during the Participants employment by the Employer; except, however, that this Section 7.1 shall not apply to Confidential Information that is or becomes public knowledge, unless such Confidential Information became or becomes public knowledge due to acts of the Participant or representatives of the Participant in violation of this Section 7.1. Upon termination of the Participants employment, he shall return to the Company all Confidential Information in his possession. After termination of the Participants employment with the Employer, the Participant shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such Confidential Information to anyone other than the Company and those designated by it, except (x) otherwise publicly available information, (y) as may be necessary to enforce his rights under the Plan or as necessary to defend himself against a claim asserted directly or indirectly by the Company or its Affiliates; or (z) as may be compelled by service of a valid subpoena or other legal process. If the Participant is served with a valid subpoena or other legal process, he must so notify the Company within three business days. Unless and until a determination has been made in accordance with Section 7.4 that the Participant has violated this Section 7.1, an asserted violation of the provisions of this Section 7.1 shall not constitute a basis for deferring or withholding any amounts otherwise payable to the Participant under the Plan.
7.2 Non-Compete. As a condition to participation in the Plan, each Participant agrees, that, in the event the Participant voluntarily terminates his employment other than for Good Reason, for the period of one year from Date of Termination he will not, without the written consent of the Company, directly or indirectly own, manage, operate, join, control, become employed by, consult to or participate in the ownership, management, or control of any business which is in direct competition with the Company or its Affiliates.
7.3 Non-Solicitation. As a condition to participation in the Plan, each Participant agrees that, in the event the Participant voluntarily terminates his employment other than for Good Reason, for the period of one year following the Date of Termination, he will not, directly or indirectly, solicit or hire, or encourage the solicitation or hiring by any employer other than the Company or its Affiliates, for any position as an employee, independent contractor, consultant or otherwise, any person who was a managerial or higher level employee of an Employer at any time during the term of the Participants employment by the Employer; provided, however, that this provision shall not apply with respect to the solicitation of any person after six months from the date on which such persons employment by an Employer has terminated.
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7.4 Enforcement. In the event of a breach by the Participant of any of the covenants set forth in this Article VII, it is agreed that the Company shall suffer irreparable harm for which money damages are not an adequate remedy, and that, in the event of such breach, the Company 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 covenants by the Participant. In the event that the Company should initiate any legal action for the breach or enforcement of any of the provisions contained in this Article VII and the Company does not prevail in such action, the Company shall promptly reimburse the Participant the full amount of any court costs, filing fees, attorneys fees which the Participant incurs in defending such action, and any loss of income during the period of such litigation.
ARTICLE VIII
AMENDMENT AND TERMINATION
8.1 Amendment. The Company may amend this Plan at any time, and from time to time, by action of the Committee; provided, however, that no amendment adopted after the effective date of a Change in Control shall have the effect of either (i) removing an individual from the list of Participants, (ii) adding conditions for participation or the entitlement to receive benefits hereunder, (iii) reducing the amount of benefits payable to a Participant or (iv) otherwise restricting a Participants right to receive benefits under the Plan, except as may otherwise be required to conform such payments to the requirements of Section 409A of the Code, as provided in Section 1.1.
8.2 Termination. The Committee may terminate the Plan at any time prior to a Change in Control. The Plan may not be terminated after the effective date of a Change in Control.
ARTICLE IX
ADMINISTRATION
9.1 Plan Administrator. The Plan shall be administered by the Committee, which shall have the duties and responsibilities for administering the Plan as are specifically set forth in this Article IX.
9.2 Responsibilities of Committee.
(a) The Committee shall have responsibility for the day to day administration of the Plan. In addition, the Committee shall have the specific powers, duties, responsibilities and obligations specifically provided for herein.
(b) Subject to the express provisions of the Plan, the Committee shall have full and exclusive authority to interpret the Plan and to make all other factual determinations deemed necessary or advisable in the implementation and administration of the Plan, including but not limited to determinations with respect to the eligibility of Participants to
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receive benefits under the Plan and the status and rights of such Participants and all other persons affected hereunder. The Committees interpretation and construction of the Plan shall be conclusive and binding on all persons.
(c) The Committee shall have sole authority to adopt rules and regulations, which shall be administered by the Committee. In addition, the Committee shall have the discretionary authority to issue rulings and interpretations concerning the Plan and all matters arising thereunder, on a uniform and nondiscriminatory basis, provided the same shall not be contrary to or inconsistent with any provision of the Plan.
(d) As a condition of distributing any benefit under the Plan, the Committee may prescribe the use of such forms and require the furnishing of such information as the Plan Committee may deem appropriate for administering the Plan.
9.3 Allocation or Delegation of Duties and Responsibilities. In furtherance of its duties and responsibilities under the Plan, the Committee may:
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(a) Employ agents to carry out non-fiduciary responsibilities; |
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(b) Employ agents to carry out fiduciary responsibilities; |
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(c) Consult with counsel, who may be counsel to the Company; and |
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(d) Delegate any of its duties and responsibilities hereunder to such officer or officers of the Company as the Committee shall designate; except, however, that the Committee may not delegate to any other person the designation of Eligible Employees under Section 3.1. |
9.4 Expenses. Unless otherwise agreed to by the Company, no person acting as a fiduciary hereunder (who is an employee of an Employer) shall receive any compensation for services as such. Expenses incurred by fiduciaries in connection with the administration of the Plan shall be paid by the Company.
9.5 Indemnification of Plan Administrator. The Company shall indemnify, to the fullest extent permitted by law, each person made or threatened to be made a party to any civil or criminal action or proceeding by reason of the fact that he, or his testator or intestate, was a member of the Committee, or a delegate of the Committee, acting in the capacity of Plan administrator.
9.6 Reliance Upon Others. The Committee, any person to whom it may delegate such of its duties and powers as provided herein, and the officers and directors of the Company shall be entitled to rely conclusively upon and shall be fully protected in any action taken by them in good faith in reliance upon any tables, valuations, certificates, opinions, reports or other advice furnished to them by any duly appointed actuary, accountant, legal counsel (who may be counsel for the Company) or other specialist.
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9.7 Notification. All notices, reports and statements in connection with the Plan that are given, made, delivered or transmitted to a Participant shall be deemed duly given, made, delivered, or transmitted when mailed, by such class as the sender may deem appropriate, with postage prepaid and addressed to the Participant at the address last appearing on the records of the Employer with respect to this Plan. All notices, direct actions or other communications given, made, delivered or transmitted by a Participant to an Employer or Committee shall not be deemed to have been duly given, made, delivered, transmitted or received unless and until actually received by the Employer or Committee.
9.8 Multiple Capacities. A person may serve in more than one fiduciary capacity with respect to the Plan.
ARTICLE X
CLAIMS PROCEDURE
10.1 Submission of Claims. The initial claim by any Participant for benefits under this Plan shall be submitted in writing to the Committee within 60 days after the occurrence of the termination of employment that the Participant claims to have triggered entitlement to Plan benefits.
10.2 Computation and Review of Claims. All benefits shall be computed by the Committee or its delegate. All claims shall be approved or denied by the Committee (or its delegate) as soon as practicable, but in no event later than 90 days after application by the claimant.
(a) Initial Denial of ClaimAny denial of a claim shall include:
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(i) Reason or reasons for the denial; |
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(ii) Reference to pertinent Plan provisions on which the denial is based; |
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(iii) Description of any additional material or information necessary for the claimant to perfect the claim together with an explanation of why the material or information is necessary; and |
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(iv) Explanation of the Plans claim review procedure, described below. |
(b) Review of a Denied ClaimA claimant shall have a reasonable opportunity to appeal a denied claim to the Committee (or its delegate) for a full and fair review. The claimant or a duly authorized representative:
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(i) Shall have 60 days, after receipt of written notification of the denial of claim in which to request a review. |
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(ii) May request a review upon written application to the Committee. |
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(iii) Shall submit written comments, documents, records and other information relating to the claim. |
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(iv) May review, free of charge, pertinent Plan documents, records and other information relevant to the claim. |
(c) Committee ReviewThe Committees (or its delegates) review shall take into account all comments, documents, records and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination..
(d) Written DecisionThe Committee (or its delegate) shall issue a decision on the reviewed claim promptly but no later than 60 days after receipt of the review. The Committees decision shall be in writing and shall include:
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(i) Reasons for the decision, |
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(ii) References to the Plan provisions on which the decision is based, and |
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(iii) Statement that the claimant is entitled to receive, upon request, reasonable access to, and copies of, all documents, records and other information relevant to the claim |
(e) Binding EffectThe Committees (or its delegates) decision shall be final and binding on the claimant and the Employer.
ARTICLE XI
GENERAL PROVISIONS
11.1 Construction. This Plan shall be construed and enforced in accordance with and governed by the internal substantive laws (and not the laws relating to conflict of laws or choice of laws) of the State of New Jersey, except to the extent that such laws are preempted by Federal law.
11.2 Unfunded Plan. The obligations of the Company under this Plan are not required to be funded in advance. Nothing contained in this Plan shall give an Eligible Employee or Participant any right, title or interest in any property of the Company or any of its Affiliates.
11.3 No Right to Continued Employment. Nothing contained herein shall be deemed to give any Eligible Employee or Participant the right to be retained in the employment of an Employer or to limit the rights of any Employer to discharge any Eligible Employee or Participant at any time, with or without notice and with or without Cause.
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11.4 Partial Invalidity. The invalidity or unenforceability of any term or provision, or any clause, or portion thereof, of this Plan shall in no way impair or affect the validity or enforceability of any other provision of this Plan, which shall remain in full force and effect.
11.5 Successors and Assigns.
(a) This Plan shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(b) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform the Companys obligations under the Plan in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.
(c) In no event shall a Participant assign his interests under the Plan to any other person without the prior written consent of the Committee.
11.6 Waivers. Failure to strictly comply with any term, condition or requirement set forth in the Plan shall not be deemed a waiver of such term, condition or requirement, nor shall any waiver of any such term, condition or requirement at any one time or times be deemed to result in a waiver of such term, condition or requirement at any other time or times.
11.7 Gender and Number. Masculine pronouns include the feminine as well as the neuter genders, and the singular shall include the plural, unless indicated otherwise by the context.
11.8 Headings. The headings of the Plan are for purposes of reference only and shall not limit or otherwise affect the meaning hereof.
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SCHEDULE A
As Amended October 18, 2005
PARTICIPANTS
(New Schedule A to be approved by the Committee on 9/22/08)
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SCHEDULE B
(New Schedule B to be approved by the Committee on 9/22/08
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EXHIBIT I
Form of Restrictive Covenant Agreement
AGREEMENT, by and between Public Service Enterprise Group Incorporated, a New Jersey Corporation (the Company) and [_________________] (Executive), dated as of [______________ ].
WHEREAS, the Company maintains the Key Executive Severance Plan of Public Service Enterprise Group Incorporated (the Plan), effective December 20, 2004, and as thereafter amended, modified or supplemented;
WHEREAS, Executive was designated as an Eligible Employee under the Plan by the Organization and Compensation Committee of the Companys board of directors on ___________;
WHEREAS, pursuant to Section 3.2 of the Plan, in order to be a Participant in and be entitled to benefits and protections under the Plan, Executive must execute and delivery to the Company within 30 days after Executive was designated as an Eligible Employee a written agreement to be bound by the terms and conditions of certain covenants set out in Article VII of the Plan, which is hereby incorporated herein;
NOW THEREFORE, the parties agree as follows:
1. Executive has received a copy of the Plan and has read and understands the terms of conditions of Section 7.1, Confidentiality, Section 7.2, Non-Compete, and Section 7.3, Non-Solicitation, therein, as applied to Executive (the Covenants).
2. Executive agrees to be bound by and comply with the terms of the Covenants in consideration for becoming a Participant in the Plan.
3. Executive acknowledges that the Covenants are reasonable in the scope of the activities restricted, the geographic area covered by the restrictions, the duration of the restrictions, and that such Covenants are reasonably necessary to protect the Companys legitimate interests in its Confidential Information and its relationships with its employees, customers and suppliers.
4. Executive acknowledges that the Covenants will not deprive Executive of the ability to earn a livelihood or to support Executives dependents.
5. Executive shall be a Participant in the Plan and be entitled to all of the rights and benefits provided thereunder as of the date of this Agreement.
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6. This Agreement shall be construed and enforced in accordance with and governed by the internal substantive laws (and not the laws relating to conflict of laws or choice of laws) of the State of New Jersey, except to the extent that such laws are preempted by Federal law.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written.
[This Agreement may be executed in counterparts.]
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PUBLIC SERVICE ENTERPRISE |
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GROUP INCORPORATED |
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By: |
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Title: |
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EXHIBIT II
Form of Separation Agreement and General Release
SEPARATION AGREEMENT AND GENERAL RELEASE, by and between Public Service Enterprise Group Incorporated, a New Jersey Corporation, (the Company) and [_________________ ] (Executive), dated as of [______________], (this Agreement).
WHEREAS, the Company maintains the Key Executive Severance Plan of Public Service Enterprise Group Incorporated (the Plan), effective December 20, 2004, and as thereafter amended, modified or supplemented;
WHEREAS, Executive was designated as an Eligible Employee under the Plan by the Organization and Compensation Committee of the Companys board of directors on ___________ and became a Participant in the Plan as of [date];
WHEREAS, the Company or one of its Affiliates terminated Executives employment effective [date] (the Termination Date);
WHEREAS, pursuant to Section 3.3 of the Plan, in order to be a Participant in and be entitled to benefits and protections under the Plan, Executive must execute and delivery this Agreement to the Company within forty-five days after Executive receives this Agreement; and
WHEREAS, Executive and the Company desire to settle fully and finally any differences, rights and duties arising between them, including, but in no way limited to, any differences, rights and duties that have arisen or might arise out of or are in any way related to Executives employment with the Company, and the conclusion of that employment;
NOW THEREFORE, Executive and the Company agree as follows:
1. Terms. All capitalized terms in this Agreement shall have the same meanings and definitions as assigned to such terms in the Plan.
2. Separation Payment. The Company acknowledges that the Executive is entitled to and that the Company will provide the payments and benefits described in Article IV or Article V of the Plan, all such payments and benefits to be paid to Executive less all applicable withholdings.
3. Release of Claims. Executive, for himself and for his children, heirs, administrators, representatives, executors, successors and assigns, releases and gives up any and all claims and rights which he has, may have or hereafter may have against the Company, its Affiliates and their respective subsidiaries, affiliates, predecessors, successors, assigns, officers, directors, shareholders, employees and agents and all of their predecessors, successors and assigns (the Releasees) from the beginning of the world until the date of the execution of this Agreement, including, but not limited to, any and all charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, remedies, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys fees and costs) of
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any nature whatsoever, whether known or unknown, whether in law or equity (collectively, Claims), including, but not limited to, any Claims related to Executives employment with the Company and the conclusion thereof, any Claims based on wrongful termination, any Claims based on contract whether express or implied, written or oral, and any Claims arising under the United States and/or State Constitutions, federal and/or common law, and/or rights arising out of alleged violations of any federal, state or other government statutes, regulations or ordinances including, without limitation, the National Labor Relations Act, Title VII of the 1964 Civil Rights Act, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Sarbanes-Oxley Act, the New Jersey Law Against Discrimination, the New Jersey Conscientious Employee Protection Act, the Americans with Disabilities Act, the Civil Rights Act of 1866 (42 U.S.C. § 1981), the Civil Rights Act of 1991, the Equal Pay Act, the Family and Medical Leave Act, the Fair Labor Standards Act and the Employees Retirement Income Security Act of 1974, all as amended. This release specifically includes, but is not limited to, the right to the payment of wages, vacation, pension benefits or any other employee benefits, and any other rights arising under federal, state or local laws prohibiting discrimination and/or harassment on the basis of age, race, color, religion, creed, sex, national origin, ancestry, mental or physical disability, alienage or citizenship status, marital status, or any other basis prohibited by law.
4. Covenant Not To Sue. Executive has not filed against the Company or any of the Releasees, any complaints, charges or lawsuits with any government agency, arbitral tribunal, self-regulatory body, or any court arising out of Executives employment by the Company or any other matter arising on or prior to the date hereof. Executive will not, directly or indirectly, commence or prosecute, or assist in the filing, commencement or prosecution in any court, arbitral tribunal, self-regulatory body or local or state government agency, any claim or charge against the Company or any of the Releasees arising out of any of the matters set forth in this Agreement or based upon any common law or statutory claim against the Company or any of the Releasees that can be brought under federal, state or local law. Notwithstanding the foregoing, Executive shall not be limited from commencing a proceeding for the sole purpose of enforcing his rights under this Agreement or under the Plan, provided Executive first complies with the Claims Review procedures described in Article X of the Plan.
5. No Admission of Liability. This Agreement does not constitute or imply an admission of liability or wrongdoing by Executive, the Company or any of the Releasees.
6. No Disparagement. Executive and the officers and directors of the Company and its Affiliates agree that they will not make, or cause to be made, any statements, observations or opinions, or communicate any information (whether oral or written) that disparages or is likely in any way to harm the reputation in the case of the officers and directors of the Company and its Affiliates, Executive, and in the case of Executive, the Company, its Affiliates or any of the Releasees.
7. Confidentiality. The terms of this Agreement are CONFIDENTIAL. Executive agrees not to tell anyone about this Agreement and not to disclose any information contained in this Agreement to anyone, other than to his lawyer, financial advisor or immediate family members, to enforce this Agreement, or to respond to a valid subpoena or other legal process. If
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Executive does tell his lawyer, financial advisor or immediate family members about this Agreement or its contents, he must immediately tell them that they must keep it confidential as well. The Company agrees that it will keep the terms of this Agreement confidential, except as is necessary to administer this Agreement, as required by law or to respond to a valid subpoena or other legal process.
8. No Reliance. Executive represents that in executing this Agreement he does not rely and has not relied upon any representation or statement not set forth in this Agreement that the Company or any of its agents, representatives or attorneys may have made with regard to the subject matter, basis or effect of this Agreement.
9. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New Jersey without regard to any states conflict of law provisions.
10. Remedy for Breach. In the event of any breach of this Agreement, the parties may only institute an action for specific enforcement of the terms of this Agreement and the Plan and seek damages resulting from such breach. Executive may not institute any proceeding based on any Claims related to his employment with the Company or the conclusion of his employment because of a breach of this Agreement or the Plan by the Company. The prevailing party in any such action shall be entitled to an award of attorneys fees and costs in addition to any other legal or equitable relief, except that the Company will not be entitled to its attorneys fees or other damages if Executive challenges the validity or enforceability of this Agreement.
11. Severability. If at any time, after the date of the execution of this Agreement, any provision of this Agreement shall be held in any court or agency of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect. In the event that a court or agency of competent jurisdiction concludes that the release contained in paragraph 3 or the covenant not to sue contained in paragraph 4 are illegal, void or unenforceable, Executive agrees to execute a release and covenant not to sue that are legal, valid and enforceable.
12. Entire Agreement. This Agreement, the Plan and the Restrictive Covenant Agreement required by Section 3.2 of the Plan set forth the entire agreement between the parties with respect to the termination of Executives employment and supersede any and all prior understandings and agreements between the parties. Neither party shall have any obligation toward the other except as set forth herein and therein.
13. Modifications. This Agreement may not be modified except in writing signed by all parties.
14. Enforceability. The parties are bound by this Agreement. Anyone who succeeds to the parties rights and responsibilities, such as their heirs, executors, successors or assigns, is also bound.
15. Headings. The headings contained in this Agreement are for the convenience of reference only and are not intended to define, limit, expand or describe the scope or intent of any provision of this Agreement.
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16. Acknowledgements. Executive acknowledges that:
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Executive has carefully read and understands this Agreement; |
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Executive has been given forty-five (45) days to consider his rights and obligations under this Agreement and to consult with an attorney; |
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The Company advised Executive to consult with an attorney and/or any other advisors of his choice before signing this Agreement; |
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Executive understands that this Agreement is LEGALLY BINDING and by signing it he gives up certain rights; |
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Executive has voluntarily chosen to enter into this Agreement and has not been forced or pressured in any way to sign it; |
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f. |
Executive KNOWINGLY AND VOLUNTARILY RELEASES the Company and the Releasees from any and all claims Executive may have, known or unknown, in exchange for the benefits Executive has obtained by signing, and that these benefits are in addition to any benefit Executive would have otherwise received if he did not sign this Agreement; |
|
|
|
|
g. |
The General Release in this Agreement includes a WAIVER OF ALL RIGHTS AND CLAIMS Executive may have under the Age Discrimination In Employment Act of 1967 (29 U.S.C. §621 et seq.); and |
|
|
|
|
h. |
Executive has seven (7) days after he signs this Agreement to revoke it by notifying the Company in writing. Executive must deliver the written revocation to the Companys General Counsel so that it is actually received by the Company within seven (7) days of the date Executive signs this Agreement. This Agreement will not become effective or enforceable until the Company receives a copy of this Agreement signed by Executive and the seven (7) day revocation period has expired without Executive revoking this Agreement. |
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
|
|
|
|
EXECUTIVE |
|
|
PUBLIC SERVICE ENTERPRISE GROUP |
|
|
|
INCORPORATED |
|
|
By: |
|
|
|
|
|
|
|
Name: |
|
|
|
|
|
|
|
Title |
|
31
EXHIBIT 12
PUBLIC
SERVICE ENTERPRISE GROUP
INCORPORATED
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine |
|
For the Years Ended |
|
|||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
|
|
2008 |
|
2007 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
(Millions, except ratios) |
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings as Defined in Regulation S-K (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income from Continuing Operations |
|
$ |
1,526 |
|
$ |
1,848 |
|
$ |
2,379 |
|
$ |
1,139 |
|
$ |
1,386 |
|
$ |
1,220 |
|
$ |
1,256 |
|
(Income) Loss from Equity Investees, net of Distributions |
|
|
(6 |
) |
|
2 |
|
|
(10 |
) |
|
(2 |
) |
|
(37 |
) |
|
78 |
|
|
79 |
|
Fixed Charges |
|
|
488 |
|
|
586 |
|
|
782 |
|
|
851 |
|
|
888 |
|
|
894 |
|
|
953 |
|
Capitalized Interest (B) |
|
|
(25 |
) |
|
(23 |
) |
|
(26 |
) |
|
(33 |
) |
|
(92 |
) |
|
(109 |
) |
|
(116 |
) |
Preferred Securities Dividend Requirements of Subsidiaries |
|
|
(5 |
) |
|
(5 |
) |
|
(6 |
) |
|
(6 |
) |
|
(6 |
) |
|
(6 |
) |
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings |
|
$ |
1,978 |
|
$ |
2,408 |
|
$ |
3,119 |
|
$ |
1,949 |
|
$ |
2,139 |
|
$ |
2,077 |
|
$ |
2,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges as Defined in Regulation S-K (C) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$ |
473 |
|
$ |
572 |
|
$ |
765 |
|
$ |
834 |
|
$ |
872 |
|
$ |
879 |
|
$ |
939 |
|
Interest Factor in Rentals |
|
|
10 |
|
|
9 |
|
|
11 |
|
|
11 |
|
|
10 |
|
|
9 |
|
|
8 |
|
Preferred Securities Dividend Requirements of Subsidiaries |
|
|
5 |
|
|
5 |
|
|
6 |
|
|
6 |
|
|
6 |
|
|
6 |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Charges |
|
$ |
488 |
|
$ |
586 |
|
$ |
782 |
|
$ |
851 |
|
$ |
888 |
|
$ |
894 |
|
$ |
953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges |
|
|
4.05 |
|
|
4.11 |
|
|
3.99 |
|
|
2.29 |
|
|
2.41 |
|
|
2.32 |
|
|
2.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
The term earnings shall be defined as pre-tax Income from Continuing Operations before income or loss from equity investees plus distributed income from equity investees. 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 securities dividend requirements of majority-owned subsidiaries stated on a pre-tax level. |
|
|
(B) |
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 majority-owned subsidiaries stated on a pre-tax level. |
|
|
(C) |
Capitalized Interest excludes AFUDC for PSE&G. |
EXHIBIT 12.1
PSEG POWER LLC
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine |
|
For the Years Ended |
|
|||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
|
|
September 30, |
|
December 31, |
|
|||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
|
|
2008 |
|
2007 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
(Millions, except ratios) |
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings as Defined in Regulation S-K (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income from Continuing Operations |
|
$ |
1,414 |
|
$ |
1,263 |
|
$ |
1,590 |
|
$ |
878 |
|
$ |
752 |
|
$ |
594 |
|
$ |
815 |
|
Fixed Charges |
|
|
157 |
|
|
143 |
|
|
193 |
|
|
190 |
|
|
197 |
|
|
198 |
|
|
219 |
|
Capitalized Interest |
|
|
(22 |
) |
|
(21 |
) |
|
(23 |
) |
|
(30 |
) |
|
(89 |
) |
|
(107 |
) |
|
(106 |
) |
Preferred Stock Dividend Requirements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings |
|
$ |
1,549 |
|
$ |
1,385 |
|
$ |
1,760 |
|
$ |
1,038 |
|
$ |
860 |
|
$ |
685 |
|
$ |
928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges as Defined in Regulation S-K (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$ |
156 |
|
$ |
142 |
|
$ |
192 |
|
$ |
189 |
|
$ |
195 |
|
$ |
197 |
|
$ |
217 |
|
Preferred Securities Dividend Requirements of Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Factor in Rentals |
|
|
1 |
|
|
1 |
|
|
1 |
|
|
1 |
|
|
2 |
|
|
1 |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Charges |
|
$ |
157 |
|
$ |
143 |
|
$ |
193 |
|
$ |
190 |
|
$ |
197 |
|
$ |
198 |
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges |
|
|
9.87 |
|
|
9.69 |
|
|
9.12 |
|
|
5.46 |
|
|
4.37 |
|
|
3.46 |
|
|
4.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 the amount of any interest capitalized during the period. |
|
|
(B) |
Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense and (c) an estimate of interest implicit in rentals. |
Exhibit 12.2
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Nine |
|
For the Years Ended |
|
|||||||||||||||||
|
|
September 30, |
|
December 31, |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions, except ratios) |
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings as Defined in Regulation S-K (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income from Continuing Operations |
|
$ |
448 |
|
$ |
516 |
|
$ |
637 |
|
$ |
448 |
|
$ |
583 |
|
$ |
592 |
|
$ |
376 |
|
Fixed Charges |
|
|
244 |
|
|
250 |
|
|
332 |
|
|
346 |
|
|
342 |
|
|
362 |
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
$ |
692 |
|
$ |
766 |
|
$ |
969 |
|
$ |
794 |
|
$ |
925 |
|
$ |
954 |
|
$ |
766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges as Defined in Regulation S-K (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$ |
244 |
|
$ |
250 |
|
$ |
332 |
|
$ |
346 |
|
$ |
342 |
|
$ |
362 |
|
$ |
390 |
|
Interest Factor in Rentals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Charges |
|
$ |
244 |
|
$ |
250 |
|
$ |
332 |
|
$ |
346 |
|
$ |
342 |
|
$ |
362 |
|
$ |
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges |
|
|
2.84 |
|
|
3.06 |
|
|
2.92 |
|
|
2.29 |
|
|
2.70 |
|
|
2.64 |
|
|
1.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
The term earnings shall be defined as pretax income from continuing operations. Add to pretax income the amount of fixed charges adjusted to exclude the amount of any interest capitalized during the period. |
|
|
(B) |
Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense and (c) an estimate of interest implicit in rentals. |
EXHIBIT 12.3
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Plus Preferred Security Dividend Requirements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
For the Years Ended |
|
|||||||||||||||||
|
|
Ended September 30, |
|
December 31, |
|
|||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||
|
|
2008 |
|
2007 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
(Millions, except ratios) |
|
|||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings as Defined in Regulation S-K (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income from Continuing Operations |
|
$ |
448 |
|
$ |
516 |
|
$ |
637 |
|
$ |
448 |
|
$ |
583 |
|
$ |
592 |
|
$ |
376 |
|
Fixed Charges |
|
|
249 |
|
|
255 |
|
|
339 |
|
|
353 |
|
|
349 |
|
|
369 |
|
|
397 |
|
Preferred Securities Pre Tax |
|
|
(5 |
) |
|
(5 |
) |
|
(7 |
) |
|
(7 |
) |
|
(7 |
) |
|
(7 |
) |
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
$ |
692 |
|
$ |
766 |
|
$ |
969 |
|
$ |
794 |
|
$ |
925 |
|
$ |
954 |
|
$ |
766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges as Defined in Regulation S-K (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$ |
244 |
|
$ |
250 |
|
$ |
332 |
|
$ |
346 |
|
$ |
342 |
|
$ |
362 |
|
$ |
390 |
|
Interest Factor in Rentals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Securities Dividends |
|
|
3 |
|
|
3 |
|
|
4 |
|
|
4 |
|
|
4 |
|
|
4 |
|
|
4 |
|
Adjustment to state Preferred Securities Dividends on a pre-income tax basis |
|
|
2 |
|
|
2 |
|
|
3 |
|
|
3 |
|
|
3 |
|
|
3 |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Charges |
|
$ |
249 |
|
$ |
255 |
|
$ |
339 |
|
$ |
353 |
|
$ |
349 |
|
$ |
369 |
|
$ |
397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges |
|
|
2.78 |
|
|
3.00 |
|
|
2.86 |
|
|
2.25 |
|
|
2.65 |
|
|
2.59 |
|
|
1.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
The term earnings shall be defined as pretax income from continuing operations. Add to pretax income the amount of fixed charges adjusted to exclude (a) the amount of any interest capitalized during the period (b) the actual amount of any preferred securities dividend requirements of majority owned subsidiaries (c) preferred stock dividends which were included in such fixed charges amount but not deducted in the determination of pre-tax income. |
|
|
(B) |
Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount and premium expense (c) an estimate of interest implicit in rentals and (d) preferred securities dividend requirements of majority owned subsidiaries and preferred stock dividends, increased to reflect the pre-tax earnings requirement for PSE&G. |
EXHIBIT 31
Certification Pursuant to Rules 13a-14 and 15d-14
of the 1934 Securities Exchange Act
|
|
|
|
|
I, Ralph Izzo, certify that: |
||||
|
|
|
|
|
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Public Service Enterprise Group Incorporated; |
||
|
|
|
|
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
||
|
|
|
|
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
||
|
|
|
|
|
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
||
|
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
||
|
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
October 31, 2008 |
|
/s/ Ralph Izzo |
|
|
|
|
|
|
|
Ralph Izzo |
|
|
|
Public Service Enterprise Group Incorporated |
|
|
|
Chief Executive Officer |
EXHIBIT 31.1
Certification Pursuant to Rules 13a-14 and
15d-14
of the 1934 Securities Exchange Act
|
|
|
|
|
I, Thomas M. OFlynn, certify that: |
||||
|
|
|
|
|
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of Public Service Enterprise Group Incorporated; |
||
|
|
|
|
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
||
|
|
|
|
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
||
|
|
|
|
|
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
||
|
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
||
|
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
October 31, 2008 |
|
/s/ Thomas M. OFlynn |
|
|
|
|
|
|
|
Thomas M. OFlynn |
|
|
|
Public Service Enterprise Group Incorporated |
|
|
|
Chief Financial Officer |
EXHIBIT 31.2
Certification Pursuant to Rules 13a-14 and
15d-14
of the 1934 Securities Exchange Act
|
|
|
|
|
I, Ralph Izzo, certify that: |
||||
|
|
|
|
|
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of PSEG Power LLC; |
||
|
|
|
|
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
||
|
|
|
|
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
||
|
|
|
|
|
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
||
|
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
||
|
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
October 31, 2008 |
|
/s/ Ralph Izzo |
|
|
|
|
|
|
|
Ralph Izzo |
|
|
|
PSEG Power LLC |
|
|
|
Chief Executive Officer |
EXHIBIT 31.3
Certification Pursuant to Rules 13a-14 and
15d-14
of the 1934 Securities Exchange Act
|
|
|
|
|
I, Thomas M. OFlynn, certify that: |
||||
|
|
|
|
|
|
1. |
I have reviewed this Quarterly Report on Form 10-Q of PSEG Power LLC; |
||
|
|
|
|
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
||
|
|
|
|
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
||
|
|
|
|
|
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
||
|
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
||
|
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
October 31, 2008 |
|
/s/ Thomas M. OFlynn |
|
|
|
|
|
|
|
Thomas M. OFlynn |
|
|
|
PSEG Power LLC |
|
|
|
Chief Financial Officer |
EXHIBIT 31.4
Certification Pursuant to Rules 13a-14 and
15d-14
of the 1934 Securities Exchange Act
|
|
|
|
|
I, Ralph Izzo, certify that: |
||||
|
|
|
|
|
|
2. |
I have reviewed this Quarterly Report on Form 10-Q of Public Service Electric and Gas Company; |
||
|
|
|
|
|
|
3. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
||
|
|
|
|
|
|
4. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
||
|
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
||
|
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
|
6. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
||
|
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
October 31, 2008 |
|
/s/ Ralph Izzo |
|
|
|
|
|
|
|
Ralph Izzo |
|
|
|
Public Service Electric and Gas Company |
|
|
|
Chief Executive Officer |
EXHIBIT 31.5
Certification Pursuant to Rules 13a-14 and
15d-14
of the 1934 Securities Exchange Act
|
|
|
|
|
I, Thomas M. OFlynn, certify that: |
||||
|
|
|
|
|
|
2. |
I have reviewed this Quarterly Report on Form 10-Q of Public Service Electric and Gas Company; |
||
|
|
|
|
|
|
3. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
||
|
|
|
|
|
|
4. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
||
|
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
||
|
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
|
6. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
||
|
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
October 31, 2008 |
|
/s/ Thomas M. OFlynn |
|
|
|
|
|
|
|
Thomas M. OFlynn |
|
|
|
Public Service Electric and Gas Company |
|
|
|
Chief Financial Officer |
EXHIBIT 32
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Ralph Izzo, Chief Executive Officer of Public Service Enterprise Group Incorporated, to the best of my knowledge, certify that (i) the Quarterly Report of Public Service Enterprise Group Incorporated on Form 10-Q for the period ended September 30, 2008 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Public Service Enterprise Group Incorporated.
|
|
|
/s/ Ralph Izzo |
|
|
|
Ralph Izzo |
|
Public Service Enterprise Group Incorporated |
|
Chief Executive Officer |
|
October 31, 2008 |
EXHIBIT 32.1
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Thomas M. OFlynn, Chief Financial Officer of Public Service Enterprise Group Incorporated, to the best of my knowledge, certify that (i) the Quarterly Report of Public Service Enterprise Group Incorporated on Form 10-Q for the period ended September 30, 2008 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Public Service Enterprise Group Incorporated.
|
|
|
/s/ Thomas M. OFlynn |
|
|
|
Thomas M. OFlynn |
|
Public Service Enterprise Group Incorporated |
|
Chief Financial Officer |
|
October 31, 2008 |
EXHIBIT 32.2
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Ralph Izzo, Chief Executive Officer of PSEG Power LLC, to the best of my knowledge, certify that (i) the Quarterly Report of PSEG Power LLC on Form 10-Q for the period ended September 30, 2008 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PSEG Power LLC.
|
|
|
/s/ Ralph Izzo |
|
|
|
Ralph Izzo |
|
PSEG Power LLC |
|
Chief Executive Officer |
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October 31, 2008 |
EXHIBIT 32.3
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Thomas M. OFlynn, Chief Financial Officer of PSEG Power LLC, to the best of my knowledge, certify that (i) the Quarterly Report of PSEG Power LLC on Form 10-Q for the period ended September 30, 2008 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PSEG Power LLC.
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/s/ Thomas M. OFlynn |
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Thomas M. OFlynn |
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PSEG Power LLC |
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Chief Financial Officer |
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October 31, 2008 |
EXHIBIT 32.4
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Ralph Izzo, Chief Executive Officer of Public Service Electric and Gas Company, to the best of my knowledge, certify that (i) the Quarterly Report of Public Service Electric and Gas Company on Form 10-Q for the period ended September 30, 2008 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Public Service Electric and Gas Company.
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/s/ Ralph Izzo |
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Ralph Izzo |
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Public Service Electric and Gas Company |
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Chief Executive Officer |
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October 31, 2008 |
EXHIBIT 32.5
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Thomas M. OFlynn, Chief Financial Officer of Public Service Electric and Gas Company, to the best of my knowledge, certify that (i) the Quarterly Report of Public Service Electric and Gas Company on Form 10-Q for the period ended September 30, 2008 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Public Service Electric and Gas Company.
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/s/ Thomas M. OFlynn |
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Thomas M. OFlynn |
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Public Service Electric and Gas Company |
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Chief Financial Officer |
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October 31, 2008 |