-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JBjYL3UirWcbhY44UQvPIhvzmazT8kVI/R3c3HYlOTqmFaOj+AABS/GNKvUzPMMW ooSww/78vGwuoFpClxbNzw== 0000950110-99-000213.txt : 19990224 0000950110-99-000213.hdr.sgml : 19990224 ACCESSION NUMBER: 0000950110-99-000213 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE ENTERPRISE GROUP INC CENTRAL INDEX KEY: 0000788784 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 222625848 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09120 FILM NUMBER: 99547243 BUSINESS ADDRESS: STREET 1: 80 PARK PLZ STREET 2: P O BOX 1171 CITY: NEWARK STATE: NJ ZIP: 07101 BUSINESS PHONE: 2014307000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE ELECTRIC & GAS CO CENTRAL INDEX KEY: 0000081033 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 221212800 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00973 FILM NUMBER: 99547244 BUSINESS ADDRESS: STREET 1: 80 PARK PLZ STREET 2: PO BOX 570 CITY: NEWARK STATE: NJ ZIP: 07101 BUSINESS PHONE: 2014307000 10-K405 1 FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ COMMISSION REGISTRANT, STATE OF INCORPORATION, I.R.S. EMPLOYER FILE NUMBER ADDRESS, AND TELEPHONE NUMBER IDENTIFICATION NO. - -------------- -------------------------------------------- ------------------ 1-9120 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 22-2625848 (A New Jersey Corporation) 80 Park Plaza P.O. Box 1171 Newark, New Jersey 07101-1171 973 430-7000 http://www.pseg.com SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------------------ ------------------------------------------- Common Stock without par value New York Stock Exchange Philadelphia Stock Exchange Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's Debentures), $25 par value at 7.44%, issued by Enterprise Capital Trust I (Registrant). Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's Debentures), $25 par value at 7.25%, issued by Enterprise Capital Trust III (Registrant). SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: Floating Rate Capital Securities (Guaranteed Preferred Beneficial Interest in PSEG's Debentures), $1,000 par value issued by Enterprise Capital Trust II (Registrant), LIBOR plus 1.22%. Extendible Notes, Series A, LIBOR plus .75%, Due 2000. Extendible Notes, Series B, LIBOR plus .78%, Due 2000. 1-973 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 22-1212800 (A New Jersey Corporation) 80 Park Plaza P.O. Box 570 Newark, New Jersey 07101-0570 973 430-7000 DOCUMENTS INCORPORATED BY REFERENCE PART OF FORM 10-K DOCUMENTS INCORPORATED BY REFERENCE - ----------------- ----------------------------------- III Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders of Public Service Enterprise Group Incorporated to be held April 20, 1999, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 2, 1999, as specified herein. ================================================================================ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- ------------------- Cumulative Preferred Stock $100 par value First and Refunding Mortgage Bonds Series Series: Due: 4.08% 8 3/4% Z 1999 4.18% 9 1/8% BB 2005 4.30% 9 1/4% CC 2021 5.05% 8 7/8% DD 2003 5.28% 7 7/8% FF 2001 5.97% 7 5/8% II 2000 6.92% 6 7/8% MM 2003 New York Stock Exchange 6 1/2% PP 2004 $25 par value Series: 6 % QQ 2000 6.75% 6 1/8% RR 2002 7 % SS 2024 7 3/8% TT 2014 6 3/4% UU 2006 6 3/4% VV 2016 6 1/4% WW 2007 6 1/2% XX 2000 6 3/8% YY 2023 8 % 2037 5 % 2037
Monthly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures), $25 par value at 9.375%, $25 par value at 8.00%, issued by Public Service Electric and Gas Capital, L.P. (Registrant) and registered on the New York Stock Exchange. Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures), $25 par value at 8.625%, issued by PSE&G Capital Trust I (Registrant) and registered on the New York Stock Exchange. Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures), $25 par value at 8.125%, issued by PSE&G Capital Trust II (Registrant) and registered on the New York Stock Exchange. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: REGISTRANT TITLE OF CLASS ---------- -------------- Public Service Electric and Gas Company 6.92% Cumulative Preferred Stock $100 par value Medium-Term Notes, Series A Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the Common Stock of Public Service Enterprise Group Incorporated held by non-affiliates as of January 31, 1999 was $8,840,858,422 based upon the New York Stock Exchange Composite Transaction closing price. The number of shares outstanding of Public Service Enterprise Group Incorporated's sole class of Common Stock, as of the latest practicable date, was as follows: CLASS OUTSTANDING AT JANUARY 31, 1999 ----- ------------------------------- Common Stock, without par value 223,136,208 As of January 31, 1999, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record by Public Service Enterprise Group Incorporated. TABLE OF CONTENTS PAGE ---- Table of Contents......................................................... i PART I Item 1. Business.................................................... 1 General..................................................... 1 PSEG........................................................ 1 PSE&G....................................................... 1 Industry Issues and Risk Factors............................ 1 Segment Information......................................... 2 Competitive Environment..................................... 2 Construction and Capital Requirements....................... 5 Financing Activities........................................ 6 Income Taxes................................................ 6 Credit Ratings.............................................. 6 PSE&G....................................................... 6 Rate Matters................................................ 6 Customers................................................... 6 Electric Supply and Capacity................................ 7 Nuclear Operations.......................................... 10 Electric Fuel Supply and Disposal........................... 14 Gas Operations and Supply................................... 16 Employee Relations.......................................... 17 Environmental Controls...................................... 17 Energy Holdings............................................. 22 Item 2. Properties.................................................. 24 Item 3. Legal Proceedings........................................... 27 Item 4. Submission of Matters to a Vote of Security Holders......... 33 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 33 Item 6. Selected Financial Data..................................... 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 35 PSEG........................................................ 35 Corporate Structure......................................... 35 Overview of 1998 and Future Outlook......................... 36 Results of Operations....................................... 38 Liquidity and Capital Resources............................. 41 External Financings......................................... 46 Qualitative and Quantitative Disclosures About Market Risk.. 49 Foreign Operations.......................................... 51 Year 2000 Readiness Disclosure.............................. 51 Rate Matters................................................ 54 Accounting Issues........................................... 55 Impact of New Accounting Pronouncements..................... 55 Site Restorations and Other Environmental Costs............. 55 PSE&G....................................................... 55 Forward Looking Statements.................................. 56 Item 7A. Qualitative and Quantitative Disclosures About Market Risk.. 56 i TABLE OF CONTENTS -- (Continued) PAGE ---- Item 8. Financial Statements and Supplementary Data................. 57 Consolidated Statements of Income (PSEG).................... 58 Consolidated Balance Sheets (PSEG).......................... 59 Consolidated Statements of Cash Flows (PSEG)................ 61 Consolidated Statements of Common Stockholders' Equity (PSEG).................................................... 62 Consolidated Statements of Income (PSE&G)................... 64 Consolidated Balance Sheets (PSE&G)......................... 65 Consolidated Statements of Cash Flows (PSE&G)............... 67 Consolidated Statements of Common Stockholder's Equity (PSE&G)................................................... 68 Notes to Consolidated Financial Statements (PSEG)........... 69 Notes to Consolidated Financial Statements (PSE&G).......... 112 Financial Statement Responsibility (PSEG)................... 116 Financial Statement Responsibility (PSE&G).................. 117 Independent Auditors' Report (PSEG)......................... 118 Independent Auditors' Report (PSE&G)........................ 119 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................. 120 PART III Item 10. Directors and Executive Officers of the Registrants......... 120 Directors of the Registrants................................ 120 PSEG........................................................ 120 PSE&G....................................................... 120 Executive Officers of the Registrants....................... 121 Item 11. Executive Compensation...................................... 122 PSEG........................................................ 122 PSE&G....................................................... 122 Summary Compensation Table.................................. 123 Option Grants in Last Fiscal Year (1998).................... 124 Aggregated Option Exercises in Last Fiscal Year (1998) and Fiscal Year End Option Values (12/31/98).................. 125 Employment Contracts and Arrangements....................... 125 Compensation Committee Interlocks and Insider Participation............................................. 126 Compensation of Directors and Certain Business Relationships............................................. 126 Compensation Pursuant to Pension Plans...................... 126 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 127 PSEG........................................................ 127 PSE&G....................................................... 127 Item 13. Certain Relationships and Related Transactions.............. 128 PSEG........................................................ 128 PSE&G....................................................... 128 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................... 129 Schedule II--Valuation and Qualifying Accounts (PSEG)....... 131 Schedule II--Valuation and Qualifying Accounts (PSE&G)...... 131 Signatures--Public Service Enterprise Group Incorporated.... 132 Signatures--Public Service Electric and Gas Company......... 133 Exhibit Index............................................... 134 PSEG........................................................ 135 PSE&G....................................................... 144 Glossary of Terms......................................................... 151 ii PART I ITEM 1. BUSINESS GENERAL PSEG Public Service Enterprise Group Incorporated (PSEG), incorporated under the laws of the State of New Jersey with its principal executive offices located at 80 Park Plaza, Newark, New Jersey 07102, is an exempt public utility holding company. PSEG has two principal direct wholly-owned subsidiaries: Public Service Electric and Gas Company (PSE&G) and PSEG Energy Holdings Inc. (Energy Holdings), formerly Enterprise Diversified Holdings Incorporated. Energy Holdings is the parent of PSEG's non-utility businesses: PSEG Global Inc. (Global), formerly Community Energy Alternatives Incorporated; PSEG Resources Inc. (Resources), formerly Public Service Resources Corporation; PSEG Energy Technologies Inc. (Energy Technologies) formerly Energis Resources Incorporated; Enterprise Group Development Corporation (EGDC); PSEG Capital Corporation (PSEG Capital) and Enterprise Capital Funding Corporation (Funding). PSE&G PSE&G, a New Jersey corporation with its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102, is an operating public utility company engaged principally in the generation, transmission, distribution and sale of electric energy service and in the transmission, distribution and sale of gas service in New Jersey. PSE&G supplies electric and gas service in areas of New Jersey in which approximately 5.5 million people, about 70% of the State's population, reside. PSE&G's electric and gas service area is a corridor of approximately 2,600 square miles running diagonally across New Jersey from Bergen County in the northeast to an area below the City of Camden in the southwest. The greater portion of this area is served with both electricity and gas, but some parts are served with electricity only and other parts with gas only. This heavily populated, commercialized and industrialized territory encompasses most of New Jersey's largest municipalities, including its six largest cities--Newark, Jersey City, Paterson, Elizabeth, Trenton and Camden--in addition to approximately 300 suburban and rural communities. This service territory contains a diversified mix of commerce and industry, including major facilities of many corporations of national prominence. PSE&G believes that it has all the franchises (including consents) necessary for its electric and gas distribution operations in the territory it serves. Such franchise rights are not exclusive. INDUSTRY ISSUES AND RISK FACTORS The electric and gas utility industries in the State of New Jersey and across the country are undergoing major transformations. Legislation has been passed in New Jersey mandating retail competition in the electric and gas industries and rate decreases in the electric industry in New Jersey. The New Jersey Board of Public Utilities (BPU) is expected to issue rulings that will decide company specific issues by March 31, 1999 and generic issues for the State sometime thereafter. For discussion of this activity including related potential financial impacts, volatility of earnings and accounting changes, see Overview of 1998 and Future Outlook of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 2. Regulatory Issues of Notes to Consolidated Financial Statements (Notes). PSEG and PSE&G are affected by many issues that are generic to the electric and gas industries such as: deregulation, the unbundling of energy supplies and services and the establishment of a competitive energy marketplace for products and services (see Competitive Environment and Note 2. Regulatory Issues of Notes); energy sales retention and growth potential in a mature, competitive service territory; the need to reduce operating and capital costs in a competitive environment and in light of mandated rate reductions; revenue stability and growth, including the ability to obtain adequate and timely rate relief, cost recovery, including stranded costs, and other necessary regulatory approvals (see Note 2. Regulatory Issues of Notes); the ability to economically and safely operate nuclear facilities in accordance with regulatory requirements (see Nuclear Operations); increased capital investments attributable to environmental regulations 1 (see Construction and Capital Requirements and Environmental Controls); nuclear decommissioning and the availability of storage facilities for spent nuclear fuel and related costs of disposal (see Electric Fuel Supply and Disposal); managing wholesale energy trading operations in conjunction with electricity and gas production, transmission and distribution systems, including commodity price fluctuations, volatility and credit risk from counterparties; managing foreign investments and electric generation and distribution operations in locations outside of the traditional utility service territory (see Foreign Operations of MD&A and Note 20. Subsequent Events of Notes); political and foreign currency risks; exposure to market price fluctuations and volatility (see Qualitative and Quantitative Disclosures About Market Risk and Foreign Operations of MD&A); Year 2000 issues (see Year 2000 Readiness Disclosure of MD&A and Note 10. Commitments and Contingent Liabilities of Notes); accounting changes resulting from deregulation (see Note 19. Accounting Matters of Notes); and debt and equity market concerns associated with these issues. SEGMENT INFORMATION Financial information with respect to business segments of PSEG and PSE&G is set forth in Note 15. Financial Information by Business Segments of Notes. COMPETITIVE ENVIRONMENT OVERVIEW The regulatory structure which has historically governed the electric and gas industries in the United States and in New Jersey is in transition. Deregulation is underway in New Jersey and in other states in the Northeast, including Pennsylvania and New York, and across the United States. The deregulation and restructuring of the nation's energy markets, unbundling of services, the diverse industry strategies related to generation capacity and the anticipated resulting industry consolidation will have a profound effect on PSEG and PSE&G, providing new opportunities and exposing PSEG and PSE&G to new risks (see Overview of 1998 and Future Outlook of MD&A). Legislative and regulatory initiatives, at both the State and Federal levels, are designed to promote competition and will continue to impose additional pressures on PSE&G's ability to retain customers. Statutorily mandated unbundling of the services traditionally provided by vertically integrated companies, such as PSE&G, and the rapid growth of independent generation, energy trading and marketing together with new technology and interest in self generation and cogeneration have provided customers with alternative sources and supplies of energy. Retention of existing customers and potential sales growth will depend upon the ability of PSE&G to reduce costs, meet customer expectations and respond to changing economic conditions and regulation. Recently, a number of utility-affiliated entities and other companies have purchased generating units from utilities in the Northeast which are divesting such assets. In addition, a variety of energy marketers have expressed interest in operating in New Jersey. These and others selling generation and other products and services will be competitors of PSEG and PSE&G. For further information on regulatory changes, see Overview of 1998 and Future Outlook of MD&A and Note 2. Regulatory Issues of Notes. PSEG's non-utility businesses are subject to substantial competition in the United States as well as in the international markets. Restructuring of world energy markets including the privatization of government owned utilities and the opening of opportunities to foreign investors will impact PSEG. Some of the power generation projects in which Global invests compete with other independent power providers as well as utility generators both domestically and internationally. Global's distribution businesses in Argentina and Brazil operate pursuant to franchise arrangements and are generally not subject to competition. Energy Technologies also competes with other providers of energy services, including utilities and their affiliates. For additional information, see Energy Holdings. STATE REGULATORY BODIES As a New Jersey public utility, PSE&G is subject to comprehensive regulation by the BPU including, among other matters, regulation of intrastate rates and service and the issuance and sale of securities. As a participant in the ownership of certain generation and transmission facilities in Pennsylvania, PSE&G is subject to regulation by the Pennsylvania Public Utility Commission (PPUC) in limited respects in regard to such facilities. PSEG is not subject to direct regulation by the BPU, except potentially with respect to certain transfers of control and reporting requirements. The BPU may also impose certain requirements with respect to affiliate transactions between and among PSE&G, PSEG and PSEG's non- 2 utility subsidiaries (see Energy Holdings). Additionally, PSEG and PSE&G are subject to the rules and regulations of the New Jersey Department of Environmental Protection (NJDEP) and the State Department of Transportation. STATE REGULATION ELECTRIC The BPU, as well as the New Jersey State Legislature, have each undertaken the task of restructuring the electric and gas industries in New Jersey. Throughout 1998, the BPU held hearings and reviewed an Administrative Law Judge's recommendations and the results of management audits in the proceedings relating to its Energy Master Plan issued in 1997. In January 1999, the State Legislature enacted legislation to guide the restructuring of New Jersey's electric and gas industries. That legislation, the New Jersey Electric Discount and Energy Competition Act (Energy Competition Act), was signed into law by the Governor on February 9, 1999. The Energy Competition Act provides, among other things, for rate reductions and customer choice by August 1, 1999. Over the next few months, the BPU is expected to issue a series of orders to continue to provide the specific rules to govern the new deregulated electric marketplace in New Jersey in accordance with the Energy Competition Act. The BPU has set a target date for finalizing electric restructuring rules for March 31, 1999, but has yet to establish a target date for a gas restructuring order. For further discussion of the aforementioned BPU activities, the Energy Competition Act and the forthcoming BPU proceedings (collectively, the Energy Master Plan Proceedings) regarding deregulation and unbundling of the electric utility industry in New Jersey, see Overview of 1998 and Future Outlook of MD&A and Note 2. Regulatory Issues of Notes. The BPU's response to the New Jersey legislation will significantly impact PSEG's and PSE&G's future prospects. The BPU will continue in its regulatory role over many aspects of the New Jersey electric industry, both in determining the rules for the competitive marketplace and continuing to regulate the portions of PSE&G's business that remain regulated, including transmission and distribution of electricity. In other matters, in 1995 the BPU initiated a generic proceeding that led to New Jersey electric utilities having the ability to offer "off-tariff" negotiated rates to customers. Although these Off-Tariff Rate Agreements (OTRAs) are offered at PSE&G's sole discretion, they are subject to BPU approval of minimum price, confidentiality of information, contract duration, regulatory filing requirements and other reporting requirements. These negotiated OTRAs have formed part of PSE&G's overall strategy to retain customers in its service territory and maintain long-term electric sales. PSE&G files an annual report with the BPU which discusses OTRA activities in the prior year. This report allows the BPU to evaluate the impact of the OTRAs on the financial integrity of PSE&G. PSE&G is currently in negotiation with several customers for OTRAs. These agreements have been or will shortly be submitted to the BPU for review and approval. The Energy Competition Act provides that OTRAs implemented on or after the effective date of retail competition may establish a price only for the transmission or distribution of electricity to a retail customer that is different from, but in no case higher than, that specified in the electric public utility's current cost-of-service-based tariff rate for transmission or distribution service otherwise applicable to that customer. The electric rates under these OTRAs shall include the appropriate societal benefits charge, market transition charge and securitization transition bond charge. For further discussion of the Energy Competition Act and the Energy Master Plan Proceedings, see Note 2. Regulatory Issues of Notes. PSE&G does not expect the impact of OTRAs to have a material effect on its financial position, results of operations and net cash flows. The Energy Competition Act repealed the New Jersey Public Utility Accident Fault Determination Act (Fault Act) which had required the BPU to make a determination of fault with regard to any accident at any electric generating or transmission facility prior to granting a request by any utility for a rate increase to cover accident-related costs in excess of $10 million. The Energy Competition Act also repealed the requirement that electric utilities obtain a certificate of need prior to construction of a new electric generating facility. For more information on the Energy Competition Act and the Energy Master Plan Proceedings, see Note 2. Regulatory Issues. 3 GAS PSE&G's unbundled gas transportation tariffs, which have been in place since 1994, allow any nonresidential customer, regardless of size, to purchase its own gas, transport it to PSE&G and require PSE&G to deliver such gas to the customer's facility. Under the Energy Competition Act, utilities are required to offer all of their customers the choice to buy the gas commodity from alternate suppliers by December 31, 1999. For further discussion of gas unbundling and the Energy Master Plan Proceedings, see Note 2. Regulatory Issues of Notes. GENERAL Under the general laws of New Jersey, PSE&G has the right to use the public highways, streets and alleys in New Jersey for erecting, laying and maintaining poles, conduits and wires necessary for its electric operations. PSE&G must, however, first obtain the consent in writing of the owners of the soil for the purpose of erecting poles. PSE&G's rights are also subject to regulation by municipal authorities with respect to street openings and the use of streets for erecting poles in incorporated cities and towns. Concerning gas distribution, PSE&G has the right to use the roads, streets, highways and public grounds in New Jersey for pipes and conduits. The issue of PSEG sharing the benefits of consolidated tax savings with PSE&G or its ratepayers was addressed by the BPU in 1995 in a letter which informed PSE&G that the issue of consolidated tax savings can be discussed in the context of its next base rate case or plan for an alternative form of regulation. PSEG believes that PSE&G's taxes should be treated on a stand alone basis for rate making purposes, based on the separate nature of the utility and non-utility businesses. However, neither PSEG nor PSE&G is able to predict what action, if any, the BPU may take concerning consolidation of tax benefits in future proceedings. Under New Jersey law, the BPU is required to audit all or a portion of the operating procedures and other internal workings of every gas or electric utility subject to its jurisdiction, including PSE&G, at least once every six years. The BPU may, upon completion of the audit and after notice and hearing, order the utility to adopt such new practices and procedures that it shall find reasonable and necessary to promote efficient and adequate service to meet public convenience and necessity. In June 1997, the BPU commenced management audits of all New Jersey electric utilities, with the assistance of certain consulting firms, under the direction of its own audit staff. The audit process included, but was not limited to, focused reviews of electric utility filings in response to the BPU's Energy Master Plan. The management audit process for PSE&G was concluded in December 1997 with a report of the BPU's management consultants relating to issues of stranded costs, securitization and consumer rate reductions. A second report on restructuring was filed in February 1998. These management audit reports were approved for release by the BPU in January 1998 and March 1998, respectively, and are being considered by the BPU as part of the Energy Master Plan Proceedings. For additional information regarding the management audit report, see Note 2. Regulatory Issues of Notes. For a discussion of the BPU's previous focused audit of the non-utility businesses of PSEG and its impact on PSEG, see Liquidity and Capital Resources of MD&A. The BPU can adopt, reject or modify the audit report's results in its decision in the Energy Master Plan Proceedings. PSE&G cannot predict to what extent the BPU will rely on the results of the audit report nor what the ultimate outcome of the Energy Master Plan Proceedings will be; however, the decision of the BPU will fundamentally change the rules for the generation and sale of electricity in New Jersey and therefore could have a material adverse effect on PSEG's and PSE&G's financial condition, results of operations and net cash flows. On August 31, 1998, the BPU mandated the commencement of an audit of PSE&G's competitive services, including PSE&G's Appliance Service Business, to determine whether PSE&G's competitive services have impaired or could impair PSE&G's ability to provide safe, adequate and proper service; if cross-subsidization exists between the regulated utility and the entity providing competitive services; if rates for competitive services are unjust, unreasonable, discriminatory or unduly preferential and if the utility is in compliance with the BPU's compliance monitoring and reporting requirements. The BPU completed its audit by December 31, 1998 and is expected to issue a draft report of its findings in concert with the Energy Master Plan Proceedings. PSE&G cannot predict the outcome of this matter. 4 The Energy Competition Act requires an independent audit of the relationship between PSE&G's regulated businesses and its and its affiliates' competitive businesses every two years. On December 16, 1998, the BPU issued an Order in connection with its investigation of the damage caused by a September 1998 storm that passed through PSE&G's territory. This Order recommended improvement in communications between PSE&G and its customers and emergency officials after storm-related power outages. PSE&G responded to the BPU on January 4, 1999 stating that it will comply and will work with the BPU on any open recommendations. FEDERAL REGULATORY BODIES PSE&G and certain of Energy Holdings' subsidiaries are subject to regulation by the Federal Energy Regulatory Commission (FERC) with respect to certain matters, including interstate sales and exchanges of electric transmission, capacity and energy. PSEG has claimed an exemption from regulation by the Securities and Exchange Commission (SEC) as a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), except for Section 9(a)(2) thereof, which relates to the acquisition of 5% or more of the voting securities of an electric or gas utility company. Construction and operation of nuclear generating facilities are regulated by the Nuclear Regulatory Commission (NRC). For additional information relating to regulation by the NRC, see Nuclear Operations. In addition, the Federal Emergency Management Agency is responsible for the review, in conjunction with the NRC, of certain aspects of emergency planning relating to the operation of nuclear plants. Additionally, PSE&G is subject to the rules and regulation of the Federal Environmental Protection Agency (EPA), Department of Transportation (USDOT) and Department of Energy (DOE). For information on environmental regulation, see Environmental Controls. FEDERAL REGULATION ELECTRIC The electric industry is currently undergoing restructuring as a result of Federal legislation and regulatory initiatives. The National Energy Policy Act of 1992 (EPAct) eased restrictions on independent power producers (IPP) in an effort to increase competition in the wholesale electric generation market. FERC Order No. 888 (Order No. 888) became effective in July 1996 and required all public utilities owning, controlling or operating electric transmission lines to offer nondiscriminatory open access to their transmission systems. Intra-pool transactions for power pools were also required to be conducted under a nondiscriminatory, pool-wide open access tariff by March 1, 1997. Numerous parties, including PSE&G, filed requests seeking rehearing and clarification of various aspects of Order No. 888. As a result of those requests, FERC issued Orders No. 888-A and 888-B, which clarified and largely reaffirmed the legal and policy bases on which Order No. 888 was grounded, and also provided a process for recovery of stranded costs from wholesale customers. Numerous parties, including PSE&G, have filed petitions for judicial review of these orders and these petitions are currently pending before the United States Courts of Appeals for the District of Columbia and the Second Circuits (see PJM Interconnection, L.L.C. (PJM)). In March 1998, all of these appeals were consolidated in the Court of Appeals for the District of Columbia Circuit (D.C. Circuit). On April 30, 1998, the D.C. Circuit entered an order permitting certain additional parties to intervene and establishing certain procedural guidelines for the hearing of these appeals. Briefs were filed on October 1, 1998. Additional briefs are to be filed later in 1999. Oral argument has been scheduled for November 1999. GAS Over the last decade, the natural gas industry has experienced a dramatic transformation as several FERC initiatives have opened the industry to competitive market forces. On the interstate level, the pipeline suppliers that serve PSE&G have unbundled gas supply and transportation services and now offer transportation services that move gas purchased from numerous natural gas producers and marketers to PSE&G's service territory. 5 CONSTRUCTION AND CAPITAL REQUIREMENTS For information concerning investments, construction and capital requirements see MD&A--Liquidity and Capital Resources--Construction and Capital Requirements Forecast, Note 4. Long-Term Investments, Note 7. Schedule of Consolidated Debt and Note 10. Commitments and Contingent Liabilities of Notes. FINANCING ACTIVITIES For a discussion of issuance, repurchase, book value and market value of PSEG's Common Stock and external financing activities of PSEG, PSE&G and Energy Holdings for the year 1998, see Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Liquidity and Capital Resources of MD&A. For a discussion of PSEG Capital and Funding, see Energy Holdings--PSEG Capital and Energy Holdings--Funding. For further discussion of long-term debt and short-term debt, see Note 7. Schedule of Consolidated Debt of Notes. INCOME TAXES For information regarding Federal and State income taxes, see Note 1. Organization and Summary of Significant Accounting Policies, Note 2. Regulatory Issues and Note 12. Income Taxes of Notes. CREDIT RATINGS The current ratings of securities of PSEG and its subsidiaries are shown below and reflect the respective views of the rating agencies, from whom an explanation of the significance of their ratings may be obtained. There is no assurance that these ratings will continue for any given period of time or that they will not be revised or withdrawn entirely by the rating agencies, if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal may adversely effect the market price of PSEG's, Energy Holdings' and PSE&G's securities and serve to increase those companies' cost of capital. STANDARD DUFF & MOODY'S & POOR'S PHELPS ------- -------- ------ PSEG Preferred Securities............................ Baa2 BB+ BBB Extendible Notes................................ Baa2 BBB BBB+ PSE&G Mortgage Bonds.................................. A3 A- A Preferred Securities............................ Baa1 BBB A- Commercial Paper (including PSE&G Fuel Corp.)... P2 A2 Duff 1 ENERGY HOLDINGS Senior Debt (PSEG Capital)...................... Baa2 BBB BBB+ As a component of PSE&G's ratings, each rating agency issues its opinion of the credit trend or outlook. Duff and Phelps currently evaluates that credit trend or outlook as negative. Standard and Poor's and Moody's evaluate the outlook as stable. In February 1999, Standard & Poor's introduced a single credit rating scale for both debt and preferred securities to replace the separate rating scales that were applied to these two classes of securities. By rating all debt and preferred securities according to the same scale, Standard & Poor's has stated that it believes investors will gain a clearer picture of the credit risk that these securities present. Broadly, the criteria of the new scale calls in part for Standard & Poor's to rate preferred securities at least two notches below the corporate credit rating of an investment-grade issuer. This has resulted in the re-rating of the preferred securities of PSEG and PSE&G to BB+ and BBB, respectively. 6 PSE&G RATE MATTERS For information concerning the Energy Master Plan Proceedings, PSE&G's rate matters and environmental remediation and fuel adjustment clauses, see General--Competitive Environment--State Regulation (Electric), Note 1. Organization and Summary of Significant Accounting Policies and Note 2. Regulatory Issues of Notes. For information concerning PSE&G's under (over) recovered electric energy and gas fuel costs, see Note 3. Regulatory Assets and Liabilities of Notes. CUSTOMERS As of December 31, 1998, PSE&G provided service to approximately 1.9 million electric customers and 1.6 million gas customers. PSE&G is not dependent on a single customer or a few customers for its electric or gas sales. For the year ended December 31, 1998, PSE&G's operating revenues aggregated $5.6 billion, of which 72% was from its electric operations and 28% from its gas operations. PSE&G's business is weather sensitive and seasonal in that sales of electricity are higher during the summer months because of air conditioning requirements and sales of gas are greater in the winter months due to the use of gas for space-heating purposes. Revenues were derived as follows for 1998: REVENUES ---------------------------- ELECTRIC GAS ------------ ---------- (MILLIONS OF DOLLARS) Residential....................... $1,272 $833 Commercial........................ 1,849 194 Industrial........................ 631 237 Transportation Service--Gas....... -- 245 Other............................. 279 50 ------------ ---------- Total......................... $4,031 $1,559 ============ ========== For information on the impact of competition and the Energy Master Plan Proceedings on PSE&G's customer and revenue base, see Overview of 1998 and Future Outlook of MD&A and Note 2. Regulatory Issues of Notes. ELECTRIC SUPPLY AND CAPACITY The supply of electricity for PSE&G's business is provided by various sources. Generation, power purchases within PJM, from other power pools and from non-utility generators (NUGs), and demand side management programs provide sources for electricity as a commodity. Capacity is provided by the installed generation production facilities which PSE&G owns as well as through bilateral purchases and purchases in the new capacity market administered by PJM. The nature of the supply and capacity markets are changing due to deregulation in various states and FERC initiatives. The resulting development of new markets has increased volatility and risks and also has created opportunities for PSE&G. For further discussion, see Qualitative and Quantitative Disclosures About Market Risk of MD&A. RESOURCE PLAN AND POWER PURCHASES PSE&G periodically reevaluates its forecasted customer load and peak growth and the sources of electric generating capacity and Demand Side Management (DSM) to meet such projected growth (see DSM below and Note 2. Regulatory Issues of Notes). The Resource Plan takes into account assumptions concerning future customer demand, future cost trends, especially fuel and purchased power expenses, the impacts of conservation and load management activities, the long-term condition of and projected additions to PSE&G's plants and capacity available from other electric utilities and non-utility suppliers. The forecast for electric system peak demand over the period 1999-2003 has been developed based on an assumed compound annual rate of growth of 1.47%. 7 A component of PSE&G's Resource Plan consists of expected capacity additions from PJM and NUGs. PSE&G is engaged in wholesale purchases and sales of electricity and gas. These transactions help satisfy the Resource Plan requirements and may include both purchasing power from PJM and other electric systems. Analysis of the lowest cost sources of electricity is made and based on the expectation that, at certain times, purchases at the wholesale level will replace production of electricity by PSE&G's facilities. For further discussion of wholesale activities, see Quantitative and Qualitative Disclosures About Market Risk of MD&A and Note 8. Financial Instruments and Risk Management of Notes. NUG projects are expected to comprise approximately 6% of capacity resources by 2005. The availability of NUG generation reduces the need for PSE&G to build or acquire additional generation. For further information on PJM, NUGs and Stranded Costs, see PJM Interconnection, L.L.C. and Note 2. Regulatory Issues of Notes. DEMAND SIDE MANAGEMENT (DSM) The BPU adopted rules in 1991 to encourage utilities to offer DSM-related load management and conservation services. These rules were re-adopted in 1996 and are designed to treat DSM on equal regulatory footing with supply side or energy production investments. The Energy Competition Act permits the continuation of DSM programs. The recovery of costs for DSM programs is to be through a societal benefits charge, on all electric customers' bills, initially set at the level in rates for DSM cost recovery in place on February 9, 1999. Within the subsequent twelve months, the BPU is required to complete a statewide comprehensive resource analysis of energy efficiency and renewable energy programs and determine the appropriate level of funding for each utility based on this analysis. PSE&G's most recent DSM Resource Plan (1995 Plan) was approved by the BPU in 1995 and was designed to encourage investment in energy-saving DSM activities. These activities involve energy saving techniques and technologies, such as high-efficiency lighting and motors, which help reduce customer demand for energy. The 1995 Plan consisted of two major program areas for both electric and gas; (1) Core Programs which include many specialized programs such as energy audits, building envelope efficiency improvements and rebates for high efficiency heating and cooling equipment; and (2) the Standard Offer Program which is performance based and provides payment for measurable energy savings resulting from the installation of qualified measures that improve the energy efficiency of end-uses. BPU approval of the 1995 Plan included a requirement to file the next DSM Plan by July 1, 1997. In April of 1997 PSE&G filed a request with the BPU to extend the 1995 Plan for one year and to defer filing the next DSM Plan until July 1, 1998, which requests were granted with the condition that the Core Programs would continue until the next DSM Plan was approved. The BPU further directed that PSE&G also extend existing project acceptance and in-service deadline dates by one year. On June 29, 1998, PSE&G filed with the BPU the 1999 Interim Demand Side Management Plan which included Core Programs and the Standard Offer, and hearings on the filing were conducted. No action has been taken by the BPU leaving no mechanism open at this time for the accepting of new Standard Offer project proposals. It is anticipated that there will be BPU action on the 1999 Interim Plan in the near future, but PSE&G cannot predict the outcome of such action. ELECTRIC GENERATING CAPACITY The following table sets forth certain information as to PSE&G's installed generating capacity as of December 31, 1998: INSTALLED SOURCE CAPACITY (A) (MW) PERCENTAGE - ------------------------------------------------- ----------------- ---------- Conventional Steam Electric: Oil-fired (B)............................... 1,531 15% Coal-fired New Jersey (C)................... 1,271 12% Coal-fired Pennsylvania (mine mouth) (D).... 770 7% Combustion Turbine (E)........................... 2,724 27% Combined Cycle................................... 920 9% Diesel (D)....................................... 5 0% Nuclear (D): New Jersey.................................. 1,921 19% 8 Pennsylvania................................ 930 9% Pumped Storage (D) (E)........................... 200 2% ----------- --------- Total................................... 10,272 100% =========== ========= (A) Excludes 695 MW of non-utility generation and 505 MW of capacity sales to other utilities. (B) Units with aggregate capacity of 836 MW can also burn gas. (C) Can also burn gas. (D) PSE&G share of jointly owned facilities. (E) Primarily used for peaking purposes. For additional information, see Item 2. Properties--PSE&G--Electric Properties. The capacity available at any time may be less than the installed capacity noted in the table above because of temporary outages for inspection, maintenance, repairs, legal and regulatory requirements including environmental constraints or unforeseen circumstances (see Environmental Controls). The maximum one-hour demand (peak load) which PSE&G experienced in 1998 was 9,226 MW, which occurred on July 22, 1998, when the day's output was 178,741 megawatt-hours (MWH) of electricity. The all time peak load record is 9,548 MW, which occurred on July 15, 1997, when the day's output was 184,357 MWH of electricity. Demand for electricity will come from PSE&G's retail customers to whom PSE&G will continue to provide service following implementation of competition as well as basic generation service customers as mandated by the Energy Competition Act. See Note 2. Regulatory Issues for further discussion of basic generation service under the Energy Competition Act. PSE&G expects to be able to continue to meet the demand for electricity on its system through operation of available equipment and by power purchases. However, if periods of unusual demand should coincide with outages of equipment, PSE&G could find it necessary at times to reduce voltage or curtail load in order to safeguard the continued operation of its energy delivery systems. PJM INTERCONNECTION, L.L.C. (PJM) PSE&G is a member of PJM and participates on the PJM Members Committee as part of its governance structure. The PJM Office of Interconnection (PJM OI) administers the open-access transmission tariff for the PJM power pool and operates the centrally dispatched bid-based energy market for the PJM region, including sections of Pennsylvania, New Jersey, Delaware, Maryland, Virginia and the District of Columbia. The PJM electric system is interconnected with other major electric utility companies in the eastern half of the United States. The PJM area of the power grid is operated as one system to provide increased reliability, an assurance of an adequate supply of electricity, security to withstand disturbances and reduced operating costs to its members. PSE&G's output, as shown under Electric Fuel Supply and Disposal, reflects significant amounts of purchased power because at times it is more economical for PSE&G to purchase power from PJM and others than to produce it. As of December 31, 1998, the aggregate installed generating capacity of the PJM companies was 57,551 MW. The maximum one-hour demand experienced by PJM in 1998 was 48,397 MW which occurred on July 22, 1998. The all time record peak one-hour demand experienced by PJM was 49,406 MW which occurred on July 15, 1997. PSE&G's capacity obligations to the PJM system vary from year to year due to changes in system characteristics. PSE&G expects to have sufficient installed capacity to meet its obligations during the 1999-2003 period. PSE&G is also a member of the Mid-Atlantic Area Reliability Council which provides for review and evaluation of plans for generation and transmission facilities and other matters relevant to reliability of the bulk electric supply systems in the Mid-Atlantic area. PJM operates under a two-tier governance structure under which an independent 7-member Board of Managers (PJM Board) is responsible for supervision and oversight of the day-to-day operations of PJM. A Members Committee, consisting of five sectors representing generation owners, other suppliers, transmission owners, electric distribution and end-use customers elects, and provides advice to, the PJM Board. PJM has implemented a zonal rate design for 9 transmission service, subject to its being replaced by a more uniform, regional rate design within five years in accordance with FERC requirements. On October 15, 1998, PJM began operating a centralized capacity credit market, providing a new option to participants for procuring and selling surplus capacity to meet reliability obligations within the PJM Control Area. Capacity is the capability to produce electric power, typically from owned generation or third-party purchase contracts and differs from the electric energy markets, which trade the actual energy being generated. This market facilitates the selling and buying of capacity for participants by providing a single point of contact for market participants and a published capacity market clearing price. The design of the PJM capacity market is compatible with the already existing bilateral capacity market. PSE&G will continue trading capacity both through bilateral transactions and by participating in the centralized PJM capacity market. Effective April 1, 1998, PJM implemented locational marginal pricing (LMP) to establish the market clearing prices for electric energy and to price electric transmission usage based upon costs associated with transmission system congestion. When there is no congestion on the power system and energy is flowing on the grid in an unconstrained manner, energy prices are cleared at the highest bid accepted by PJM for the entire PJM region. When a limit is reached on the transmission grid, PJM will operate the generators to preserve system reliability. LMP allows PJM to send signals to raise and lower generator output when the power flows are constrained. Different energy market clearing prices are paid by wholesale power buyers and sellers on the power grid that reflect the value relative to a system constraint. LMP provides for an efficient allocation of congestion costs to transmission users within the PJM control area. FERC has approved the use of the LMP congestion management system to allow electric energy market participants with power contracts on neighboring electric systems to compensate PJM for any unintended flows on the PJM system, rather than forcing those participants to curtail their contracts. PSE&G cannot predict how the changes in the energy market will impact PSE&G's cost of power. On December 31, 1997, the PJM Supporting Companies, including PSE&G, filed market enhancements with the FERC. The filing seeks the ability to auction residual and released Fixed Transmission Rights (FTRs), which are financial hedges against congestion costs, beginning in April 1999. As proposed, these systems would all be administered by the PJM Independent System Operator (ISO). The FERC Order on this filing instructs PJM to submit further details on how the auction will be implemented. PSE&G cannot predict the impacts of PJM implementing these proposed market enhancements. Currently, the PJM Operating Agreement dictates that bids for electric energy offered for sale in the PJM interchange energy market from generation located within the PJM control area shall not exceed the variable cost of producing such energy. Transactions that are bid into the PJM pool from generation located outside the PJM control area are capped at $1,000 per megawatt hour. All power providers are paid the LMP set through power providers' bids. Certain PJM members, including PSE&G, have requested that FERC revise the PJM Operating Agreement to allow the submission of market based bids to the PJM interchange energy market. The lifting of such caps could provide opportunity for PSE&G's generation business to receive higher prices for energy it sells while exposing the delivery business to higher prices when PSE&G is a net buyer. It is anticipated that should FERC find that no single market participant can unduly influence market prices and that a market monitoring function is provided by the ISO, the current bidding restrictions would be eliminated. Furthermore, in the event that all available generation within the PJM control area is insufficient to satisfy demand, PJM may institute emergency purchases from adjoining regions. The cost of such emergency purchases is not subject to any PJM price cap. PSEG and PSE&G cannot predict the outcome of this request or the impact on PSEG's and PSE&G's future financial condition, results of operations and net cash flows if such request is successful, but risk would increase if the cap were eliminated. For further discussion of price volatility of electricity, see Qualitative and Quantitative Disclosures About Market Risk of MD&A. NUCLEAR OPERATIONS PSE&G has an ownership interest in five nuclear generating units and operates three of these, the Salem Nuclear Generating Station, Units 1 and 2 (Salem 1 and 2), and the Hope Creek Nuclear Generating Station (Hope Creek). PECO Energy Company (PECO Energy) operates the Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom 2 and 3). Operation of nuclear generating units involves continuous close regulation by the NRC. Such regulation involves testing, evaluation and modification of all aspects of plant operation in light of NRC safety and environmental 10 requirements. Continuous demonstrations to the NRC that plant operations meet applicable requirements are also required. The NRC has the ultimate authority to determine whether any nuclear generating unit may operate. For 1998, PSE&G's nuclear units achieved an average capacity factor of approximately 85%. For information concerning the performance of PSE&G's nuclear units, see Note 10. Commitments and Contingent Liabilities of Notes. Refueling outages, expected to last approximately seven weeks in duration, are scheduled in 1999 for Salem 1 and 2, Hope Creek and Peach Bottom 3. Hope Creek commenced its refueling outage in February 1999. On September 16, 1998, the NRC suspended its Systematic Assessment of Licensee Performance (SALP) program for an interim period until the NRC staff completes a review of its nuclear power plant performance assessment process. During the interim period while the SALP program is suspended, the NRC has indicated that it will utilize the results of its plant performance reviews to provide nuclear power plant performance information to licensees, state and local officials and the public. The NRC has indicated that these reviews are intended to identify performance trends since the previous assessment and make any appropriate changes to the NRC's inspection plans. At the end of the process, the NRC will decide whether to resume the SALP program or substitute an alternative program. PSE&G cannot predict the final outcome of this NRC review nor its impact on its nuclear operations. SALEM Salem consists of two 1,106 MW pressurized water nuclear reactors (PWR) located in Salem County, New Jersey on the Delaware River. PSE&G owns 42.59% of the Salem units and operates them on behalf of itself and three other owners: PECO Energy--42.59%; Atlantic City Electric Company (ACE)--7.41%; and DP&L--7.41%. In March 1998, ACE and DP&L merged to become Conectiv. As of December 31, 1998, PSE&G's net book value was approximately $362 million for Salem 1, $340 million for Salem 2 and $153 million in common plant between the two units. Each Salem unit represents approximately 5% of PSE&G's installed electric generating capacity, approximately 3% of its total assets and approximately 4% of its net utility plant in service. For 1998, Salem achieved an average capacity factor of approximately 74%. As previously reported, Salem 1 and 2 were taken out of service by PSE&G in the second quarter of 1995. Salem 2 returned to service on August 30, 1997. Salem 1 returned to service on April 17, 1998. In July 1998, the NRC removed Salem 1 and 2 from the NRC Watch List. The NRC noted that plant material condition, safety culture and management oversight and effectiveness had substantially improved. The NRC also observed that, while the maintenance backlog resulting from discovery efforts during the outage remains high, PSE&G is effectively managing the prioritization and resolution of those items. Additionally, the NRC noted that PSE&G's management team has instituted robust safety oversight and self-assessment at the site and that Salem has demonstrated sustained successful plant performance. In the past, the outage of a Salem unit has caused PSE&G to incur replacement energy costs of approximately $4 to $6 million per month per unit. Such amounts vary, however, depending upon the availability of other generation, the cost of purchased energy and other factors including modifications to maintenance schedules of other units. These costs will also vary greatly depending upon the time of year an outage occurs, since with the competitive PJM marketplace, times of higher demand will cause prices to rise significantly. For further discussion, see Electric Supply and Capacity. On September 15, 1998, the NRC issued its latest SALP Report for Salem for the period March 1, 1997 to August 1, 1998. In the areas of Maintenance and Engineering, Salem was rated Category 2 or "good" performance. In the areas of Operations and Plant Support, Salem received "superior", or Category 1, ratings. The NRC noted improved performance overall during the period, as demonstrated by the nearly event free return of both units to operation following the extended outage. The NRC identified strong management oversight, safe and conservative operations, good engineering support and effective programs for independent oversight and self-assessment. The NRC also noted that although human performance has improved significantly due to extensive training interventions, continued close management attention is warranted in the Operations and Maintenance areas. For certain litigation relating to Salem, see Item 3. Legal Proceedings. For information on the operating performance standard applicable to Salem, see Note 10. Commitments and Contingent Liabilities of Notes. 11 HOPE CREEK Hope Creek consists of one 1,031 MW boiling water nuclear reactor (BWR) located in Salem County, New Jersey on the Delaware River adjacent to Salem. PSE&G owns 95% of Hope Creek and operates the unit on behalf of itself and ACE, which owns the remaining 5%. As of December 31, 1998, PSE&G's net book value for Hope Creek was approximately $2.8 billion. Hope Creek represents approximately 10% of PSE&G's installed electric generating capacity, approximately 19% of its total assets and approximately 26% of its net utility plant in service. For 1998, Hope Creek achieved an average capacity factor of approximately 96%. Hope Creek completed its latest planned refueling and maintenance outage in December 1997. In the past, an outage at Hope Creek has caused PSE&G to incur replacement energy costs of approximately $8 to $10 million per month. Such amounts vary, however, depending upon the availability of other generation, the cost of purchased energy and other factors including modifications to maintenance schedules of other units. These costs will also vary greatly depending upon the time of year an outage occurs, since with the competitive PJM marketplace, times of higher demand will cause prices to rise significantly. On June 8, 1998, the NRC issued its latest SALP Report for Hope Creek for the period November 10, 1996 to May 16, 1998. In the areas of Operations, Maintenance and Engineering, Hope Creek was rated Category 2 or "good" performance. In the area of Plant Support, Hope Creek received a "superior", or Category 1, rating. The NRC noted improved performance in all functional areas during the period, with marked improvement in the Plant Support area, particularly concerning security and emergency preparedness. The NRC also noted that although several human performance issues associated with procedure violations, attention to detail and work controls were evident during the fall 1997 outage, operation since then has been nearly event-free. PEACH BOTTOM Peach Bottom consists of two 1,093 MW BWRs located on the Susquehanna River in southeastern Pennsylvania. PECO Energy owns 42.49% of the Peach Bottom units and operates them on behalf of itself and three other owners: PSE&G--42.49%; ACE--7.51%; and DP&L--7.51%. As of December 31, 1998, PSE&G's net book value was approximately $237 million for Peach Bottom 2 and $243 million for Peach Bottom 3. Each Peach Bottom unit represents approximately 5% of PSE&G's installed electric generating capacity, approximately 2% of its total assets and approximately 2% of its net utility plant in service. For 1998, Peach Bottom achieved an average capacity factor of approximately 86%. Peach Bottom 2 completed a scheduled refueling and maintenance outage in November 1998. In the past, an outage of a Peach Bottom unit has caused PSE&G to incur additional replacement energy costs of approximately $4 to $6 million per month per unit. Such amounts vary, however, depending upon the availability of other generation, the cost of purchased energy and other factors including modifications to maintenance schedules of other units. These costs will also vary greatly depending upon the time of year an outage occurs, since with the competitive PJM marketplace, times of higher demand will cause prices to rise significantly. On July 17, 1997, the NRC issued its latest periodic SALP Report for Peach Bottom for the period October 15, 1995 to June 7, 1997. Peach Bottom was rated Category 1 in the areas of Plant Operations, Maintenance and Plant Support and rated Category 2 in the area of Engineering. Overall, the NRC observed excellent performance at Peach Bottom during the assessment period. The NRC stated that station management provided excellent oversight and control of engineering activities throughout the period. The NRC noted that, while overall engineering performance was good, there were several instances where operating procedures, surveillances and tests were not consistent with the design and licensing bases. PECO Energy has advised PSE&G that it will continue to take actions to improve performance at Peach Bottom. OTHER NUCLEAR MATTERS On November 24, 1998, the NRC issued a new rule concerning nuclear plant license transfers, in response to increasing numbers of license transfer requests brought on by electric utility deregulation. Each company that operates and/or owns an interest in a nuclear generating station in the United States must possess a license from the NRC specific to that station. Any transfers to third parties or to subsidiaries or affiliates of a utility will require a new license for the entity becoming the owner and/or operator of the nuclear generating station. The new rule changes the license transfer process 12 by utilizing a legislative-type hearing rather than the former adjudicatory proceeding. PSE&G cannot predict what other actions, if any, the NRC may take in such matters. In 1990, General Electric (GE) reported that crack indications were discovered near the seam welds of the core shroud assembly in a GE BWR located outside the United States. As a result, GE issued a letter requesting that the owners of GE BWR plants take interim corrective actions. Hope Creek's core shroud was inspected during a refueling outage in 1997 with no indication of cracking found. PECO Energy has advised PSE&G that examination of the Peach Bottom 2 and 3 core shrouds were not required during their refueling outages in 1998 and 1997, and that examinations will be performed during their next refueling outages in 2000 and 1999, respectively. PECO Energy has also advised PSE&G that Peach Bottom 3 was shut down from March 13 through March 31, 1998 to repair cracks in three recirculation system jet pump risers within the reactor vessel. Permanent repairs were completed and Peach Bottom 3 returned to full power operation. In a separate matter, as a result of several BWRs experiencing clogging of some emergency core cooling system suction strainers which supply water from the suppression pool for emergency cooling of the core and related structures, the NRC issued a Bulletin in 1996 to operators of BWRs requesting that measures be taken to minimize the potential for clogging. The NRC has proposed three resolution options and required that actions be completed by the end of the unit's first refueling outage after January 1, 1997. Alternative resolution options will be subject to NRC approval. PSE&G installed a portion of the required large capacity passive strainers at Hope Creek during Hope Creek's last refueling outage in December 1997. The remaining strainers are being installed during the current refueling outage. PECO Energy has advised PSE&G that large capacity passive strainers were installed at Peach Bottom 3 during its refueling outage in October 1997 and at Peach Bottom 2 during its refueling outage in October 1998. PSE&G cannot predict what other actions, if any, the NRC may take in this matter. Predecisional enforcement conferences were held on December 9, 1997 to discuss two allegations concerning security program issues which occurred at Salem and Hope Creek in 1996. On April 24, 1998, the NRC issued a severity Level III violation for one of these matters and informed PSE&G that it would await issuance of the Secretary of Labor's Administrative Review Board decision before making an enforcement decision in the other matter. There was no civil penalty issued by the NRC for this violation. PSE&G did not contest this violation. PSE&G cannot predict what other actions, if any, the NRC may take in regard to the second matter. In a March 1998 letter to PSE&G, the Nuclear Regulatory Commission (NRC) said that two issues identified at Hope Creek have resulted in two Level III violations and an associated $55,000 civil penalty. PSE&G met with NRC officials in 1998 and discussed these issues, including corrective actions and improvements. These were implemented across PSE&G's nuclear operations to ensure the continued safe, reliable operation of all three nuclear units. The first issue was identified at Hope Creek during an NRC inspection in November 1997, while the unit was shut down for normal refueling maintenance. The NRC noted that certain plant conditions required more strict procedure compliance and management oversight than was provided. This resulted in one of the two Level III violations and the civil penalty. The NRC issued the civil penalty because a similar issue had been identified in 1996. The second issue concerned the implementation of the Maintenance Rule, which requires utilities to monitor the effectiveness of equipment reliability. The NRC said that PSE&G's Maintenance Rule program did not include all necessary equipment. Because this issue was self-identified and immediate corrective actions were taken, the NRC issued a Level III violation with no civil penalty. In accordance with NRC requirements, nuclear plants utilize various fire barrier systems to protect equipment necessary for the safe shutdown of the plant in the event of a fire. As part of an inspection by the NRC in April 1997, the NRC noted certain weaknesses in Salem's fire barrier systems. PSE&G sent a letter to the NRC in June 1997 addressing these issues concerning the qualification of fire wrap barriers used to protect electrical cabling at Salem. The letter outlined a resolution plan and schedule to address the fire wrap issues. PSE&G has committed to alternative measures in the form of fire watches until this plan is implemented. A review of the installed fire barrier materials and safe shutdown analysis is currently in progress. If certain modifications are necessary to comply with NRC requirements, it is expected that the cost of such will not be material. However, failure to resolve these fire barrier issues could result in potential NRC violations, fines and/or plant shutdown which could have a material adverse impact to PSE&G's financial condition, results of operations and net cash flows. PECO Energy has advised PSE&G that the NRC held a predecisional enforcement conference on May 21, 1998 to discuss two apparent violations concerning failure to maintain the operability of a Peach Bottom Unit 3 emergency core 13 cooling system pump. On June 11, 1998, the NRC issued an aggregate Level III violation and a civil penalty of $55,000. PECO Energy has advised PSE&G that it will not dispute the violation. For discussion of the lawsuit by PSE&G and the other co-owners of Salem seeking to recover damages for the costs of replacing the steam generators at Salem 1 and 2, see Item 3. Legal Proceedings. For discussion of the 1994 NJPDES permit related to Salem and its operations, see Water Pollution Control. NUCLEAR DECOMMISSIONING In accordance with Federal regulations, utilities owning an interest in nuclear generating facilities are required to determine the costs and funding methods necessary to decommission such facilities upon termination of operation. As a general practice, each nuclear utility places funds in independent external trust accounts it maintains to provide for decommissioning. PSE&G currently recovers from its customers the amounts paid into the trust fund over a period of years. Although PSE&G's Energy Master Plan proposal continues this treatment, no assurances can be given as to the final outcome of the Energy Master Plan Proceedings. For information concerning nuclear decommissioning costs and the Energy Master Plan Proceedings, see Note 2. Regulatory Issues and Note 11. PSE&G Nuclear Decommissioning of Notes. ELECTRIC FUEL SUPPLY AND DISPOSAL The following table indicates PSE&G's MWH output by source of energy:
ACTUAL ESTIMATED (A) SOURCE 1998 1999 - ------------------------------------------------------------ ------ ------------- Nuclear: New Jersey facilities.................................. 34% 33% Pennsylvania facilities................................ 16% 16% Fossil: Coal: New Jersey facilities.................................. 9% 11% Pennsylvania facilities................................ 14% 13% Natural Gas................................................. 5% 5% Net PJM Interchange and Purchases From Utilities and NUG's.. 22% 22% ------ ----------- Total (B).......................................... 100% 100% ====== ===========
(A) No assurances can be given that actual output will match estimates. (B) Oil generation for 1998 was less than 1% and for 1999 is estimated to be less than 1%. NUCLEAR FUEL The supply of fuel for nuclear generating units involves the mining and milling of uranium ore to uranium concentrate, conversion of the uranium concentrate to uranium hexafluoride, enrichment of the uranium hexafluoride gas, conversion of the enriched gas to fuel pellets and fabrication of fuel assemblies. PSE&G has several long-term contracts with uranium ore operators, converters, enrichers and fabricators to process uranium ore to uranium concentrate to meet the currently projected requirements for Salem and Hope Creek. PSE&G has been advised by PECO Energy that it has similar contracts to satisfy the fuel requirements of Peach Bottom. Currently, there is an adequate supply of nuclear fuel for Salem, Hope Creek and Peach Bottom. For a discussion of issues related to disposal of spent nuclear fuel and related litigation, see Nuclear Fuel Disposal and Note 10. Commitments and Contingent Liabilities of Notes. COAL Approximately 42% of PSE&G's coal supply for its New Jersey facilities is obtained under a contract which expires in 1999. PSE&G is currently renegotiating this contract to extend it through 2001. The balance of the supply is contracted annually from various suppliers, many of whom PSE&G has dealt with on a continuing basis for a number of years, 14 supplemented by spot market purchases. PSE&G does not presently anticipate any difficulties in obtaining adequate coal supplies. PSE&G owns approximately 23% of the Keystone and Conemaugh coal-fired generating stations located in western Pennsylvania and operated by GPU Generation, Inc., a subsidiary of GPU Energy, Inc. Pending regulatory approval, it is expected that GPU Generation, Inc. will sell its ownership interest and transfer operation of the stations to Sithe Energies, Inc. in the third quarter of 1999. The Keystone Conemaugh Projects Office, which performs project administration at these plants on a day to day basis, has advised PSE&G that it does not presently anticipate any difficulties in obtaining adequate coal supplies (see Environmental Controls) through long-term contracts and spot market purchases. NATURAL GAS PSE&G utilizes natural gas available from various spot and short-term gas contracts for electric generation. PSE&G does not presently anticipate any difficulties in obtaining natural gas supplies. OIL PSE&G uses residual oil in its conventional fossil-fired, steam-electric units. The supply of residual oil is furnished by spot market purchases. PSE&G uses distillate fuel in its combustion turbines which is also acquired by spot market purchases. PSE&G does not presently anticipate any difficulties in obtaining oil supplies. NUCLEAR FUEL DISPOSAL After spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Under the Nuclear Waste Policy Act of 1982 (NWPA), as amended, the Federal government has entered into contracts for transportation and ultimate disposal of the spent fuel and the nuclear utilities agreed to contribute to a Nuclear Waste Fund at a rate of one mill per kilowatt-hour (KWH) of nuclear generation, subject to such escalation as may be required to assure full cost recovery by the Federal government. In addition, a one-time payment was made to the DOE for permanently discharged spent fuels irradiated prior to 1983. Payments made to the DOE for disposal costs are based on nuclear generation and are included in Net Interchanged Power and Fuel for Electric Generation in the Statements of Income. Until the start of retail competition pursuant to the Energy Competition Act, these costs are being recovered through the Electric Levelized Energy Adjustment Clause (LEAC). Thereafter, PSE&G will bear the risks of nuclear fuel disposal costs. For more information on the Energy Master Plan Proceedings, see Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes. The Federal government's present policy is that spent nuclear fuel will be accepted for storage and disposal at government-owned and operated repositories. However, at present, no such repositories are in service or under construction. DOE construction of a permanent disposal facility has not begun and DOE has announced that it does not expect a facility to be available earlier than 2010. For a discussion of legislation regarding a centralized interim spent fuel storage facility, see Note 11. PSE&G Nuclear Decommissioning. Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be stored in reactor facility storage pools or in independent spent fuel storage installations located at reactor or away-from-reactor sites for at least 30 years beyond the licensed life for reactor operation (which may include the term of a revised or renewed license). As a result of reracking the two spent fuel pools at Salem, the availability of adequate spent fuel storage capacity is estimated through 2012 for Salem 1 and 2016 for Salem 2, prior to losing an operational full core discharge reserve. The Hope Creek pool is also fully racked and it is expected to provide storage capacity until 2008, again prior to losing an operational full core discharge reserve. PSE&G is currently assessing available options which could satisfy the potential need for additional storage capacity, including the option of constructing an on-site storage facility that would satisfy the spent fuel storage needs of both Salem and Hope Creek. PECO Energy has advised PSE&G that spent fuel racks at Peach Bottom have storage capacity until 2000 for Peach Bottom 2 and 2001 for Peach Bottom 3, prior to losing full core discharge reserve capability. PECO Energy has also advised PSE&G that it is constructing an on-site dry storage facility which is expected to be operational in 2000 to provide additional storage capacity. For further discussion of Nuclear Fuel Disposal, see Note 11. PSE&G Nuclear Decommissioning of Notes. 15 LOW LEVEL RADIOACTIVE WASTE (LLRW) As a by-product of their operations, nuclear generating units, including those in which PSE&G owns an interest, produce LLRW. Such wastes include paper, plastics, protective clothing, water purification materials and other materials. LLRW materials are accumulated on site and disposed of at licensed permanent disposal facilities. In 1991, New Jersey enacted legislation providing for funding of the estimated $70 million cost of establishing a LLRW disposal facility. New Jersey would recover the costs through fees paid by LLRW generators. PSE&G's overall share was expected to be about 40% of the total cost. PSE&G has provided about $6 million to date. New Jersey established a volunteer siting process to establish a LLRW disposal facility by 2000. Public meetings were held across the State in an effort to provide information to and obtain feedback from the public; however, no voluntary sites were identified. Consequently, on February 10, 1998, the New Jersey agency responsible for this program recommended to the Governor that this volunteer plan be abandoned. The Governor has accepted the agency's plan to reduce the scope of siting activities since the development of a disposal facility in New Jersey may not be economically feasible in light of current out-of-state disposal options. As a result, the refund of the unspent funds paid by waste generators in New Jersey to finance the siting process needs to be addressed. PSE&G expects to partially recover the funds it paid in connection with this effort. Because of the uncertainties regarding disposal, PSE&G built an on-site facility which was completed in July 1994. The facility has the capacity to store five years of LLRW from Hope Creek and Salem. The facility was used from July 1994 through June 1995, while there was no permanent disposal site available. The facility is currently being used for interim storage of radioactive materials and waste prior to transport to a permanent disposal facility. PECO Energy has advised PSE&G that it has an on-site LLRW storage facility for Peach Bottom, which has the capacity for at least 5 years of temporary storage. PECO Energy has also advised PSE&G that Pennsylvania pursued its own LLRW site development via State-selected candidate sites, along with a volunteer plan option. On June 18, 1998, the Appalachian States LLRW Compact Commission unanimously agreed to suspend efforts to site a radwaste storage facility in Pennsylvania. The Pennsylvania Department of Environmental Protection had suggested ending the search due to the declining amounts of radwaste produced by hospitals, nuclear power plants and research facilities. The other compact members (Delaware, Maryland and West Virginia) have asked Pennsylvania to make provisions to resume the search if conditions change. GAS OPERATIONS AND SUPPLY PSE&G supplies its gas customers principally with natural gas. PSE&G supplements natural gas with purchased refinery/landfill gas and liquefied petroleum gas produced from propane. The adequacy of supply of all types of gas is affected by the nationwide availability of all sources of fuel for energy production. As of December 31, 1998, the daily gas capacity of PSE&G was as follows: TYPE OF GAS THERMS PER DAY - ----------- -------------- Natural gas.............................................. 22,513,000 Liquefied petroleum gas.................................. 2,200,000 Refinery/landfill gas.................................... 323,000 ---------- Total.................................................. 25,036,000 ========== About 40% of the daily gas capacity is firm transportation which is available every day of the year. The remainder comes from field storage, liquefied natural gas, seasonal sales, contract peaking supply, propane and refinery/landfill gas. PSE&G's total gas sold to and transported for its various customer classes in 1998 was 3.6 billion therms. Included in this amount is 1.0 billion therms of gas delivered to customers under PSE&G's transportation tariffs and individual cogeneration contracts. During 1998, PSE&G purchased approximately 3.6 billion therms of gas for its combined gas and electric operations directly from natural gas producers and marketers. These supplies were transported to New Jersey by four interstate pipeline suppliers. 16 The majority of PSE&G's gas transportation and supply contracts expire at various times over the next 10 years. PSE&G does not presently anticipate any difficulty in negotiating replacement contracts. Since the quantities of gas available to PSE&G under its supply contracts are more than adequate in warm months, PSE&G nominates part of such quantities for storage, to be withdrawn during the winter season under storage contracts with its principal suppliers. Underground storage capacity currently is approximately 770 million therms. PSE&G does not presently anticipate any difficulty in obtaining adequate supplies of natural gas. Currently, substantially all of PSE&G's gas sales are made under rates which are currently designed to permit the recovery of projected increases in the cost of natural gas and gas from supplemental sources, when compared to levels included in base rates on a current annual basis. Different rate structures could be implemented in the future as part of gas industry restructuring in New Jersey. For more information on gas regulation, see State Regulation--Gas. The demand for gas by PSE&G's customers is affected by customer conservation, economic conditions, weather, the price relationship between gas and alternative fuels and other factors not within PSE&G's control. Rates for gas sold in interstate commerce are not subject to cost of service ratemaking but are subject to market forces. PSE&G buys gas from producers, marketers, unregulated marketing affiliates of interstate pipeline companies and others. Interstate transportation is regulated by the FERC (see Competitive Environment--State Regulation). PSE&G was able to meet all of the demands of its firm customers during the 1997-98 winter season and expects to continue to meet such energy-related demands of its firm customers during the 1998-99 winter season. However, the sufficiency of supply could be affected by several factors not within PSE&G's control, including curtailments of natural gas by its suppliers, the severity of the winter, the extent of energy conservation by its customers and the availability of feedstocks for the production of supplements to its natural gas supply. EMPLOYEE RELATIONS PSEG has no employees. As of December 31, 1998, PSE&G had 10,126 employees. Six-year collective bargaining agreements with all of its union groups, representing 6,147 PSE&G employees, expire on April 30, 2002. Also at December 31, 1998, Energy Holdings had 810 employees, of whom 200 were represented by unions. PSE&G and Energy Holdings believe that they maintain satisfactory relationships with their employees. For information concerning the employee pension plan and other postretirement benefits, see Note 1. Organization and Summary of Significant Accounting Policies and Note 13. Pension, Other Postretirement Benefit and Savings Plans of Notes. ENVIRONMENTAL CONTROLS PSEG and PSE&G, like most industrial enterprises, are subject to regulation with respect to the environmental impacts of its operations, including air and water quality control, limitations on land use, disposal of wastes, aesthetics and other matters by various Federal, regional, state and local authorities, including the EPA, USDOT, NJDEP, the New Jersey Department of Health, the BPU, the Interstate Sanitation Commission, the Hackensack Meadowlands Development Commission, the Pinelands Commission, the Delaware River Basin Commission (DRBC), the U.S. Coast Guard and the U.S. Army Corps of Engineers. Global and EGDC are also subject to similar regulation with respect to operation of their facilities (see Energy Holdings). Environmental laws generally require air emissions and water discharges to meet specified limits. They also impose potential joint and several liability, without regard to fault, on the generators of various hazardous substances to manage these materials properly and to clean up property affected by the production and discharge of such substances. Compliance with environmental requirements has caused PSE&G to modify the day-to-day operation of its facilities, to participate in the cleanup of various properties that have been contaminated and to modify, supplement and replace existing equipment and facilities. During 1998, PSE&G expended approximately $26 million for capital related expenditures to improve the environment and comply with changing regulations and estimates that it will expend approximately $48 million, $40 million and $46 million in the years 1999 through 2001, respectively, for such purposes. Such amounts are included in PSE&G's estimates of construction expenditures (see MD&A--Liquidity and Capital Resources). 17 Preconstruction analyses and projections of the environmental impacts of contemplated activities, discharges and emissions are frequently required by the permitting agency. Before licensing approvals and permits are granted, the agency usually requests a modeling analysis of the effects of a specific action, its effect in combination with other existing and permitted activities and may request the applicant to address emerging environmental issues. Such environmental reviews have caused delays in the proceedings for licensing facilities and similar delays can be expected in the future. The New Jersey Environmental Rights Act provides that any person may maintain a court action against any other person to enforce or to restrain the violation of any statute, regulation or ordinance which is designed to prevent or minimize pollution, impairment or destruction of the environment; or where no such violation exists, to protect the environment from pollution, impairment or destruction. Certain Federal legislation confers similar rights on individuals. The principal laws and regulations relating to the protection of the environment which affect PSE&G's operations are described below. AIR POLLUTION CONTROL The Federal Clean Air Act (CAA) and the EPA's regulations implementing the CAA impose emission control requirements, including requirements related to the emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) and requires attainment of National Ambient Air Quality Standards (NAAQS). The New Jersey Air Pollution Control Act (NJAPCA) and regulations of the NJDEP implementing the NJAPCA govern compliance with, and maintenance of, the NAAQS in New Jersey and also impose emission control requirements. PSE&G's approximate 23% ownership interest in Conemaugh and Keystone subject it to State regulation in Pennsylvania governing compliance with, and maintenance of, the NAAQS in Pennsylvania. The CAA provides for SO2 emission reductions to be achieved through a total cap on SO2 emissions from affected units, and an allocation of SO2 "allowances" (each allowance authorizes the emission of one ton of SO2). Units needing to cover emissions above their allocations can buy allowances from sources that have excess allowances. At this time, PSE&G does not expect that it will incur material expenditures for the units subject to the program. The NJDEP's regulations also require that each major facility apply for and receive a facility-wide operating permit. The facility-wide operating permit terms and conditions are enforceable by both EPA and NJDEP. PSE&G filed permit applications for its major facilities in New Jersey in 1995. A draft permit for one facility was issued for comment in 1997. Draft and final permits may be issued by NJDEP for all of PSE&G's remaining major facilities in 1999. Operating permits for certain PSE&G facilities may require changes to facility operations or technology, installation of additional air pollution controls and performance of supplemental emissions monitoring. Capital costs of complying with these and other air pollution control requirements through 2003 are included in PSE&G's estimate of construction expenditures (see Construction and Capital Requirements). PSE&G's generating stations in New Jersey are located in areas of the State classified as "non-attainment" for the ozone NAAQS. In non-attainment areas, construction or expansion of a facility may commence only upon a showing that any additional emissions from the source will be more than offset by reductions in similar emissions from existing sources. These requirements may affect PSE&G's ability to operate, locate, construct or expand generating facilities in New Jersey in the future which could have an adverse material impact on PSEG's and PSE&G's financial condition, results of operations and net cash flows. Air quality in the northeastern United States is affected by air pollution transported within and into the region by prevailing winds. In September 1994, 11 Northeastern states and the District of Columbia signed a memorandum of understanding (MOU) establishing a regional plan for reducing NOx emissions from utility and large industrial boilers. NOx contributes to the formation of ozone. The 12 jurisdictions signing this MOU fall within the Ozone Transport Region (OTR), created under the CAA in recognition of the regional ozone problem facing the northeastern United States. In June 1998, the NJDEP adopted regulations implementing the MOU. Consistent with the MOU, New Jersey's regulations are expected to result in a 65% reduction in NOx emissions from 1990 levels starting in 1999 and a 90% reduction starting in 2003. These reductions are to be achieved through a regional cap on NOx emissions from the largest sources of NOx, including PSE&G's fossil-fueled electric generating facilities. Under formulas established in the 18 regulations, each source will be allocated a number of "allowances," with each allowance representing one ton of NOx that the source is allowed to emit. The allowances can be bought and sold through a regional trading program similar to the trading of SO2 allowances in the Federal Acid Rain Program established in Title IV of the CAA which has been in place since 1995. The extent of investment in control technologies, operational changes, and allowance purchases required to comply with these regulations will be directly related to the number of allowances PSE&G receives. PSE&G will receive a preliminary allocation of allowances in March 1999 and the final allocation will be determined in accordance with the NJDEP regulations in November 1999 which is subsequent to the May 1 through September 30, 1999 period governed by the regulations. PSE&G has attempted to minimize the uncertainty associated with the timing of the allocation by purchasing allowances, upgrading control technologies and estimating the expected allocation with as much precision as is practicable using available data. However PSE&G's present analysis leads it to believe that the potential costs for purchasing additional NOx budget allowances should not exceed a total of $10 million through December 31, 2002. Expenditures associated with installing control technology could result in an additional $72 million. However, PSE&G is currently analyzing alternatives which could preclude the necessity of capital improvements. To further improve northeastern air quality, PSE&G is working collaboratively with several environmental organizations, electric utilities, environmental regulators and large manufacturing companies located in the Northeast to achieve significant NOx emission reductions from power plants in the South and Midwest. It is expected that emission reductions from these power plants will improve the Northeast's air quality, thereby lessening the need for additional emission controls in New Jersey beyond those already in effect. These collaborative efforts, coupled with growing concerns for cost-effective compliance with CAA requirements, resulted in the creation of an environmental forum called the Ozone Transport Assessment Group (OTAG), consisting of the 37 states east of the Mississippi River. In June 1997, OTAG issued several recommendations for the reduction of ozone and ozone precursors throughout 22 states of the OTAG region. These recommendations include a call for reducing power plant NOx emissions by as much as 85% from 1990 levels. OTAG also recommended that air emissions trading be used to implement this recommendation. In July 1997, EPA adopted new Federal air quality standards for ozone. The new ozone standard was lowered to be more protective of human health and the measure of the standard was revised to more accurately reflect the nature of the ozone problem confronting many areas of the United States. In announcing the new ozone standard, EPA stated that the regional NOx control program for power plants recommended by OTAG will bring nearly 80% of all new non-attainment areas back into attainment. PSE&G supports the new ozone standard and EPA's implementation policy because it addresses the ozone transport problem which burdens much of the northeastern United States. On September 24, 1998, EPA issued regulations (referred to as a State Implementation Plan (SIP) Call) implementing the OTAG recommendations by requiring the 22 states in the eastern half of the United States to make significant NOx emission reductions by 2003 and to subsequently cap these emissions. The NOx reduction requirements are consistent with requirements already in place in New Jersey and thus are not likely to have an additional impact on New Jersey facilities nor change the capacity availability from PSE&G's New Jersey facilities. The impact on facilities in Pennsylvania cannot be assessed at this time as such impacts are dependent upon Pennsylvania's implementation of the SIP Call through state regulations which have not been proposed. If implemented as adopted, these recommendations will require power plants in the South and Midwest to meet NOx control requirements that are similar to the requirements faced by PSE&G facilities in New Jersey. PSE&G supports adoption and implementation of the EPA SIP Call because it addresses the ozone transport problem which burdens much of the northeastern United States. A new particulate matter standard was also adopted by EPA in July 1997 to address emission of fine particulate matter. It is widely understood that attainment of the fine particulate matter standard may require reductions in NOx and SO2. However, under the time schedule announced by EPA when the new standard was adopted, non-attainment areas will not be designated until 2002 and control measures to meet this standard will not be identified until 2005. PSEG Eagle Point, Inc. (Eagle Point), an indirect subsidiary of Global, is one partner in a partnership which owns the Eagle Point Cogeneration Facility (EPC), located in West Deptford, New Jersey. EPC is operated by an affiliate of Eagle Point's partner. EPC provides electricity and steam for an adjacent petroleum refinery (owned and operated by another affiliate of Eagle Point's partner) and sells excess electricity to PSE&G. In 1995, Eagle Point received a Notice of Violation (NOV) from Region II of the EPA alleging violations of certain CAA requirements and limitations related to the 19 air permit at EPC and the adjacent refinery and demanding that such violations be corrected. Eagle Point, its partner and the operator of the refinery are contesting the EPA conclusion that violations have occurred and they have met with the staffs of the EPA and NJDEP to discuss issues related to the NOV. As a result of discussions with NJDEP, Eagle Point received a modified air permit from NJDEP during January 1997. Discussions with the U.S. Department of Justice (DOJ) were initiated in the last half of 1997 to explore a negotiated resolution to the NOV issues. The NOV was settled in 1998 and did not have a material adverse effect on PSEG's or PSE&G's financial position, results of operations and net cash flows. WATER POLLUTION CONTROL The Federal Water Pollution Control Act (FWPCA) authorizes the imposition of technology and water-quality based effluent limitations to regulate the discharge of pollutants into the surface waters of the United States through the issuance of National Pollutant Discharge Elimination System (NPDES) permits. EPA has been designated as the agency charged with responsibility for implementing the NPDES program. The FWPCA authorizes the EPA to delegate implementation of the NPDES program to states with approved programs. The New Jersey Water Pollution Control Act (NJWPCA) and implementing regulations were adopted to regulate discharges to New Jersey's surface waters and ground waters through the New Jersey Pollutant Discharge Elimination System (NJPDES) permits. EPA has delegated to New Jersey authority to administer the NPDES program through the NJWPCA and to implement regulations with EPA oversight. The NJDEP administers the NPDES/NJPDES permit program. Certain PSE&G facilities are directly regulated by NJPDES permits issued by NJDEP pursuant to FWPCA and the NJWPCA. The FWPCA authorizes the imposition of less stringent thermal limits pursuant to a variance procedure set forth in its Section 316(a) and regulates cooling water intake structures pursuant to its Section 316(b). PSE&G has filed or will file data and information with the NJDEP in support of Section 316(a) variance requests and Section 316(b) best technology available determinations for several of its electric generating stations in connection with the renewal of the facilities' NJPDES permits. With respect to Section 316(b) requirements, the EPA is presently required under a consent decree to propose draft regulations on or before July 1999 and promulgate final regulations by August 2001. EPA has indicated that it intends to seek an extension of these deadlines. These regulations will address, among other things, regulatory approaches for determining what constitutes adverse environmental impact and what constitutes the best technology available for minimizing adverse environmental impact. It is not possible to determine at this time how the EPA will resolve these issues. EPA's 316(b) regulations in general and these determinations in particular may have a material effect on the review of section 316(b) demonstrations. The NJPDES permit renewal application for PSE&G's Hudson Station, a 983 MW coal-fired fossil plant located in Jersey City, New Jersey, is in the process of being reviewed by the NJDEP. As part of that renewal, the NJDEP has requested updated information in connection with PSE&G's 316(a) and 316(b) demonstrations, in part, to address issues identified by a consultant hired by NJDEP. The consultant recommended that Hudson Station be retrofitted to operate with closed cycle cooling to address alleged adverse impacts associated with the thermal discharge and intake structure. PSE&G collected additional data which was used in the updated demonstrations. PSE&G in its 316(b) demonstration, included a proposal for certain modifications to the intake structure which included modified screens with fish buckets and a fish return system. PSE&G submitted these demonstrations to NJDEP in the fourth quarter of 1998. While PSE&G believes that these demonstrations address the issues identified by the NJDEP's consultant and provide an adequate basis for favorable determinations under Sections 316(a) and 316(b) without the imposition of closed cycle cooling, it is impossible to predict the outcome of the agency's review at the present time. PSE&G presently estimates that the cost of retrofitting Hudson Station to operate with closed cycle cooling, if required, to be approximately $100 million. Such amount is not included in PSE&G's estimate of construction expenditures (see Liquidity and Capital Resources of MD&A). NJDEP has advised PSE&G that it is reviewing a renewal application for Mercer Station, a 648 MW coal fired fossil plant located in Hamilton Township, New Jersey, and in connection with that renewal, will be reexamining the effects of Mercer Station's cooling water system pursuant to Sections 316(a) and 316(b). In 1998, PSE&G submitted to NJDEP a plan of study for updating its Sections 316(a) and 316(b) demonstrations for Mercer Station. PSE&G is in the process of implementing the plan of study which includes the collection of additional data which will be used to update demonstrations to be submitted to the NJDEP in 2000. It is not possible to predict the outcome of such review. 20 PSE&G is implementing the 1994 NJPDES permit issued for Salem which requires, among other things, water intake screen modifications and wetlands restoration. The estimated capital cost of compliance with the final permit, the preparation of a renewal submittal and the activities required to obtain a renewed permit is approximately $140 million. The project is approximately 90% complete. Under the 1994 permit, which remains in effect until such time as a renewal permit is issued, PSE&G is continuing to restore wetlands and to conduct the requisite management and monitoring associated with the implementation of the special conditions of that permit. The existing permit remains in full force and effect indefinitely upon submission of a timely renewal filing. PSE&G's share is 42.59% and is included in its 1999-2003 construction program. PSE&G must apply to renew the Salem permit in 1999 and must provide updated Section 316(a) and 316(b) demonstrations for the NJDEP's review (see the discussion above regarding EPA's Section 316(b) rulemaking and MD&A--Liquidity and Capital Resources--Construction and Capital Requirements Forecast). On March 4, 1999 PSE&G will file a comprehensive application for the renewal of Salem's NJDEP permit and will file updated Section 316(a) and 316(b) demonstrations. While it is impossible to predict the outcome of the review of this application presently, an unfavorable determination could have a material adverse effect on PSEG's and PSE&G's financial position, results of operations and net cash flows. The DRBC issued a revised Docket for Salem in 1995 (Revised Docket) approving a modification to the 1970 Salem Docket that approved the construction and operation of the station's cooling water system. The Revised Docket authorized, among other things, the continued operation of the station's cooling water system for an additional five years. The Revised Docket provides that the authorization expires September 27, 2000 absent review of the Docket on or before August 31, 1999 and renewal by the DRBC. DRBC review of the matter is planned to commence in the second quarter of 1999. CONTROL OF HAZARDOUS SUBSTANCES PSE&G MANUFACTURED GAS PLANT REMEDIATION PROGRAM For information regarding PSE&G's Manufactured Gas Plant Remediation Program, see Note 2. Regulatory Issues and Note 10. Commitments and Contingent Liabilities of Notes. OTHER SITES A preliminary review of possible mercury contamination at the Kearny Station, a 280 MW oil fired fossil plant located in Kearny, New Jersey, concluded that an additional study and investigations are required. In 1996, PSE&G entered into a Memorandum of Agreement (MOA) with NJDEP for the Kearny Station which required PSE&G to conduct a Remedial Investigation (RI) of the site. An RI Report was submitted to the NJDEP in September 1997 and is currently under technical review by the NJDEP. As currently issued, the RI Report found that the mercury at the site is stable and immobile and should be addressed at the time the Kearny Station is retired. PSE&G does not anticipate that remediation of this site will have a material effect on its financial position, results of operations and net cash flows. HAZARDOUS SUBSTANCES Certain Federal and state laws authorize the U.S. Environmental Protection Agency (EPA) and the New Jersey Department of Environmental Protection (NJDEP), among other agencies, to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is determined to present an actual or potential threat to human health or the environment because of an actual or threatened release of one or more hazardous substances. Because of the nature of PSE&G's business, including the production of electricity, the distribution of gas and, formerly, the manufacture of gas, various by-products and substances are or were produced or handled which contain constituents classified as hazardous. For a discussion of these hazardous waste issues, see Note 10. Commitments and Contingent Liabilities. For a discussion of remediation/clean-up actions involving PSE&G, see Item 3. Legal Proceedings. For information regarding the Passaic River site, see Note 10. Commitments and Contingent Liabilities of Notes. In addition to the sites individually listed in Item 3. Legal Proceedings, PSE&G has received 15 claims and/or inquiries concerning prospective enforcement actions by the EPA and/or NJDEP. Such claims/inquiries relate to properties/sites where it has been alleged that an actual or potential threat to human health or to the environment exists as a result of an 21 actual or threatened release of one or more hazardous substances. PSE&G's investigation and initial response concerning each such claim and/or inquiry indicates that PSE&G's potential liability, if any, with respect to these claims will not have a material adverse effect on its financial position, results of operations and net cash flows. Other liabilities associated with environmental remediation include Natural Resource Damages. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) and the New Jersey Spill Compensation and Control Act (Spill Act) authorize Federal and state trustees for natural resources to assess "damages" against persons who have discharged a hazardous substance, which discharge resulted in an "injury" to natural resources. Until recently, the State trustee, NJDEP, has not aggressively pursued natural resource damages. In February 1997, the NJDEP adopted changes to the Technical Requirements for Site Remediation pursuant to the Spill Act. Among these changes was a new provision requiring all persons conducting remediation to characterize "injuries" to natural resources. Further, these changes required persons to address those injuries through restoration or damages. Since that time, PSE&G and others, including industry groups, have been working with NJDEP on policies to implement this regulatory requirement. The State's program is still developing and PSE&G cannot assess the magnitude of the potential impact of this regulatory change. Although inestimable, these costs could be material. The EPA conducted an inspection of Spill Prevention Control and Countermeasure (SPCC) Plan compliance at three PSE&G electric distribution facilities in 1997. The EPA identified certain procedural and substantive deficiencies in the SPCC Plans for these sites. PSE&G has submitted revised SPCC Plans to the EPA for these sites and is currently working with the EPA to finalize these SPCC Plans. In 1998, PSE&G evaluated SPCC Plan compliance at all electric distribution facilities and identified deficiencies. PSE&G has begun making the necessary upgrades. It is anticipated that these upgrades will take several years to complete. PSE&G does not anticipate that the costs will have a material adverse effect on its financial position, results of operations and net cash flows. ENERGY HOLDINGS Energy Holdings, the wholly-owned, direct non-utility subsidiary of PSEG, is incorporated under the laws of New Jersey and is the parent company of Global, Resources, Energy Technologies, EGDC, PSEG Capital and Funding. Energy Holdings' principal executive offices are located at 80 Park Plaza, Newark, New Jersey 07102. Energy Holdings' focus is on investment opportunities in the domestic non-utility and international energy markets. Resources' investments are designed to produce immediate earnings and cash flows, which enable Global and Energy Technologies to focus on longer-term growth. For a discussion of PSEG's agreement with the BPU regarding utility/non-utility activities and its impact on Energy Holdings, see Liquidity and Capital Resources of MD&A. For more information on Energy Holdings investment activities, see Note 15. Financial Information by Business Segments of Notes. GLOBAL Global, a New Jersey corporation, has its principal executive offices at 1200 East Ridgewood Avenue, Ridgewood, New Jersey 07450. Global invests and participates in the development and operation of projects in the generation and distribution of energy, which include cogeneration and IPP facilities and electric distribution companies. Global's investments include domestic qualifying facilities (QFs), foreign exempt wholesale generators (EWGs) and foreign utility companies (FUCOs). Global is expected to be a primary vehicle for Energy Holdings' long-term business growth with emphasis on growth opportunities in the generation and distribution markets arising from domestic electric utility deregulation and international privatization and development. Global has investments in 25 cogeneration or independent power projects (ten in California, two in New Jersey, two in China and one each in New Hampshire, Pennsylvania, Hawaii, Maine, the Philippines, Argentina and Venezuela), including four under construction (three in China and one in India), and four electric distribution ventures (three in Argentina and one in Brazil). Global continuously evaluates the status of project development and construction activities in light of the realities of timely completion and the costs incurred. Global's projects are diversified geographically and technologically and are generally financed with equity and non-recourse debt (see Liquidity and Capital Resources of MD&A). Global's investments in QF projects have been undertaken with other participants because Global, together with any other utility affiliate, may not own more than 50% of a QF under applicable law subsequent to the in-service date. Projects involving EWGs or FUCOs are not restricted to a 50% investment limitation. Global is an investor in partnerships and corporate joint ventures which own these projects and the electric capacity of these facilities is not part of PSE&G's installed capacity. However, some of the electric power 22 generated by these facilities is being purchased by PSE&G pursuant to long-term contracts with the applicable partnerships and corporate joint ventures. For more information on Global's investment activity, see Liquidity and Capital Resources and Foreign Operations of MD&A. As of December 31, 1998 and 1997, Global's consolidated assets aggregated $1.1 billion and $1.2 billion, respectively, of which 20 % was financed with non-recourse debt. RESOURCES Resources, a New Jersey corporation, has its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. Resources makes primarily passive investments in assets that can provide funds for future growth as well as provide incremental earnings for Energy Holdings. Resources' investments are diverse as to asset type and maturity and include leveraged leases, limited partnerships, leveraged buyout funds and securities. Some of the transactions in which Resources participates involve other equity investors. For more information on Resources' operations and investments, see Liquidity and Capital Resources of MD&A and Note 4. Long-Term Investments of Notes. As of December 31, 1998 and 1997, Resources' consolidated assets aggregated $1.8 billion and $1.6 billion, respectively. ENERGY TECHNOLOGIES Energy Technologies, a New Jersey corporation, has its principal executive offices at 499 Thornall Street, Edison, New Jersey 08837. Energy Technologies, an energy services business, provides a variety of energy related services to industrial and commercial customers both within and outside of PSE&G's traditional service territory. In January 1998, Energy Technologies acquired a diversified mechanical service contractor which provides services for commercial and industrial clients in Pennsylvania, New Jersey and Delaware. In January 1999, Energy Technologies acquired another mechanical service contractor servicing Rhode Island, Connecticut and Massachusetts. Energy Technologies has also entered into a strategic alliance to market and service compact portable generators. As of December 31, 1998 and 1997, Energy Technologies' assets were $124 million and $60 million, respectively. For additional information, see Liquidity and Capital Resources of MD&A. See Note 20. Subsequent Events related to the transfer of Public Service Conservation Resources Corporation's (PSCRC) assets from PSE&G to Energy Technologies effective January 1, 1999. EGDC EGDC, a New Jersey corporation having its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102, is a nonresidential real estate development and investment business. EGDC has investments in eight commercial real estate properties (one of which is developed) in several states. EGDC's strategy is to preserve the value of its assets to allow for the controlled disposition of its properties as the real estate market improves. EGDC has been conducting a controlled exit from the real estate business since 1993. As of December 31, 1998 and 1997, EGDC's consolidated assets aggregated $75 million and $83 million, respectively. PSEG CAPITAL PSEG Capital, a New Jersey corporation, has its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. PSEG Capital serves as a financing vehicle for Energy Holdings' businesses (excluding Energy Technologies and EGDC), borrowing on their behalf on the basis of a minimum net worth maintenance agreement with PSEG. As of December 31, 1998 and 1997, PSEG Capital had debt outstanding of $498 million and $611 million, respectively. For additional information, see External Financings--Energy Holdings and Liquidity and Capital Resources--Energy Holdings of MD&A. 23 FUNDING Funding, a New Jersey corporation, has its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. Funding serves as a financing vehicle for Resources, Global and their subsidiaries, borrowing on their behalf, as well as investing their short-term funds. As of December 31, 1998 and 1997, Funding had outstanding debt of $251 million and $395 million, respectively. For additional information, see External Financings--Energy Holdings and Liquidity and Capital Resources--Energy Holdings of MD&A. ITEM 2. PROPERTIES PSE&G The statements under this Item as to ownership of properties are made without regard to leases, tax and assessment liens, judgments, easements, rights of way, contracts, reservations, exceptions, conditions, immaterial liens and encumbrances and other outstanding rights affecting such properties, none of which is considered to be significant in the operations of PSE&G, except that PSE&G's First and Refunding Mortgage (Mortgage), securing the bonds issued thereunder, constitutes a direct first mortgage lien on substantially all of such property. PSE&G maintains insurance coverage against loss or damage to its principal plants and properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost. For a discussion of nuclear insurance, see Note 10. Commitments and Contingent Liabilities of Notes. The electric lines and gas mains of PSE&G are located over or under public highways, streets, alleys or lands, except where they are located over or under property owned by PSE&G or occupied by it under easements or other rights. These easements and rights are deemed by PSE&G to be adequate for the purposes for which they are being used. Generally, where payments are minor in amount, no examinations of underlying titles as to the rights of way for transmission or distribution lines or mains have been made. 24 ELECTRIC PROPERTIES As of December 31, 1998, PSE&G's share of installed generating capacity was 10,272 MW, as shown in the following table: INSTALLED PRINCIPAL NAME AND LOCATION CAPACITY (MW) FUELS USED - ------------------------------------------------- -------------- ---------- Steam: Hudson, Jersey City, NJ...................... 1,006 Coal/Gas Mercer, Hamilton, NJ......................... 648 Coal/Gas Sewaren, Woodbridge Twp., NJ................. 453 Gas/Oil Linden, Linden, NJ........................... 415 Oil Keystone, Shelocta, PA--22.84%(B)............ 388 Coal Conemaugh, New Florence, PA--22.50%(B)....... 382 Coal Kearny, Kearny, NJ........................... 280 Oil ----------- Total Steam............................. 3,572 ----------- Nuclear: Hope Creek, Lower Alloways Creek, NJ 95%(B).. 979 Nuclear Salem 1, Lower Alloways Creek, NJ 42.59%(B).. 471 Nuclear Salem 2, Lower Alloways Creek, NJ 42.59%(B).. 471 Nuclear Peach Bottom 2, Peach Bottom, PA 42.49%(B)... 465 Nuclear Peach Bottom 3, Peach Bottom, PA 42.49%(B)... 465 Nuclear ----------- Total Nuclear........................... 2,851 ----------- Combined Cycle: Bergen, Ridgefield, NJ....................... 675 Gas Burlington, Burlington, NJ................... 245 Gas ----------- Total Combined Cycle.................... 920 ----------- Combustion Turbine: Essex, Newark, NJ............................ 617 Gas/Oil Edison, Edison Township, NJ.................. 504 Gas/Oil Kearny, Kearny, NJ........................... 504 Gas/Oil Burlington, Burlington, NJ................... 389 Oil Linden, Linden, NJ........................... 223 Gas/Oil Hudson, Jersey City, NJ...................... 129 Oil Mercer, Hamilton, NJ......................... 129 Oil Sewaren, Woodbridge Township, NJ............. 129 Oil Bayonne, Bayonne, NJ......................... 42 Oil Bergen, Ridgefield, NJ....................... 21 Gas National Park, National Park, NJ............. 21 Oil Salem, Lower Alloways Creek, NJ 42.59%(B).... 16 Oil ----------- Total Combustion Turbine................ 2,724 ----------- Internal Combustion: Conemaugh, New Florence, PA--22.50%(B)....... 3 Oil Keystone, Shelocta, PA--22.84%(B)............ 2 Oil ----------- Total Internal Combustion............... 5 ----------- Pumped Storage: Yards Creek, Blairstown, NJ--50%(B)(C)....... 200 ----------- Total PSE&G............................. 10,272(A) =========== (A) Excludes 695 MW of non-utility capacity and 505 MW of capacity sales. (B) PSE&G's share of jointly owned facility. (C) Excludes energy for pumping and synchronous condensers. For information regarding construction see MD&A--Construction and Capital Requirements Forecast. 25 In addition to the generating facilities in New Jersey and Pennsylvania as indicated in the table above, as of December 31, 1998, PSE&G owned 41 switching and/or generating stations with an aggregate installed capacity of 30,417,670 kilovolt-amperes and 222 substations with an aggregate installed capacity of 7,497,000 kilovolt-amperes. In addition, seven substations having an aggregate installed capacity of 103,250 kilovolt-amperes were operated on leased property. All of these facilities are located in New Jersey. As of December 31, 1998, PSE&G's transmission and distribution system included approximately 154,634 circuit miles, of which approximately 38,538 miles were underground, and approximately 808,164 poles, of which approximately 538,759 poles were jointly owned. Approximately 99% of this property is located in New Jersey. In addition, as of December 31, 1998, PSE&G owned four electric distribution headquarters and five subheadquarters in four operating divisions all located in New Jersey. GAS PROPERTIES As of December 31, 1998, the daily gas capacity of PSE&G's 100%-owned peaking facilities (the maximum daily gas delivery available during the three peak winter months) consisted of liquid petroleum air gas (LPG) and liquefied natural gas (LNG) and aggregated 2,973,000 therms (approximately 2,886,000 cubic feet on an equivalent basis of 1,030 Btu/cubic foot) as shown in the following table: DAILY CAPACITY -------------- PLANT LOCATION (THERMS) - ----- -------- Burlington LNG........................ Burlington, NJ 773,000 Camden LPG............................ Camden, NJ 280,000 Central LPG........................... Edison Twp., NJ 960,000 Harrison LPG.......................... Harrison, NJ 960,000 --------- Total............................... 2,973,000 ========= As of December 31, 1998, PSE&G owned and operated approximately 16,240 miles of gas mains, owned 11 gas distribution headquarters and two subheadquarters all in two operating regions located in New Jersey and owned one meter shop in New Jersey serving all such areas. In addition, PSE&G operated 61 natural gas metering or regulating stations, all located in New Jersey, of which 28 were located on land owned by customers or natural gas pipeline companies supplying PSE&G with natural gas and were operated under lease, easement or other similar arrangement. In some instances, portions of the metering and regulating facilities were owned by the pipeline companies. ENERGY HOLDINGS Energy Holdings maintains insurance coverage against loss or damage to its properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost. For a brief general description of the properties of the subsidiaries of Energy Holdings and their locations, see Item 1. Business--Energy Holdings. OFFICE BUILDINGS AND FACILITIES PSE&G PSE&G leases substantially all of a 26-story office tower for its corporate headquarters at 80 Park Plaza, Newark, New Jersey, together with an adjoining three-story building. PSE&G also leases other office space at various locations throughout New Jersey for district offices and offices for various corporate groups and services. PSE&G also owns various other sites for training, testing, parking, records storage, research, repair and maintenance, warehouse facilities and for other purposes related to its business. 26 ENERGY HOLDINGS Energy Holdings owns no real property. Energy Holdings leases office space for its corporate headquarters at 80 Park Plaza, Newark, New Jersey from PSE&G. ITEM 3. LEGAL PROCEEDINGS As previously disclosed, in October 1995, PSEG received a letter from a representative of a purported shareholder demanding that it commence legal action against certain of its officers and directors with regard to nuclear operations of Salem and Hope Creek. The Board of Directors promptly commenced an investigation and advised the purported shareholder thereof. While the investigation was pending, the purported shareholder nevertheless commenced, by complaint filed in December 1995, a shareholder derivative action on behalf of PSEG shareholders against the then incumbent directors, except Dr. Remick. Similar derivative complaints were filed by two profit sharing plans and one individual in February and March 1996 against Messrs. Ferland, Codey and others. On March 19, 1996, the Board's investigation was concluded, and the Board determined that this litigation should not have been instituted and should be terminated. On July 3, 1996, another individual purported shareholder filed a similar complaint naming the same defendants as the first derivative lawsuit. On August 21, 1996, all defendants filed motions to dismiss all four derivative actions, which motions were denied and attempts to appeal were unsuccessful. The defendants filed motions for summary judgment to dismiss all four of the cases, which motions are pending. One of the plaintiffs has sold her shares and has withdrawn from the litigation. Another of the plaintiffs (a profit sharing plan) has been dissolved, and one of the individual participants in the plan is maintaining the litigation in his individual name. The four complaints generally seek recovery of damages for alleged losses purportedly arising out of PSE&G's operation of the Salem and Hope Creek generating stations, together with certain other relief, including removal of certain executive officers of PSE&G and PSEG and certain changes in the composition of PSEG's Board of Directors. Discovery in all four cases is proceeding to permit plaintiffs to respond to the defendants' motions for summary judgement. PSEG cannot predict the outcome of this matter. Public Service Enterprise Group Inc. by G. E. Stricklin, derivatively v. E. James Ferland, et. al., Docket No. L1068395, Superior Court of New Jersey, Law Division, Camden County. Dr. Steven Fink and Dr. David Friedman, P.C. Profit Sharing Plan, derivatively, et. al. v. Lawrence R. Codey, et. al., Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-65-96. A. Harold Datz Pension and Profit Sharing Plan derivatively, et. al., v. Lawrence R. Codey, et. al., Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-68-96. Tillie Greenberg, derivatively v. E. James Ferland, et. al., Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-188-96. As previously disclosed, on June 25, 1998, a complaint was filed against the directors of PSEG, and PSEG as a nominal defendant, by the same purported shareholder of PSEG who instituted the December 1995 shareholder derivative suit, alleging that the 1996, 1997 and 1998 proxy statements provided to shareholders of PSEG were false and misleading by reason, among other things, of failure to disclose certain material facts relating to (i) the controls over and oversight of PSEG's nuclear operations, (ii) the condition of problems at and reserves with respect to PSEG's nuclear operations, (iii) the demand letter and derivative litigation disclosed above, (iv) PSEG's liabilities to the Salem co-owners as a result of the shutdown of the Salem plants and (v) a shareholder proposal relating to operations of Salem 1 and 2 which was voted upon at the 1998 annual meeting of shareholders. The complaint sought to have the 1996, 1997 and 1998 proxy statements declared to be in violation of law, and to set aside the elections of directors of PSEG, the ratification of the selection of Deloitte & Touche LLP as PSEG's auditors at those annual meetings and the other matters voted upon at the 1996, 1997 and 1998 annual meetings, and to require PSEG to conduct a special meeting of shareholders providing for election of directors following timely dissemination of a proxy statement approved by the Court hearing this matter, which should include as nominees for election as directors persons having no previous relationship with PSEG or the current directors, and other relief. A motion to dismiss the complaint was granted by the Court on November 10, 1998 except with respect to allegations concerning the 1998 shareholder proposal and with respect to the disclosure in the 1998 proxy statement of the settlement of litigation between PSE&G and the Salem co-owners. Following the filing of an amended complaint and a second amended complaint, the Court, on January 19, 1999, again granted defendants' motion to dismiss the second amended complaint, again except to the extent set forth in the Court's November 10, 1998 decision. Discovery on the two remaining claims has commenced. PSEG cannot predict the outcome of this matter. G.E. Stricklin v. E. James Ferland, et al., United States District Court for the Eastern District of Pennsylvania, Civil Action No. 98-3279. PSE&G and the three other co-owners of Salem filed suit in February 1996 in the U.S. District Court for the District of New Jersey (Civil Action No. CB96-925) against Westinghouse Electric Corporation (Westinghouse) seeking damages to recover the cost of replacing the steam generators at Salem 1 and 2. The suit alleges fraud and breach of contract by 27 Westinghouse in the sale, installation and maintenance of the generators, including a claim under the Federal Racketeering Influenced and Corrupt Organizations Act (RICO). In April 1996, Westinghouse filed an answer and $2.5 million counterclaim for unpaid work related to services at Salem. Westinghouse has filed a motion for summary judgment on the grounds that the claim of the plaintiffs is barred by the statute of limitations and oral arguments on this motion were held in February 1998. On November 6, 1998, the Court granted Westinghouse summary judgment on the RICO claim but did not address the plaintiffs' remaining claims, dismissing them without prejudice since the Court only had original jurisdiction over the RICO claim. The plaintiffs have appealed this decision to the Third Circuit Court of Appeals and have re-filed their remaining claims in the Superior Court of New Jersey. In October 1997, Old Dominion Electric Cooperative (ODEC) filed a Complaint at FERC (Docket No. EL 98-6-000) seeking to modify its 1992 Agreement with PSE&G for a ten-year sale of 150 MW of capacity and energy. ODEC's Complaint argued that, given the restructuring of PJM, particularly PJM's new open access regional transmission service rate design which effectively eliminates rate "pancaking" for energy transactions that traverse more than one transmission system, it is unreasonable to leave intact existing bilateral agreements that result in multiple transmission charges. ODEC therefore urged FERC to reduce ODEC's contract capacity rate with PSE&G to eliminate an imputed transmission charge. In an answer filed in December 1997, PSE&G responded that the contract rates were negotiated at arm's length, are fully cost justified and cannot legally be modified absent an overriding public interest. Although at the time, FERC had not acted on these filings, it appears FERC summarily decided the issue in ODEC's favor in its November 25, 1997 PJM Restructuring Order (November 25th Order). PSE&G has requested rehearing and clarification of the November 25th Order. In May 1998, while the ODEC complaint was pending, in a separate proceeding relating to the restructuring of PJM, FERC ordered PSE&G to reduce its charges to ODEC by $5.5 million annually for each of the remaining six years of the agreement. FERC determined that a transmission charge, which it imputed to the agreement, violated FERC policy, specifically, that users of the PJM transmission system must pay one rate for transmission based on the transmission zone in which they are delivering power rather than multiple rates based on their actual use of multiple transmission systems through which their energy transactions are moving. PSE&G has applied to FERC for a rehearing of its order which is pending at this time. On August 4, 1998, FERC dismissed ODEC's October 1997 complaint, determining that issues relating to rate "pancaking" of transmission were more appropriately addressed in the separate FERC proceeding on PJM restructuring and that ODEC had failed to show it was entitled to relief on the remaining issues. ODEC did not seek further review of this order. On October 10, 1997, PSE&G filed a Petition for Expedited Approvals with the BPU (Docket No. GM97100758) seeking approval, pursuant to a FERC authorized capacity release mechanism, to transfer to its subsidiary Public Service Energy Trading Company (PSETC), all of PSE&G's rights and obligations under its transportation and storage contracts with interstate pipelines. PSETC, in turn, would supply all of the natural gas requirements of PSE&G pursuant to a Requirement Contract between the two parties. The proposed transaction would transfer to PSETC all future contractual liabilities under these agreements and protect the regulatory status of certain off-system sales transactions currently being performed. On December 3, 1997, one of the interstate pipeline companies from which PSE&G obtains service filed a declaratory judgment action with FERC challenging PSE&G's interpretation of the capacity release rules. Under the interpretation proposed by the interstate pipeline company, PSE&G would be required to guarantee the performance of PSETC under the transferred agreements. PSE&G disagreed with these claims and filed a protest challenging the December 3, 1997 filing. On February 11, 1998, FERC ruled in favor of the interstate pipeline company (Texas Eastern Transmission Corporation, Docket No. RP98.83-000) finding that it was not unreasonable for the pipeline company to refuse to discharge PSE&G under the circumstances addressed in the order. On April 29, 1998, FERC issued an order on rehearing in which it denied PSE&G's request for a rehearing. On June 26, 1998, PSE&G filed a petition for review of FERC's order with the U.S. Court of Appeals, District of Columbia Circuit. In January 1999, PSE&G filed a brief. The matter is currently pending. In addition, see the following below or at the pages indicated: (1) Pages 2, 9 and 72. Proceedings before the BPU in the matter of the Energy Master Plan Phase II Proceeding to investigate the future structure of the Electric Power Industry, Docket Nos. EX94120585Y, EO97070462 and EO97070463. (2) Page 3. Generic proceedings before the BPU relating to standards for "off-tariff" negotiated rate agreement programs, Docket No. EX95070320. 28 (3) Page 4. Proceeding before the BPU in the Matter of the Board's Determination a Management Audit be Performed on PSE&G, Docket No. EA97060397. (4) Pages 4 and 73. Proceedings before the BPU relating to an audit of PSE&G's competitive services, Docket No. EC98080627. (5) Page 5. Proceedings before the United States Court of Appeals, District of Columbia Circuit, in the matter of appeal of FERC Orders No. 888, 888A and 888B. (Transmission Access Policy Study Group v. Federal Energy. (6) Pages 5 and 9 through 10. Proceedings before FERC relating to competition and electric wholesale power markets. (Inquiry Concerning the Pricing Policy for Transmission Services Provided by Utilities Under the Federal Power Act, Docket No. RM93-19.) (7) Pages 5 and 10. Proceeding before FERC relating to the development by PSE&G and other regional transmission owners in PJM of a new transmission service tariff and an Independent System Operator, FERC Docket Nos. OA97-261-000, et al. (8) Pages 14 and 97. Proceedings before the United States Court of Appeals, District of Columbia Circuit, in the matter of the DOE's unconditional obligation to begin spent fuel acceptance by January 31, 1998, Northern States Power v. Department of Energy, Docket No. 97-1064. (9) Page 19. Notice of Violation issued by EPA against Eagle Point Cogeneration Partnership regarding alleged violations of air permit. (10) Page 20. Administrative proceedings before the NJDEP under Section 316 of the FWPCA for certain electric generating stations. (11) Pages 40 and 98. Implementation of P.L.1997,C.162, an Act Revising the Taxation of Electric and Gas Utilities, Docket Nos. ER97090661 and GR97090672. (12) Page 71. Generic proceeding before the BPU relating to the matter of an inquiry into methods of implementation of SFAS-106, Docket No. AX96070530. (13) Page 77. Generic proceeding before the BPU relating to recovery of capacity costs associated with power purchases from cogenerators, Docket No. EX93060255. (14) Page 78. Proceedings before the BPU relating to PSE&G's Levelized Gas Adjustment Clause (LGAC) filed November 14, 1997, Docket No. GR97110839. (15) Page 78. Proceeding before the Superior Court of New Jersey, Appellate Division in the matter of the motion of PSE&G to increase the level of the Electric Demand Side Adjustment Factor, Appellate Docket No. A-005257-97T2. (16) Page 78. Proceeding before the BPU related to the Electric Levelized Energy Adjustment Clause (LEAC) rate increase to recover DSM costs, Docket No. ER97020101. (17) Page 79. Proceedings before the BPU relating to PSE&G's RAC filed August 1, 1997, Docket No. GR97080573. 29 (18) Page 80. Proceedings before the BPU in the Matter of the Electric Restructuring Plans Filed by Atlantic City Electric Company, Jersey Central Power & Light Company, D/B/A GPU Energy, Public Service Electric and Gas Company, and Rockland Electric Company -- General Auction Standards and Review Criteria, Order Adopting Auction Standards, Docket Nos. EX94120585Y, EO97070457, EO97070460, EO97070463 and EO97070466. (19) Page 80. Proceedings before the BPU relating to PSE&G's proposed CTC filed September 19, 1996, Docket No. ET96090669. (20) Page 96. Investigation by the U.S. Environmental Protection Agency (EPA) regarding the Passaic River site. (21) Page 96. Additional investigation by the U.S. Environmental Protection Agency (EPA) regarding the Passaic River site. (22) Page 98. Proceedings before the United States Court of Claims and United States District Court for the Southern District of New York relating to recovery of certain uranium enrichment decontamination and decommissioning payments. Docket Nos. 96-490C and 98CIV.4155(WK). In addition, see the following environmental related matters. Based on current information, PSEG and PSE&G do not expect expenditures for any such site, individually or all such current sites in the aggregate, to have a material effect on financial condition, results of operations and net cash flows. (23) Claim made in 1985 by U. S. Department of the Interior under CERCLA with respect to the Pennsylvania Avenue and Fountain Avenue municipal landfills in Brooklyn, New York, for damages to natural resources. The U.S. Government alleges damages of approximately $200 million. To PSE&G's knowledge there has been no action on this matter since 1988. (24) In July 1997, EPA Region III completed its deletion of a site operated by Sealand Ltd. in Mount Pleasant Township, New Castle County, Delaware from the National Priorities List. PSE&G has agreed to enter into a Consent Decree with the State of Delaware under the Delaware Hazardous Substance Cleanup Act, requiring the PRPs to conduct additional limited monitoring at the Sealand site for five years and to reimburse Delaware for past and future oversight costs. (25) Duane Marine Salvage Corporation Superfund Site is in Perth Amboy, Middlesex County, New Jersey. (26) Various Spill Act directives were issued by NJDEP to PRPs, including PSE&G with respect to the PJP Landfill in Jersey City, Hudson County, New Jersey, ordering payment of costs associated with operating and maintenance expenses, interim remedial measures and a Remedial Investigation and Feasibility Study (RI/FS) in excess of $25 million. The directives also sought reimbursement of NJDEP's past and future oversight costs and the costs of any future remedial action. (27) Claim by EPA, Region III, under CERCLA with respect to a Superfund site in Philadelphia, Pennsylvania, owned and formerly operated as a non-ferrous scrap reclamation facility by Metal Bank of America, Inc. PSE&G, other utilities and other companies are alleged to be liable for contamination at the site. PSE&G has been named as a potentially responsible party and alleged to be liable for contamination at the Metal Bank Cottman Avenue Superfund Site, a former non-ferrous scrap reclamation facility located in Philadelphia, Pennsylvania. PSE&G and other utilities signed an Administrative Order by Consent (AOC) in 1991 to perform a remedial investigation and prepare a feasibility statement which was submitted to EPA in 1994. In 1995, EPA issued a Proposed Remedial Action Plan for the site in which EPA's proposed remedy was estimated to cost between $17 and $30 million. In December 1997, EPA issued a Record of Decision (ROD). EPA estimates that the selected remedy will cost approximately $17 million. PSE&G cannot predict with reasonable certainty the actual cost of the selected remedy or who will implement the remedy. PSE&G estimates that its share of the cost of performing the remedy selected by the U.S. Environmental Protection Agency (EPA) could be $4 to $8 million. On June 26, 1998, EPA Region III issued an Administrative Order For Remedial Design And Remedial Action, Docket No. III-98-082-DC, to thirteen Respondents including PSE&G, other utilities, and other persons and entities, ordering the Respondents to implement the remedy selected ROD issued by EPA Region III in December, 1997. Additionally, with respect to this site, the 30 United States of America application in the matter entitled United States of America, et. al., v. Union Corporation, et. al., Civil Action No. 80-1589, United States District Court for the Eastern District of Pennsylvania, seeking leave of court to file an amended complaint adding claims under the CERCLA was granted. PSE&G and one other utility were named as third party defendants in the foregoing captioned matter. Defendants have filed an amended third party complaint naming PSE&G as a third party defendant. On July 28, 1998, PSE&G and seven other utilities named as Respondents in the above-referenced Administrative Order filed with EPA Region III a Notice of Intent to Comply With Administrative Order for Remedial Design and Remedial Action, Metal Bank Cottman Avenue Site, Docket No. III-98-082-DC. (28) The Klockner Road site is located in Hamilton Township, Mercer County, New Jersey, and occupies approximately two acres on PSE&G's Trenton Switching Station property. PSE&G has entered into a MOA with the NJDEP for the Klockner Road site pursuant to which PSE&G will conduct an RI/FS and remedial action, if warranted, of the site. Preliminary investigations indicated the potential presence of soil and groundwater contamination at the site. (29) In U.S. v. CDMG Realty Co., et al., Civil Action No. 89-4246 (NHP) (RJH), pending in the U.S. District Court for the District of New Jersey, PSE&G and over 60 other entities were joined in 1995 as additional third-party defendants. Third-party plaintiffs, an association of 44 entities, are essentially seeking contribution and/or indemnification for the expenses they have incurred and will incur as a result of having settled the direct claims of the NJDEP and EPA related to the investigation and remediation of Sharkey's Landfill, located in Parsippany-Troy Hills, Morris County, New Jersey. The claims are all alleged to be brought pursuant to CERCLA and PSE&G is alleged to have arranged for the disposal of industrial wastes at Sharkey's Landfill. On July 31, 1998, PSE&G and 23 other third-party defendants entered into a Settlement Agreement with third-party plaintiffs. The Settlement Agreement provides the settling defendants, including PSE&G, a release from all claims for contribution, diminution of property value, and certain defined response costs. PSE&G's financial contribution to the settlement was not material. By Order dated September 2, 1998, the matter was dismissed with prejudice. (30) In 1991, the NJDEP issued Directive and Notice to Insurers Number Two (Directive Two) to 24 Insurers and 52 Respondents, including PSE&G, in connection with an investigation and remediation of the Global Landfill Site in Old Bridge Township, Middlesex County, New Jersey (Global Site). Directive Two seeks recovery of past and anticipated future NJDEP response costs ($37 million). PSE&G and other participating PRPs have agreed with NJDEP to a partial settlement of such costs and to perform the remedial design and remedial action. In 1996, 13 of the Directive Two Respondents, including PSE&G, filed a contribution action pursuant to CERCLA and the Spill Act against approximately 190 parties seeking contribution for an equitable share of all liability for response costs incurred and to be incurred in connection with the site. In September 1997, the NJDEP issued a Superfund ROD with estimated cost of $3.7 million. (31) In 1991, the NJDEP issued Directive and Notice To Insurers Number One (Directive No. One) to 50 insurers and 20 respondents, including PSE&G, seeking from the respondents payment of $5.5 million of NJDEP's anticipated costs of remedial action and of administrative oversight at the Combe Fill South Sanitary Landfill in Washington and Chester Townships, Morris County, New Jersey (Combe Site). The $5.5 million represents NJDEP's 10% share of total estimated site remediation costs and administrative oversight costs pursuant to a cooperative agreement with the United States concerning the selected remedial action for the site. In 1996, the NJDEP issued Directive Number Two (Directive No. Two) to 37 respondents, including PSE&G, directing the respondents to arrange for the operation, maintenance and monitoring of the implemented remedial action described therein or pay the NJDEP's future costs of these activities, estimated to be $39 million. In addition, Directive No. Two directs the respondents to prepare a workplan for the development and implementation of a Natural Resource Damage Restoration Plan. In October 1998, the NJDEP and The United States of America filed separate cost recovery actions pursuant to CERCLA and/or the Spill Act against approximately 30 parties seeking recovery of their respective shares of past and future site investigation and remediation response and administrative oversight costs incurred and to be incurred at the site. Third party contribution actions were also filed in each of the foregoing cost recovery actions seeking contribution for an equitable share of all liability for these same costs from approximately 170 third party defendants. PSE&G is a named defendant in the 31 NJDEP cost recovery action and a named third party defendant in the contribution action filed in the United States' lawsuit. (32) Spill Act Multi-Site Directive (Directive) issued by the NJDEP to PRPs, including PSE&G, listing four separate sites, including the former solid waste bulking and transfer facility called the Marvin Jonas Transfer Station (Sewell Site) in Deptford Township, Gloucester County, New Jersey. With regard to the Sewell Site, this Directive ordered approximately 350 PRPs, including PSE&G, to enter into an Administrative Consent Order (ACO) with NJDEP, requiring them to remediate the Sewell Site. Certain PRPs, including PSE&G, have completed the interim actions directed at both site security and off-site disposal of containers, trailers and contaminated surface soils. PRPs, including PSE&G, are currently fulfilling the terms of a MOA entered into with NJDEP in 1993 to conduct an RI/FS and, if necessary, take remedial action. (33) In 1993, in a matter entitled The Fishbein Family Partnership v. PPG Industries, Inc. and Public Service Electric and Gas Company, Civil Action No. 93-653 (D.N.J.), the plaintiff filed an action pursuant to CERCLA, the Spill Act and various common law theories of liability, seeking declaratory relief regarding responsibility for and recovery of damages and response costs incurred and/or to be incurred as a result of the release or threatened release of hazardous substances at a property located in Jersey City, Hudson County, New Jersey. The plaintiff alleges that defendants are liable for the damages and relief sought based on their past conduct of industrial operations at the site. The industrial operations referenced in plaintiff's Complaint include chromium ore processing operations (PPG and its predecessors) and coal gasification operations (PSE&G and its predecessors). PSE&G filed its response to the plaintiff's Complaint including cross-claims for indemnity and contribution against PPG. PSE&G also filed a Third Party Complaint against UGI Utilities, Inc. (UGI) seeking indemnification and contribution as to any liability imposed upon PSE&G attributable to UGI's past conduct of industrial operations on a portion of the site. In 1995, PSE&G filed an Amended Third Party Complaint extending the time period of PSE&G's allegations concerning UGI's past conduct of industrial operations at the site. Also in 1995, an Administrative Stay of this matter was entered pending either an agreement between the NJDEP and PPG as to a cleanup plan for the site or a determination of certain cross-motions for summary judgment filed by plaintiff and PPG. In 1996, following the court's determination of plaintiff's and PPG's cross-motions for summary judgment, the Court entered an Order amending the Order of Administrative Stay whereby plaintiff's claims against PSE&G, all cross-claims of PPG and PSE&G, and all claims in the third party action were administratively stayed until further order of the court. (34) Morton International, Inc. and the Velsicol Chemical Corporation have instituted separate suits (Morton International, Inc. v. A.E. Staley Manufacturing Co., et al. Civil Action No. 96-3609 (NHP) and Velsicol Chemical Corporation, et al. v. A.E. Staley Manufacturing Co., et al. Civil Action No. 96-3610 (NHP)) in the U.S. District Court in Newark, New Jersey against one hundred and seven (107) defendants, including PSE&G. The suits are contribution actions pursuant to CERCLA and the Spill Act seeking contribution for an equitable share of all liability for response costs and damages that plaintiffs anticipate they will incur in connection with the RI/FS and remedial action of a forty (40) acre parcel of land in Wood Ridge, Bergen County, New Jersey and an adjoining water body known as Berry's Creek. Plaintiffs have not initiated any remedial actions to date either at the site or the adjacent creek. While plaintiffs anticipate that the costs of the RI/FS and past and future NJDEP oversight costs with respect to the site will approximate $6 million, they have no current estimate of the costs for remediation of the site and/or the RI/FS and remediation of the creek. PSE&G's alleged nexus to the site is based on shipments of quantities of mercury from its Kearny Generating Station and other unnamed facilities. 32 (35) The EPA issued a Notice of Potential Liability (Notice) to approximately twenty entities including PSE&G in 1996 with respect to the Custom Distribution Services site in Perth Amboy, Middlesex County, New Jersey, formerly operated as a waste oil recovery facility. Available information suggests that PSE&G may have shipped waste oil to the facility for recycling. The EPA's notice advises that is has completed a removal action at the site at a cost of slightly in excess of $2 million and intends to seek to recover said costs from those entities including PSE&G that received a Notice. Prospective remedial actions, if any, have not been performed and/or identified. (36) The NJDEP assumed control of a former petroleum products blending and mixing operation and waste oil recycling facility in Elizabeth, Union County, New Jersey (Borne Chemical Co. site) and issued various directives to a number of entities including PSE&G requiring performance of various remedial actions including: establishment of security at the site; removal and off-site disposal of containerized wastes at the site; and conduct of a remedial investigation of the site. PSE&G's nexus to the site is based upon the shipment of certain waste oils to the site for recycling. PSE&G and certain of the other entities named in NJDEP directives are members of a PRP group that have been working together to satisfy NJDEP requirements including: funding of the site security program; containerized waste removal; and a site remedial investigation program. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PSEG and PSE&G, inapplicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PSEG's Common Stock is listed on the New York Stock Exchange, Inc. and the Philadelphia Stock Exchange, Inc. All of PSE&G's common stock is owned by PSEG, its parent company. As of December 31, 1998, there were 144,218 holders of record of PSEG Common Stock. The following table indicates the high and low sale prices for PSEG's Common Stock and dividends paid for the periods indicated: DIVIDEND COMMON STOCK HIGH LOW PER SHARE - ------------ ---- --- --------- 1998: First Quarter........................ $37 15/16 $30 5/16 $.54 Second Quarter....................... 37 7/8 31 3/4 .54 Third Quarter........................ 39 11/16 32 5/16 .54 Fourth Quarter....................... 42 3/4 36 15/16 .54 1997: First Quarter........................ $29 1/4 $26 1/8 $.54 Second Quarter....................... 26 1/2 22 7/8 .54 Third Quarter........................ 26 3/16 24 1/16 .54 Fourth Quarter....................... 31 13/16 24 3/4 .54 For additional information concerning dividend history, policy, and potential preferred voting rights, restrictions on payment and common stock repurchase programs, see Liquidity and Capital Resources and External Financings of MD&A and Note 6. Schedule of Consolidated Capital Stock and Other Securities of Notes. 33 ITEM 6. SELECTED FINANCIAL DATA PSEG The information presented below should be read in conjunction with PSEG's Consolidated Financial Statements and Notes thereto.
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------- ------------- ------------- ------------- -------------- (MILLIONS OF DOLLARS, WHERE APPLICABLE) Total Operating Revenues.......................... $5,931 $6,100 $6,041 $5,893 $5,695 ============= ============= ============= ============= ============== Income from Continuing Operations................. $644 $560 $588 $627 $667 Income from Discontinued Operations (A)........... -- -- 24 35 12 ------------- ------------- ------------- ------------- -------------- Net Income........................................ $644 $560 $612 $662 $679 ============= ============= ============= ============= ============== Earnings per Average Share (Basic and Diluted): From Continuing Operations..................... $2.79 $2.41 $2.42 $2.57 $2.73 From Discontinued Operations................... -- -- .10 .14 .05 ------------- ------------- ------------- ------------- -------------- Total Earnings per Average Share............. $2.79 $2.41 $2.52 $2.71 $2.78 ============= ============= ============= ============= ============== Dividends Paid per Share.......................... $2.16 $2.16 $2.16 $2.16 $2.16 As of December 31: Total Assets................................... $17,997 $17,943 $16,915 $16,816 $16,313 Long-Term Liabilities: Long-Term Debt............................... $4,763 $4,873 $4,580 $5,190 $5,110 Other Long-Term Liabilities.................. $517 $457 $411 $367 $332 Preferred Stock With Mandatory Redemption......... $75 $75 $150 $150 $150 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures............. $210 $210 $210 $210 $150 Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures............. $303 $303 $208 -- -- Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures.............. $525 -- -- -- -- Ratio of Earnings to Fixed Charges plus Preferred Securities Dividend Requirements (B)........... 2.86 2.61 2.68 2.78 2.84
(A) For discussion of discontinued operations, see Note 16. Discontinued Operations of Notes. (B) Excludes income and expenses from discontinued operations. 34 PSE&G The information presented below should be read in conjunction with PSE&G's Consolidated Financial Statements and Notes thereto.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 ----------- ------------ ----------- ------------ ---------- (MILLIONS OF DOLLARS, WHERE APPLICABLE) Total Operating Revenues.............................. $5,590 $5,855 $5,825 $5,707 $5,518 Net Income............................................ $604 $528 $535 $617 $659 As of December 31: Total Assets....................................... $14,748 $14,920 $14,799 $14,587 $14,259 Long-Term Liabilities: Long-Term Debt................................... $4,045 $4,126 $4,107 $4,586 $4,487 Other Long-Term Liabilities...................... $517 $457 $411 $367 $332 Preferred Stock With Mandatory Redemption............. $75 $75 $150 $150 $150 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures.................... $210 $210 $210 $210 $150 Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures.................... $303 $303 $208 -- -- Ratio of Earnings to Fixed Charges.................... 3.27 2.81 2.83 3.25 3.35 Ratio of Earnings to Fixed Charges plus Preferred Securities Dividend Requirements................... 3.15 2.70 2.62 2.77 2.92
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PSEG This discussion refers to the Consolidated Financial Statements and related Notes of Public Service Enterprise Group Incorporated (PSEG) and should be read in conjunction with such statements and notes. CORPORATE STRUCTURE PSEG has two principal direct wholly-owned subsidiaries: Public Service Electric and Gas Company (PSE&G) and PSEG Energy Holdings Inc. (Energy Holdings), formerly Enterprise Diversified Holdings Incorporated. PSEG's largest subsidiary, PSE&G, is an operating public utility providing electric and gas service in certain areas within the State of New Jersey. Energy Holdings is the parent of PSEG's non-utility businesses: PSEG Global Inc. (Global), formerly Community Energy Alternatives Incorporated, an investor in and developer and operator of projects in the generation and distribution of energy, including cogeneration and independent power production (IPP) facilities, electric distribution companies, exempt wholesale generators (EWGs) and foreign utility companies (FUCOs); PSEG Resources Inc. (Resources), formerly Public Service Resources Corporation, which has made primarily passive investments; PSEG Energy Technologies Inc. (Energy Technologies), formerly Energis Resources Incorporated, which provides a variety of energy related services to industrial and commercial customers both within and outside of PSE&G's traditional service territory; and Enterprise Group Development Corporation (EGDC), a nonresidential real estate development and investment business. Energy Holdings also has two finance subsidiaries: PSEG Capital Corporation (PSEG Capital), which provides privately-placed debt financing to Energy Holdings' operating subsidiaries, except Energy Technologies, on the basis of a minimum net worth maintenance agreement with PSEG and Enterprise Capital Funding Corporation (Funding), which provides privately-placed debt financing to Resources, Global and their subsidiaries, which debt is guaranteed by Energy Holdings, 35 but without direct support from PSEG. EGDC has been conducting a controlled exit from its real estate business since 1993. In July 1996, Energy Holdings sold Energy Development Corporation (EDC), an oil and gas subsidiary. As of December 31, 1998 and 1997, PSE&G comprised 82% and 83%, respectively, of PSEG's assets. For each of the years 1998, 1997 and 1996, PSE&G revenues were approximately 94%, 96%, and 96%, respectively, of PSEG's revenues and PSE&G's earnings available to PSEG for such years were 92%, 92% and 87%, respectively, of PSEG's net income. OVERVIEW OF 1998 AND FUTURE OUTLOOK In 1998, energy industry restructuring continued to advance in New Jersey as PSE&G completed the evidentiary hearings related to the Energy Master Plan and the Office of Administrative Law filed its decision providing its recommendations to the New Jersey Board of Public Utilities (BPU). On February 9, 1999, the New Jersey Electric Discount and Energy Competition Act (Energy Competition Act) was enacted. It provides that all New Jersey retail electric customers may select their electric supplier commencing August 1, 1999 and all New Jersey retail gas customers may select their gas suppliers commencing January 1, 2000, thus fully opening the New Jersey energy markets to competition. The Energy Competition Act also: o Requires electric rate decreases of at least 10%, to be phased in over a period of up to 36 months. o Allows utilities to have an opportunity to recover up to 100% of electric-related stranded (above market) costs. o Allows securitization of up to 75% of electric-related stranded costs. o Permits the BPU to require the functional separation or divestiture of generating assets if required for competition to develop. o Provides for customer account services (e.g., metering, billing and related administrative services) to become competitive in one year. o Authorizes private and municipal aggregation of customers to collectively choose their electric supplier. o Authorizes "shopping credits" or discounts for customers that switch from their current electric utility supplier. o Requires disclosure of the environmental impact of generation used for supplying electric customers. o Authorizes the collection of costs of certain social programs, nuclear plant decommissioning, demand side management, manufactured gas plant clean up costs and consumer education through a non-bypassable Societal Benefits Charge. The BPU has been conducting related proceedings pursuant to the New Jersey Energy Master Plan (Energy Master Plan), under which the BPU is expected to issue a series of orders that will decide both generic issues for the energy industry (e.g., affiliate standards) and company specific matters (e.g. the levels of rate decrease, shopping credit, stranded asset recovery and securitization) for each utility. The BPU has set a target date of March 31, 1999 for issuing an electric restructuring order, but has yet to establish a target date for the gas restructuring order. For further discussion of the aforementioned BPU activities, the Energy Competition Act and the forthcoming BPU proceedings (collectively, the Energy Master Plan Proceedings), see Note 2. Regulatory Issues of Notes to Consolidated Financial Statements (Notes). These decisions will fundamentally change the energy industry in New Jersey and will result in competitive markets for electric and gas supply and for customer services. The transmission and distribution businesses will remain regulated. The outcome of these proceedings could have a material adverse impact on PSEG's and PSE&G's financial condition, results of operations and net cash flows including a potentially material impact resulting from the discontinuation of the regulated accounting model currently used by PSE&G. For discussion of potential accounting changes resulting from deregulation, see Note 19. Accounting Matters of Notes. PSEG has been engaged in the competitive energy business for a number of years through certain of its non-utility subsidiaries. Due to the regulatory changes outlined above, in the future, PSEG will include a larger component of 36 competitive businesses. As the unregulated component of the business continues to grow, potential financial risks and rewards will be greater, financial requirements will change, and the volatility of earnings will increase. The pending regulatory decisions and the business experience PSEG has acquired in operating non-regulated energy business will be significant components in determining future success. As part of its Energy Master Plan proposal, PSE&G has proposed to recover $2.5 billion of its potentially stranded costs through the issuance of its transition bonds, referred to as securitization. The Energy Competition Act provides that the net proceeds from securitization must be used to reduce utility debt and equity. Dependent upon the level of securitization authorized by the BPU in the Energy Master Plan Proceedings, PSE&G may use a number of alternatives to reduce utility debt and equity, including purchasing outstanding PSEG common stock and the redemption, tender or purchase of outstanding PSE&G mortgage bonds and PSE&G preferred stock. For further discussion of securitization, see Note 2. Regulatory Issues of Notes. To the extent that recovery of stranded costs occasioned by deregulation are not probable of recovery and not eligible for deferred accounting treatment under Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71) and EITF Issue 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF 97-4), PSE&G would incur an extraordinary, non-cash charge to operations, which could be material to the financial position and results of operations of PSEG and PSE&G. For discussion of potential accounting changes due to deregulation, see Note 19. Accounting Matters of Notes. PSEG and PSE&G believe that the end result of the Energy Master Plan Proceedings will involve a fundamental change in the way their businesses are conducted. These changes may impact financial operating trends and could result in earnings volatility, write down of asset values, reduction in dividend payments and adverse impacts on revenues due to the mandated electric rate cut, electric and gas retail choice and fuel and energy price risks. PSE&G is actively seeking regulatory and operational changes that will allow it to provide energy services in a safe and reliable manner at competitive prices while achieving strong financial performance. Many forces are reshaping how the utility industry meets the needs and expectations of its customers and shareholders. Profound changes in the way the industry is regulated are affecting how PSEG conducts business and its financial prospects in the future. Competitive changes in the utility industry continued to occur in 1998 and will continue to occur in 1999. For discussions of the New Jersey Energy Master Plan Proceedings and other rate matters, see Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes. The New Jersey Gross Receipts and Franchise Tax (NJGRT) was eliminated effective January 1, 1998 and replaced with a combination of the New Jersey Corporate Business Tax which is a State income tax, the State sales and use tax and a Transitional Energy Facility Assessment (TEFA), with no material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G. As a result of such tax reform, after the phase out of the TEFA, the effective state tax rate applicable to PSE&G will be substantially reduced, putting PSE&G on a more level playing field with competitors. For additional discussion of energy tax reform, see Note 12. Income Taxes of Notes. To the extent that the discussion that follows reports on business conducted under full monopoly regulation of the utility business, it must be understood that such business will change in 1999 and that past results are not necessarily an indication of future business prospects or financial results. In 1998, PSE&G's operations were highlighted by the return to service of Salem 1 and the overall successful operation of the nuclear generation program. Complimenting PSE&G's generation capability was the activity of its wholesale energy operations which positively contributed to PSE&G's results and, through its risk management policies, mitigated PSE&G's exposure to the dramatic price volatility and credit concerns seen throughout the energy commodity markets during the summer of 1998 (see Qualitative and Quantitative Disclosures About Market Risk). In 1998, Energy Holdings continued to implement its strategy to develop its business through international expansion as Global made its first investment in India and continued its growth in Latin America through the acquisition of its third 37 Argentine electric distribution company. Resources also continued its investment strategy through its investments in several leveraged leases on energy-related assets in Europe. For discussion of related risks, see Qualitative and Quantitative Disclosures About Market Risk and Foreign Operations. Going forward, PSEG will continue to pursue its strategies to grow its family of businesses. As previously reported, more emphasis will be placed on finding opportunities for expansion outside of its traditional utility services and markets. PSE&G's strategy is to size its electric generation fleet in New Jersey to meet its anticipated needs, while seeking to increase its value and manage commodity price risk through its wholesale trading activity. PSE&G will also seek to capitalize on synergies which may exist with its natural gas purchasing and trading activities. PSE&G's transmission and distribution strategy, both gas and electric, is to provide cost-effective, high quality service. PSEG will also consider opportunities for expansion through business combinations. Global's strategy is to invest in both generation and distribution facilities worldwide with the goal of creating long-term value. Resources' strategy is to continue focusing on passive investments in the energy sector worldwide seeking to provide earnings and economic value. Energy Technologies' strategy is to expand upon the current energy related services it provides to industrial and commercial customers to create long-term value and to participate in the retail energy marketplace. Successful implementation of these strategies, coupled with the restructuring of the electric and gas industries will shift more of the assets and earnings of the PSEG companies from regulated to competitive businesses. As a result of the deregulation of the electric utility industry, PSE&G could be required to separate its electric generation services, and potentially other competitive services, from its regulated utility operations and to possibly transfer those operations to an entity functionally independent from PSE&G. RESULTS OF OPERATIONS Basic and diluted earnings per share of PSEG common stock (Common Stock) were $2.79 in 1998, representing an increase of $0.38 per share or 16% from 1997. Basic and diluted earnings per share were $2.41 in 1997, a decrease of $0.11 per share or 4% from 1996. PSE&G's contribution to earnings per share of Common Stock in 1998 increased $0.37 or 17% compared to 1997 primarily due to the settlement of the lawsuits filed by the co-owners of Salem which negatively impacted 1997 earnings by $0.27 per share, an increase in electric revenues resulting from considerably warmer weather in the third quarter of 1998 and wholesale power activities of PSE&G (see Item 7A. Qualitative and Quantitative Disclosures About Market Risk). These increases were partially offset by lower gas sales in 1998 due to mild winter weather during the 1998 heating seasons. It is expected that PSE&G's 1999 earnings will be impacted by the outcome of the Energy Master Plan Proceedings. Energy Holdings' contribution to earnings per share in 1998 increased $0.01 or 5% compared to 1997. Energy Holdings' earnings were primarily those of PSEG Resources due to the strong overall performance of its investment portfolio, including leveraged leases, limited partnerships, leveraged buyout funds and marketable securities. Global's 1998 earnings were negatively impacted by the loss on the sale of its investment in an electric generating facility located in Colombia. Global's 1999 earnings will be negatively impacted as a result of the recent economic developments in Brazil, including the devaluation of its currency, however, this is not expected to have a material adverse effect on the results of operations for PSEG. For further discussion, see Foreign Operations and Note 20. Subsequent Events of Notes. PSE&G's contribution to earnings per share in 1997 decreased $0.07 or 3% compared to 1996 due to higher administrative costs attributable to systems modifications for Year 2000 readiness, legal fees associated with the settlement of the Salem co-owner litigation and a gain recorded in the second quarter of 1996 from the repurchase of a portion of PSE&G's outstanding cumulative preferred stock at discounts to par. These decreases were partially offset by lower operation and maintenance expenses at Salem and the Hudson generating station. Salem's refueling outage expenses and restart activities declined while Hudson's expenses benefited from a decrease in the workforce as well as a reduction of outage work performed in 1997. Earnings per share in 1997 and 1996 were each negatively impacted by charges related to the shutdown of Salem 1 and 2 which began in 1995. The settlement of the lawsuits filed by the co-owners of Salem negatively impacted 1997 earnings by $0.27 per share and refunds required by the BPU's December 31, 1996 Order (December 31st Order) which resolved Salem and other outstanding regulatory issues negatively impacted 1996 earnings by $0.25 per share. For discussion of the December 31st Order, see Note 2. Regulatory Issues of Notes. 38 Energy Holdings' contribution to earnings per share in 1997 decreased $0.14 or 17% compared to 1996 primarily due to the inclusion in 1996 of earnings of $0.10 per share related to the discontinued operations of EDC and higher operating expenses of Energy Technologies as it continued to grow. As a result of PSEG's stock repurchase program which began in July 1996, earnings per share of Common Stock for 1997 increased $0.10 from 1996. A total of 12.7 million shares were repurchased at a cost of $350 million under this program which concluded in January 1997. PSE&G--REVENUES Certain of the below listed year to year variances did not impact earnings as there was a corresponding variance in expense. To the extent fuel revenue and expense flowed through the LEAC and LGAC mechanisms, variances in fuel revenues and expenses offset and thus had no direct effect on earnings. These include base fuel revenues, demand side management (DSM) revenue and Remediation Adjustment Charge (RAC) revenue. See Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes for a discussion of LEAC, LGAC, RAC and DSM and their current and proposed status under the Energy Competition Act. ELECTRIC Electric revenues increased $113 million or 3% in 1998 and decreased $26 million or 1% in 1997. The increase in 1998 was primarily due to higher sales resulting from considerably warmer weather in the third quarter of 1998 augmented by positive economic factors in New Jersey. Additionally, revenue from wholesale power activities and DSM revenue were higher in 1998 than in 1997. These increases were partially offset by a decrease to revenue caused by New Jersey energy tax reform in 1998. For a discussion of energy tax reform, see Note 12. Income Taxes of Notes. Collection of New Jersey Gross Receipts and Franchise Tax (NJGRT) was reflected in revenue and expense in prior years. As a result of energy tax reform, the portion of NJGRT replaced by the New Jersey sales and use tax is no longer reflected in revenue or expense on the income statement. State sales and use tax is a liability of the customer, collected by PSE&G and remitted to the State and is recorded in Other Current Liabilities on the Consolidated Balance Sheets. The decrease in 1997 was primarily due to lower kilowatt sales from unfavorable weather partially offset by 1996 refunds required by the December 31st Order. GAS Gas revenues decreased $378 million or 20 % in 1998 and increased $56 million or 3% in 1997. The decrease in 1998 is primarily due to lower therm sales resulting from milder winter weather in 1998 and energy tax reform. PSE&G--EXPENSES NET INTERCHANGED POWER AND FUEL FOR ELECTRIC GENERATION Net Interchanged Power and Fuel for Electric Generation increased $36 million or 4% in 1998 and decreased $10 million or 1% in 1997. The increase in 1998 was primarily due to increased sales of electricity resulting in increased purchases of fuel for electric generation and purchases of power from the PJM Interconnection, L.L.C. (PJM) pool. Effective January 1, 1998, the amount included for the LEAC under/overrecovery represents the difference between fuel-related revenues and fuel-related expenses which are comprised of the cost of generation and interchanged power at the PJM market clearing price. Effective April 1, 1998, PJM, as independent system operator (ISO), replaced the PJM uniform market clearing price with locational marginal pricing (LMP) for determining the market clearing pricing to energy providers. Experience to date shows no material adverse impact of this change to LMP on PSE&G's cost of Net Interchanged Power and Fuel for Electric Generation. To the extent fuel revenue and expense flow through the LEAC mechanism, variances in fuel revenues and expenses offset and thus have no direct effect on earnings. In 1999, the LEAC mechanism will be discontinued as a result of the Energy Master Plan Proceedings. This may increase earnings volatility 39 and fuel and energy price risk since PSE&G will bear the full risks and rewards of changes in nuclear and fossil generating fuel costs and replacement power costs. For a discussion of fuel related revenue and expense included in the LEAC and for the current status of the LEAC, see Note 1. Organization and Summary of Significant Accounting Policies, Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes. GAS PURCHASED Gas Purchased decreased $131 million or 12% and $17 million or 2% in 1998 and 1997, respectively. The decrease in 1998 was primarily due to the milder winter weather in 1998. Due to the operation of the Levelized Gas Adjustment Clause (LGAC) mechanism, variances in fuel revenues and expenses offset and had no direct effect on earnings. OPERATION AND MAINTENANCE Operation and Maintenance expense increased $81 million or 6% in 1998 and decreased $23 million or 2% in 1997. The increase in 1998 was primarily due to higher DSM recovery resulting in a greater recognition of previously deferred expenses, higher information technology costs in 1998 due to Year 2000 remediation work, higher marketing costs, and higher administrative and general cost related to wholesale power activities. These increases were partially offset by lower nuclear operation and maintenance costs due to restart expenses in 1997 for Salem. DSM costs are currently recoverable through the demand side adjustment factor of the LEAC and are recorded in both expense and revenue and therefore, have no direct effect on earnings. For discussion of DSM under the Energy Master Plan Proceedings, see Note 2. Regulatory Issues of Notes. INCOME TAXES Income Taxes increased $91 million or 30% and $42 million or 16% in 1998 and 1997, respectively. The 1998 increase was primarily due to inclusion of New Jersey State income tax of $103 million in 1998. PSE&G became subject to New Jersey State income tax, effective January 1, 1998, due to energy tax reform in the State of New Jersey. For more detail on energy tax reform and changes in New Jersey taxes, see Note 12. Income Taxes of Notes. Partially offsetting the increase in 1998 was a decrease from 1997 in Federal income tax due to adjustments of prior year taxes. The 1997 taxes were higher due to an increase in pre-tax operating income. TRANSITIONAL ENERGY FACILITY ASSESSMENT (TEFA) / NEW JERSEY GROSS RECEIPTS AND FRANCHISE TAX (NJGRT) TEFA/NJGRT decreased $405 million or 70% and $22 million or 4% in 1998 and 1997, respectively. The 1998 decrease is due to New Jersey energy tax reform. For 1998, the amount represents TEFA unit-based taxes while the 1997 amount represents NJGRT unit-based taxes. The TEFA unit tax rates are approximately 30% of the NJGRT unit tax rates. See Note 12. Income Taxes of Notes for other impacts of New Jersey energy tax reform. SETTLEMENT OF SALEM LITIGATION In January and February 1997, the settlement of the Salem litigation related to the 1995 shutdown was recorded. That settlement reduced Other Income and Deductions by $53 million, net of taxes of $29 million, in 1997. For a further discussion of the Salem settlement, see Note 2. Regulatory Issues of Notes. 40 NET LOSS (GAIN) ON PREFERRED STOCK REDEMPTIONS Net Loss (Gain) on Preferred Stock Redemptions decreased $21 million in 1997 from the comparable 1996 period. The decrease was primarily due to an $18 million net gain on the repurchase of certain of PSE&G's outstanding cumulative preferred stock at discounts to par in the second quarter of 1996. ENERGY HOLDINGS--NET INCOME
INCREASE OR (DECREASE) ---------------------------------------------------------- 1998 VS. 1997 1997 VS. 1996 --------------------------- ---------------------------- PER PER AMOUNT SHARE AMOUNT SHARE ------------ ------------- ------------- ------------ (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) Global.............................. $(6) $(.03) $4 $.02 Resources........................... (3) (.01) 3 .01 EGDC................................ 6 .03 (5) (.02) Energy Technologies................. 5 .02 (12) (.05) ------------ ------------- ------------- ------------ Continuing Operations............... 2 .01 (10) (.04) Discontinued Operations--EDC Income from Operations............ -- -- (11) (.04) Gain on Sale...................... -- -- (13) (.06) ------------ ------------- ------------- ------------ Total....................... $ 2 $.01 $(34) $(.14) ============ ============= ============= ============
CONTINUING OPERATIONS Energy Holdings' income from continuing operations was $49 million, a $2 million increase from 1997. Energy Holdings' earnings were primarily those of PSEG Resources due to the strong overall performance of its investment portfolio, including leveraged leases, limited partnerships, leveraged buyout funds and marketable securities. Global's 1998 earnings were negatively impacted by the loss on the sale of its investment in an electric generating facility located in Colombia. Global's 1999 earnings will be negatively impacted as a result of the recent economic developments in Brazil, including the devaluation of its currency, however, at present, this is not expected to have a material adverse effect on the results of operations for PSEG. For further discussion, see Foreign Operations and Note 20. Subsequent Events of Notes. Energy Holdings' income from continuing operations was $47 million for 1997, a $10 million decrease from 1996. The loss for Energy Technologies increased due to higher selling, general and administrative expenditures as Energy Technologies continued to grow. Resources' income increased primarily due to income from new lease investments, partially offset by lower income from partnership investments. Global's income increased due to improved financial performance of several projects. DISCONTINUED OPERATIONS EDC was sold on July 31, 1996. Income related to EDC operations was $11 million in 1996. Additionally, a gain of $13 million was recorded on the sale in 1996. For a discussion of discontinued operations, see Note 16. Discontinued Operations. LIQUIDITY AND CAPITAL RESOURCES PSEG AND PSE&G PSEG is an exempt public utility holding company and, as such, has no operations of its own. The following is a discussion of PSEG's liquidity and capital resources on a consolidated basis, noting the uses and contributions of PSEG's two direct operating subsidiaries, PSE&G and Energy Holdings. 41 Cash generated from PSE&G's operations is expected to continue to provide the major source of funds for PSE&G's operating needs. Energy Holdings' growth will be funded through external financings and cash generated from operations. PSEG's cash and cash equivalents totaled $140 million at the end of 1998 compared with $83 million at the end of 1997. PSEG and PSE&G believe that the deregulation of the utility industry will impact the sources and uses of cash in 1999 and beyond. Securitization as proposed in PSE&G's Energy Master Plan proposal and authorized in the Energy Competition Act will change the sources of cash flows. The cash received by PSE&G from the net proceeds of securitization is required by the Energy Competition Act to be applied to reduce outstanding debt and equity of the utility. The outcome of the Energy Master Plan Proceedings could have a material impact on the cash flows of PSEG and PSE&G. For further discussion of securitization, see Note 2. Regulatory Issues of Notes. On September 15, 1998, in anticipation of securitization of PSE&G's stranded costs afforded by the then proposed Energy Competition Act, the Board of Directors of PSEG authorized the repurchase of up to 10 million shares of Common Stock. Under the authorization, repurchases were made in the open market at the discretion of PSEG. The repurchased shares have been held as treasury stock. At December 31, 1998, PSEG had repurchased approximately 5.3 million shares of Common Stock at a cost of $207 million, under this authorization. As of February 8, 1999, PSEG had repurchased a total of 10 million shares at a cost of approximately $391 million under this program. On February 16, 1999, the Board of Directors of PSEG authorized the expansion of the repurchase program up to an aggregate of 20 million shares under substantially the same terms and conditions as the program which began in September 1998. Dividend payments on Common Stock were $2.16 per share and totaled $499 million for the year ended December 31, 1998. Amounts and dates of such dividends on Common Stock as may be declared in the future will necessarily be dependent upon PSEG's future earnings, cash flows, financial requirements, the outcome of the Energy Master Plan Proceedings (see Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes), the receipt of dividend payments from its subsidiaries and other factors. Since 1986, PSE&G has made regular cash payments to PSEG in the form of dividends on outstanding shares of PSE&G's common stock. PSE&G has paid quarterly dividends on its common stock in each year commencing in 1948, the year of the distribution of PSE&G's common stock by Public Service Corporation of New Jersey, the former parent of PSE&G. PSE&G has not increased its dividend rates in seven years in order to retain additional capital for reinvestment and to reduce its payout ratio. PSE&G paid common stock dividends of $503 million and $523 million to PSEG during the years ended December 31, 1998 and 1997, respectively. Changes in PSE&G's financial condition that could result from the Energy Master Plan Proceedings could have a material adverse effect on the ability to maintain the dividend at such level. For discussion of the Energy Master Plan Proceedings, see Note 2. Regulatory Issues of Notes. Due to the growth in Energy Holdings investment activities, no dividends on Energy Holdings' common stock were paid in 1998 or are anticipated for 1999. From 1992 through 1996, Energy Holdings made regular cash payments to PSEG in the form of dividends on outstanding shares of Energy Holdings' common stock. PSEG and PSE&G, respectively, have issued Deferrable Interest Subordinated Debentures in connection with the issuance of their respective tax deductible preferred securities. If, and for as long as, payments on those Deferrable Interest Subordinated Debentures have been deferred, or PSEG or PSE&G, respectively, has defaulted on the applicable indenture related thereto or its guarantee thereof, neither PSEG nor PSE&G, respectively, may pay any dividends on its common or preferred stock. For detail on the capital securities of PSEG and PSE&G, see Note 6. Schedule of Consolidated Capital Stock and Other Securities of Notes. As shown on the Consolidated Statements of Cash Flows, net cash provided by operating activities totaled $1.422 billion in 1998, up from $1.095 billion in 1997. The major contributor in 1998 was net income of $644 million, which included $669 million of non-cash deductions for depreciation and amortization. Net cash provided by operating activities totaled $1.095 billion in 1997, down from $1.470 billion in 1996. The major contributor in 1997 was net income of $560 million, which included $630 million of non-cash deductions for depreciation and amortization. Net cash used in investing activities totaled $712 million in 1998, down from $1.614 billion in 1997. The primary use of such cash in 1998 was for utility plant additions, excluding Allowance for Funds Used During Construction (AFDC), of 42 $535 million at PSE&G. Additionally there was a net increase in long-term investments of $58 million, including Resources' net increase in investments of $136 million, partially offset by Global's net decrease in investments primarily from the sale of investments in generation and co-generation companies of $47 million, and contributions made by PSE&G to the pension and nuclear decommissioning trust funds of $115 million. Net cash used in investing activities totaled $1.614 billion in 1997, up from $9 million in 1996. The primary use of such cash in 1997 was a net increase in long-term investments of $914 million, including Global's investments in distribution and generation companies of $852 million, Resources' net increase in investments of $97 million and utility plant additions, excluding Allowance for Funds Used During Construction (AFDC), of $542 million at PSE&G. Net cash used in financing activities was $653 million in 1998 as compared to $323 million of cash provided by financing activities in 1997. Major uses of such cash in 1998 were a decrease in short-term debt by PSE&G of $256 million, Energy Holdings of $61 million and PSEG of $75 million, the payment of dividends on Common Stock of $499 million and the purchase of Common Stock of $207 million. These uses were partially funded by cash provided by the issuance of preferred securities by PSEG's Enterprise Capital Trust I, II and III of $525 million. PSE&G's long-term debt (primarily Mortgage Bonds) decreased $99 million in 1998 while Energy Holdings' long-term debt decreased $208 million. PSEG's long-term debt at the holding company level increased $275 million in 1998 due to the issuance of Extendible Notes. Net cash provided by financing activities was $323 million in 1997 as compared to $1.244 billion of cash used in financing activities in 1996. Major contributors in 1997 were an increase in short-term debt by PSE&G of $468 million, Energy Holdings of $267 million and PSEG of $75 million, primarily used to fund certain scheduled long-term debt maturities, Global's investments and a net increase in long-term debt of $85 million, partially offset by the payment of dividends on Common Stock of $501 million. PSE&G's long-term debt decreased $287 million in 1997 while Energy Holdings' long-term debt increased $372 million. As of December 31, 1998, PSEG's capital structure consisted of 46.1% common equity, 43.0% long-term debt and 10.9% preferred securities. The capital structure as of December 31, 1997 consisted of 48.4% common equity, 45.3% long-term debt and 6.3% preferred securities. As a result of the 1992 focused audit of PSEG's non-utility businesses (Focused Audit), the BPU approved a plan which, among other things, provides that: (1) PSEG will not permit Energy Holdings' non-utility investments to exceed 20% of PSEG's consolidated assets without prior notice to the BPU (such investments at December 31, 1998 were approximately 17% of assets); (2) the PSE&G Board of Directors will provide an annual certification that the business and financing plans of Energy Holdings will not adversely affect PSE&G; (3) PSEG will (a) limit debt supported by the minimum net worth maintenance agreement between PSEG and PSEG Capital to $650 million and (b) make a good-faith effort to eliminate such support over a six to ten year period from April 1993; and (4) Energy Holdings will pay PSE&G an affiliation fee of up to $2 million a year to be applied by PSE&G through its LGAC and its LEAC to reduce utility rates. PSEG and Energy Holdings and its subsidiaries continue to reimburse PSE&G for the costs of all services provided to them by employees of PSE&G. As a result of PSEG's intent that Energy Holdings and its subsidiaries be its long-term growth vehicles, financing requirements connected with the continued growth of Energy Holdings, changes to the utility industry expected from the final outcome of the Energy Master Plan Proceedings and potential accounting impacts resulting from the deregulation of the generation of electricity and the unbundling of the utility business, modifications will be required to certain of the restrictions agreed to by PSEG with the BPU in response to the Focused Audit. Inability to achieve satisfactory resolution of these matters could impact the future relative size and financing of Energy Holdings and accordingly, PSEG's future prospects, including financial condition, results of operations and net cash flows. For discussion of the Energy Master Plan Proceedings and potential impacts see Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes. 43 ENERGY HOLDINGS As noted above, Global, Resources and Energy Technologies are expected to provide long-term growth for Energy Holdings and PSEG. Resources' investments are designed to produce immediate earnings and cash flows, which enable Global and Energy Technologies to focus on longer-term growth. During the next five years, Energy Holdings' capital requirements are expected to be provided from additional debt financing and operating cash flows. A significant portion of Global's growth is expected to occur internationally due to the current and anticipated growth in electric capacity required in certain regions of the world. Resources will continue its focus on investments related to energy infrastructure. Energy Technologies is expected to expand upon the current energy related services being provided to industrial and commercial customers. Energy Holdings' cash provided by (used in) operating, investing and financing activities was as follows:
1998 1997 1996 ------------ ------------ ------------ (MILLIONS OF DOLLARS) Operating Activities: Global.................................... $(26) $(9) $9 Resources................................. 23 130 164 Energy Technologies....................... (25) -- -- Other..................................... (5) (23) (16) ------------ ------------ ------------ Continuing Operations..................... (33) 98 157 EDC....................................... -- -- 78 ------------ ------------ ------------ Total Operating Activities............ $(33) $98 $235 ============ ============ ============ Investing Activities: Global.................................... $47 $(852) $(8) Resources................................. (136) (97) 2 Energy Technologies....................... (40) -- -- Other..................................... 30 (2) 12 ------------ ------------ ------------ Continuing Operations..................... (99) (951) 6 EDC....................................... -- -- 653 ------------ ------------ ------------ Total Investing Activities............ $(99) $(951) $659 ============ ============ ============ Financing Activities: Debt...................................... $(287) $638 $(380) Preferred Equity (A)...................... 416 78 (369) ------------ ------------ ------------ Total Financing Activities............ $129 $716 $(749) ============ ============ ============
(A) Preferred stock issued internally to PSEG by Energy Holdings. For a discussion of the source of Energy Holdings' funds, see External Financings. Over the next several years, Energy Holdings and its subsidiaries will be required to refinance their maturing debt and provide additional debt and equity financing for growth. Any inability to obtain required additional external capital or to extend or replace maturing debt and/or existing agreements at current levels and interest rates may affect PSEG's and Energy Holdings' financial condition, results of operations and net cash flows. As of December 31, 1998, 1997 and 1996, Energy Holdings' embedded cost of debt of its finance subsidiaries was approximately 7.4%, 8.2% and 8.9%, respectively. Energy Holdings' finance subsidiaries did not provide any additional long-term debt financing during 1998. In January, June and July 1998, PSEG invested $217 million, $147 million and $145 million, respectively, in Energy Holdings which issued to PSEG like amounts of its 5.01%, 4.80% and 4.875% Cumulative Preferred Stock and made additional equity investments in Global and Resources. PSEG funded its additional investment in Energy Holdings through the sale of tax deductible preferred securities, issued by Enterprise Capital Trust I, II and III, special purpose statutory business trusts controlled by PSEG, representing Guaranteed Preferred Beneficial Interests in PSEG's Debentures. 44 CAPITAL REQUIREMENTS Capital resources and capital requirements will be affected by the outcome of the Energy Master Plan Proceedings. For a discussion of the potential impact of the Energy Master Plan Proceedings on PSE&G's future prospects, including financial condition, results of operations and net cash flows, see Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes. PSE&G PSE&G had utility plant additions of $547 million, $557 million and $603 million for 1998, 1997 and 1996, respectively, including AFDC of $12 million, $15 million and $17 million, respectively. Construction expenditures were related to improvements in PSE&G's existing power plants (including the replacement of Salem 1 steam generators in 1997 and acquisition of nuclear fuel), transmission and distribution system, gas system and common facilities. PSE&G also expended $10 million, $28 million and $34 million for the cost of plant removal (net of salvage) in 1998, 1997 and 1996, respectively. Construction expenditures from 1999 through 2003 are expected to aggregate $2.8 billion, excluding AFDC. Forecasted construction expenditures are related to improvements in PSE&G's transmission and distribution system, existing power plants (including acquisition of nuclear fuel), gas system and common facilities. Decision with regard to these improvements will depend, in part, upon the outcome of the Energy Master Plan Proceedings. Dependent upon the outcome of the Energy Master Plan Proceedings, PSE&G expects that it will be able to internally generate the majority of its construction and capital requirements over the next five years, assuming adequate and timely recovery of costs, as to which no assurances can be given, with the balance to be provided by issuance of debt to replace maturities. For discussion of the Energy Master Plan Proceedings and their potential impacts and potential contingent liabilities, see Note 2. Regulatory Issues and Note 10. Commitments and Contingent Liabilities of Notes. ENERGY HOLDINGS GLOBAL In May 1998, Global sold its 50% interests in two domestic cogeneration plants, resulting in proceeds to Energy Holdings of approximately $70 million. In July 1998, Global sold its 5% interest in a domestic cogeneration plant and in August 1998, sold its 50% interest in a natural gas-fired generating station in Colombia for aggregate proceeds of approximately $70 million. The aggregate proceeds of all 1998 sales of $140 million approximated book value. In November 1998, Global acquired a 30% interest in an Argentine electric distribution company serving a population of 750,000 in the northeast corner of the Province of Buenos Aires at a cost of approximately $60 million. In December 1998, Global acquired a 20% equity share of a 330 megawatt power plant to be constructed in India, for which Global will be the operations and maintenance contractor. RESOURCES In the first quarter of 1998, Resources received proceeds of $120 million from investment liquidations resulting from the exercise of an early buyout option by the lessee in a leveraged lease and from sales of investments held in leveraged buyout and venture capital partnerships. In March 1998, Resources entered into a leveraged lease of a natural gas distribution network in the Netherlands and, in April 1998, acquired a lease of a domestic gas-fired steam electric generating station. The aggregate amount of these investments was approximately $132 million. In July 1998, Resources purchased a 33.3% interest in a leveraged lease of a natural gas-fired generating station in the United Kingdom for approximately $40 million and in September 1998, purchased a 100% interest in a leveraged lease of several gas distribution networks in the Netherlands for approximately $45 million. In December 1998, Resources closed on an additional investment in a gas distribution network leveraged lease in the Netherlands for approximately $34 million. ENERGY TECHNOLOGIES Energy Technologies continued to implement its growth strategy in the regional energy service arena through its acquisition of two mechanical service contractors and by participating in the deregulating energy markets in the Northeast. 45 EGDC In June 1998, EGDC continued its controlled exit from the real estate business and sold its 75% interest in one of its properties for approximately $5 million, which approximated book value. CONSTRUCTION AND CAPITAL REQUIREMENTS FORECAST
1999 2000 2001 2002 2003 TOTAL --------- --------- --------- -------- ---------- --------- (MILLIONS OF DOLLARS) Construction and Investment Requirements (Estimate): PSE&G.......................................... $572 $591 $576 $558 $544 $2,841 Energy Holdings................................ 359 263 233 152 260 1,267 --------- --------- --------- -------- ---------- --------- Total Construction and Investment Requirements. 931 854 809 710 804 4,108 --------- --------- --------- -------- ---------- --------- Mandatory Retirement of Debt: PSEG........................................... -- 275 -- -- -- 275 PSE&G.......................................... 100 635 100 300 300 1,435 Energy Holdings................................ 318 109 166 160 -- 753 --------- --------- --------- -------- ---------- --------- Total Retirement of Debt....................... 418 1,019 266 460 300 2,463 --------- --------- --------- -------- ---------- --------- Total Capital Requirements.................. $1,349 $1,873 $1,075 $1,170 $1,104 $6,571 ========= ========= ========= ======== ========== =========
The projected effect of securitization, as included in PSE&G's Energy Master Plan proposal, is not included in the above forecast. For discussion of securitization and the Energy Master Plan Proceedings, see Note 2. Regulatory Issues of Notes. EXTERNAL FINANCINGS The changes in the utility industry are attracting increased attention of bond rating agencies which regularly assess business and financial matters including how utility companies are meeting competition and competitive initiatives, especially as they affect potential stranded costs. Bond ratings affect the cost of capital and the ability to obtain external financing. PSE&G continually updates the rating agencies on all corporate matters in order to minimize surprises and give the rating agencies time to comprehend the information. Given the changes in the industry and the potential use of securitization, attention and scrutiny of PSE&G's competitive strategies by rating agencies will likely continue. These changes could result in changes to PSEG's and PSE&G's bond ratings and significantly alter the capital structures of both PSEG and PSE&G. In addition, the impact of the use of securitization proceeds, capital structure changes and other actions which might be taken by PSEG and PSE&G in connection with energy industry restructuring is likely to affect the market prices of their respective securities. For discussion of the use of proceeds of securitization see Note 2. Regulatory Issues of Notes. PSEG At December 31, 1998, PSEG had a committed $150 million revolving credit facility which expires in December 2002. At December 31, 1998, PSEG had no debt outstanding under this revolving credit facility. At December 31, 1998 and 1997, PSEG had a $25 million and a $75 million uncommitted line of credit, respectively, with a bank. At December 31, 1998, PSEG had no debt outstanding under this line of credit. In January 1998, Enterprise Capital Trust I, a special purpose statutory business trust controlled by PSEG, issued $225 million of 7.44% Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's Debentures). In June 1998, Enterprise Capital Trust II, a special purpose statutory business trust controlled by PSEG, issued $150 million of Floating Rate Capital Securities, Series B at three-month London Interbank Offered Rate (LIBOR) plus 1.22% reset quarterly. At the time of issuance, PSEG's floating rate obligation under its debentures was swapped for a fixed rate payment resulting in an effective rate of 7.2%. For more detail, see Note 8. Financial Instruments and Risk Management of Notes. In July 1998, Enterprise Capital Trust III, a special purpose statutory business trust controlled by PSEG, issued $150 million of its 7.25% Trust Originated Preferred Securities, Series C. Proceeds of these issues were loaned to PSEG and are evidenced by its deferrable interest subordinated debentures. PSEG used the proceeds of these issues to make $509 million 46 preferred equity investments in Energy Holdings. The debentures and their related indentures constitute a full and unconditional guarantee by PSEG of the preferred securities issued by the trusts. If, and for as long as, payments on PSEG's debentures have been deferred, or PSEG has defaulted on the indentures related thereto or its guarantee thereof, PSEG may not pay any dividends on its Common Stock. For a discussion of dividends, see Liquidity and Capital Resources - -- PSEG. In November 1998, PSEG issued $275 million of Extendible Notes in two series, $100 million principal amount of Series A with interest at LIBOR plus 0.75%, reset quarterly, and automatically tendered to the remarketing agent for remarketing on May 24, 1999 and $175 million principal amount of Series B with interest at LIBOR plus 0.78%, reset quarterly, and automatically tendered to the remarketing agent for remarketing on November 22, 1999. PSEG used the net proceeds of these issuances to repurchase shares of its Common Stock and to reimburse its treasury for expenditures made for that purpose. As previously disclosed, PSEG and PSE&G have issued a total of approximately $525 million and $513 million, respectively, of deferrable interest subordinated debentures which are treated as debt to the issuer for Federal income tax purposes and as preferred equity for financial accounting and rating agency purposes. In a case not involving PSEG or PSE&G, the Internal Revenue Service (IRS) had proposed to disallow interest deductions claimed by Enron Corp. (Enron) on two issues of similar long-term subordinated debentures and brought that issue to litigation. Although in December 1998, the IRS conceded this issue in the Enron litigation, there can be no assurance as to whether the IRS nevertheless will not seek to disallow the deductions that PSEG and PSE&G have taken and will claim for interest paid on such debentures. The annualized interest expense for these debentures for PSEG and PSE&G together is approximately $83 million. In total for 1994 through 1997, PSEG and PSE&G claimed approximately $89 million in interest deductions for these debentures, which equates to approximately $31 million in tax benefits. If challenged by the IRS, PSEG and PSE&G would expect to vigorously defend the deductibility of the interest payments taken as deductions on previously filed Federal tax returns. In the event of the occurrence of a Tax Event as defined in the respective debenture indentures, such as the receipt of an opinion of counsel that there is a more than insubstantial risk that interest payable on the debentures will not be tax deductible, PSEG and PSE&G have the right to redeem the preferred securities and issue the debentures to the preferred securities holders or to refinance such obligations as allowed in the respective debenture indentures. PSE&G PSE&G has filed with the BPU for approval, which it expects to obtain, to opportunistically refinance essentially all of its long-term debt through January 4, 2000. Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds (Bonds) against previous additions and improvements and/or retired Bonds provided that its ratio of earnings to fixed charges calculated in accordance with its Mortgage is at least 2:1. As of December 31, 1998, the Mortgage would permit up to $3.6 billion aggregate principal amount of new Bonds to be issued against previous additions and improvements. At December 31, 1998, PSE&G's Mortgage coverage ratio was 3.98:1. PSE&G expects to apply for and receive necessary BPU authorization for external financings to meet its requirements over the next five years, as needed. In January 1998, $100 million of PSE&G's 6.00% Bonds, Series NN, matured. In April 1998, $8 million of PSE&G's 7.50% Bonds, Series OO, were purchased in the open market. On August 3, 1998, the remaining outstanding $234 million of the 7.50% Series OO Bonds were redeemed. In May 1998, PSE&G sold $250 million of its Bonds, Remarketable Series YY, due 2023, Mandatorily Tendered 2008. The Series YY Bonds bear interest at the rate of 6.375% per annum until May 1, 2008. PSE&G also entered into a Remarketing Agreement with a third party that granted the third party the option to call and remarket the Series YY Bonds on May 1, 2008 for the remaining term of the Series YY Bonds. If not called by the third party, the Bonds must be put by the holders to PSE&G. The proceeds of the sale were used primarily to redeem PSE&G's 7.50% Series OO Bonds. On July 1, 1998, $18 million of PSE&G's 6% Debenture Bonds matured. To provide liquidity for its commercial paper program, PSE&G has a $650 million revolving credit agreement expiring in June 1999, which PSE&G expects to be able to renew, and a $650 million revolving credit agreement expiring 47 in June 2002 with a group of commercial banks, which provide for borrowings of up to one year. On December 31, 1998, there were no borrowings outstanding under these credit agreements. The BPU has authorized PSE&G to issue and have outstanding at any one time through January 4, 2000, not more than $1.5 billion of short-term obligations, consisting of commercial paper and other unsecured borrowings from banks and other lenders. On December 31, 1998, PSE&G had $770 million of short-term debt outstanding, including $115 million borrowed against its uncommitted bank lines of credit which lines of credit totaled $150 million as of December 31, 1998. PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125 million revolving credit facility with a group of banks, which expires on June 28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations under this program. As of December 31, 1998, Fuelco had commercial paper of $80 million outstanding. ENERGY HOLDINGS The minimum net worth maintenance agreement between PSEG Capital and PSEG provides, among other things, that PSEG (1) maintain its ownership, directly or indirectly, of all outstanding common stock of PSEG Capital, (2) cause PSEG Capital to have at all times a positive tangible net worth of at least $100,000 and (3) make sufficient contributions of liquid assets to PSEG Capital in order to permit it to pay its debt obligations. In 1993, PSEG agreed with the BPU to make a good-faith effort to eliminate such PSEG support within six to ten years. Effective January 31, 1995, PSEG Capital notified the BPU of its intention not to have more than $650 million of debt outstanding at any time. PSEG Capital has a $650 million Medium Term Note (MTN) program which provides for the private-placement of MTNs without registration. PSEG Capital's assets consist principally of demand notes of Global and Resources. Intercompany borrowing rates are established based upon PSEG Capital's cost of funds. At December 31, 1998, PSEG Capital had total debt outstanding of $498 million, all of which were comprised of MTNs. On February 16, 1999, PSEG Capital issued $252 million of 6.25% MTNs due May 2003. The proceeds were used to repay $100 million of PSEG Capital MTNs which matured February 16, 1999 and to reduce Energy Holdings' short-term debt. At February 16, 1999, total debt outstanding under the MTN program was $650 million. As of December 31, 1998, Funding had $150 million and $300 million revolving credit facilities with two groups of banks which expire in July and November 1999, respectively. Funding expects to be able to renew both credit facilities. Funding makes short-term investments only if the funds cannot be employed in intercompany loans. Intercompany borrowing rates are established based upon Funding's cost of funds. Funding is providing both long and short-term capital for Resources and Global and their subsidiaries on the basis of an unconditional guaranty from Energy Holdings, but without direct support from PSEG. As of December 31, 1998, Funding had $251 million of total debt outstanding, including $45 million of privately-placed Senior Notes which mature in March 1999. For a discussion of the non-recourse debt of Global, a wholly-owned subsidiary of Energy Holdings, see Note 7. Schedule of Consolidated Debt of Notes. Energy Holdings, Global and Resources are subject to restrictive business and financial covenants contained in existing debt agreements. Energy Holdings is required to maintain a debt to equity ratio of no more than 2.00:1 and a twelve-months earnings before interest and taxes to interest (EBIT) coverage ratio of at least 1.50:1. As of December 31, 1998 and 1997, Energy Holdings had consolidated debt to equity ratios of 0.89:1 and 1.80:1, respectively, and for the years ended December 31, 1998, 1997 and 1996, EBIT coverage ratios, as defined to exclude the effects of EGDC and the gain on the sale of EDC, of 2.10:1, 2.20:1 and 2.45:1, respectively. The 1998 debt to equity ratio decreased primarily due to the equity investment by PSEG of $509 million, evidenced by the like amount of preferred stock issued by Energy Holdings to PSEG. Compliance with applicable financial covenants will depend upon future financial position and levels of earnings, as to which no assurance can be given. In addition, Energy Holdings' ability to continue to grow its business will depend to a significant degree on PSEG's and Energy Holdings' ability to obtain additional financing beyond current levels. 48 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in PSEG's market risk sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices, equity security prices, interest rates and foreign currency exchange rates as discussed below. PSEG's policy is to use derivatives to manage risk consistent with its business plans and prudent practices. PSEG has a Risk Management Committee made up of executive officers and an independent risk oversight function to ensure compliance with corporate policies and prudent risk management practices. PSEG is exposed to credit losses in the event of non-performance or non-payment by counterparties. PSEG also has a credit management process which is used to assess, monitor and mitigate counterparty exposure for PSE&G and Energy Holdings. In the event of nonperformance or nonpayment by a major counterparty, there may be a material adverse impact on PSEG's and PSE&G's financial condition, results of operations and net cash flows. COMMODITIES--PSE&G 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 and other events. To reduce price risk caused by market fluctuations, PSE&G enters into derivative contracts, including forwards, futures, swaps and options with approved counterparties, to hedge its anticipated demand. These contracts, in conjunction with owned electric generating capacity and physical gas supply contracts, are designed to cover estimated electric and gas customer commitments. PSE&G currently has levelized energy adjustment clauses in its rate structure in place for both electricity (LEAC) and natural gas (LGAC). These clauses were established to minimize the impact of major commodity price swings on customer prices. They also reduce the risk to PSE&G by permitting PSE&G to defer price increases and decreases until regulatory treatment can be determined. In accordance with the December 31st Order, PSE&G is utilizing deferred accounting for electricity supply costs, however, overrecoveries during the LEAC period will be used to mitigate stranded costs to be determined in the Energy Master Plan Proceedings while underrecoveries will be recognized in results of operations. PSE&G's proposal in the BPU's restructuring proceedings would cap basic tariff rates for seven years and discontinue the LEAC upon commencement of customer choice. For discussion of the levelized energy adjustment clauses, see Note 2. Regulatory Issues of Notes. During the summer of 1998, the eastern electricity commodity markets experienced severe volatility resulting from extremely hot weather and electric capacity and energy shortages in the Midwest. Certain electric power marketers defaulted, ultimately resulting in their bankruptcy. FERC issued a report on September 22, 1998 addressing the causes of these severe price movements in the summer of 1998. The report focused on the activity in the Midwest where the most extreme movements resulted causing surrounding pools to experience higher than expected prices and volatilities The report concluded that "the particular combination of factors that led to the June event was quite unusual." The report stated further, "This combination of factors was not typical, is not likely to recur, and is not representative of how wholesale electricity markets usually work. However, price increases and decreases may be expected in the future depending upon the balance of demand and supply." PSE&G cannot predict whether similar events that may lead to extreme price movements will occur again. Given the impending regulatory change and the dissolution of the LEAC, the absence of a PJM price cap in situations involving emergency purchases, and the potential for plant outages, extreme price movements could have a material impact on PSE&G's financial condition, results of operations and net cash flows. PSE&G uses a value-at-risk model to assess the market risk of its commodity business. This model includes fixed price sales commitments, owned generation, native load requirements, physical contracts and financial derivative instruments. Value-at-risk represents the potential gains or losses for instruments or portfolios due to changes in market factors, for a specified time period and confidence level. PSE&G estimates value-at-risk across its commodity business using a model with historical volatilities and correlations. The measured value-at-risk using a variance/co-variance model with a 97.5% confidence level and assuming a one week horizon at December 31, 1998 was approximately $4 million, compared to the December 31, 1997 level of $7 million, due to a reduction in net exposure during volatile months. PSE&G's calculated value-at-risk exposure represents an estimate of potential net losses that could be recognized on its portfolio of physical and financial derivative instruments assuming historical movements in future market rates. These estimates, however, are not necessarily indicative of actual results which may occur, since actual future gains and losses will differ from those historical estimates based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in PSE&G's portfolio of hedging instruments during the year. 49 As discussed in Results of Operations, wholesale power activities at PSE&G positively impacted the results of operations for 1998. Certain other utilities and power marketers have experienced significant losses in their wholesale power operations during that period. These losses were primarily attributable to extreme market volatility, counterparty defaults and unavailability of generation. COMMODITIES--ENERGY HOLDINGS During 1998, Energy Technologies entered into futures contracts to buy natural gas related to fixed-price natural gas sales commitments. Such contracts hedged approximately 90% of its fixed price sales commitments at December 31, 1998. As of December 31, 1998, Energy Technologies had a net unrealized hedge loss of $5 million. NUCLEAR DECOMMISSIONING TRUST FUNDS--PSE&G Contributions made into the Nuclear Decommissioning Trust Funds are invested in debt and equity securities. These marketable debt and equity securities are recorded at $524 million with a fair market value of $542 million at December 31, 1998 and have exposure to price risk. The potential change in fair value resulting from a hypothetical 10% change in quoted market prices of these securities amounts to $54 million. All realized gains on Nuclear Decommissioning Trust Fund investments are recorded as a component of accumulated depreciation while unrealized gains are recorded as deferred credits and neither affects earnings. Under the Energy Master Plan Proceedings, it is expected that the recovery of these investments will be continued as part of the societal benefits charge, as to which no assurances can be given. EQUITY SECURITIES--ENERGY HOLDINGS Resources has investments in equity securities and partnerships, in which Resources is a limited partner, which invest in equity securities. Resources carries its investments in equity securities at their approximate fair value as of the reporting date. Consequently, the carrying value of these investments is affected by changes in the fair value of the underlying securities. Fair value is determined by adjusting the market value of the securities for liquidation and market volatility factors, where appropriate. The aggregate amount of such investments which have available market prices at December 31, 1998 and 1997 are recorded at fair value of $204 million and $185 million, respectively, and have exposure to price risk. A sensitivity analysis has been prepared to estimate Energy Holdings' exposure to market sensitivity of these investments. The potential change in fair value resulting from a hypothetical 10% change in quoted market prices of these investments amounts to $17 million. INTEREST RATES--PSEG PSEG is subject to the risk of fluctuating interest rates in the normal course of business. PSEG's policy is to manage interest rates through the use of interest rate swaps and fixed and floating rate debt. As of December 31, 1998, a hypothetical 10% change in market interest rates would result in a $2 million change in interest costs related to floating rate debt, in addition to that noted in Interest Rates--PSE&G and Interest Rates--Energy Holdings below. PSEG entered into an interest rate swap on June 26, 1998 to hedge Enterprise Capital Trust II's $150 million of Floating Rate Capital Securities, Series B, due 2028, which were sold to a group of institutional investors in June 1998. The Floating Rate Capital Securities were offered to institutional investors at an annual rate equal to three-month LIBOR plus 1.22%, reset quarterly. Enterprise Capital Trust II is a special purpose statutory business trust controlled by PSEG. The basis for both the interest rate swap and the Floating Rate Capital Securities is the quarterly LIBOR. This interest rate swap effectively hedges the underlying debt for 10 years at an effective rate of 7.2%. INTEREST RATES--PSE&G PSE&G is subject to the risk of fluctuating interest rates in the normal course of business. PSE&G's policy is to manage interest rates through the use of fixed and, to a lesser extent, floating rate debt. PSE&G's interest rate risk related to existing fixed, long-term debt is not significant as PSE&G expects to receive BPU approval to issue long-term debt for opportunistic refinancing purposes. Additionally, PSE&G would also use interest rate swap instruments to hedge interest 50 rate risk, when appropriate. As of December 31, 1998, a hypothetical 10% change in market interest rates would result in a $6 million change in interest costs related to short-term and floating rate debt. INTEREST RATES--ENERGY HOLDINGS Energy Holdings is subject to the risk of fluctuating interest rates in the normal course of business. Energy Holdings' policy is to manage interest rates through the use of fixed rate debt, floating rate debt and interest rate swaps. As of December 31, 1998, a hypothetical 10% change in market interest rates would result in a $3 million change in interest costs related to short-term and floating rate debt. In June 1997, an indirect subsidiary of Global entered into an interest rate swap on 50% of its floating rate borrowings of $87 million. The basis for the interest rate swap is six month LIBOR. The interest rate swap effectively hedges the underlying debt through its scheduled maturity in May 1999 at the current effective rate of 7.76%. The interest differential to be received or paid under the interest rate swap agreement is recorded over the life of the agreement as an adjustment to the interest expense of the related borrowing. The swap terminates on May 28, 1999. FOREIGN CURRENCIES--ENERGY HOLDINGS Global had consolidated non-recourse debt of $123 million as of December 31, 1998 which is denominated in the Brazilian Real that is indexed to a basket of currencies including U.S. dollars. As a result, it is subject to foreign currency exchange rate risk due to the effect of exchange rate movements between the indexed foreign currencies and the Brazilian Real and between the Brazilian Real and the U.S. Dollar. Exchange rate changes ultimately impact the debt level outstanding in the denominated currency and result in foreign currency transactions in accordance with current accounting guidance. Any related transaction (losses)/gains resulting from such exchange rate changes are included in determining net income for the period and amounted to $(3) million and $1 million for the years ended December 31, 1998 and 1997, respectively. For more information on foreign operations and the devaluation of foreign currencies, see below and Note 20. Subsequent Events of Notes. FOREIGN OPERATIONS In accordance with their growth strategies, Global and Resources have made approximately $919 million and $691 million, respectively, of international investments. These investments represent 9% of PSEG's consolidated assets and contribute 2% of consolidated revenues. Resources investments are primarily in leveraged leases in the Netherlands and the United Kingdom with associated revenues denominated in U.S. dollars, and, therefore bear no foreign currency risk. Global's investments are primarily in projects that generate or distribute electricity in Brazil, Argentina and China. As a primary vehicle for PSEG's growth, Global is expected to continue to invest in competitive power markets. Where possible, Global structures its investments to manage the risk associated with project development, including foreign currency devaluation and fluctuations. PSEG has evaluated the current economic conditions in these regions and has determined that its investments have not been impaired. Net foreign currency devaluations, caused primarily by the Brazilian Real, have reduced Global's total assets by $43 million as of December 31, 1998 with an offsetting charge to cumulative foreign currency translation adjustment (a separate component of stockholders' equity). In January 1999, Brazil abandoned its managed devaluation strategy and allowed its currency, the Real, to float against other currencies. As of January 31, 1999, the Real has devalued approximately 40% against the U.S. dollar since December 31, 1998. Based on the December 31, 1998 Brazilian investment balance of $482 million, there was a 40% devaluation as of January 31, 1999 which resulted in a charge of $172 million to cumulative foreign currency translation adjustment (a separate component of stockholders' equity). PSEG cannot predict to what extent, if any, further devaluation may occur, and, therefore, cannot predict the impact of potential devaluation of currencies on PSEG's results of operations, financial condition and net cash flows. However, assuming no further significant devaluation, PSEG does not expect this to have a material adverse effect on its 1999 results of operations, financial condition or net cash flows. For additional information, see Note 20. Subsequent Events and Note 15. Financial Information by Business Segment of Notes. As PSEG increases its international investments, the financial statements of PSEG will be increasingly affected by changes in the global economy. 51 YEAR 2000 READINESS DISCLOSURE Many of PSEG's and PSE&G's systems, which include information technology applications, plant control and telecommunications infrastructure systems, must be modified due to computer program limitations in recognizing dates beyond 1999. PSEG and PSE&G have had a formal project in place since 1997 to address Year 2000 issues. Based upon project progress to date, all mission critical systems are expected to be ready by January 1, 2000. Future progress is dependent on a wide number of variables, including the continued availability of trained resources and vendors meeting commitments to PSEG and PSE&G. YEAR 2000 READINESS STATUS PSEG and PSE&G have established a three-phase program to achieve Year 2000 readiness. The initial phase (Inventory) identifies systems having potential Year 2000 issues and sets priorities for assessing and remediating those systems. The second phase (Assessment) determines whether systems are digital/date sensitive and the extent of date related issues. The third phase (Remediation/Testing) repairs programming code, upgrades or replaces systems and validates that code repairs were implemented as intended. PSEG's and PSE&G's Year 2000 readiness program addresses issues relating to three principal types of systems: o Information technology systems, which include such business applications as the customer information, administrative and "back office" systems. o Process control and monitoring systems, which include embedded devices as well as real time systems such as energy management systems (EMS) and the supervisory control systems for gas and electric (SCADA). o Infrastructure systems, which include such devices as servers, routers, etc. Inventory is more than 99% complete for all information technology, infrastructure and process control/monitoring systems. Substantial Assessment work has been completed on the information technology, infrastructure systems and process control systems. Remediation/Testing is in progress on information technology, process control and infrastructure systems. PSEG and PSE&G have completed required Year 2000 readiness work for more than 80% of their critical systems by the end of 1998. The work required by the remaining critical systems is expected to be completed by July 1999, except for certain systems operated by PSE&G's nuclear operations, as discussed below. By the end of 1999, a majority of PSEG's and PSE&G's non-critical systems are also expected to be Year 2000 ready with the remainder of such non-critical systems to be ready in 2000. Energy Holdings and its subsidiaries have essentially completed Inventory on all systems impacted by Year 2000 readiness issues and substantial Assessment work has been completed on such systems. Remediation/Testing is expected to be completed in 1999 on all such systems. As previously reported, on May 11, 1998, the NRC issued a Generic Letter requiring submission of a written response within 90 days of that date indicating whether or not nuclear plant operators have pursued and continue to pursue Year 2000 programs and addressing the programs' scope, assessment process, plans for corrective actions, quality assurance measures, contingency plans and regulatory compliance. Additionally, the Generic Letter required submission of a written response upon completion of the operators' Year 2000 program or no later than July 1, 1999 confirming that their facilities are Year 2000 ready, or will be Year 2000 ready, by 2000 with regard to compliance with the terms and conditions of their licenses and NRC regulations. On July 23, 1998, PSE&G provided its written response to the first requirement noted above, outlining for the NRC its nuclear operations' Year 2000 program and indicating that planned implementation will allow PSE&G's nuclear operations to be Year 2000 ready and in compliance with the terms and conditions of its licenses and NRC regulation by January 1, 2000. As of December 31, 1998, PSE&G's nuclear operations' Year 2000 effort is on schedule to have all mission critical systems ready by January 1, 2000. Additionally, at a meeting held on September 29, 1998, PECO informed PSE&G that Peach Bottom's Year 2000 effort is on schedule to meet the July 1999 NRC response schedule. During the week of October 26, 1998, the NRC conducted an audit of the nuclear operations' Hope Creek Year 2000 Project. The audit report states that the nuclear operations' Year 2000 project plan is comprehensive and is receiving the appropriate management support and oversight. 52 PSEG and PSE&G are continuing to work with their supplier base to assess the Year 2000 readiness status of vendors who provide critical materials and services (key vendors). Sufficient information has not yet been received from all key vendors to confirm their preparedness for Year 2000. PSEG and PSE&G are aggressively pursuing the key vendors who have been unresponsive. However, PSEG and PSE&G are not yet able to determine whether all of their key vendors will be able to meet Year 2000 requirements. Failure of key vendors to meet these requirements could result in material adverse impacts to PSEG's and PSE&G's operations, financial condition, results of operations and net cash flows. YEAR 2000 COSTS For a discussion of Year 2000 Costs, see Note 10. Commitments and Contingent Liabilities of Notes. YEAR 2000 RISKS The North American Electric Reliability Council (NERC) has been asked by the Department of Energy (DOE) to lead national efforts for electric utility industry Year 2000 readiness. In its report issued in September 1998, NERC evaluated potential risks for the industry from both an impact and probability basis. PSEG's and PSE&G's internal analyses of the risks posed by the Year 2000 are consistent with the risk assessment prepared by NERC. PSEG and PSE&G expect that the Year 2000 project (specifically remediation and contingency planning efforts) will mitigate these risks and allow PSEG and PSE&G to meet their fiduciary, regulatory and safety commitments. The following risks defined by NERC were assumed only for the purpose of planning and preparing for operations. None of the risks identified in this plan are predictions of Year 2000 events:
==================================================================================================== NERC NERC PROBABILITY IMPACT NERC DEFINED SCENARIO FOR INDUSTRY FOR INDUSTRY - ---------------------------------------------------------------------------------------------------- Loss of generation High High - ---------------------------------------------------------------------------------------------------- Loss of EMS, SCADA Systems High High - ---------------------------------------------------------------------------------------------------- Loss of leased communications lines High High - ---------------------------------------------------------------------------------------------------- Generation Restart/Loss of Load/Unusual load High Low - ---------------------------------------------------------------------------------------------------- Environmental control or monitoring Medium Medium - ---------------------------------------------------------------------------------------------------- Loss of internal communications Medium Medium - ---------------------------------------------------------------------------------------------------- Loss of gas or oil supply Medium High - ---------------------------------------------------------------------------------------------------- Sabotage Medium High - ---------------------------------------------------------------------------------------------------- Distribution system failure/DC Tie Failure/Under-frequency or Low High under-frequency voltage load shed failure/Loss of system protection/Loss of transmission/Loss of security coordinator functions - ---------------------------------------------------------------------------------------------------- Voltage control device failure Low High - ---------------------------------------------------------------------------------------------------- Loss of control center access Low Medium - ---------------------------------------------------------------------------------------------------- Loss of coal Low Medium - ---------------------------------------------------------------------------------------------------- Operating Personnel/Generation and Transmission Information Low Low Sharing System (OASIS) Failure/Loss of non-critical operating data/DSM failure/Supplies ====================================================================================================
PSEG's and PSE&G's efforts have focused on reducing the "High" and "Medium" probability scenarios and mitigating the effects of "High" and "Medium" impacts. PSEG and PSE&G have identified some and will continue working to determine the most reasonably likely, worst case scenarios arising from Year 2000 readiness issues. Such scenarios may include, among others, significant reductions in key customers' power needs due to their own Year 2000 readiness issues or temporary disruption of service from the effect of disruptions caused by other entities whose electrical systems are connected to PSE&G's through PJM. The results of such analysis will depend, in part, on the results of information currently being obtained from key vendors as to their Year 2000 readiness and the readiness of PJM and trading partners, among others. 53 PSEG and PSE&G have no outstanding litigation relating to Year 2000 issues. The likelihood of future Year 2000 related liabilities cannot be determined at this time. PSEG and PSE&G have not been subject to specific or general Year 2000 regulatory action, other than responding to inquiries from regulatory bodies such as the BPU and the NRC. CONTINGENCY PLANS PSEG and PSE&G are developing contingency plans in accordance with NERC and NRC guidelines. The cornerstone of the guidance is to use a "defense in depth" strategy by creating multiple defense barriers to reduce the risk of catastrophic results to extremely small probability levels. Other areas covered by NERC and PSEG's and PSE&G's responses include: ================================================================================ GUIDANCE PSEG'S AND PSE&G'S CONTINGENCY PLAN - -------------------------------------------------------------------------------- Identify and fix known Year 2000 PSEG and PSE&G have focused their problems. resources on the remediation of non-compliant systems. - -------------------------------------------------------------------------------- Identify most probable and credible PSEG and PSE&G are currently worst case scenarios. evaluating. - -------------------------------------------------------------------------------- Plan for the probable, prepare for the PSEG and PSE&G will develop special worst. Develop special operating procedures and will conduct both procedures, conduct training and system internal drills and participate in wide drills. industry efforts. - -------------------------------------------------------------------------------- Operate systems in a precautionary PSEG & PSE&G are working with the posture during critical Year 2000 Mid-Atlantic Area Council (MAAC) and periods. This may include reducing with PJM for detailed planning. voluntary bulk transfers, ensuring that adequate generation facilities are in service and increasing staffing. ================================================================================ The nature of contingency plans will include 1) using existing redundant assets, such as PSE&G's mix of generating assets; 2) leveraging existing business continuity plans, such as storm preparedness plans; 3) using manual work-arounds; 4) using rapid-reaction teams and 5) development of risk mitigation approaches to reduce overall dependency on vendors. PSEG and PSE&G's emerging strategy calls for the deployment of these plans in the following manner (using risk scenarios shown above that NERC evaluated to have a high probability and a high impact): ================================================================================ SCENARIO INITIAL PLAN - -------------------------------------------------------------------------------- Loss of generation Use existing redundant assets. Have available a varied mix of generating assets, with sufficient reserve capacity, to ensure that if certain stations are unable to function, the reserve can meet generating needs. - -------------------------------------------------------------------------------- Loss of EMS, SCADA Systems Use manual work-arounds and rapid reaction teams. - -------------------------------------------------------------------------------- Loss of leased communications lines Use existing redundant assets such as existing radio and back-up communications systems. ================================================================================ PSEG and PSE&G have adopted NERC's timetable, guidelines and detailed requirements for developing these contingency plans. The planning process is an iterative one. PSEG and PSE&G have completed their preliminary contingency plans. The second version of their contingency plans will be completed by June 30, 1999, consistent with NERC's timetable. PSEG and PSE&G will participate, with internal drills to be completed beforehand, in NERC's industry-coordinated Year 2000 readiness drills on April 8-9, 1999 and September 8-9, 1999. PSEG and PSE&G will evaluate plan updates, as needed, from September 1999 through January 2000. PSEG and PSE&G expect that with completion of the Year 2000 project and implementation of programs from SAP America, Inc. (SAP), the possibility of significant interruptions of normal operations should be reduced. However, if PSEG, PSE&G, their domestic and international subsidiaries, the other members of PJM, PJM trading partners supplying power through PJM or PSEG's or PSE&G's critical vendors and/or customers are unable to meet the Year 2000 deadline, such inability could have a material adverse impact on PSEG's and PSE&G's operations, financial condition, results of operations and net cash flows. 54 RATE MATTERS For discussions of the Energy Master Plan Proceedings, Stranded Costs, Securitization, Depreciation, NJGRT Reform, Settlement of Certain Regulatory Issues, the LGAC, the LEAC, the Demand Side Adjustment Factor, the Remediation Adjustment Charge, Consolidated Tax Benefits, OPEB, and other rate matters, see Note 2. Regulatory Issues of Notes. ACCOUNTING ISSUES For a discussion of significant accounting policies, including those regarding regulation of PSE&G such as Statement of Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation," and Emerging Issues Task Force (EITF) Issue 97-4, "Deregulation for the Pricing of Electricity -- Issues Related to the Application of FASB Statements No. 71 and 101," see Note 1. Organization and Summary of Significant Accounting Policies and Note 19. Accounting Matters of Notes. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS For a discussion of the impact of new accounting pronouncements including SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), Emerging Issues Task Force (EITF) Issues 98-10, "Accounting for Energy Trading and Risk Management Activities" (EITF 98-10), Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1) and SOP 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5), see Note 19. Accounting Matters of Notes. SITE RESTORATIONS AND OTHER ENVIRONMENTAL COSTS For discussion of potential environmental and other remediation costs, see Note 10. Commitments and Contingent Liabilities of Notes. PSE&G The information required by this item is incorporated herein by reference to the following portions of PSEG's Management's Discussion and Analysis of Financial Condition and Results of Operations, insofar as they relate to PSE&G and its subsidiaries: Corporate Structure; Overview of 1998 and Future Outlook; Results of Operations; Liquidity and Capital Resources; External Financings; Qualitative and Quantitative Disclosures About Market Risk; Foreign Operations; Year 2000 Readiness Disclosure; Rate Matters; Accounting Issues; Impact of New Accounting Pronouncements and Site Restorations and Other Environmental Costs. 55 FORWARD LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the Act) provides a "safe harbor" for forward-looking statements to encourage such disclosures without the threat of litigation providing those statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Forward-looking statements have been made in this report. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used herein, the words "will", "anticipate", "estimate", "expect", "objective", "hypothetical", "potential" and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: deregulation and the unbundling of energy supplies and services; managing rapidly changing energy trading operations in conjunction with electricity and gas production, transmission and distribution systems; managing foreign investments and electric generation and distribution operation in locations outside of the traditional utility service territory; political and foreign currency risks; an increasingly competitive energy marketplace; sales retention and growth potential in a mature service territory and a need to reduce operating and capital costs; ability to obtain adequate and timely rate relief, cost recovery, including stranded costs, and other necessary regulatory approvals; Federal and state regulatory actions; costs of construction; Year 2000 issues; operating restrictions, increased cost and construction delays attributable to environmental regulations; nuclear decommissioning and the availability of reprocessing and storage facilities for spent nuclear fuel; licensing and regulatory approval necessary for nuclear and other operating stations; the ability to economically and safely operate nuclear facilities in accordance with regulatory requirements; environmental concerns; and market risk and credit market concerns. PSEG and PSE&G undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors pursuant to the Act should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by PSEG and PSE&G prior to the effective date of the Act. ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Information relating to quantitative and qualitative disclosures about market risk is set forth under the caption "Qualitative and Quantitative Disclosures About Market Risk" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and "Financial Instruments" in Note 1. Organization and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. Such information is incorporated herein by reference. For PSE&G, the information required by this item is incorporated herein by reference insofar as it relates to PSE&G and its subsidiaries. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 56 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- OPERATING REVENUES Electric $ 4,031 $ 3,918 $ 3,944 Gas 1,559 1,937 1,881 Nonutility Activities 341 245 216 --------- --------- --------- Total Operating Revenues 5,931 6,100 6,041 --------- --------- --------- OPERATING EXPENSES Net Interchanged Power and Fuel for Electric Generation 945 909 919 Gas Purchased 970 1,101 1,118 Operation and Maintenance 1,501 1,364 1,371 Depreciation and Amortization 669 630 607 Taxes (Note 12) Income Taxes 420 334 295 Transitional Energy Facility Assessment/New Jersey Gross Receipts Taxes 171 576 598 Other 69 71 76 --------- --------- --------- Total Operating Expenses 4,745 4,985 4,984 --------- --------- --------- OPERATING INCOME 1,186 1,115 1,057 --------- --------- --------- OTHER INCOME AND DEDUCTIONS Settlement of Salem Litigation - Net of Applicable Taxes of $29 -- (53) -- Other - net 6 7 (2) --------- --------- --------- Total Other Income and Deductions 6 (46) (2) --------- --------- --------- INCOME BEFORE INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES 1,192 1,069 1,055 --------- --------- --------- INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS Interest Expense (Note 7) 481 470 453 Allowance for Funds Used During Construction - Debt and Capitalized Interest (13) (20) (18) Preferred Securities Dividend Requirements of Subsidiaries (Note 6) 80 56 50 Net Loss (Gain) on Preferred Stock Redemptions (Note 6) -- 3 (18) --------- --------- --------- Total Interest Charges and Preferred Securities Dividends 548 509 467 --------- --------- --------- INCOME FROM CONTINUING OPERATIONS 644 560 588 Discontinued Operations (Note 16): Discontinued Operations - Net of Taxes -- -- 11 Gain on Sale of Discontinued Operations -- -- 13 --------- --------- --------- NET INCOME $ 644 $ 560 $ 612 ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL DILUTIVE EFFECT OF STOCK OPTIONS OUTSTANDING (000's) 230,974 231,986 242,401 EARNINGS PER SHARE (Basic and Diluted) Income From Continuing Operations $ 2.79 $ 2.41 $ 2.42 Income From Discontinued Operations -- -- 0.04 Gain on Sale of Discontinued Operations -- -- 0.06 --------- --------- --------- TOTAL EARNINGS PER SHARE $ 2.79 $ 2.41 $ 2.52 ========= ========= ========= DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 2.16 $ 2.16 $ 2.16 ========= ========= =========
See Notes to Consolidated Financial Statements. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS ASSETS (MILLIONS OF DOLLARS)
DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- UTILITY PLANT - Original cost Electric $ 14,069 $ 13,692 Gas 2,847 2,697 Common 578 558 ---------- ---------- Total 17,494 16,947 Less: Accumulated depreciation and amortization 7,048 6,463 ---------- ---------- Net 10,446 10,484 Nuclear Fuel in Service, net of accumulated amortization - 1998, $312; 1997, $302 187 216 ---------- ---------- Net Utility Plant in Service 10,633 10,700 Construction Work in Progress, including Nuclear Fuel in Process - 1998, $72; 1997, $60 219 326 Plant Held for Future Use 24 24 ---------- ---------- Net Utility Plant 10,876 11,050 ---------- ---------- INVESTMENTS AND OTHER NONCURRENT ASSETS Long-Term Investments, net of amortization - 1998, $28; 1997, $21, and net of valuation allowances - 1998, $18; 1997, $23 3,034 2,873 Nuclear Decommissioning and Other Special Funds 649 492 Other Noncurrent Assets, net of amortization - 1998, $29; 1997, $16, and net of valuation allowances - 1998, $10; 1997, $7 150 167 ---------- ---------- Total Investments and Other Noncurrent Assets 3,833 3,532 ---------- ---------- CURRENT ASSETS Cash and Cash Equivalents 140 83 Accounts Receivable: Customer Accounts Receivable 506 520 Other Accounts Receivable 219 293 Less: Allowance for Doubtful Accounts 38 41 Unbilled Revenues 255 270 Fuel, at average cost 331 310 Materials and Supplies, at average cost, net of inventory valuation reserves - 1998, $12; 1997, $12 148 142 Miscellaneous Current Assets 93 86 ---------- ---------- Total Current Assets 1,654 1,663 ---------- ---------- DEFERRED DEBITS (Note 3) SFAS 109 Income Taxes 704 725 OPEB Costs 270 289 Demand Side Management Costs 150 116 Environmental Costs 139 122 Unamortized Loss on Reacquired Debt and Debt Expense 135 136 Electric Energy and Gas Costs 35 167 Other 201 143 ----------------------- Total Deferred Debits 1,634 1,698 ---------- ---------- TOTAL $ 17,997 $ 17,943 ========== ==========
See Notes to Consolidated Financial Statements. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES (MILLIONS OF DOLLARS)
DECEMBER 31, ------------------------- 1998 1997 ---------- ---------- CAPITALIZATION Common Stockholders' Equity: Common Stock, issued; 231,957,608 shares $ 3,603 $ 3,603 Treasury Stock, at cost; 5,314,100 shares (207) -- Retained Earnings 1,748 1,623 Accumulated Other Comprehensive Income (46) (15) ---------- ---------- Total Common Stockholders' Equity 5,098 5,211 Subsidiaries' Preferred Securities: Preferred Stock Without Mandatory Redemption 95 95 Preferred Stock With Mandatory Redemption 75 75 Guaranteed Preferred Beneficial Interest in Subordinated Debentures (Note 6) 1,038 513 Long-Term Debt 4,763 4,873 ---------- ---------- Total Capitalization 11,069 10,767 ---------- ---------- OTHER LONG-TERM LIABILITIES Accrued OPEB 344 289 Decontamination and Decommissioning Costs 39 43 Environmental Costs (Note 10) 84 73 Capital Lease Obligations 50 52 ---------- ---------- Total Other Long-Term Liabilities 517 457 ---------- ---------- CURRENT LIABILITIES Long-Term Debt due within one year 418 340 Commercial Paper and Loans 1,056 1,448 Accounts Payable 655 686 Other 329 353 ---------- ---------- Total Current Liabilities 2,458 2,827 ---------- ---------- DEFERRED CREDITS Income Taxes 3,384 3,394 Investment Tax Credits 322 343 Other 247 155 ---------- ---------- Total Deferred Credits 3,953 3,892 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 10) -- -- ---------- ---------- TOTAL $ 17,997 $ 17,943 ========== ==========
See Notes to Consolidated Financial Statements. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (MILLIONS OF DOLLARS)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 644 $ 560 $ 612 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and Amortization 669 630 607 Amortization of Nuclear Fuel 94 60 60 Recovery (Deferral) of Electric Energy and Gas Costs - net 132 9 (5) Unrealized Gains on Investments - net (51) (56) (7) Proceeds from Leasing Activities (20) 71 89 Changes in certain current assets and liabilities: Net change in Accounts Receivable and Unbilled Revenues 100 (95) (12) Net change in Inventory - Fuel and Materials and Supplies (27) 9 (64) Net change in Prepayments (13) (15) 6 Net change in Accounts Payable (31) (11) 60 Net change in Provision for Rate Refund -- (80) 75 Net change in Other Current Assets and Liabilities (18) (7) 11 Other (57) 20 (16) Net cash provided by operating activities - Discontinued Operations -- -- 54 ---------- ---------- ---------- Net Cash Provided By Operating Activities 1,422 1,095 1,470 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant, excluding AFDC (535) (542) (586) Net change in Long-Term Investments (58) (914) 5 Contribution to Decommissioning Funds and Other Special Funds (115) (63) (29) Other (4) (95) (52) Net Proceeds from Sale of Discontinued Operations -- -- 704 Change in Net Assets - Discontinued Operations -- -- (51) ---------- ---------- ---------- Net Cash Used In Investing Activities (712) (1,614) (9) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in Short-Term Debt (392) 810 71 Issuance of Long-Term Debt 525 785 374 Redemption of Long-Term Debt (557) (700) (808) Redemption of Preferred Stock -- (94) (212) Issuance of Preferred Securities 525 95 208 Purchase of Treasury Stock (207) -- -- Retirement of Common Stock -- (43) (307) Cash Dividends Paid on Common Stock (499) (501) (523) Other (48) (29) (47) ---------- ---------- ---------- Net Cash (Used In) Provided By Financing Activities (653) 323 (1,244) ---------- ---------- ---------- Net Change In Cash And Cash Equivalents 57 (196) 217 Cash And Cash Equivalents At Beginning Of Year 83 279 62 ---------- ---------- ---------- Cash And Cash Equivalents At End Of Year $ 140 $ 83 $ 279 ========== ========== ========== Income Taxes Paid $ 426 $ 170 $ 157 Interest Paid $ 469 $ 416 $ 463
See Notes to Consolidated Financial Statements. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (MILLIONS)
ACCUMULATED OTHER COMMON TREASURY RETAINED COMPREHENSIVE STOCK STOCK EARNINGS INCOME TOTAL --------------- ----------------- -------- ------------- ------- SHS. AMOUNT SHS. AMOUNT ---- ------ ---- ------ BALANCE AS OF JANUARY 1, 1996 245 $ 3,801 -- $ -- $ 1,637 $ -- $ 5,438 Net Income -- -- -- -- 612 -- 612 Other Comprehensive Income -- -- -- -- -- -- -- ------- Comprehensive Income -- -- -- -- -- -- 612 ------- Cash Dividends on Common Stock -- -- -- -- (523) -- (523) Retirement of Common Stock (11) (174) -- -- (133) -- (307) Preferred Securities Issuance Expenses -- -- -- -- (7) -- (7) --------------- ----------------- -------- ------------- ------- BALANCE AS OF DECEMBER 31, 1996 234 3,627 -- -- 1,586 -- 5,213 --------------- ----------------- -------- ------------- ------- Net Income -- -- -- -- 560 -- 560 Other Comprehensive Income, net of tax: Currency Translation Adjustment, net of tax of $(2) -- -- -- -- -- (15) (15) ------- Other Comprehensive Income -- -- -- -- -- -- (15) ------- Comprehensive Income -- -- -- -- -- -- 545 ------- Cash Dividends on Common Stock -- -- -- -- (501) -- (501) Retirement of Common Stock (2) (24) -- -- (19) -- (43) Preferred Securities Issuance Expenses -- -- -- -- (3) -- (3) --------------- ----------------- -------- ------------- ------- BALANCE AS OF DECEMBER 31, 1997 232 3,603 -- -- 1,623 (15) 5,211 --------------- ----------------- -------- ------------- ------- Net Income -- -- -- -- 644 -- 644 Other Comprehensive Income, net of tax: Pension Plan Additional Minimum Liability, net of tax of $(2) -- -- -- -- -- (3) (3) Currency Translation Adjustment, net of tax of $(3) -- -- -- -- -- (28) (28) ------- Other Comprehensive Income -- -- -- -- -- -- (31) ------- Comprehensive Income -- -- -- -- -- -- 613 ------- Cash Dividends on Common Stock -- -- -- -- (499) -- (499) Purchase of Treasury Stock -- -- (5) (207) -- -- (207) Restricted Stock Award -- -- -- -- (5) -- (5) Preferred Securities Issuance Expenses -- -- -- -- (15) -- (15) --------------- ----------------- -------- ------------- ------- BALANCE AS OF DECEMBER 31, 1998 232 $ 3,603 (5) $ (207) $ 1,748 $ (46) $ 5,098 =============== ================= ======== ============= =======
Note: The ability of PSEG to declare and pay dividends is contingent upon its receipt of dividends from its subsidiaries. PSE&G, PSEG's principal subsidiary, has restrictions on the payment of dividends which are contained in its Restated Certificate of Incorporation, as amended, and certain of the indentures supplemental to its Mortgage and certain other indentures. However, none of these restrictions presently limits the payment of dividends out of current earnings. The amount of PSE&G's restricted retained earnings at December 31, 1998, 1997 and 1996 was $10 million. There are no restrictions on Energy Holding's retained earnings. See Notes to Consolidated Financial Statements. PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (MILLIONS OF DOLLARS)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- OPERATING REVENUES Electric $ 4,031 $ 3,918 $ 3,944 Gas 1,559 1,937 1,881 ---------- ---------- ---------- Total Operating Revenues 5,590 5,855 5,825 ---------- ---------- ---------- OPERATING EXPENSES Net Interchanged Power and Fuel for Electric Generation 945 909 919 Gas Purchased 970 1,101 1,118 Operation and Maintenance 1,357 1,276 1,299 Depreciation and Amortization 658 616 604 Taxes (Note 12) Income Taxes 398 307 265 Transitional Energy Facility Assessment/New Jersey Gross Receipts Taxes 171 576 598 Other 72 72 75 ---------- ---------- ---------- Total Operating Expenses 4,571 4,857 4,878 ---------- ---------- ---------- OPERATING INCOME 1,019 998 947 ---------- ---------- ---------- OTHER INCOME AND DEDUCTIONS Settlement of Salem Litigation - Net of Applicable Taxes of $29 -- (53) -- Other - net 8 7 (2) ---------- ---------- ---------- Total Other Income and Deductions 8 (46) (2) ---------- ---------- ---------- INCOME BEFORE INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES 1,027 952 945 ---------- ---------- ---------- INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS Interest Expense (Note 7) 390 395 399 Allowance for Funds Used During Construction - Debt (12) (15) (17) Preferred Securities Dividend Requirements of Subsidiaries (Note 6) 45 44 28 ---------- ---------- ---------- Total Interest Charges and Preferred Securities Dividends 423 424 410 ---------- ---------- ---------- NET INCOME 604 528 535 ---------- ---------- ---------- Preferred Stock Dividend Requirements (Note 6) 9 12 23 Net Loss (Gain) on Preferred Stock Redemptions (Note 6) -- 3 (18) ---------- ---------- ---------- EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED $ 595 $ 513 $ 530 ========== ========== ==========
See Notes to Consolidated Financial Statements. PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED BALANCE SHEETS ASSETS (MILLIONS OF DOLLARS)
DECEMBER 31, --------------------------- 1998 1997 ---------- ---------- UTILITY PLANT - Original cost Electric $ 14,069 $ 13,692 Gas 2,847 2,697 Common 578 558 ---------- ---------- Total 17,494 16,947 Less: Accumulated depreciation and amortization 7,048 6,463 ---------- ---------- Net 10,446 10,484 Nuclear Fuel in Service, net of accumulated amortization - 1998, $312; 1997, $302 187 216 ---------- ---------- Net Utility Plant in Service 10,633 10,700 Construction Work in Progress, including Nuclear Fuel in Process - 1998, $72; 1997, $60 219 326 Plant Held for Future Use 24 24 ---------- ---------- Net Utility Plant 10,876 11,050 ---------- ---------- INVESTMENTS AND OTHER NONCURRENT ASSETS Long-Term Investments, net of amortization - 1998, $28; 1997, $21, and net of valuation allowances - 1998, $11; 1997, $15 138 137 Nuclear Decommissioning and Other Special Funds 649 492 Other Noncurrent Assets, net of amortization - 1998, $1; 1997, $1 46 45 ---------- ---------- Total Investments and Other Noncurrent Assets 833 674 ---------- ---------- CURRENT ASSETS Cash and Cash Equivalents 43 17 Accounts Receivable: Customer Accounts Receivable 460 488 Other Accounts Receivable 178 232 Less: Allowance for Doubtful Accounts 38 41 Unbilled Revenues 255 270 Fuel, at average cost 331 310 Materials and Supplies, at average cost, net of inventory valuation reserves - 1998, $12; 1997, $12 146 142 Miscellaneous Current Assets 84 81 ---------- ---------- Total Current Assets 1,459 1,499 ---------- ---------- DEFERRED DEBITS (Note 3) SFAS 109 Income Taxes 704 725 OPEB Costs 270 289 Demand Side Management Costs 150 116 Environmental Costs 139 122 Unamortized Loss on Reacquired Debt and Debt Expense 135 135 Electric Energy and Gas Costs 35 167 Other 147 143 ---------- ---------- Total Deferred Debits 1,580 1,697 ---------- ---------- TOTAL $ 14,748 $ 14,920 ========== ==========
See Notes to Consolidated Financial Statements. PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES (MILLIONS OF DOLLARS)
DECEMBER 31, ---------------------------- 1998 1997 ---------- ---------- CAPITALIZATION Common Stockholder's Equity: Common Stock, issued; 132,450,344 shares $ 2,563 $ 2,563 Contributed Capital 594 594 Retained Earnings 1,443 1,352 Accumulated Other Comprehensive Income (3) -- ---------- ---------- Total Common Stockholder's Equity 4,597 4,509 Preferred Stock Without Mandatory Redemption 95 95 Preferred Stock With Mandatory Redemption 75 75 Subsidiaries' Preferred Securities: Guaranteed Preferred Beneficial Interest in Subordinated Debentures (Note 6) 513 513 Long-Term Debt 4,045 4,126 ---------- ---------- Total Capitalization 9,325 9,318 ---------- ---------- OTHER LONG-TERM LIABILITIES Accrued OPEB 344 289 Decontamination and Decommissioning Costs 39 43 Environmental Costs (Note 10) 84 73 Capital Lease Obligations 50 52 ---------- ---------- Total Other Long-Term Liabilities 517 457 ---------- ---------- CURRENT LIABILITIES Long-Term Debt due within one year 100 118 Commercial Paper and Loans 850 1,106 Accounts Payable 627 608 Other 255 268 ---------- ---------- Total Current Liabilities 1,832 2,100 ---------- ---------- DEFERRED CREDITS Income Taxes 2,527 2,569 Investment Tax Credits 313 333 Other 234 143 ---------- ---------- Total Deferred Credits 3,074 3,045 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 10) -- -- ---------- ---------- TOTAL $ 14,748 $ 14,920 ========== ==========
See Notes to Consolidated Financial Statements. PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (MILLIONS OF DOLLARS)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 604 $ 528 $ 535 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and Amortization 658 616 604 Amortization of Nuclear Fuel 94 60 60 Recovery (Deferral) of Electric Energy and Gas Costs - net 132 9 (5) Changes in certain current assets and liabilities: Net change in Accounts Receivable and Unbilled Revenues 94 (64) 7 Net change in Inventory - Fuel and Materials and Supplies (25) 9 (64) Net change in Prepayments (8) (15) 5 Net change in Accounts Payable 19 (19) 67 Net change in Provision for Rate Refund -- (80) 75 Net change in Other Current Assets and Liabilities (8) (6) (8) Other 5 (30) (37) ---------- ---------- ---------- Net Cash Provided By Operating Activities 1,565 1,008 1,239 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant, excluding AFDC (535) (542) (586) Contribution to Decommissioning Funds and Other Special Funds (115) (62) (29) Other (21) (67) (49) ---------- ---------- ---------- Net Cash Used In Investing Activities (671) (671) (664) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in Short-Term Debt (256) 468 71 Issuance of Long-Term Debt 250 288 374 Redemption of Long-Term Debt (349) (575) (429) Redemption of Preferred Stock -- (94) (212) Issuance of Preferred Securities -- 95 208 Cash Dividends Paid (513) (535) (547) Other -- (15) (25) ---------- ---------- ---------- Net Cash Used In Financing Activities (868) (368) (560) ---------- ---------- ---------- Net Change In Cash And Cash Equivalents 26 (31) 15 Cash And Cash Equivalents At Beginning Of Year 17 48 33 ---------- ---------- ---------- Cash And Cash Equivalents At End Of Year $ 43 $ 17 $ 48 ========== ========== ========== Income Taxes Paid $ 410 $ 259 $ 254 Interest Paid $ 386 $ 357 $ 392
See Notes to Consolidated Financial Statements. PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (MILLIONS OF DOLLARS)
ACCUMULATED CONTRIBUTED OTHER COMMON CAPITAL FROM RETAINED COMPREHENSIVE STOCK PSEG EARNINGS INCOME TOTAL ---------- ---------- ---------- ---------- ---------- BALANCE AS OF JANUARY 1, 1996 $ 2,563 $ 594 $ 1,366 $ -- $ 4,523 Net Income -- -- 535 -- 535 Other Comprehensive Income -- -- -- -- -- ---------- Comprehensive Income -- -- -- -- 535 ---------- Cash Dividends on Common Stock -- -- (524) -- (524) Cash Dividends on Preferred Stock -- -- (23) -- (23) Preferred Securities Issuance Expenses -- -- (7) -- (7) Net Gain on Preferred Stock Redemptions -- -- 18 -- 18 ---------- ---------- ---------- ---------- ---------- BALANCE AS OF DECEMBER 31, 1996 2,563 594 1,365 -- 4,522 ---------- ---------- ---------- ---------- ---------- Net Income -- -- 528 -- 528 Other Comprehensive Income -- -- -- -- -- ---------- Comprehensive Income -- -- -- -- 528 ---------- Cash Dividends on Common Stock -- -- (523) -- (523) Cash Dividends on Preferred Stock -- -- (12) -- (12) Preferred Securities Issuance Expenses -- -- (3) -- (3) Net Loss on Preferred Stock Redemptions -- -- (3) -- (3) ---------- ---------- ---------- ---------- ---------- BALANCE AS OF DECEMBER 31, 1997 2,563 594 1,352 -- 4,509 ---------- ---------- ---------- ---------- ---------- Net Income -- -- 604 -- 604 Other Comprehensive Income, net of tax: Pension Plan Additional Minimum Liability, net of tax of $(2) -- -- -- (3) (3) ---------- Other Comprehensive Income -- -- -- -- (3) ---------- Comprehensive Income -- -- -- -- 601 ---------- Cash Dividends on Common Stock -- -- (503) -- (503) Cash Dividends on Preferred Stock -- -- (10) -- (10) ---------- ---------- ---------- ---------- ---------- BALANCE AS OF DECEMBER 31, 1998 $ 2,563 $ 594 $ 1,443 $ (3) $ 4,597 ========== ========== ========== ========== ==========
Note: The ability of PSEG to declare and pay dividends is contingent upon its receipt of dividends from its subsidiaries. PSE&G, PSEG's principal subsidiary, has restrictions on the payment of dividends which are contained in its Restated Certificate of Incorporation, as amended, and certain of the indentures supplemental to its Mortgage and certain other indentures. However, none of these restrictions presently limits the payment of dividends out of current earnings. The amount of PSE&G's restricted retained earnings at December 31, 1998, 1997 and 1996 was $10 million. There are no restrictions on Energy Holding's retained earnings. See Notes to Consolidated Financial Statements. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION PSEG has two principal direct wholly-owned subsidiaries: Public Service Electric and Gas Company (PSE&G) and PSEG Energy Holdings Inc. (Energy Holdings), formerly Enterprise Diversified Holdings Incorporated. PSEG's largest subsidiary, PSE&G, is an operating public utility providing electric and gas service within certain areas in the State of New Jersey. Energy Holdings is the parent of PSEG's non-utility businesses: PSEG Global Inc. (Global), formerly Community Energy Alternatives Incorporated, an investor in and developer and operator of projects in the generation and distribution of energy, including cogeneration and independent power production (IPP) facilities, electric distribution companies, exempt wholesale generators (EWGs) and foreign utility companies (FUCOs); PSEG Resources Inc. (Resources), formerly Public Service Resources Corporation, which has made primarily passive investments; PSEG Energy Technologies Inc. (Energy Technologies), formerly Energis Resources, which provides a variety of energy related services to industrial and commercial customers both within and outside of PSE&G's traditional service territory; and Enterprise Group Development Corporation (EGDC), a nonresidential real estate development and investment business. Energy Holdings also has two finance subsidiaries: PSEG Capital Corporation (PSEG Capital), which provides privately-placed debt financing to Energy Holdings' operating subsidiaries, except Energy Technologies, on the basis of a minimum net worth maintenance agreement with PSEG and Enterprise Capital Funding Corporation (Funding), which provides privately-placed debt financing to Resources, Global and their subsidiaries, which debt is guaranteed by Energy Holdings, but without direct support from PSEG. EGDC has been conducting a controlled exit from the real estate business since 1993. In July 1996, Energy Holdings sold Energy Development Corporation (EDC), an oil and gas subsidiary. For more information on EDC, see Note 16. Discontinued Operations. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REGULATION--PSE&G The accounting and rates of PSE&G are subject, in certain respects, to the requirements of the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). As a result, PSE&G maintains its accounts in accordance with their prescribed Uniform Systems of Accounts, which are the same. The application of Generally Accepted Accounting Principles (GAAP) by PSE&G differs in certain respects from applications by non-regulated businesses. PSE&G prepares its financial statements in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the relationship of costs and revenues. As a result, a regulated utility may defer recognition of costs (a regulatory asset) or recognize obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in revenues. Accordingly, PSE&G has deferred certain costs and recoveries, which will be amortized over various future periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G's competitive position, the associated regulatory asset or liability will be charged or credited to income unless recovery mechanisms are approved by the BPU. PSE&G continues to meet the requirements for application of SFAS 71. However, once the BPU issues an order with respect to PSE&G in the New Jersey Energy Master Plan (Energy Master Plan) Proceedings, currently scheduled for March 31, 1999, it is expected that PSE&G will no longer meet the requirements for application of SFAS 71 for its then deregulated operations. See Note 2. Regulatory Issues and Note 19. Accounting Matters for further discussion of deregulation and the potential accounting impacts caused by deregulation. 68 CONSOLIDATION POLICY The consolidated financial statements include the accounts of PSEG and its subsidiaries. PSEG and its subsidiaries consolidate those entities in which they have a controlling interest. All significant intercompany accounts and transactions are eliminated in consolidation. Those entities in which PSEG does not have a controlling interest are being accounted for under the equity method of accounting. For investments in which significant influence does not exist, the cost method of accounting is applied. RECLASSIFICATIONS Certain reclassifications of prior period data have been made to conform with the current presentation. UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE Bond issuance costs and associated premiums and discounts are generally amortized over the life of the debt issuance. In accordance with Federal Energy Regulatory Commission (FERC) regulations, costs to reacquire debt are amortized over the remaining original life of the retired debt. When refinancing debt, the unamortized portion of the original debt issuance costs of the debt being retired must be amortized over the life of the replacement debt. Upon deregulation, gains and losses on reacquired debt associated with the deregulated portion of PSE&G's operations will be reflected in the statement of operations as incurred. Gains and losses on reacquired debt associated with PSE&G's regulated operations will continue to be deferred and amortized to interest expense over the period approved for ratemaking purposes. UTILITY PLANT--PSE&G Additions to utility plant and replacements of units of property are capitalized at original cost. The cost of maintenance, repair and replacement of minor items of property is charged to appropriate expense accounts. At the time units of depreciable property are retired or otherwise disposed, the original cost less net salvage value is charged to accumulated depreciation. Upon deregulation, PSE&G will record a gain or loss on the retirement, sale or disposal of assets in the deregulated portion of its business. DEPRECIATION AND AMORTIZATION Depreciation is computed under the straight-line method. Depreciation is based on estimated average remaining lives of the several classes of depreciable property. These estimates are reviewed on a periodic basis and necessary adjustments are made as approved by the BPU. Depreciation rates stated in percentages of original cost of depreciable property were 3.53% in 1998, 1997 and 1996. PSE&G has certain regulatory assets resulting from the use of a level of depreciation expense in the ratemaking process that differs from the amount that is recorded under generally accepted accounting principles (GAAP) for non-regulated companies. Upon issuance of a BPU order, PSE&G will no longer calculate depreciation in accordance with BPU guidance for the deregulated portion of PSE&G's business. Depreciation for those assets will be calculated based on estimated plant lives rather than regulatory guidance. PSE&G cannot presently quantify what the financial statement impact might be if depreciation expense were required to be determined absent regulation, but the impact on the financial position, results of operations and net cash flows of PSEG and PSE&G could be material. Nuclear fuel burnup costs are charged to fuel expense on a units-of-production basis over the estimated life of the fuel. Rates for the recovery of fuel used at all nuclear units include a provision of one mill per kilowatt-hour (KWH) of nuclear generation for spent fuel disposal costs. 69 USE OF ESTIMATES The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. DECONTAMINATION AND DECOMMISSIONING--PSE&G In 1993, FERC issued Order No. 557 regarding the accounting and rate-making treatment of special assessments levied under the National Energy Policy Act of 1992 (EPAct). Order No. 557 provides that special assessments are a necessary and reasonable current cost of fuel and shall be fully recoverable in rates in the same manner as other fuel costs. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFDC)--PSE&G AFDC represents the cost of debt and equity funds used to finance the construction of new utility facilities. The amount of AFDC capitalized is reported in the Consolidated Statements of Income as a reduction of interest charges for the borrowed funds component and as other income for the equity funds component. The rates used for calculating AFDC in 1998, 1997 and 1996 were 6.06 %, 5.71% and 5.83%, respectively. Upon deregulation, PSE&G will no longer calculate AFDC for the deregulated portion of PSE&G's business. Interest (cost of debt only) related to capital projects for generation projects will be capitalized in accordance with SFAS No. 34, "Capitalization of Interest Cost." REVENUES AND FUEL COSTS--PSE&G Revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues representing the estimated amount customers will be billed for services rendered from the time meters were last read to the end of the respective accounting period. Rates include projected fuel costs for electric generation, purchased and interchanged power and gas purchased. The fuel component of the LEAC rate was frozen for 1997 and 1998 as part of the BPU's Order dated December 31, 1996 (December 31st Order) and PSE&G bore all risks associated with fuel prices. Any Electric Levelized Energy Adjustment Clause (LEAC) and Levelized Gas Adjustment Clause (LGAC) underrecoveries or overrecoveries, together with interest (in the case of net overrecoveries), are deferred and included in operations in the period in which they are reflected in rates. Effective January 1, 1998, the amount included for LEAC under/overrecovery represents the difference between fuel related revenues and fuel related expenses which are comprised of the cost of generation and interchanged power at the PJM Interconnection, L.L.C. (PJM) market clearing price. Effective April 1, 1998, PJM, as independent system operator (ISO), replaced the PJM uniform market clearing price with locational marginal pricing (LMP) for determining the market clearing pricing to energy providers. For discussion of the current and proposed status of the LEAC and the LGAC, see Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities. INVENTORY--MATERIALS AND SUPPLIES AND NUCLEAR FUEL Inventory is carried on the books at cost in accordance with rate based regulation. When portions of PSE&G's business become deregulated, the carrying value of its inventory for its unregulated operations will be valued at a lower of cost or market basis which could have a material adverse impact on PSEG's and PSE&G's financial position, results of operations and net cash flows to the extent that any write downs are not recovered through regulatory mechanisms approved by the BPU. COMMODITY CONTRACTS--PSE&G PSE&G engages in electricity and natural gas commodity forwards, futures, swaps and options purchases and sales with counterparties to manage exposure to electricity and natural gas price risk. Certain contracts, in conjunction with owned electric generating capacity, are designed to provide for estimated electric customer commitments. Similarly, 70 PSE&G uses natural gas futures and swaps to manage the price risk associated with gas supply to customers. PSE&G's accounting policy for these contracts is to recognize the gains and losses in income upon settlement of the contracts. PSE&G also enters into forwards, futures, swaps and options that are not used to manage price risk exposure for commitments to customers. As these are considered to be trading contracts, PSE&G's accounting policy has been to mark the contracts to market and record unrealized gains and losses in income. These contracts do not have a material impact on PSE&G's financial condition, results of operations and net cash flows. PSE&G does not hold any financial instruments of a leveraged nature. For discussion of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), and Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities" (EITF 98-10), see Note 19. Accounting Matters. FINANCIAL INSTRUMENTS--ENERGY HOLDINGS Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets and liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions also are deferred and recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. EQUITY INVESTMENTS--ENERGY HOLDINGS Resources carries its investments in equity securities at their approximate fair market values as of the reporting date. FOREIGN CURRENCY TRANSLATION/TRANSACTIONS--ENERGY HOLDINGS The assets and liabilities of Energy Holdings' foreign operations are translated into U.S. dollars at current exchange rates and revenues and expenses are translated at average exchange rates for the year. Resulting translation adjustments are reflected as a separate component of stockholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on normal operating transactions denominated in a currency other than the functional currency, except those transactions which operate as a hedge of an identifiable foreign currency commitment or as a hedge of a foreign currency investment position, are included in the results of operations as incurred. INCOME TAXES PSEG and its subsidiaries file a consolidated Federal income tax return and income taxes are allocated to PSEG's subsidiaries based on the taxable income or loss of each subsidiary. Investment tax credits were deferred in prior years and are being amortized over the useful lives of the related property, including nuclear fuel. For discussion of energy tax reform and its impact on NJGRT, see Note 12. Income Taxes. BENEFIT PLANS Non-represented employees of PSE&G commencing service before January 1, 1996, represented employees of PSE&G commencing employment before January 1, 1997 and certain employees of PSE&G's affiliated companies are covered by a noncontributory trusteed pension plan (Pension Plan) from the date of hire. Non-represented employees of PSE&G who commenced service after January 1, 1996, represented employees of PSE&G who commenced employment after January 1, 1997 and certain employees of PSE&G's affiliated companies are covered by a cash balance pension plan. Beginning with the plan year 1997, the funding policy was modified to provide annual funding not to exceed the maximum tax deductible amount. Contributions will be made each year based on targeted funding levels for the plan. In 1993, PSEG adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106), which requires that the expected cost of employees' postretirement health care and life insurance benefits, also referred to as other postretirement benefits (OPEB), be charged to income during the years in which employees render 71 service. PSE&G deferred a portion of these costs as a regulatory asset from 1993 until 1997 when a BPU order was received stipulating that current rates were sufficient to recover such costs. Therefore, on January 1, 1998, PSE&G began amortizing its regulatory asset for OPEB over 15 years and recording the annual SFAS 106 OPEB cost. In 1998, PSE&G began funding its annual OPEB obligation in an external trust to the maximum extent allowable under Section 401(h) of the Internal Revenue Code. CAPITAL LEASES AS LESSEE The Consolidated Balance Sheets include assets and related obligations applicable to capital leases under which PSE&G is a lessee. The total amortization of the leased assets and interest on the lease obligations equals the net minimum lease payments included in rent expense for capital leases. Capital leases of PSE&G relate primarily to its corporate headquarters. IMPAIRMENT OF LONG-LIVED ASSETS On January 1, 1996, PSEG adopted SFAS 121, which requires review for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 did not have an impact on the results of operations, financial condition and net cash flows of PSEG or PSE&G. However, future developments in the electric and gas industries could have a material impact on the carrying value of certain investments. Upon deregulation, PSE&G will reevaluate the potential impairment of its assets which may result in recording an extraordinary, non-cash charge to earnings that could have a material adverse impact on PSEG's and PSE&G's financial condition and results of operations to the extent that any impairments are not recovered through regulatory mechanisms approved by the BPU. EARNINGS PER SHARE In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which was effective for financial statements issued after December 15, 1997. Under the new standard, basic earnings per share is computed as earnings available to common stockholders divided by weighted average shares outstanding excluding the dilutive effect of potential common shares. Diluted earnings per share includes the dilutive effect of potential common shares. PSEG has an existing stock option plan which allows for options to be granted on a periodic basis. These potential common shares had no impact on diluted earnings per share for the years ended December 31, 1998, 1997 and 1996. NOTE 2. REGULATORY ISSUES NEW JERSEY ENERGY MASTER PLAN PROCEEDINGS In 1998 and continuing into 1999, energy industry restructuring continued to advance in New Jersey. In 1998, evidentiary hearings related to PSE&G's proposal in connection with the BPU's New Jersey Energy Master Plan were completed and the Office of Administrative Law filed its decision providing its recommendations on such proposal with the BPU. In January 1999, the State Legislature passed the New Jersey Electric Discount and Competition Act (Energy Competition Act) which was signed into law by the Governor on February 9, 1999. The Energy Competition Act and the related BPU proceedings are hereinafter defined as the Energy Master Plan Proceedings. Among other things, the Energy Competition Act provides that all New Jersey retail electric customers may select their electric supplier commencing August 1, 1999 and all New Jersey retail gas customers may select their gas suppliers commencing January 1, 2000, thus fully opening the New Jersey energy markets to customer choice and competition. The Energy Competition Act provides the BPU requisite authority to implement certain aspects of retail electric and gas competition in New Jersey. The BPU is currently engaged in proceedings to implement the Energy Competition Act, the result of which will fundamentally change the electric and gas industries in New Jersey by, among other things, introducing retail competition to replace the monopoly position of regulated public utilities, potentially requiring or resulting in the separation or sale of utilities' electric generation assets and establishing a number of generic rules related to deregulation, including governing regulated utilities' relationships with their affiliates. 72 Under the Energy Competition Act, the distribution business will remain regulated by the BPU. Transmission will remain regulated by the FERC. With deregulation, electric generation will be a competitive business. Succeeding as a competitive generator will depend on many factors such as fuel cost, production costs including labor cost, environmental constraints and related expenses, transmission availability and rates, marketing ability and quality of service, among others. The outcome of these proceedings will have a profound effect on PSEG and PSE&G. On February 11, 1999, the BPU adopted a schedule for the resolution of each New Jersey electric utility's filings for rate unbundling, stranded cost and restructuring proceedings. With respect to PSE&G, the BPU indicated that it is encouraging the parties to the case to undertake discussions in an attempt to reach consensus on the litigated issues in the rate unbundling, stranded cost and, on limited issues, the restructuring proceedings. The BPU further indicated that, in lieu of a negotiated settlement of the case among the parties, it has scheduled a final vote on the PSE&G filing at its March 31, 1999 agenda meeting. To that end, the BPU has set a deadline of March 3, 1999 for the submission of any negotiated settlement. Shortly thereafter, the BPU is expected to issue a series of orders that will decide generic issues related to deregulation of the industry in the State (e.g., affiliate standards). The BPU has yet to set a timetable related to a gas restructuring order. Once the March 31, 1999 BPU Order is issued, PSE&G will no longer meet the requirements of SFAS 71 for the electric generation portion of its business. While PSE&G cannot predict the outcome of the Energy Master Plan Proceedings, when PSE&G discontinues the application of SFAS 71 and if full recovery were not probable through recovery mechanisms approved by the BPU, there could be an extraordinary, non-cash charge to operations that could be material to the financial position and results of operations of PSEG and PSE&G. See Note 19. Accounting Matters for further discussion of the potential accounting impacts caused by deregulation. THE ENERGY COMPETITION ACT Key features of the Energy Competition Act, as passed, include: o Competitive choice for electric service will begin on August 1, 1999. Competitive choice for gas service must be fully implemented by December 31, 1999. For further discussion of gas competition, see Gas Unbundling. o Mandates that an electric rate reduction of at least 10%, phased in over a period of up to thirty-six months, will be provided to consumers. The rate reduction will be based on the level of rates in effect as of April 30, 1997. Rates must be reduced by no less than 5% effective August 1, 1999. When coupled with reductions from the 1998 change in New Jersey energy taxes, the total rate reductions for consumers could total 16%, not including an additional 3.5% reduction due to an interim DSM rate increase. o Authorizes "shopping credits" or discounts for customers that switch from their current electric utility supplier to encourage competition. o Utilities have an opportunity to recover stranded costs associated with generation assets through a market transition charge (MTC) that could last up to eight years. Costs associated with above-market power purchase contracts with other utilities and with non-utility generators (NUGs) will be recovered over the remaining life of those contracts. Mitigation by the utility of its stranded costs, to the extent possible, is required. o Securitization is limited to 75% of utility generation-related stranded costs. Transition bonds with a maximum scheduled amortization of 15 years can be issued if the proceeds are used to recover eligible stranded costs. Power purchase contracts can also be securitized in an effort to buy out or buy down contracts. o On or after the starting date of implementation of retail choice, the BPU may require functional separation of a utility's non-competitive business functions from its competitive electric generation service and require that those competitive services be provided by a related competitive business segment of a public utility holding company. The related competitive business segment of the public utility holding company will not be subject to regulation under New Jersey utility law but may be subject to FERC regulation. 73 o While the Energy Competition Act does not mandate divestiture of electric generation assets, it gives the BPU the right to examine market conditions and requires divestiture if the BPU finds market power would impede development of competition. o Competitive services may be offered by a public utility or a competitive business segment of a public utility only with the written approval of the BPU. Tariffs for competitive services will be required and subject to review and approval by the BPU. The competitive business segment must not adversely impact the ability of the utility to offer non-competitive services to customers in a safe, adequate and proper manner. The price for services must not be less than the fully allocated cost of providing such services. Cross-subsidization is prohibited and standards for affiliate relationships will be established. The BPU will be required to apply 50% of the net revenues earned from competitive services offered by an electric public utility as an offset to stranded costs or a reduction of rates for the period of time that the utility collects transition bond charges. o Utility holding companies are permitted to offer competitive electric generation service to existing utility retail customers subject to affiliate relations standards to be established by the BPU. A utility holding company's competitive business entity utilizing utility assets, including personnel and equipment other than the delivery network or certain shared corporate overhead or administrative services, to provide competitive services is subject to a 50% sharing of net revenues from such services. Unless the utility ratepayers receive full market value for the use of such utility assets pursuant to a contract between the parties filed with the BPU, those revenues will be used to offset transition charges and/or distribution rates for a period of time. o The BPU is required to initiate a proceeding and adopt interim technical standards to ensure the safety, reliability and accuracy of metering equipment provided to electric and gas customers. The BPU is required to issue an order providing customers the opportunity to choose a supplier for some or all customer services (such as metering and billing) not later than one year from the start of retail competition. Until that time, customers are given the option with affirmative consent to receive two bills, one from the utility and one from the supplier. o The BPU is required to adopt interim consumer protection standards for electric and gas suppliers to prevent slamming, protect customer privacy and provide customers necessary information to make informed decisions. o Simultaneously with the implementation of retail choice, the BPU may permit recovery of certain costs through a Societal Benefits Charge which would be a component of rates for all retail customers. These costs will include social programs for which rate recovery was approved prior to April 30, 1997; nuclear decommissioning costs; demand side management program costs, manufactured gas plant clean up costs and potentially the cost of a statewide consumer education program. The BPU is authorized to use the existing funds for social programs to create a universal service fund for low income energy assistance. o Utilities will serve customers for at least three years as the energy provider of last resort, providing basic electric generation and gas services. The BPU is required to decide, no later than three years after the start of retail choice, whether to allow other, non-utility, suppliers to offer basic generation service on a competitive basis. o Businesses, cities, towns and counties are able to aggregate their own power demands and other energy needs for which marketers may bid to serve. Customers will control their inclusion in any such group. Aggregation by municipalities to serve residents and businesses within those municipalities can also begin at the start of retail choice. o Electric suppliers must disclose information about fuels used to generate the electricity that they sell and emissions from their portfolio of electricity suppliers on customers' bills or in marketing materials. The BPU and New Jersey Department of Environmental Protection (NJDEP) may adopt an emission control portfolio standard for all retail suppliers if the BPU finds that a standard is necessary to meet Clean Air Act rules and that regional and Federal actions would not achieve compliance with those rules, or if two other states using the PJM power pool comprising 40% of the retail electric usage in PJM adopt such standards. STRANDED COSTS 74 Stranded costs represent the portion of the book value of generation related assets or the portion of payments under power purchase contracts which are in excess of their value in a competitive deregulated marketplace. In its initial proposal, PSE&G had identified its potentially stranded costs associated with fossil and nuclear generating stations at $3.9 billion, based on certain assumptions, including future market prices of electricity and performance of generating units. Changes in these assumptions could materially alter the estimated amount of potentially stranded costs. To the extent that any portion of its stranded costs are not probable of recovery upon the conclusion of the Energy Master Plan Proceedings, and thus ineligible for deferral as a regulatory asset under Statement of Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), PSE&G would incur an extraordinary, non-cash charge to income that could be material to the financial position and results of operations of PSEG and PSE&G. For additional discussion related to the Energy Master Plan Proceedings, see Note 3. Regulatory Assets and Liabilities. Recoverability of these costs is largely dependent on the order to be issued by the BPU at the conclusion of the Energy Master Plan Proceedings. PSE&G has proposed to securitize $2.5 billion of these costs, with the remainder to be recovered through a market transition charge during a proposed transition period of seven years. In addition, PSE&G is seeking to negotiate the restructuring of certain of its BPU approved contracts with Non-utility Generators (NUGs), which, in PSE&G's initial proposal, were estimated to be $1.6 billion above assumed future market prices. These costs are being recovered through the LEAC and are expected to continue to be recovered through successor mechanisms to be determined by the outcome of the Energy Master Plan Proceedings as to which no assurances can be given. PSEG and PSE&G cannot predict the outcome of these proceedings. However, such proceedings could have a material adverse effect on PSEG's and PSE&G's financial condition, results of operations and net cash flows and could adversely affect the carrying values of PSEG's and PSE&G's assets and the ability to declare dividends on PSEG's common stock. SECURITIZATION In accordance with the provisions of the Energy Competition Act, it is expected that the BPU will issue an order authorizing securitization of up to 75% of PSE&G's generation-related stranded costs. Securitization is a refinancing technique, whereby the interest and principal payments on the securitized debt which is issued will be serviced by an irrevocable, non-bypassable charge to utility customers. The Energy Competition Act provides that net proceeds from any authorized securitization of a utility's stranded costs must be used to reduce that utility's debt and equity. Dependent upon market conditions and the level of securitization authorized by the BPU in the Energy Master Plan Proceedings, PSE&G may use a number of alternatives to reduce its debt and equity, including the redemption, tender or purchase of its outstanding Mortgage Bonds and preferred stock. In anticipation of an application of the use of proceeds of securitization, PSEG has been engaged in a program to repurchase its Common Stock, as discussed below. Since the Energy Master Plan Proceedings are still in progress, PSE&G cannot predict the extent to which regulators will allow the use of such securitization for recovery of stranded costs. PSE&G's decision as to the manner in which the proceeds of securitization will be utilized to reduce debt and equity is dependent upon the BPU's decision in the Energy Master Plan Proceedings. The decision of the BPU required in this matter could have a material adverse effect on PSEG's and PSE&G's financial condition, results of operations and net cash flows. The use of securitization proceeds to reduce debt and equity is likely to affect the market prices of the related securities. Additionally, the use of securitization could impact PSEG's and PSE&G's bond ratings and the cost of other debt for PSEG and PSE&G. On September 15, 1998, in anticipation of securitization of PSE&G's stranded costs afforded by the then proposed Energy Competition Act, the Board of Directors of PSEG authorized the repurchase of up to 10 million shares of its Common Stock. Under the authorization, repurchases were made in the open market at the discretion of 75 PSEG. The repurchased shares have been held as treasury stock. At December 31, 1998, PSEG had repurchased approximately 5.3 million shares of Common Stock at a cost of approximately $207 million, under this authorization. As of February 8, 1999, PSEG had repurchased a total of 10 million shares at a cost of approximately $391 million under this program. DEPRECIATION In its Energy Master Plan proposal, PSE&G has proposed to lengthen the depreciable lives of its electric distribution assets from 28 to 45 years. These assets are expected to remain regulated. The excess depreciation reserve, calculated based on this change in depreciable lives, would be amortized over a proposed seven year transition period. If PSE&G's plan is adopted as proposed, it would result in a reduction of annual depreciation expense of $116 million during such transition period and $35 million thereafter over the remaining life of these assets. ADMINISTRATIVE LAW JUDGE'S RECOMMENDATIONS Previously, in connection with its Energy Master Plan Proceedings, the BPU requested the Office of Administrative Law to hold evidentiary hearings regarding stranded costs and unbundling issues. Hearings were held before an Administrative Law Judge (ALJ) and on August 17, 1998, the ALJ filed his decision providing its recommendations to the BPU. The BPU can adopt, reject or modify the ALJ's recommendations in its decision on PSE&G's proposal which was filed as part of these proceedings. PSE&G cannot predict the extent to which the BPU will rely on the ALJ's decision in evaluating PSE&G's proposal. The ALJ's decision on PSE&G's competition and rate proposal: o Recommended the adoption of PSE&G's request to securitize up to $2.5 billion of its after-tax stranded costs through the issuance of revenue bonds, which would mature over a 15 year period. o Recommended the recovery of $1.6 billion of PSE&G's above-market price contracts to purchase power from non-utility generators (NUGs). o Recommended a rate cut of between 10% and 12%, exclusive of the impact of energy tax reform. o Supported PSE&G's request for a seven year transition period. PSE&G had proposed a transition period of seven years, starting on the effective date of the BPU's final decision in these proceedings, with basic tariff rates capped during that seven year period. During the transition period, PSE&G would maintain responsibility for system reliability of energy and capacity supply. o Accepted PSE&G's approach/methodology of quantifying stranded costs without quantifying the amount of such costs. o Recommended a review of PSE&G's actual electric fuel costs, which would apply any potential savings from the elimination of the Electric Levelized Energy Adjustment Clause (LEAC) to mitigate stranded costs. o Supported PSE&G's Societal Benefits Clause proposal, but proposed to exclude non-utility generators (NUG) costs from the Societal Benefits Clause. A separate NUG charge would be created. o Recommended adding an amount, known as a "retail adder," to the proposed market-based energy credit on customers' bills to give customers who choose another energy supplier credits for more than the market price for power. On October 2, 1998, PSE&G filed exceptions to the ALJ's decision. These exceptions addressed issues identified in the ALJ's decision including the validity of capital additions made by PSE&G after the conclusion of its 1992 base rate case, the relevance of PSE&G's methodology regarding stranded costs, mitigation strategies, the adoption of securitization and the unbundling of costs and rates. Other parties to the proceeding have also filed exceptions to the ALJ's decision. PSE&G filed its reply exceptions to the other parties' exceptions to the ALJ's decision on October 30, 1998. 76 Hearings at the BPU addressing other restructuring issues such as market power, functional separation and consumer protection concluded on May 28, 1998. Briefs have been filed by the parties in these hearings. As previously discussed, these generic issues are expected to be decided shortly after the March 31, 1999 BPU Order. SETTLEMENT OF CERTAIN REGULATORY ISSUES By Order dated December 31, 1996 (December 31st Order), the BPU approved a settlement among PSE&G, the staff of the BPU (Staff) and the New Jersey Division of Ratepayer Advocate (Ratepayer Advocate) addressing (1) the cost impact of the 1995 shutdown of Salem Nuclear Generating Station (Salem) Units 1 and 2 (Salem 1 and 2), including the "used and useful" issue related to the units through December 31, 1998; (2) the recovery of certain replacement power costs associated with the 1994 Salem 1 outage; and (3) the recovery of capacity costs associated with PSE&G's power purchases from cogeneration producers through December 31, 1998. Under the December 31st Order, PSE&G recorded a charge of $83.9 million for bill credits to electric customers who received credits in January and February 1997. PSE&G also agreed to forego recovery of $12 million associated with energy costs that previously had been deferred. The resulting after-tax earnings loss of $62 million or 26 cents per share of PSEG Common Stock was previously recorded ($59 million or 25 cents per share in the third quarter of 1996 and $3 million or 1 cent per share in 1995). Under the terms of the December 31st Order, Salem 1 and 2 continued in base rates without being subject to further refund and PSE&G assumed all nuclear and fossil generating fuel and performance risks, including replacement power costs associated with the Salem, Hope Creek Generating Station (Hope Creek) and Peach Bottom Atomic Power Station (Peach Bottom) nuclear stations from January 1, 1997 through December 31, 1998. The BPU's nuclear performance standard (NPS) did not apply to PSE&G from January 1, 1996 through December 31, 1998. In addition, the energy component of PSE&G's LEAC was fixed at its then existing level with no increase to customers until at least January 1999 with PSE&G responsible for all risks associated with fuel prices. Any underrecovered or overrecovered LEAC balance existing on December 31, 1998 would not be considered in any LEAC review subsequent to that date. Any overrecovery at that date would be applied to reduce any potential stranded costs and any underrecovered balance will be charged to income in the period identified. For an update on the current status of the LEAC, see Note 3. Regulatory Assets and Liabilities. The December 31st Order provided PSE&G the opportunity, but no guarantee, during the period January 1, 1997 through December 31, 1998, to fully recover the December 31, 1996 underrecovered LEAC energy balance of $151 million without any change in the current energy component of the LEAC charge. This balance was fully recovered and the overrecovery of $39 million at December 31, 1998 is being carried as a regulatory liability to offset stranded costs. In addition to the resolution of the Salem "used and useful" issue, the December 31st Order addressed two other separate long standing issues that PSE&G had been litigating before the BPU. The first pertains to the recovery of certain replacement power costs associated with a 58 day outage at Salem 1 in 1994. The December 31st Order required PSE&G to reduce its underrecovered LEAC balance by $7 million related to that outage. The second pertains to the recovery of capacity costs associated with electric utility power purchases from cogeneration producers through December 31, 1998. The December 31st Order required PSE&G to provide bill credits to electric customers totaling $6.4 million during January and February 1997. In addition, PSE&G reduced its underrecovered LEAC balance by $5 million related to the recovery of capacity costs. Through separate letter agreements, PSE&G and the Ratepayer Advocate agreed on a commitment by PSE&G to provide financial assistance toward economic growth and development in New Jersey. This commitment, which runs through December 31, 1999, has four key elements. First, PSE&G created a $30 million revolving economic development fund with emphasis on stimulating jobs and developing high technology projects in urban areas. Second, PSE&G will continue to provide incentives to encourage local public housing authorities to replace up to 4,000 refrigerators a year. Third, PSE&G committed $1 million to develop a fund to provide innovative assistance to low income residents who are having difficulty paying energy bills. Finally, PSE&G committed to developing a computer system which has been developed to assist low income residents in identifying government and community programs from which they would be eligible to receive benefits. On November 10, 1998, the BPU requested PSE&G to identify its intention with regard to a new LEAC filing before the BPU, in accordance with the December 31st Order. On November 20, 1998, PSE&G responded and addressed the issue 77 of a new LEAC by stating that it intends to follow its Energy Master Plan filing, wherein it proposed to discontinue the LEAC effective with the commencement of retail electric competition. PSE&G intends to continue the utilization of deferred accounting for the LEAC until commencement of customer choice. Assuming that retail access will commence on or about August 1, 1999, as mandated in the Energy Competition Act, any overrecovery that exists as of that date would be utilized as an offset to the proposed $3.9 billion of stranded costs. As of December 31, 1998, PSE&G established a deferred regulatory liability in the amount of $39 million which represents an overrecovery of LEAC fuel costs, to be applied as an offset to stranded costs. ELECTRIC LEVELIZED ENERGY ADJUSTMENT CLAUSE (LEAC)/DEMAND SIDE ADJUSTMENT FACTOR (DSAF) As discussed above, the December 31st Order fixed the energy component of the LEAC as of December 31, 1996. Additionally, under PSE&G's Energy Master Plan proposal, if approved, the LEAC would be discontinued. Certain components of the LEAC would become part of the societal benefits clause under PSE&G's proposal. No assurances can be given as to the outcome of the Energy Master Plan Proceedings. For further discussion, see Note 3. Regulatory Assets and Liabilities and Note 11. PSE&G Nuclear Decommissioning. On February 24, 1997, PSE&G requested an annualized increase of $151.8 million in the DSAF component of the LEAC effective for the period from May 1997 through December 1998, representing an increase on a typical residential bill of approximately 3.5%. The request included recovery of electric demand side management (DSM)/conservation costs related to BPU approved programs and would raise rates to a level sufficient to recover such costs incurred through December 31, 1998. On April 1, 1998, the BPU approved $150.8 million of PSE&G's requested increase. This increase was effective for service rendered on or after April 3, 1998. The Division of the Ratepayer Advocate has appealed the BPU's order, seeking to overturn the BPU's decision. Initial Briefs on Appeal were filed on October 14, 1998. PSE&G cannot predict the outcome of that appeal. If such an appeal is successful, there could be a material adverse impact on PSEG's and PSE&G's financial condition, results of operations and net cash flows. At December 31, 1998, PSE&G had an underrecovered balance, including interest, of approximately $150 million related to these programs. Such amount is included in Deferred Debits on PSE&G's balance sheet. PSE&G's most recent DSM Resource Plan (1995 Plan) was approved by the BPU in 1995 and was designed to encourage investment in energy-saving DSM activities. BPU approval of the 1995 Plan included a requirement to file the next DSM Plan by July 1, 1997. In April of 1997 PSE&G filed a request with the BPU to extend the 1995 Plan for one year and to defer filing the next DSM Plan until July 1, 1998, which requests were granted with the condition that the Core Programs would continue until the next DSM Plan was approved. The BPU further directed that PSE&G also extend existing project acceptance and in-service deadline dates by one year. On June 29, 1998, PSE&G filed with the BPU the 1999 Interim Demand Side Management Plan which included Core programs and the Standard Offer, and hearings on the filing were conducted. No action has been taken by the BPU leaving no mechanism open at this time for the accepting of new Standard Offer project proposals. It is anticipated that there will be BPU action on the 1999 Interim Plan in the near future, but PSE&G cannot predict the outcome of such action. The Energy Competition Act provides for the continued ability to recover costs related to the DSM programs through a societal benefits charge initially set at the level in rates for DSM cost recovery in place on February 9, 1999. Within the subsequent twelve months, the BPU is required to complete a statewide comprehensive resource analysis of energy efficiency and renewable energy programs and determine the appropriate level of funding for each utility based on this analysis. PSEG and PSE&G cannot predict the final outcome of DSM and other mandated societal costs recovery under the Energy Master Plan Proceedings. Inability to recover such amounts could have a material adverse impact on PSEG's and PSE&G's financial condition, results of operations and net cash flows. For further discussion of the potential impact on PSEG and PSE&G of the Energy Master Plan Proceedings, see New Jersey Energy Master Plan Proceedings. LEVELIZED GAS ADJUSTMENT CLAUSE (LGAC) On July 10, 1998, PSE&G filed a motion with the BPU requesting a $27 million annual increase in its LGAC for the period October 1, 1998 to September 30, 1999, representing an increase on a typical residential bill of approximately 2.8%. Also included in the revised LGAC rate is an increase in the Remediation Adjustment Clause (RAC) component, a decrease in the Demand Side Adjustment Factor (DSAF) and a request to change, on a monthly basis, the over/under collection 78 component of the LGAC rate for residential customers. On October 15, 1998, PSE&G, BPU Staff and the Ratepayer Advocate executed an Interim Stipulation which allows the filed LGAC rates to become effective, subject to refund. On November 4, 1998, the BPU approved an Order adopting the Interim Stipulation. On December 22, 1998, the Board approved a Final Stipulation in the LGAC which provided for the following: 1) All previously approved interim rates became final. 2) All margins (prospectively) from PSE&G's participation in the New Jersey Natural Gas Company (New Jersey Natural) residential unbundling pilot program were to be returned 100% to PSE&G's firm gas customers. 3) PSE&G was allowed to hedge up to 115bcf (approximately 80%) of its residential gas supply through physical or financial transactions, with a limit on the financial transactions of 75% of the total to be hedged. 4) The LGAC rate can now be changed (increased or decreased) monthly, within certain limits, during November through April to reflect changes in the projected over/under collection. On November 14, 1997, PSE&G filed its 1997/98 LGAC petition with the BPU requesting a $45 million increase on an annual basis in its LGAC for the period January 1, 1998 to December 31, 1998. This increase, as filed, amounts to approximately 4.8% on a typical residential bill. Public hearings were held on February 3, 1998. On February 18, 1998, the BPU approved a Stipulation agreed to by the parties in the proceeding. The Stipulation provided for an interim increase in LGAC revenues of approximately $31 million, excluding State sales and use tax. This represents an increase of 3.5% on a typical residential bill. On June 26, 1998, an Order was executed by the BPU making the terms of the interim Stipulation final, without modification. REMEDIATION ADJUSTMENT CHARGE (RAC) In 1992, the BPU approved a mechanism for recovery of PSE&G's costs associated with its Manufactured Gas Plant Remediation Program (Remediation Program) allowing the recovery of actual costs plus carrying charges, net of insurance recoveries, over a seven-year period through PSE&G's LGAC and LEAC, with 60% charged to gas customers and 40% charged to electric customers. On July 10, 1998, PSE&G filed a motion before the BPU requesting a $1.5 million annual increase in its RAC for the period August 1, 1997 to July 31, 1998, representing an increase on a typical residential bill of approximately 0.03%. On November 4, 1998, the BPU issued an Order approving the rate increase on an interim basis, subject to refund. On December 22, 1998, the BPU approved the rate increase on a final basis. The Energy Competition Act provides for the continued ability to recover costs related to the Remediation Program through a societal benefits charge. No assurances can be given as to the outcome of the Energy Master Plan Proceedings. CONSOLIDATED TAX BENEFITS In a case affecting another utility in which neither PSEG nor PSE&G were parties, the BPU considered the extent to which tax savings generated by non-utility affiliates included in the consolidated tax return of that utility's holding company should be considered in setting that utility's rates. In 1992, the BPU approved an order in such case treating certain consolidated tax savings generated after June 30, 1990 by that utility's non-utility affiliates as a reduction of its rate base. Also in 1992, the BPU issued an order resolving PSE&G's 1992 base rate proceeding without separate quantification of the consolidated tax issue. Such order did not provide final resolution of the consolidated tax issue for any subsequent base rate filing. While PSEG continues to account for its two wholly-owned subsidiaries on a stand-alone basis, resulting in a realization of tax benefits by the entity generating the benefit, an ultimate unfavorable resolution of the consolidated tax issue could reduce PSE&G's and PSEG's revenues, net income or net cash flows. In addition, an unfavorable resolution may adversely impact PSEG's non-utility investment strategy. PSEG believes that PSE&G's taxes should be treated on a stand-alone basis for rate-making purposes, based on the separate nature of the utility and non-utility businesses. The issue of PSEG sharing the benefits of consolidated tax savings with PSE&G or its ratepayers was addressed by the BPU in its July 28, 1996 letter which informed PSE&G that the issue of consolidated tax savings can be discussed in the context of PSE&G's next base rate case or plan for an alternative form of regulation. However, neither PSEG nor PSE&G is able to predict what action, if any, the BPU may take concerning consolidation of tax benefits in future rate proceedings. 79 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (OPEB) On October 21, 1998, the BPU ordered PSE&G to fund in an external trust its annual OPEB obligation to the maximum extent allowable under Section 401(h) of the Internal Revenue Code. For 1998, the amount funded was $12 million. Remaining OPEB costs will not be funded in an external trust. OTHER REGULATORY ISSUES NON-UTILITY GENERATION BUYDOWN PSE&G is seeking to restructure certain of its BPU approved contracts with NUGs, which are estimated to be $1.6 billion above assumed future market prices. Under Federal and State regulations, utilities have been required to enter into long-term power purchase agreements with NUGs at prices which have subsequently proven to be above market. In June 1998, PSE&G and the Union County Utilities Authority (UCUA) announced an agreement to amend their Power Purchase and Interconnection Agreement and in July 1998, the BPU approved this amendment. Under this amendment, PSE&G has paid UCUA a lump sum amount of $7.75 million in exchange for a $15.6 million savings to ratepayers on a net present value basis. The payment of $7.75 million by PSE&G is being recovered through the LEAC and is expected to continue to be recovered through successor mechanisms to be determined by the outcome of the Energy Master Plan Proceedings as to which no assurances can be given. ORDER ADOPTING AUCTION STANDARDS On June 16, 1998, the BPU adopted standards applicable to the auction processes being used by two other New Jersey utilities to divest themselves of certain of their generating plants by sale to unrelated entities. At this time, PSEG's strategy is to retain its generation assets. The BPU order adopting these auction standards indicated that the standards would be reviewed and possibly modified if deemed appropriate. Should PSE&G decide or be required to sell its generation assets, PSE&G would determine at such time whether to seek such review or modification. INTERIM COMPETITIVE TRANSITION CHARGE (ICTC) In September 1996, PSE&G filed a petition with the BPU to establish an ICTC which is designed to recover stranded costs which will result from a customer leaving PSE&G's system as a full requirements customer. The Energy Competition Act does not require that on-site generators pay any fees equivalent to the societal benefits charge or recovery of utility stranded costs (market transition charge or transition bond charges) provided that the energy load served by the on-site generators does not reduce the utility's distributed kilowatt hours below 92.5% of the kilowatt hours distributed by the utility in 1999. If that trigger is exceeded, then on-site generators will pay such charges. PSE&G cannot predict the impact this may have on its financial condition, results of operations and net cash flows. GAS UNBUNDLING PSE&G's unbundled gas transportation tariffs, which have been in place since 1994, allow any nonresidential customer, regardless of size, to purchase its own gas, transport it to PSE&G and require PSE&G to deliver such gas to the customer's facility. Under the Energy Competition Act, utilities are required to offer all of their customers the choice to buy the gas commodity from alternate suppliers by December 31, 1999. The Energy Competition Act also applies similar rules to the gas industry as to the electric industry addressing affiliate relations, consumer protections, among others. To date, approximately 17,700 commercial and industrial customers, of approximately 180,000 such customers eligible, have elected to utilize unbundled gas service. PSE&G cannot predict, in light of restructuring and with the changes in the law affecting the gross receipts and franchise tax which became effective on January 1, 1998, whether additional customers will use this service. Those changes now apply sales tax to sales by marketers, putting a similar tax burden on them as borne by PSE&G (see NJGRT Reform below). In April 1997, the BPU approved PSE&G's proposal for a residential gas unbundling pilot program (SelectGas), which allowed approximately 65,000 residential natural gas customers, out of a total of 1.4 million residential gas customers, to participate in the competitive marketplace effective May 1, 1997. On April 30, 1998, PSE&G filed a report with the BPU 80 on SelectGas and proposed refinements for a permanent residential gas unbundling program (SelectGas Plus). Under SelectGas Plus, as proposed, a total of 300,000 residential customers would be permitted to choose their gas supplier on a first-come, first-served basis. This expanded program would commence sixty days after a BPU order authorizing this program. PSE&G's proposal would permit its remaining residential customers to choose their gas supplier by July 1, 1999 or such alternate date as may be established by the BPU. On December 22, 1998, PSE&G, the BPU and the Ratepayer Advocate executed an Interim Stipulation for Phase I of PSE&G's Residential Gas Transportation Program (Program). In accordance with the Interim Stipulation, residential customers would not be eligible to register (sign-up) for the Program until 60 days after the BPU's Energy Master Plan Proceedings written order. The Interim Stipulation mandates that residential customers who return to PSE&G's bundled sales service after a designated period would be served gas which is market- priced under PSE&G's Market Price Gas Service (MPGS) tariff. PSE&G also participates in a retail pilot program of the New Jersey Natural Gas Company (New Jersey Natural) to provide unbundled gas transportation to former residential customers of New Jersey Natural. PSE&G has enrolled over 1,700 former residential gas customers of New Jersey Natural. Current transportation rate schedules produce the same non-fuel revenue per therm as existing sales tariff rate schedules. Thus, to date, PSE&G's earnings have been unaffected by whether the customers remain on sales tariffs or convert to transportation service. PSEG's indirect subsidiary, Energy Technologies, provides non-utility gas marketing services operating in New Jersey and several other states. NEW JERSEY GROSS RECEIPTS AND FRANCHISE TAX (NJGRT) REFORM For a discussion of New Jersey energy tax reform and its impact on the NJGRT, see Note 12. Income Taxes. NOTE 3. REGULATORY ASSETS AND LIABILITIES Regulatory assets and liabilities are recorded in accordance with the provisions of SFAS 71. In general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the relationship of costs and revenues. As a result, a regulated utility may defer recognition of costs (a regulatory asset) or recognize obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in revenues. Accordingly, PSE&G has deferred certain costs, which are being amortized over various periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G's competitive position, the associated regulatory asset or liability will be charged or credited to income. Through 1998 and into 1999, PSE&G continues to meet the requirements for application of SFAS 71. Once the BPU issues its March 31, 1999 order in the Energy Master Plan Proceedings, PSE&G will no longer meet the requirements for application of SFAS 71 for its then deregulated operations. It is expected that the existing regulatory assets, listed below, will continue in the regulated portion of PSE&G's business and will continue to be subject to SFAS 71. At December 31, 1998 and 1997, PSE&G had deferred the following regulatory assets and liabilities on the Consolidated Balance Sheets: DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- REGULATORY ASSETS (MILLIONS OF DOLLARS) SFAS 109 Income Taxes $ 704 $ 725 OPEB Costs 270 289 Demand Side Management Costs 150 116 Environmental Costs 139 122 Unamortized Loss on Reacquired Debt and Debt Expense 135 135 Decontamination and Decommissioning Costs 39 43 Underrecovered Gas Costs 35 76 Plant and Regulatory Study Costs 32 34 Repair Allowance Tax Deficiencies and Interest 26 -- Property Abandonments 21 37 Oil and Gas Property Write-Down 21 26 81 Underrecovered Electric Energy Costs -- 91 Other 7 -- ---------- ---------- Total Regulatory Assets $ 1,579 $ 1,694 ========== ========== REGULATORY LIABILITIES Overrecovered Electric Energy Costs $ 39 $ -- Other Stranded Cost Recovery Offsets 4 -- ---------- ---------- Total Regulatory Liabilities $ 43 $ -- ========== ========== UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE: Represents bond issuance costs, premiums, discounts and losses on reacquired long-term debt. OPEB COSTS: Includes costs associated with adoption of SFAS 106 which were deferred in accordance with EITF Issue 92-12. Beginning January 1, 1998, PSE&G commenced the amortization of the regulatory asset over 15 years. ENVIRONMENTAL COSTS: Represents environmental costs which are probable of recovery in future rates. UNDERRECOVERED ELECTRIC ENERGY COSTS/OVERRECOVERED ELECTRIC ENERGY COSTS: PSE&G had the opportunity, but no guarantee, during the period January 1, 1997 through December 31, 1998, to fully recover its December 31, 1996 underrecovered LEAC balance of $151 million without any change in the current energy component of the LEAC charge. At December 31, 1998, PSE&G has fully recovered its December 31, 1996 underrecovered LEAC balance. The LEAC is in an overrecovered position of $39 million at December 31, 1998. This overrecovered amount will be used to offset stranded costs per the BPU's December 31st Order in the Salem settlement. PSE&G continues to follow deferred accounting treatment for the LEAC until the BPU rules on PSE&G's Energy Master Plan proposal. The potential discontinuance of the LEAC which may result from the Energy Master Plan Proceedings may cause increased earnings volatility since PSE&G will bear the full risks and rewards of changes in nuclear and fossil generating fuel costs and replacement power costs. No assurances can be given as to the outcome of the New Jersey Energy Master Plan Proceedings. SFAS 109 INCOME TAXES: Represents regulatory asset related to the implementation of SFAS 109, "Accounting for Income Taxes" in 1993. For further discussion including flow-through impacts, see Note 12. Income Taxes. DEMAND SIDE MANAGEMENT COSTS: Recoveries of DSM/conservation costs (related to BPU-approved programs) are determined by the BPU. PSE&G's deferred DSM balance as of December 31, 1998 and 1997, respectively, reflects underrecovered/(overrecovered) costs as follows: 82 DECEMBER 31, -------------------- 1998 1997 -------- -------- (MILLIONS OF DOLLARS) Deferred DSM (Including Interest)--Electric $ 151 $ 122 Deferred DSM (Including Interest)--Gas (1) (6) -------- -------- Total $ 150 $ 116 ======== ======== DECONTAMINATION AND DECOMMISSIONING COSTS: Represents amounts related to decontamination and decommissioning at Federal government sites which are probable of recovery in future rates. PLANT AND REGULATORY STUDY COSTS: Amounts shown in the consolidated balance sheets consist of costs associated with developing, consolidating and documenting the specific design basis of PSE&G's jointly owned nuclear generating stations, as well as PSE&G's share of costs associated with the cancellation of the Hydrogen Water Chemistry System Project (HWCS Project) at Peach Bottom. PSE&G has received both BPU and FERC approval to defer and amortize, over the remaining lives of the Salem, Hope Creek and Peach Bottom nuclear units, costs associated with configuration baseline documentation and the canceled HWCS Project. REPAIR ALLOWANCE TAX DEFICIENCIES AND INTEREST: Represents Federal income tax deficiencies and interest thereon applicable to deductions under the repair allowance provisions of the Internal Revenue Code, disallowed upon IRS audit. The BPU has allowed recovery of these costs in rates. PROPERTY ABANDONMENTS: The BPU has authorized PSE&G to recover after-tax property abandonment costs from its customers. The table of Regulatory Assets above reflects property abandonments, and related tax effects, for which no return is earned. The net-of-tax discount rate used was between 4.868% and 5.292%. OIL AND GAS PROPERTY WRITE-DOWN: On December 31, 1992, the BPU approved the recovery of PSE&G's deferral of an EDC write-down through PSE&G's LGAC over a ten-year period beginning January 1, 1993. NOTE 4. LONG-TERM INVESTMENTS Long-Term Investments are primarily those of Energy Holdings. DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- (MILLIONS OF DOLLARS) Lease Agreements (see Note 5 Leasing Activities): Leveraged Leases ..................... $ 1,393 $ 1,143 Direct and Other Financing Leases .... -- 4 ---------- ---------- Total ............................. 1,393 1,147 ---------- ---------- Partnerships: General Partnerships ................. 72 142 Limited Partnerships ................. 522 534 ---------- ---------- Total ............................. 594 676 ---------- ---------- Corporate Joint Ventures ................ 879 885 Securities .............................. 21 28 Other Investments ....................... 147 137 ---------- ---------- Total Long-Term Investments ....... $ 3,034 $ 2,873 ========== ========== Resources' leveraged leases are reported net of principal and interest on non-recourse loans, unearned income and deferred tax credits. Income and deferred tax credits are recognized at a level rate of return from each lease during the periods in which the net investment is positive. 83 Partnership investments and corporate joint ventures are those of Resources, Global and EGDC. Other Investments, above, relate primarily to Public Service Conservation Resources Corporation (PSCRC), which at December 31, 1998 was a wholly-owned subsidiary of PSE&G. On January 1, 1999, PSCRC was transferred to Energy Technologies, a wholly-owned subsidiary of Energy Holdings. PSCRC's investment in DSM projects had balances at December 31, 1998 and 1997 of approximately $72 million and $84 million, respectively. NOTE 5. LEASING ACTIVITIES AS LESSOR Resources' net investments in leveraged leases are composed of the following elements: DECEMBER 31, 1998 DECEMBER 31, 1997 --------------------- --------------------- (MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS) LEVERAGED LEVERAGED LEASES LEASES ---------- ---------- Lease rents receivable ............ $ 1,921 $ 1,498 Estimated residual value .......... 665 635 ---------- ---------- 2,586 2,133 Unearned and deferred income ...... (1,193) (990) ---------- ---------- Total investments . ........... 1,393 1,143 Deferred taxes .................... (731) (670) ---------- ---------- Net investments ............... $ 662 $ 473 ========== ========== Resources' other capital leases are with various regional, state and city authorities for transportation equipment and aggregated $0 million and $4 million as of December 31, 1998 and 1997, respectively. 84 NOTE 6. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES
CURRENT REDEMPTION OUTSTANDING PRICE DECEMBER 31, DECEMBER 31, SHARES PER SHARE 1998 1997 ----------- ---------- ------------ ------------ (MILLIONS OF DOLLARS) PSEG Common Stock (no par) (A) Authorized 500,000,000 shares; issued and outstanding at December 31, 1998, 226,643,508 shares; at December 31, 1997, 231,957,608 shares and at December 31, 1996, 233,470,291 shares ........ $3,396 $3,603 PSEG Preferred Securities (B) PSEG Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures (D) (E) (G) (I) 7.44% ........................................... 9,000,000 -- $225 $-- Floating Rate ..................................... 150,000 -- 150 -- 7 1/4% .......................................... 6,000,000 -- 150 -- ------------ ------------ Total Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures ........ $525 $-- ============ ============ PSE&G Preferred Securities PSE&G Cumulative Preferred Stock (C) without Mandatory Redemption (D) $100 par value series 4.08% ........................................... 146,221 103.00 $15 $15 4.18% ........................................... 116,958 103.00 12 12 4.30% ............................................ 149,478 102.75 15 15 5.05% ............................................ 104,002 103.00 10 10 5.28% ............................................ 117,864 103.00 12 12 6.92% ............................................ 160,711 -- 16 16 $25 par value series 6.75% ............................................ 600,000 -- 15 15 ============ ============ Total Preferred Stock without Mandatory Redemption .. $95 $95 ============ ============ With Mandatory Redemption (D) (E) $100 par value series 5.97% ............................................ 750,000 102.99 $75 $75 ============ ============ Total Preferred Stock with Mandatory Redemption ..... $75 $75 ============ ============ PSE&G Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures (D) (E) (H) 9.375% ........................................... 6,000,000 -- $150 $150 8.00% ............................................ 2,400,000 -- 60 60 ------------ ------------ Total Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures ....... $210 $210 ============ ============ PSE&G Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures (D) (E) (F) (H) 8.625% ........................................ 8,320,000 -- $208 $208 8.125% ........................................ 3,800,000 -- 95 95 ------------ ------------ Total Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures ....... $303 $303 ============ ============
(A) On September 15, 1998, in anticipation of securitization of PSE&G's stranded costs afforded by the Energy Competition Act and the ALJ's decision, the Board of Directors of PSEG authorized the repurchase of up to 10 million shares of its common stock (Common Stock). Under the authorization, repurchases were made in the open market at the discretion of PSEG. The repurchased shares have been held as treasury stock. At December 31, 1998, PSEG had repurchased 5,314,100 shares of Common Stock at a cost of approximately $207 million, under this authorization. As of February 8, 1999, PSEG had repurchased a total of 10 million shares at a cost of approximately $391 million under this program. In July 1996, PSEG initiated a Common Stock repurchase program. As of December 31, 1996, 11,227,639 shares had been repurchased for $307 million. The program concluded on January 17, 1997. The total number of shares repurchased under the program was 12,740,322 at a cost of $350 million. 85 Total authorized and unissued shares include 7,302,488 shares of PSEG Common Stock reserved for issuance through PSEG's Dividend Reinvestment and Stock Purchase Plan and various employee benefit plans. In 1998 and 1997, no shares of PSEG Common Stock were issued or sold through these plans. (B) PSEG has authorized a class of 50,000,000 shares of Preferred Stock without par value, none of which is outstanding. (C) At December 31, 1998, there were aggregates of 5,954,766 shares of $100 par value and 9,400,000 shares of $25 par value Cumulative Preferred Stock which were authorized and unissued, and which upon issuance may or may not provide for mandatory sinking fund redemption. If dividends upon any shares of Preferred Stock are in arrears in an amount equal to the annual dividend thereon, voting rights for the election of a majority of PSE&G's Board of Directors become operative and continue until all accumulated and unpaid dividends thereon have been paid, whereupon all such voting rights cease, subject to being revived from time to time. (D) At December 31, 1998 and 1997, the annual dividend requirement and embedded dividend rate for Preferred Stock without mandatory redemption was $10,886,758 and 5.18%, respectively, and for Preferred Stock with mandatory redemption was $4,477,500 and 6.02%, respectively. At December 31, 1998 and 1997, the annual dividend requirement and embedded cost of the Monthly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures) was $18,862,500 and 5.50% and $18,862,500 and 6.04%, respectively. At December 31, 1998 and 1997, the annual dividend requirement of the Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures) and their embedded costs were $25,658,750 and 5.18% and $25,658,750 and 5.70%, respectively. At December 31, 1998, the annual dividend requirement of PSEG's Trust Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures) and their embedded costs were $38,433,000 and 4.91%, respectively. There were no Trust Preferred Securities at PSEG at December 31, 1997. (E) For information concerning fair value of financial instruments, see Note 8. Financial Instruments and Risk Management. (F) In February 1997, PSE&G Capital Trust II issued $95 million of 8.125% Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures. (G) In January 1998, Enterprise Capital Trust I issued $225 million of 7.44% Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures. In June 1998, Enterprise Capital Trust II issued $150 million of Floating Rate Capital Securities with a Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures. The Floating Rate Capital Securities were offered to Institutional Investors at an annual rate equal to 3-month LIBOR plus 1.22%, determined quarterly. PSEG entered into an interest rate swap agreement which effectively fixes the rate on this issue for 10 years at 7.2%. In July 1998, Enterprise Capital Trust III issued $150 million of 7.25% Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures. (H) PSE&G Capital L.P., PSE&G Capital Trust I and PSE&G Capital Trust II were formed and are controlled by PSE&G for the purpose of issuing Monthly and Quarterly Income Preferred Securities (Monthly and Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures). The proceeds were loaned to PSE&G and are evidenced by PSE&G's Deferrable Interest Subordinated Debentures. If and for as long as payments on PSE&G's Deferrable Interest Subordinated Debentures have been deferred, or PSE&G has defaulted on the indentures related thereto or its guarantees thereof, PSE&G may not pay any dividends on its common and preferred stock. The Subordinated Debentures and the indentures constitute a full and unconditional guarantee by PSE&G of the Preferred Securities issued by the partnership and the trusts. (I) Enterprise Capital Trust I, Enterprise Capital Trust II and Enterprise Capital Trust III were formed and are controlled by PSEG for the purpose of issuing Quarterly Trust Preferred Securities (Quarterly Guaranteed Preferred 86 Beneficial Interest in PSEG's Subordinated Debentures). The proceeds were loaned to PSEG and are evidenced by PSEG's Deferrable Interest Subordinated Debentures. If and for as long as payments on PSEG's Deferrable Interest Subordinated Debentures have been deferred, or PSEG has defaulted on the indentures related thereto or its guarantees thereof, PSEG may not pay any dividends on its common and preferred stock. The Subordinated Debentures and the indentures constitute a full and unconditional guarantee by PSEG of the Preferred Securities issued by the trusts. NOTE 7. SCHEDULE OF CONSOLIDATED DEBT
LONG-TERM DECEMBER 31, ------------------------------- INTEREST RATES MATURITY 1998 1997 - -------------- ----------- ------------ -------------- (MILLIONS OF DOLLARS) PSEG Extendible Notes (A) LIBOR plus 0.75% - 0.78% 2000....... $275 $-- ------------ -------------- Total Long-Term Debt of PSEG................................... $275 $-- ============ ============== PSE&G First and Refunding Mortgage Bonds (B) 6.00% 1998....... $-- $100 8.75% 1999....... 100 100 6.00%-7.625% 2000....... 635 635 7.875% 2001....... 100 100 6.125% 2002....... 300 300 6.875%-8.875% 2003....... 300 300 6.25%-9.125% 2004-2007.. 750 750 6.80%-6.90% 2008-2012.. 3 3 Variable 2008-2012.. 66 66 6.75%-7.375% 2013-2017.. 375 375 6.45%-9.25% 2018-2022.. 139 139 Variable 2018-2022.. 14 14 5.20%-7.50% 2023-2027.. 573 568 5.45%-6.55% 2028-2032.. 499 499 Variable 2028-2032.. 25 25 5.00%-8.00% 2033-2037.. 160 160 Medium-Term Notes 8.10%-8.16% 2008-2012.. 60 60 7.04% 2018-2022.. 9 9 7.15%-7.18% 2023-2027.. 41 41 ------------ -------------- Total First and Refunding Mortgage Bonds......................... 4,149 4,244 ------------ -------------- Unsecured Bonds (C) 6.00% 1998....... -- 18 Variable 2027....... 19 19 ------------ -------------- Total Unsecured Bonds............................................ 19 37 ------------ -------------- Principal Amount Outstanding (D).................................... 4,168 4,281 Amounts Due Within One Year (E)..................................... (100) (118) Net Unamortized Discount............................................ (23) (37) ------------ -------------- Total Long-Term Debt of PSE&G (F)................................ $4,045 $4,126 ============ ============== ENERGY HOLDINGS PSEG CAPITAL Senior Notes (G) 9.875%--10.05% 1998....... $-- $38 Medium-Term Notes 9.00% 1998....... -- 75 8.95%-9.93% 1999....... 155 155 6.54% 2000....... 78 78 6.74% 2001....... 135 135 6.80%-7.00% 2002....... 130 130 ------------ -------------- Principal Amount Outstanding (D).................................... 498 611 Amounts Due Within One Year (E)..................................... (155) (113) Net Unamortized Discount............................................ (2) (2) ------------ -------------- Total Long-Term Debt of PSEG Capital............................. 341 496 ------------ -------------- FUNDING (H) 9.95% 1998....... -- 83 7.58% 1999....... 45 45 ------------ -------------- Principal Amount Outstanding (D).................................... 45 128
87 Amounts Due Within One Year (E)..................................... (45) (83) ------------ -------------- Total Long-Term Debt of Funding.................................. -- 45 ------------ -------------- GLOBAL Non-recourse Debt (I) 7.721% - Bank Loan 1999....... 87 87 13.23% - Bank Loan 2002....... 123 135 14.00% - Minority Interest Loan 2027....... 10 10 ------------ -------------- Principal Amount Outstanding (D).................................... 220 232 Amounts Due Within One Year......................................... (118) (26) ------------ -------------- Total Long-Term Debt of Global................................. 102 206 ------------ -------------- Total Long-Term Debt of Energy Holdings........................ $443 $747 ============ ============== Consolidated Long-Term Debt (J)............................. $4,763 $4,873 ============ ==============
(A) In November 1998, PSEG issued Series A and B of Extendible Notes due November 2000 totaling $275 million. Series A in the amount of $100 million pays interest at LIBOR plus 0.75%, reset quarterly, and will be automatically tendered to the remarketing agent for remarketing on May 24, 1999. Series B in the amount of $175 million pays interest at LIBOR plus 0.78%, reset quarterly, and will be automatically tendered to the remarketing agent for remarketing on November 22, 1999. At December 31, 1998, the interest rates on Series A and B were 6.00% and 6.03%, respectively. (B) PSE&G's Mortgage, securing the Bonds, constitutes a direct first mortgage lien on substantially all PSE&G's property and franchises. During 1998, PSE&G reacquired on the open market $242 million of its 7.50% Series OO First and Refunding Mortgage Bonds (Bonds). In May 1998, PSE&G issued $250 million of its 6.375% Remarketable Series YY Bonds due 2023, Mandatorily Tendered 2008. PSE&G also entered into a Remarketing Agreement with a third party that granted the third party the option to call and remarket the Series YY Bonds on May 1, 2008 for the remaining term of the Series YY Bonds. In January 1998, $100 million of PSE&G's 6.00% Bonds, Series NN, matured. (C) On July 1, 1998, $18 million of PSE&G's 6% Unsecured Bonds matured. (D) For information concerning fair value of financial instruments, see Note 8. Financial Instruments and Risk Management. (E) The aggregate principal amounts of mandatory requirements for sinking funds and maturities for each of the five years following December 31, 1998 are as follows:
SINKING FUNDS MATURITIES ----- ---------------------------------------------------------------------------- PSEG YEAR GLOBAL PSEG PSE&G CAPITAL FUNDING GLOBAL TOTAL - ------------ ---------- --------- ----------- ------------ ------------ ------------ ----------- 1999........ $31 -- $100 $155 $45 $87 $418 2000........ 31 $275 635 78 -- -- 1,019 2001........ 31 -- 100 135 -- -- 266 2002........ 30 -- 300 130 -- -- 460 2003........ -- -- 300 -- -- -- 300 --------- ------------------------ ------------ ------------ ----------- $123 $275 $1,435 $498 $45 $87 $2,463 ========= ======================== ============ ============ ===========
(F) At December 31, 1998 and 1997, PSE&G's annual interest requirement on long-term debt was $282 million and $291 million, of which $274 million and $283 million, respectively, was the requirement for Bonds. The embedded interest cost on long-term debt on such dates was 7.35% and 7.44%, respectively. The embedded interest cost on long-term debt due within one year at December 31, 1998 was 8.83%. (G) PSEG Capital has provided up to $750 million debt financing for Energy Holdings' businesses, except Energy Technologies, on the basis of a net worth maintenance agreement with PSEG. Effective January 31, 1995, PSEG Capital has limited its borrowings to no more than $650 million. 88 (H) Funding provides debt financing for Resources, Global and their subsidiaries on the basis of an unconditional guarantee from Energy Holdings. (I) Global's projects are generally financed with non-recourse debt at the project level, with the balance in the form of equity investments by the partners in the project. The non-recourse debt shown in the above table is that of two consolidated subsidiaries which have equity investments in distribution facilities in Argentina and Brazil. Global's capital at risk on the projects is limited to its original equity investment. The non-recourse debt, through the process of consolidation, appears as long-term debt and long-term investments in PSEG's consolidated balance sheets. (J) At December 31, 1998 and 1997, the annual interest requirement on long-term debt was $365 million and $378 million, of which $274 million and $283 million, respectively, was the requirement for Bonds. The embedded interest cost on long-term debt on such dates was 7.32% and 7.64%, respectively. PSEG At December 31, 1998, PSEG had a committed $150 million revolving credit facility which expires in December 2002. At December 31, 1998 and 1997, PSEG had a $25 million and $75 million uncommitted line of credit, respectively, with a bank. At December 31, 1998, PSEG had no debt outstanding under these facilities. The weighted-average, short-term debt rate of PSEG was 5.6%, 6.2% and 5.7% for the years ended December 31, 1998, 1997 and 1996, respectively. PSE&G
1998 1997 1996 ---- ---- ---- (MILLIONS OF DOLLARS) Principal amount outstanding at year end, primarily commercial paper....... $850 $1,106 $638 Weighted average interest rate for short-term debt at year end............. 5.91% 6.07% 5.70%
PSE&G has authorization from the BPU to issue and have outstanding not more than $1.5 billion of its short-term obligations at any one time, consisting of commercial paper and other unsecured borrowings from banks and other lenders. This authorization expires January 4, 2000. PSE&G has a $1.3 billion commercial paper program (Program) supported by a $650 million revolving credit agreement expiring in June 1999 and a $650 million revolving credit agreement expiring in June 2002 with a group of commercial banks. As of December 31, 1998 and 1997, PSE&G had $655 million and $952 million, respectively, outstanding under the Program, which amounts are included in the table above. As of December 31, 1998, there was no debt outstanding under the revolving credit agreements. PSE&G has $150 million in uncommitted lines of credit facilities extended by a number of banks to primarily support short-term borrowings, of which $115 million was outstanding on December 31, 1998 and is included in the table above. PSE&G had various lines of credit facilities extended by banks to primarily support the issuance of letters of credit. As of December 31, 1998, letters of credit were issued in the amount of $21 million. PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125 million revolving credit facility with a group of banks, which expires on June 28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations. As of December 31, 1998 and 1997, Fuelco had commercial paper of $80 million outstanding under the commercial paper program, which amounts are included in the table above. As of December 31, 1998, there was no debt outstanding under the revolving credit facility. Pursuant to the BPU's authorization of long-term debt, PSE&G has entered into standby financing arrangements with banks totaling $124 million. These facilities support long-term tax-exempt multi-mode mortgage bond financings done through the New Jersey Economic Development Authority, The Pollution Control Financing Authority of Salem County (New Jersey), the York County (Pennsylvania) Industrial Development Authority and the Indiana County (Pennsylvania) Industrial Development Authority. As of December 31, 1998, no amounts were outstanding under such arrangements. 89 ENERGY HOLDINGS
1998 1997 1996 ---- ---- ---- (MILLIONS OF DOLLARS) Principal amount outstanding at year end................................... $206 $267 $-- Weighted average interest rate for short-term debt at year end............. 6.46% 6.92% --
Funding has a $300 million credit facility expiring in July 1999 and a $150 million revolving credit agreement expiring in November 1999. As of December 31, 1998, there was $206 million outstanding under these facilities, which is included in the table above. NOTE 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT PSEG's operations give rise to exposure to market risks from changes in commodity prices, interest rates, foreign currency exchange rates and securities prices. PSEG's policy is to use derivative financial instruments for the purpose of managing market risk consistent with its business plans and prudent business practices. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value was determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions at the end of 1998 and 1997, respectively. Note that certain events, in connection with the Energy Master Plan Proceedings could trigger certain redemption features of certain PSE&G mortgage bonds which is not reflected in the fair value estimations below, see Note 2. Regulatory Issues.
DECEMBER 31, ------------------------------------------------------------- 1998 1997 --------------------------- -------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------- ------------- --------------- --------------- (MILLIONS OF DOLLARS) Long-Term Debt (A): PSEG.................................................. $275 $275 $-- $-- Energy Holdings....................................... 762 769 969 978 PSE&G................................................. 4,145 4,389 4,244 4,389 Preferred Securities Subject to Mandatory Redemption: PSE&G Cumulative Preferred Securities................. 75 77 75 78 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures.................... 210 213 210 221 Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures.................... 303 315 303 316 Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures..................... 525 518 -- --
(A) Includes current maturities and interest rate swaps of $44 million and $150 million for Energy Holdings and PSEG, respectively, for the period ended December 31, 1998. Includes current maturities and an interest rate swap of $44 million for Energy Holdings for the period ended December 31, 1997. 90 Global had consolidated non-recourse debt of $123 million as of December 31, 1998 which is denominated in the Brazilian Real that is indexed to a basket of currencies including U.S. dollars. As a result, it is subject to foreign currency exchange rate risk due to the effect of exchange rate movements between the indexed foreign currencies and the Brazilian Real and between the Brazilian Real and the U.S. Dollar. Exchange rate changes ultimately impact the debt level outstanding in the denominated currency and result in foreign currency transactions in accordance with current accounting guidance. Any related transaction (losses)/gains resulting from such exchange rate changes are included in determining net income for the period and amounted to $(3) million and $1 million for the years ended December 31, 1998 and 1997, respectively. For more information on foreign operations and the devaluation of foreign currencies, see Note 20. Subsequent Events. COMMODITY INSTRUMENTS--PSE&G At December 31, 1998 and 1997, PSE&G held or issued instruments that reduce exposure to market fluctuations from factors such as weather, environmental policies, changes in demand, changes in supply, state and Federal regulatory policies and other events. These instruments, in conjunction with owned electric generating capacity and physical gas supply contracts, are designed to cover estimated electric and gas customer commitments. PSE&G currently has levelized energy adjustment clauses, LEAC and LGAC, in place for both electricity and natural gas pursuant to BPU orders. These clauses were established to minimize the impact of major commodity price swings on energy cost to customers. Effective January 1, 1998, the amount included for LEAC under/overrecovery represents the difference between fuel-related revenues and fuel-related expenses which are comprised of the cost of generation and net purchased power at the locational marginal price. PSE&G uses futures, forwards, swaps and options to manage and hedge price risk related to these market exposures. Energy commodity futures involve the buying or selling of electricity and natural gas at a fixed price under the provisions of exchange regulations. Energy commodity forwards involve the buying or selling of electricity and natural gas at non-standardized terms that result from direct negotiation between the buyer and the seller. Swap agreements require PSE&G to receive or make payment based on the difference between a specified price and the actual price of the underlying commodity. Energy commodity options provide the right, but not the requirement, to buy or sell energy-related commodities at a fixed price. PSE&G uses these instruments to manage commodity price risk. At December 31, 1998, PSE&G had outstanding commodity financial instruments with a notional contract quantity of 1.6 million MWH of electricity and 65.2 million MMBTU of natural gas. At December 31, 1997, PSE&G had outstanding commodity financial instruments with a notional contract quantity of 0.9 million MWH of electricity and 3.7 million MMBTU of natural gas. Notional amounts are indicative only of the volume of activity and are not a measure of market risk. At December 31, 1998 and 1997, PSE&G had current unrecognized net gains of $5 million and $3 million, respectively, related to commodity instruments. NATURAL GAS HEDGING--ENERGY HOLDINGS As of December 31, 1998 and 1997, Energy Technologies had outstanding futures contracts to buy natural gas related to fixed-price natural gas sales commitments. Such contracts hedged approximately 90% and 97% of its fixed price sales commitments at December 31, 1998 and 1997, respectively. As of December 31, 1998 and 1997, Energy Technologies had a net unrealized hedge loss of $5 million and $2 million, respectively. NUCLEAR DECOMMISSIONING TRUST FUNDS Contributions made into the Nuclear Decommissioning Trust Funds are invested in debt and equity securities. The carrying value of these funds of $524 million and $459 million approximates the fair market value as of December 31, 1998 and 1997, respectively. 91 EQUITY SECURITIES--ENERGY HOLDINGS Resources, a wholly-owned subsidiary of Energy Holdings, has investments in equity securities and partnerships, in which Resources is a limited partner, which invest in equity securities. Resources carries its investments in equity securities at their approximate fair value as of the reporting date. Consequently, the carrying value of these investments is affected by changes in the fair value of the underlying securities. Fair value is determined by adjusting the market value of the securities for liquidation and market volatility factors, where appropriate. The aggregate amount of such investments which have available market prices at December 31, 1998 and 1997 are recorded at fair value of $204 million and $185 million, respectively, and have exposure to market price risk. A sensitivity analysis has been prepared to estimate Energy Holdings' exposure to market sensitivity of these investments. The potential change in fair value resulting from a hypothetical 10% change in quoted market prices of these investments amounts to $17 million. INTEREST RATE SWAPS--PSEG AND ENERGY HOLDINGS PSEG entered into an interest rate swap on June 26, 1998 to hedge Enterprise Capital Trust II's $150 million of Floating Rate Capital Securities, Series B, due 2028. Enterprise Capital Trust II is a special purpose statutory business trust controlled by PSEG. The basis for both the interest rate swap and the Floating Rate Capital Securities is the quarterly London Interbank Offered Rate (LIBOR). This interest rate swap effectively hedges the underlying debt for 10 years at an effective rate of 7.2%. In June 1997, an indirect subsidiary of Global entered into an interest rate swap on 50% of its floating rate borrowings of $87 million. The basis for the interest rate swap is six month LIBOR. The interest rate swap effectively hedges the underlying debt through its scheduled maturity in May 1999 at the current effective rate of 7.76%. The interest differential to be received or paid under the interest rate swap agreement is recorded over the life of the agreement as an adjustment to the interest expense of the related borrowing. The swap terminates on May 28, 1999. CREDIT RISK--PSE&G AND ENERGY HOLDINGS Credit risk relates to the risk of loss that PSEG would incur as a result of nonperformance by counterparties, pursuant to the terms of their contractual obligations. PSEG has established credit policies that it believes significantly minimizes PSEG's exposure to credit risk. These policies include an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which may allow for the netting of positive and negative exposures associated with a single counterparty. NOTE 9. CASH AND CASH EQUIVALENTS The December 31, 1998 and 1997 balances consist primarily of working funds and highly liquid marketable securities (commercial paper and money market funds) with a maturity of three months or less. 92 NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES NUCLEAR INSURANCE COVERAGES AND ASSESSMENTS PSE&G's insurance coverages and maximum retrospective assessments for its nuclear operations are as follows:
PSE&G MAXIMUM TYPE AND SOURCE OF COVERAGES TOTAL SITE COVERAGES ASSESSMENTS - ---------------------------- -------------------- ----------- (MILLIONS OF DOLLARS) Public and Nuclear Worker Liability (Primary Layer): American Nuclear Insurers............................ $200.0 (A) $8.0 Nuclear Liability (Excess Layer): Price-Anderson Act................................... $9,514.8 (B) $233.6 -------- ------ Nuclear Liability Total.......................... $9,714.8 (C) $241.6 ======== ====== Property Damage (Primary Layer): Nuclear Electric Insurance Limited (NEIL) Primary (Salem/Hope Creek/Peach Bottom).................. $500.0 $11.6 Property Damage (Excess Layer): NEIL II (Salem/Hope Creek/Peach Bottom).............. $2,250.0 $10.0 -------- ----- Property Damage Total (Per Site)..................... $2,750.0 $21.6 ======== ===== Replacement Power: NEIL Primary (Primary Layer at all sites)............ $21.0 (D) N/A NEIL I (Excess Layer at Salem and Peach Bottom)...... $202.8 (E) $5.9 NEIL I (Excess Layer at Hope Creek).................. $449.5 $3.1 ---- Replacement Power Total (Hope Creek)............. See (F) $9.0 ====
(A) The primary limit for Public Liability is a per site aggregate limit with no potential for assessment. The Nuclear Worker Liability represents the potential liability from workers claiming exposure to the hazard of nuclear radiation. This coverage is subject to an industry aggregate limit, includes annual automatic reinstatement if the ICRP Reserve Fund exceeds $400 million, and has an assessment potential under former canceled policies. (B) Retrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of 1954, as amended. PSE&G is subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in the United States. This retrospective assessment can be adjusted for inflation every five years. The last adjustment was effective as of August 20, 1998. This retrospective program is excess over the Public and Nuclear Worker Liability primary layers. (C) Limit of liability under the Price-Anderson Act for each nuclear incident. (D) After a waiting period, NEIL Primary insured sites may receive a weekly indemnity of $3.5 million for six weeks. (E) Salem and Peach Bottom have an aggregate indemnity limit based on a weekly indemnity of $1.5 million for 52 weeks followed by 80% of the weekly indemnity for 104 weeks. Hope Creek has an aggregate indemnity limit based on a weekly indemnity of $3.3 million for 52 weeks followed by 80% of the weekly indemnity for 104 weeks. (F) Combined aggregate limit of NEIL Primary and NEIL I coverages available for Hope Creek is $470.5 million. For Salem and Peach Bottom the combined aggregate limits are $223.8 million. The Price-Anderson Act sets the "limit of liability" for claims that could arise from an incident involving any licensed nuclear facility in the nation. The "limit of liability" is based on the number of licensed nuclear reactors and is adjusted at least every five years based on the Consumer Price Index. The current "limit of liability" is $9.7 billion. All utilities owning a nuclear reactor, including PSE&G, have provided for this exposure through a combination of private insurance 93 and mandatory participation in a financial protection pool as established by the Price-Anderson Act. Under the Price-Anderson Act, each party with an ownership interest in a nuclear reactor can be assessed their share of $88.1 million per reactor per incident, payable at $10 million per reactor per incident per year. If the damages exceed the "limit of liability," the President is to submit to Congress a plan for providing additional compensation to the injured parties. Congress could impose further revenue raising measures on the nuclear industry to pay claims. PSE&G's maximum aggregate assessment per incident is $233.6 million (based on PSE&G's ownership interests in Hope Creek, Peach Bottom and Salem) and its maximum aggregate annual assessment per incident is $26.5 million. This does not include the $8.0 million that could be assessed under the nuclear worker policies. Further, a decision by the U.S. Supreme Court, not involving PSE&G, has held that the Price-Anderson Act did not preclude awards based on state law claims for punitive damages. PSE&G is a member of an industry mutual insurance company, NEIL. NEIL provides the primary property and decontamination liability insurance at Salem/Hope Creek and Peach Bottom. NEIL also provides excess property insurance through its decontamination liability, decommissioning liability, and excess property policy and replacement power coverage through its business interruption and/or extra expense policy. NEIL policies may make retrospective premium assessments in case of adverse loss experience. PSE&G's maximum potential liabilities under these assessments are included in the table and notes above. Certain provisions in the NEIL policies provide that the insurer may suspend coverage with respect to all nuclear units on a site without notice if the NRC suspends or revokes the operating license for any unit on a site, issues a shutdown order with respect to such unit or issues a confirmatory order keeping such unit down. NUCLEAR OPERATING PERFORMANCE STANDARD (OPS) PECO Energy Company (PECO Energy), Delmarva Power & Light Company (DP&L) and PSE&G, three of the co-owners of the Salem Nuclear Generating Station Units 1 and 2 (Salem) and the Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom), have agreed to an OPS through December 31, 2011 for Salem and through December 31, 2007 for Peach Bottom. Under the OPS, the station operator is required to make payments to the non-operating owners (excluding Atlantic City Electric Company) commencing in January 2001 if the three-year historical average net maximum dependable capacity factor for that station, calculated as of December 31 of each year commencing with December 31, 2000, falls below 40%. Any such payment is limited to a maximum of $25 million per year. The parties have further agreed to forego litigation in the future, except for limited cases in which the operator would be responsible for damages of no more than $5 million per year. YEAR 2000 Many of PSEG's and PSE&G's systems, which include information technology applications, plant control and telecommunications infrastructure systems, must be modified due to computer program limitations in recognizing dates beyond 1999. Management estimates the total cost related to Year 2000 readiness will approximate $83 million, to be incurred from 1997 through 2001, of which $8 million was incurred in 1997, $27 million was incurred in 1998 and approximately $36 million is expected to be incurred in 1999. A portion of these costs is not likely to be incremental to PSEG or PSE&G, but rather, represents a redeployment of existing personnel/resources. The schedule to replace certain systems was accelerated for Year 2000 purposes. Analysis is continuing and costs identified to date are approximately $5 million, which are not included in the estimates above. Additionally, PSE&G is installing programs (SAP) from SAP America, Inc. to replace certain major business systems. SAP America, Inc. has represented that SAP is Year 2000 compliant, and thus, installation of SAP will eliminate the need to modify those business systems for Year 2000 compliance. The phased implementation of SAP is scheduled to be completed by January 1, 2000. The cost of implementing SAP is not included in the above cost estimates since SAP implementation has not been accelerated for Year 2000 purposes. If PSEG, PSE&G, their domestic and international subsidiaries, other members of the PJM Interconnection, L.L.C. (PJM), PJM trading partners supplying power through PJM or PSEG's or PSE&G's critical vendors and/or customers are unable to meet the Year 2000 deadline, such inability could have a material adverse impact on PSEG's and PSE&G's operations, financial condition, results of operations and net cash flows. 94 CONSTRUCTION AND FUEL SUPPLIES PSE&G has substantial commitments as part of its ongoing construction program, which include capital requirements for nuclear fuel. PSE&G's construction program is continuously reviewed and periodically revised as a result of changes in economic conditions, revised load forecasts, scheduled retirement dates of existing facilities, business strategies, site changes, cost escalations under construction contracts, requirements of regulatory authorities and laws, the timing of and amount of electric and gas rate changes and the ability of PSE&G to raise necessary capital. The outcome of the Energy Master Plan Proceedings and the use of alternative sources of generation may impact PSE&G's construction program. For discussion of the Energy Master Plan Proceedings, see Note 2. Regulatory Issues. PSE&G's construction expenditures are expected to aggregate approximately $2.8 billion during the years 1999 through 2003, which includes $414 million for nuclear fuel and excludes AFDC. The estimate of construction requirements is based on expected project completion dates and includes anticipated escalation due to inflation of approximately 3% annually. Therefore, construction delays or higher inflation levels could cause significant increases in these amounts. PSE&G expects to generate the majority of funds necessary to satisfy its construction expenditures over this period, assuming adequate and timely recovery of costs which may be impacted by the outcome of the Energy Master Plan Proceedings, as to which no assurances can be given. In addition, PSE&G does not presently anticipate any difficulties in obtaining sufficient sources of fuel for electric generation or adequate gas supplies during the years 1999 through 2003. SITE RESTORATIONS AND OTHER ENVIRONMENTAL COSTS It is difficult to estimate the future financial impact of environmental laws, including potential liabilities. PSEG and PSE&G accrue environmental liabilities when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. Provisions for estimated losses from environmental remediation are, depending on the site, based primarily on internal and third-party environmental studies, estimates as to the number and participation level of any other Potentially Responsible Parties, the extent of the contamination and the nature of required remedial and restoration actions. HAZARDOUS WASTE Certain Federal and state laws authorize the U.S. Environmental Protection Agency (EPA) and the New Jersey Department of Environmental Protection (NJDEP), among other agencies, to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is determined to present an actual or potential threat to human health or the environment because of an actual or threatened release of one or more hazardous substances. Because of the nature of PSE&G's business, including the production of electricity, the distribution of gas and, formerly, the manufacture of gas, various by-products and substances are or were produced or handled which contain constituents classified as hazardous. PSE&G generally provides for the disposal or processing of such substances through licensed independent contractors. However, these statutory provisions impose joint and several responsibility without regard to fault on all responsible parties, including the generators of the hazardous substances, for certain investigative and remediation costs at sites where these substances were disposed of or processed. PSE&G has been notified with respect to a number of such sites and the investigation and remediation of these potentially hazardous sites is receiving attention from the government agencies involved. Generally, actions directed at funding such site investigations and remediation include all suspected or known responsible parties. Based on current information, except as discussed below with respect to its manufactured gas plant Remediation Program, PSEG and PSE&G do not expect its expenditures for any such site, individually or all such current sites in the aggregate, to have a material effect on financial condition, results of operations and net cash flows. The NJDEP has recently revised regulations concerning site investigation and remediation. These regulations will require an ecological evaluation of potential injuries to natural resources in connection with a remedial investigation of contaminated sites. The NJDEP is presently working with the utility industry to develop procedures for implementing these regulations. These regulations may substantially increase the costs of remedial investigations and remediations, where necessary, particularly at sites situate on surface water bodies. PSE&G and predecessor companies owned and/or operated certain facilities situate on surface water bodies, certain of which are currently the subject of remedial activities. 95 The financial impact of these regulations on these projects is not currently estimable. PSE&G does not anticipate that the compliance with these regulations will have a material adverse effect on its financial position, results of operations or net cash flows. PSE&G MANUFACTURED GAS PLANT REMEDIATION PROGRAM In 1988, NJDEP notified PSE&G that it had identified the need for PSE&G, pursuant to a formal arrangement, to systematically investigate and, if necessary, resolve environmental concerns extant at PSE&G's former manufactured gas plant sites. To date, NJDEP and PSE&G have identified 38 former manufactured gas plant sites. PSE&G is currently working with NJDEP under a program to assess, investigate and, if necessary, remediate environmental concerns at these sites. The Remediation Program is periodically reviewed and revised by PSE&G based on regulatory requirements, experience with the Remediation Program and available remediation technologies. The cost of the Remediation Program cannot be reasonably estimated, but experience to date indicates that costs of approximately $20 million per year could be incurred over a period of about 30 years and that the overall cost could be material to PSEG's and PSE&G's financial condition, results of operations and net cash flows. Costs incurred through December 31, 1998 for the Remediation Program amounted to $139 million. In addition, at December 31, 1998, PSE&G's estimated liability for remediation costs through 2001 aggregated $84 million. Expenditures beyond 2001 cannot be reasonably estimated. The Energy Competition Act provides for the continuation of RAC programs. The recovery of costs for RAC is to be through a societal benefits charge. No assurances can be given as to the outcome of the Energy Master Plan Proceedings (see Note 2. Regulatory Issues). AIR POLLUTION CONTROL In June 1998, NJDEP adopted regulations implementing a memorandum of understanding among 11 Northeastern states and the District of Columbia, establishing a regional plan for reducing nitrogen oxide (NOx) emissions from utility and large industrial boilers. The extent of investment in control technologies, operational changes and purchases of allowances required to comply with these regulations will be directly related to the number of allowances PSE&G receives. PSE&G expects to receive a preliminary allocation of allowances in March 1999 and the final allocation is expected to be determined in accordance with the NJDEP regulations in November 1999 which is subsequent to the May 1, 1999 through September 30, 1999 period governed by the regulations. PSE&G has attempted to minimize the uncertainty associated with the timing of the allocation by purchasing allowances, upgrading control technologies and estimating the expected allocation with as much precision as is practicable using available data. However PSE&G's present analysis leads it to believe that the potential costs for purchasing additional NOx budget allowances should not exceed a total of $10 million through December 31, 2002. Expenditures associated with installing control technology could result in an additional $72 million. However, PSE&G is currently analyzing alternatives which could substantially reduce the necessity of capital improvements. PASSAIC RIVER SITE The EPA has determined that a six mile stretch of the Passaic River in Newark, New Jersey is a "facility" within the meaning of that term under CERCLA and that, to date, at least thirteen corporations may be potentially liable for performing required remedial actions to address potential environmental pollution at the facility. The EPA anticipates identifying other potentially responsible parties (PRP). One PRP (Cooperating Party) entered into a consent decree with the EPA in 1994 obligating it to conduct a remedial investigation and feasibility study of available and applicable corrective actions for the site. The Cooperating Party has reported that it has incurred approximately $35 million to date in connection with the implementation of required remedial actions for the site. Future costs for prospective remedial actions may be material to PSE&G. In a separate matter, PSE&G and certain of its predecessors operated industrial facilities at properties along the stretch of the Passaic River designated as the site. In April 1996, the EPA directed PSE&G to provide information concerning the nature and quantity of raw materials, by-products and wastes which may have been generated, treated, stored or disposed at certain of these facilities. The facilities are PSE&G's former Harrison Gas Plant and Essex Generating Station. PSE&G 96 submitted responses to the EPA requests for these sites in August 1996. In July 1997, the EPA named PSE&G as a PRP for this site. PSE&G cannot predict what action, if any, the EPA or any third party may take against PSE&G with respect to this site, or in such event, what costs PSE&G may incur to address any such claims. However, such costs may be material. NOTE 11. PSE&G NUCLEAR DECOMMISSIONING The BPU decision in PSE&G's most recent base rate case utilized studies based on the prompt removal/dismantlement method of decommissioning for all of PSE&G's nuclear generating stations. This method consists of removing fuel, source material and all other radioactive materials with activity levels above accepted release limits from the nuclear sites. PSE&G has an ownership interest in five nuclear units: Salem 1 and Salem 2--42.59% each, Hope Creek--95% and Peach Bottom 2 and 3--42.49% each. In accordance with rate orders received from the BPU, PSE&G has established an external master nuclear decommissioning trust for all its nuclear units. This trust contains two separate funds: a qualified fund and a non-qualified fund, due to an Internal Revenue Service (IRS) ruling. Section 468A of the Internal Revenue Code limits the amount of money that can be contributed into a "qualified" fund. Contributions made into a qualified fund are tax deductible. PSE&G estimated the total cost of decommissioning its share of these five nuclear units at $986 million in year end 1995 dollars (the year that the most recent site specific estimates were prepared), excluding contingencies. On December 23, 1996, PSE&G filed its 1995 nuclear plant decommissioning cost update with the BPU. On December 17, 1997, the BPU accepted PSE&G's decommissioning cost updates and found that the current funding requirements as presented in PSE&G's 1996 Nuclear Decommissioning Trust Fund Report, dated May 15, 1997, appear adequate. The most recent base rate decision provided that $15.6 million of such costs are to be collected through base rates and an additional annual amount of $7 million in 1993 and $14 million each year thereafter are to be recovered through PSE&G's LEAC. Although the Energy Competition Act provides that the societal benefits charge will be utilized to collect the necessary funding for nuclear decommissioning, no assurances can be given as to the outcome of the Energy Master Plan Proceedings. At December 31, 1998 and 1997, the accumulated provision for depreciation and amortization included reserves for nuclear decommissioning for PSE&G's nuclear units of $465 million and $428 million, respectively. As of December 31, 1998 and 1997, PSE&G had contributed $303 million and $279 million, respectively, into independent, external, qualified and non-qualified nuclear decommissioning trust funds. The fair market value of these funds as of December 31, 1998 and 1997 was $542 million and $458 million, respectively. The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry, including PSE&G, regarding the recognition, measurement and classification of nuclear decommissioning costs in their financial statements. In response to these questions, the Financial Accounting Standards Board (FASB) has agreed to review the accounting for removal costs, including decommissioning. If current electric utility industry accounting practices for decommissioning are changed: (1) annual provisions for decommissioning could materially increase, (2) the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation and (3) trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense all, or any of which, could have a material adverse effect on PSEG's and PSE&G's financial condition, results of operations and net cash flows. 97 URANIUM ENRICHMENT DECONTAMINATION AND DECOMMISSIONING FUND In accordance with EPAct, domestic utilities that own nuclear generating stations are required to pay a cumulative total of $150 million each year (adjusted for inflation) into a decontamination and decommissioning fund, based on their past purchases of U.S. government enrichment services. These amounts are being collected over a period of 15 years or until $2.25 billion (adjusted for inflation) has been collected. Under this legislation, PSE&G's obligation for the nuclear generating stations in which it has an interest is $70 million (adjusted for inflation). Since 1993, PSE&G has paid $32 million, resulting in a balance due of $38 million. PSE&G has collected the expenditures incurred to date as part of underrecovered electric energy costs and anticipates recovery of such costs through a future regulatory mechanism. PSE&G believes that it should not be subject to collection of any such fund payments under EPAct. It has filed suit in the U.S. Court of Claims and petitioned the U.S. District Court, Southern District of NY to recover these costs. SPENT NUCLEAR FUEL DISPOSAL COSTS In accordance with the Nuclear Waste Policy Act (NWPA), PSE&G has entered into contracts with the Department of Energy (DOE) for the disposal of spent nuclear fuel. Payments made to the DOE for disposal costs are based on nuclear generation and are included in Net Interchanged Power and Fuel for Electric Generation in the Statements of Income. Until the start of retail competition pursuant to the Energy Competition Act, these costs are being recovered through the LEAC. Thereafter, PSE&G will bear the risks of nuclear fuel disposal costs. See Note 2. Regulatory Issues for the Energy Master Plan Proceedings and the potential impact on the LEAC. DOE construction of a permanent disposal facility has not begun and DOE has announced that it does not expect a facility to be available until 2010 at the earliest. In 1998, legislation which would have the DOE establish a centralized interim spent fuel storage facility was introduced in Congress. However, Congress ultimately elected not to consider this legislation, and whether or not similar legislation will be considered in the future is unknown. In litigation brought by PSE&G, 40 other utilities and many state and local governments, the United States Court of Appeals for the District of Columbia Circuit reaffirmed DOE's unconditional obligation to begin spent fuel acceptance by January 31, 1998. In November 1997, the court ruled that the utilities had fulfilled their obligations under their respective contracts with DOE by contributing to the Nuclear Waste Fund. The court further ruled that DOE's argument of unavoidable delay to meet its obligation was without merit. However, the court did not order DOE to commence spent fuel acceptance by January 31, 1998; instead, it decided that the standard contract provided a potentially adequate remedy in the form of payment of damages if DOE failed its obligations. In May 1998 the court denied a petition to order DOE to begin spent fuel acceptance immediately and declare that the utilities are allowed to escrow their Nuclear Waste Fund fees until DOE begins spent fuel acceptance. Following this decision, DOE offered a proposal to settle issues related to its failure to meet its obligation, which the utilities unanimously rejected. PSE&G is continuing to work with the utility industry to develop a methodology for determining damages incurred as a result of DOE's failure to meet its obligation and a strategy for its implementation. Some utilities have initiated litigation against DOE to recover damages and this option, among others, is currently being considered by PSE&G. No assurances can be given as to the ultimate availability of a facility. NOTE 12. INCOME TAXES The New Jersey Gross Receipts and Franchise Tax (NJGRT) was eliminated effective January 1, 1998 and replaced with a combination of the New Jersey Corporate Business Tax which is a State income tax, the State sales and use tax and a Transitional Energy Facility Assessment (TEFA), with no material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G. The TEFA, which is collected from customers, will be phased out over five years. The corresponding phase out and reduction in rates will cause no material impact on PSEG and PSE&G. While under NJGRT, PSE&G was subject to an effective state tax on unit sales equal to approximately 13% of receipts. As a result of such tax reform, after the phase out of the TEFA, the effective state tax rate applicable to PSE&G will have been substantially reduced, putting PSE&G on a more level playing field with competitors. Interim rates were implemented with regard to the new tax structure effective with service rendered on and after January 1, 1998. The BPU completed its administrative review of the filings of all New Jersey utilities and approved permanent rates for 1998 on July 13, 1998 in a final Order. Effective January 1, 1999, revised rates became effective which reflect one year's phase out of the TEFA. On September 18, 1998 and October 15, 1998, PSE&G filed with the BPU additional information necessary to 1) reconcile its NJGRT collections to its liability through April 1998, 2) reflect the impact of cash working capital and net 98 negative deferred State income taxes on a separate electric and gas basis and 3) provide actual and estimated tax collected and tax liability through December 31, 1998. On December 16, 1998, the BPU issued an "Order Implementing 1999 'TEFA' Reductions and Other Rate Adjustments." This order mandates PSE&G to recognize the cash working capital impact on a separate electric and gas basis and defer such impact as deferred balance sheet credits with interest. In accordance with the order, PSE&G deferred $1.3 million at December 31, 1998. The Order also requires the BPU Staff to perform audits of New Jersey energy utilities for NJGRT tax payments and collections. The results of such audits are to be reported to the BPU for further action. PSE&G does not expect these adjustments, if any, to have a material impact on its financial condition, results of operations and net cash flows. A reconciliation of reported Net Income with pretax income and of income tax expense with the amount computed by multiplying pretax income by the statutory Federal income tax rate of 35% is as follows:
1998 1997 1996 ---------- ---------- ---------- (MILLIONS OF DOLLARS) Net Income .......................................................... $644 $560 $612 Preferred securities (net) .......................................... 9 15 5 Discontinued Operations ............................................. -- -- (24) ---------- ---------- ---------- Subtotal .................................................. 653 575 593 ---------- ---------- ---------- Income taxes: Operating income: Current provision-Federal and State ............................ 441 187 127 Provision for deferred income taxes--net(A)-Federal and State .. -- 167 189 Investment tax credits--net .................................... (21) (20) (21) ---------- ---------- ---------- Total included in operating income ........................ 420 334 295 Miscellaneous other income: Current provision-Federal and State ............................ 8 (24) 1 Provision for deferred income taxes(A)-Federal and State ....... (1) -- -- SFAS 90 deferred income taxes(A) ............................... 1 1 2 ---------- ---------- ---------- Total income tax provisions ............................... 428 311 298 ---------- ---------- ---------- Pretax income ....................................................... $1,081 $886 $891 ========== ========== ==========
Reconciliation between total income tax provisions and tax computed at the statutory tax rate on pretax income:
1998 1997 1996 -------- -------- -------- (MILLIONS OF DOLLARS) Tax computed at the statutory rate ............................................ $378 $310 $312 Increase (decrease) attributable to flow through of certain tax adjustments: Depreciation ............................................................. 23 27 11 Amortization of investment tax credits ................................... (21) (20) (22) New Jersey Corporate Business Tax ........................................ 63 2 2 Other .................................................................... (15) (8) (5) -------- -------- -------- Subtotal ............................................................ 50 1 (14) -------- -------- -------- Total income tax provisions ......................................... $428 $311 $298 ======== ======== ======== Effective income tax rate ..................................................... 39.6% 35.1% 33.4%
(A) The provision for deferred income taxes represents the tax effects of the following items: 99
1998 1997 1996 -------- -------- -------- (MILLIONS OF DOLLARS) Deferred Credits: Additional tax depreciation and amortization ... $(33) $34 $39 Leasing Activities ............................. 39 114 136 Conservation Costs ............................. 36 27 15 Deferred Fuel Costs--net ....................... (60) (4) 6 Pension Cost ................................... 26 8 3 New Jersey Corporate Business Tax .............. (5) 3 2 Other .......................................... (3) (14) (10) -------- -------- -------- Total ..................................... $-- $168 $191 ======== ======== ========
Between the years 1987 and 1994, PSEG's Federal Alternative Minimum Tax (AMT) liability exceeded its regular Federal income tax liability. This excess was carried forward to offset regular income tax liability in future years. PSEG used these AMT credits as a reduction against regular tax liability for 1995, 1996 and 1997. There were no remaining credits as of December 31, 1997. PSEG provides deferred taxes at the enacted statutory tax rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate-making purposes. Management believes that it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to PSE&G customers will be recovered from utility customers in the future. Accordingly, an offsetting regulatory asset was established. As of December 31, 1998, PSE&G had a deferred tax liability and an offsetting regulatory asset of $704 million representing the future revenue expected to be recovered through rates based upon established regulatory practices which permit recovery of current taxes payable. This amount was determined using the enacted Federal income tax rate of 35% and State income tax rate of 9%. The following is an analysis of deferred income taxes: DECEMBER 31, ---------------------- 1998 1997 -------- -------- DEFERRED INCOME TAXES (MILLIONS OF DOLLARS) Assets: Current (net) ................................ $30 $25 -------- -------- Non-current: Unrecovered Investment Tax Credits ......... 110 117 Nuclear Decommissioning .................... 27 33 Construction Period Interest and Taxes ..... 13 15 New Jersey Corporate Business Tax .......... 15 -- Vacation Pay ............................... 6 7 Development Fees ........................... 15 14 Other ...................................... 32 27 -------- -------- Total Non-current ..................... 218 213 -------- -------- Total Assets .......................... 248 238 -------- -------- Liabilities: Non-current: Plant Related Items ........................ 2,180 2,246 Leasing Activities ......................... 702 667 Partnership Activities ..................... 155 159 Conservation Costs ......................... 75 39 Hope Creek O&M Costs ....................... 19 21 Deferred Electric Energy and Gas Costs ..... -- 60 Unamortized Debt Expense ................... 45 44 Taxes Recoverable Through Future Rates (net) 242 249 Other ...................................... 184 122 -------- -------- Total Non-current ..................... 3,602 3,607 -------- -------- Total Liabilities ..................... 3,602 3,607 -------- -------- Summary -- Accumulated Deferred Income Taxes 100 Net Current Assets ........................... 30 25 Net Non-current Liability .................... 3,384 3,394 -------- -------- Total ................................... $3,354 $3,369 ======== ======== NOTE 13. PENSION, OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132), which is effective for financial statements for periods beginning after December 15, 1997. This statement revises and standardizes disclosure requirements for pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. Since SFAS 132 solely revises disclosure requirements, the adoption of SFAS 132 did not have a material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G. The disclosures required by SFAS 132 are below. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
PENSION BENEFITS (B) OTHER POSTRETIREMENT BENEFITS (C) ----------------------------- --------------------------------- (MILLIONS OF DOLLARS) 1998 1997 1998 1997 ---------- ---------- ---------- ---------- CHANGE IN BENEFIT OBLIGATION Benefit Obligation at Beginning of Year $ 2,123 $ 2,065 $ 724 $ 734 Service Cost 60 54 15 12 Interest Cost 158 150 56 54 Special Termination Benefits (A) -- 2 -- -- Actuarial (Gain)/Loss 287 (11) 16 (43) Benefits Paid (140) (137) (29) (33) ---------- ---------- ---------- ---------- Benefit Obligation at End of Year 2,488 2,123 782 724 ---------- ---------- ---------- ---------- CHANGE IN PLAN ASSETS Fair Value of Assets at Beginning of Year 1,959 1,687 -- -- Actual Return on Plan Assets (Net of Expenses) 249 296 1 -- Employer Contributions 155 113 41 33 Benefits Paid (140) (137) (29) (33) ---------- ---------- ---------- ---------- Fair Value of Assets at End of Year 2,223 1,959 13 -- ---------- ---------- ---------- ---------- RECONCILIATION OF FUNDED STATUS Funded Status (265) (164) (769) (724) Unrecognized Net Transition Obligation 37 45 398 429 Prior Service Cost 134 148 30 32 (Gain)/Loss 212 (2) (9) (26) ---------- ---------- ---------- ---------- Net Amount Recognized $ 118 $ 27 $ (350) $ (289) ========== ========== ========== ========== AMOUNTS RECOGNIZED IN STATEMENT OF FINANCIAL POSITION Prepaid Benefit Cost 129 33 -- -- Accrued Benefit Cost (42) (34) (350) (289) Intangible Asset 26 28 -- -- Accumulated Other Comprehensive Income 5 -- -- -- ---------- ---------- ---------- ---------- Net Amount Recognized $ 118 $ 27 $ (350) $ (289) ========== ========== ========== ========== SEPARATE DISCLOSURE FOR PENSION PLANS WITH ACCUMULATED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS :Projected Benefit Obligation at End of Year $ 49 $ 39 Accumulated Benefit Obligation at End of Year 42 35 Fair Value of Assets at End of Year $ -- $ 1
101
PENSION BENEFITS (B) OTHER POSTRETIREMENT BENEFITS (C) ----------------------------- ----------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- COMPONENTS OF NET PERIODIC BENEFIT COST Service Cost $ 60 $ 54 $ 15 $ 12 Interest Cost 158 150 56 54 Expected Return on Plan Assets (176) (151) -- -- Amortization of Net Transition Obligation 8 8 30 30 Prior Service Cost 14 14 2 2 (Gain)/Loss -- -- (1) (2) ---------- ---------- ---------- ---------- Net Periodic Benefit Cost $ 64 $ 75 $ 102 $ 96 ========== ========== ========== ========== COMPONENTS OF TOTAL BENEFIT EXPENSE Net Periodic Benefit Cost $ 64 $ 75 $ 102 $ 96 Additional Expense Under FAS 88 Due to Special Termination Benefits (A) -- 2 -- -- ---------- ---------- ---------- ---------- Total Benefit Expense Before Effect of Regulatory Asset $ 64 $ 77 $ 102 $ 96 ---------- ---------- ---------- ---------- Effect of Regulatory Asset -- -- 19 (63) ---------- ---------- ---------- ---------- Total Benefit Expense Including Effect of Regulatory Asset $ 64 $ 77 $ 121 $ 33 ========== ========== ========== ========== COMPONENTS OF OTHER COMPREHENSIVE INCOME Decrease in Intangible Asset $ (1) $ -- Increase in Additional Minimum Liability (4) -- ---------- ---------- Other Comprehensive Income $ (5) $ -- ---------- ---------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount Rate 6.75% 7.25% 6.75% 7.25% Expected Return on Plan Assets 9.00% 9.00% 9.00% -- Rate of Compensation Increase 4.69% 4.69% 4.69% 4.69% Rate of Increase in Health Benefit Costs Administrative Expense 5.00% 5.00% Pre-65 Medical Costs Immediate Rate 11.50% 12.00% Ultimate Rate 5.00% 5.00% Year Ultimate Rate Reached 2011 2011 Post-65 Medical Costs Immediate Rate 7.50% 8.00% Ultimate Rate 5.00% 5.00% Year Ultimate Rate Reached 2003 2003 Dental Costs Immediate Rate 5.50% 6.00% Ultimate Rate 5.00% 5.00% Year Ultimate Rate Reached 1999 1999 EFFECT OF A CHANGE IN THE ASSUMED RATE OF INCREASE IN HEALTH BENEFIT COSTS Effect of a 1% Increase On Total of Service Cost and Interest Cost 5 6 Postretirement Benefit Obligation 60 57 Effect of a 1% Decrease On Total of Service Cost and Interest Cost (4) (not available) Postretirement Benefit Obligation (51) (not available)
See Note 1. Organization and Summary of Significant Accounting Policies. (A) Effective May 1, 1996, PSE&G's qualified Pension Plan was amended allowing employees the option to retire early upon attainment of age 55 and completion of 25 or more years of service. Also, between May 1, 1996 and April 30, 1997, early retirement without reduction was available to employees who had attained age 50 and had completed 30 102 or more years of service. SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" requires that an employer that offers special termination benefits to employees shall recognize a liability when the employees accept the offer and the amount can be reasonably estimated. This resulted in an immediate expense applicable to the employees who, as of April 30, 1997, had accepted the offer. (B) Beginning in 1997, SFAS 87 was applied to the non-qualified Pension Plans. Prior to that date, because the plans amounts were considered immaterial, SFAS 87 was not applied. (C) From January 1, 1993 through December 31, 1997, PSE&G accounted for the differences between its SFAS 106 accrual cost and the cash cost currently recovered through rates as a regulatory asset in accordance with SFAS 71 and EITF 92-12. In 1993, the FASB's EITF concluded that deferral of such costs is acceptable, provided regulators allow SFAS 106 costs in rates within approximately five years of the adoption of SFAS 106, which was December 31, 1997, for financial reporting purposes, with any cost deferrals recovered in approximately twenty years. On December 17, 1997, the BPU ruled that PSE&G's current rates are sufficient to recover both the ongoing OPEB costs and the amortization of the deferred regulatory asset created by the accounting change from the cash basis of accounting to the accrual basis of accounting in accordance with SFAS 106 and EITF 92-12. As a result of the BPU's decision, PSE&G began amortizing the regulatory asset over 15 years beginning January 1, 1998. Also effective January 1, 1998, PSE&G began recording the annual SFAS 106 OPEB cost. OPEB costs during 1998 were $121 million, including $19 million of amortization. At December 31, 1998, the amount of the unfunded liability was $769 million. Also, on October 21, 1998, the BPU ordered PSE&G to fund in an external trust its annual OPEB obligation to the maximum extent allowable under Section 401(h) of the Internal Revenue Code. In 1998, $12 million was funded, as allowed. Remaining OPEB costs will not be funded in an external trust, as mandated by the BPU. SAVINGS PLANS PSE&G sponsors two defined contribution plans. Represented employees of PSE&G and Energy Holdings are eligible for participation in the PSE&G Employee Savings Plan while all other employees of PSE&G and Energy Holdings are eligible for participation in the PSE&G Thrift and Tax-Deferred Savings Plan. The two principal defined contribution plans are PSE&G sponsored 401(k) plans to which eligible employees may contribute up to 25% of their compensation. Employee contributions up to 7% for represented employees and up to 8% for all other employees are matched with employer contributions of cash or PSEG common stock equal to 50% of such employee contributions. Employer contributions in excess of 5% and up to 7% are made in shares of PSEG common stock for represented employees. Employer contributions in excess of 6% and up to 8% are made in shares of PSEG common stock for all other employees. PSE&G billed Energy Holdings for its portion of employer contributions. The amount expensed for the matching provision of the plans was approximately $14 million, $15 million and $14 million in 1998, 1997 and 1996, respectively. NOTE 14. STOCK OPTIONS, STOCK PURCHASE PLAN AND STOCK REPURCHASE PROGRAM STOCK OPTIONS PSEG and PSE&G apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock-based compensation plans, which are described below. Accordingly, compensation expense has been recognized for performance units and dividend equivalent rights issued in tandem with an equal number of options under its fixed stock option grants. Performance units and dividend equivalents provide cash payments, dependent upon future financial performance of PSEG in comparison to other companies and dividend payments by PSEG, to assist recipients in exercising options granted. Prior to 1997, all options were granted in tandem with performance units and dividend equivalent rights. In 1998 and 1997, there were 4,600 and 93,500 options, respectively, granted in tandem with performance units and dividend equivalent rights. No compensation cost has been recognized for its fixed stock option grants other than those previously described since the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Had compensation costs for its stock option grants been determined based on the fair value at the grant dates for awards under these plans in accordance with SFAS No. 123 103 "Accounting for Stock-Based Compensation," there would have been a charge to PSEG's net income of approximately $0.4 million and $0.1 million in 1998 and 1997 respectively, with no impact on earnings per share. In 1989, PSEG adopted a plan (Long Term Incentive Plan) under which non-qualified options to acquire shares of common stock may be granted to officers and other key employees selected by the Organization and Compensation Committee of PSEG's Board of Directors, the plan's administrative committee (the "Committee"). Payment by option holders upon exercise of an option may be made in cash or, with the consent of the Committee, by delivering previously acquired shares of PSEG common stock or surrendering other vested options. In instances where an optionee tenders shares acquired from a grant previously exercised that were held for a period of less than six months, an expense will be recorded for the difference between the fair market value at exercise date and the option price. (To date, no such transaction has occurred.) Options are exercisable over a period of time designated by the Committee (but not prior to one year from the date of grant) and are subject to such other terms and conditions as the Committee determines. Vesting schedules may be accelerated upon the occurrence of certain events, such as a change in control. Options may not be transferred during the lifetime of a holder. The Long Term Incentive Plan originally provided for the issuance of up to 500,000 shares of common stock and was subsequently amended to increase the amount to 5,000,000. At December 31, 1998, there were 3,637,700 shares available for future grants under the Long Term Incentive Plan. Since the Long Term Incentive Plan's inception, PSEG has delivered treasury shares upon the exercise of stock options. The difference between the cost of the treasury shares (purchased on the date of exercise) and the exercise price of the options has been reflected in Stockholder's Equity except where otherwise discussed. Changes in common shares under option for the three fiscal years in the period ended December 31, 1998 are summarized as follows:
1998 1997 1996 ---------------------------- ---------------------------- ---------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ---------------------------- ---------------------------- ---------------------------- Beginning of year 430,300 $ 29.26 84,000 $ 29.38 77,200 $ 29.15 Granted 841,600 39.16 371,000 29.36 28,700 30.88 Exercised (28,100) 26.76 (21,500) 31.38 (21,900) 30.56 Canceled -- -- (3,200) 28.70 -- -- ---------- ---------- ---------- ---------- ---------- ---------- End of year 1,243,800 36.01 430,300 29.26 84,000 29.38 ---------- ---------- ---------- ---------- ---------- ---------- Exercisable at end of year 100,963 $ 29.47 6,000 $ 26.45 6,000 $ 26.45 ---------- ---------- ---------- ---------- ---------- ---------- -------------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $ 4.83 $ 3.60 $ 6.71 ========== ========== ==========
For this purpose, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively: expected volatility of 21.41%, 17.15% and 12.92%, risk free interest rates of 4.48%, 5.14% and 5.28%, expected lives of 4 years, 3.75 years and 3.75 years. Additional weighted averages assumptions include for grants in 1998, 1997 and 1996 a dividend yield of 0% with respect to the dividend equivalent feature of the tandem grants. There was a dividend yield of 5.51% in 1998 and 7.31% in 1997 on the non-tandem grants. There were no non-tandem grants issued in 1996. 104 The following table provides information about options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------------- ------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE PRICE DECEMBER 31, 1998 PRICE - ----------------------------------------------------------------------- ------------------------------------- $24.00-$30.00 384,900 8.78 years $29.34 100,963 $29.47 $30.01-$35.00 31,900 7.24 years 31.04 -- -- $35.01-$40.00 827,000 9.93 years 39.31 -- -- - ----------------------------------------------------------------------- ------------------------------------- $24.00-$40.00 1,243,800 9.50 years $36.01 100,963 $29.47 - ----------------------------------------------------------------------- -------------------------------------
In June 1998, the Committee granted 150,000 shares of common stock to a key executive. As of December 31, 1998 all of the shares remained outstanding. These shares are subject to restrictions on transfer and subject to risk of forfeiture until earned by continued employment. The shares vest on a staggered schedule beginning on March 31, 2002 and become fully vested on March 31, 2005. The unearned compensation related to this restricted stock grant as of December 31, 1998 is approximately $5 million and is included in retained earnings on the consolidated balance sheets. PSEG's Stock Plan for Outside Directors provides non-employee directors, as part of their annual retainer, 300 shares of common stock, which will be increased to 600 shares beginning in 1999. With certain exceptions, the restrictions on the stock provide that the shares are subject to forfeiture if the individual ceases to be a director at any time prior to the Annual Meeting of Stockholders following his or her 70th birthday. These shares are recorded as compensation expense in the consolidated statements of income. STOCK PURCHASE PLAN PSEG and PSE&G have an employee stock purchase plan for all eligible employees. Under the plan, shares of the common stock may be purchased at 95% of the fair market value. Employees may purchase shares having a value not exceeding 10% of their base pay. During 1998, 1997 and 1996, employees purchased 102,387, 144,377 and 153,810 shares at an average price of $36.36, $26.39 and $27.24 per share, respectively. At December 31, 1998, 1,289,780 shares were available for future issuance under this plan. STOCK REPURCHASE PROGRAM In September 1998, PSEG announced a stock repurchase program whereby the Board of Directors authorized the repurchase of up to 10 million shares of its common stock from time to time, subject to market conditions and other relevant factors affecting PSEG and PSE&G. Share repurchases are planned when market and business conditions are deemed favorable. The repurchased shares have been held as treasury stock. As of December 31, 1998, PSEG had repurchased 5,314,100 shares at a cost of approximately $207 million. As of February 8, 1999, PSEG had repurchased a total of 10 million shares at a cost of approximately $391 million under this program. NOTE 15. FINANCIAL INFORMATION BY BUSINESS SEGMENTS In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which is effective for financial statements for periods beginning after December 15, 1997. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise" and requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. Since SFAS 131 solely revises disclosure requirements, the adoption of SFAS 131 did not have a material impact on the financial condition, results of operations and net cash flows of PSEG or PSE&G. The disclosure under SFAS 131 is below. 105 BASIS OF ORGANIZATION The reportable segments disclosed herein were determined based on a variety of factors including the regulatory environment and the types of products and services offered. With the transition into a deregulated environment, it is likely that this basis of organization will change. ELECTRIC The electric segment of PSE&G's business generates revenue from its bundled tariff rates under which it provides generation, transmission and distribution energy services for its residential, commercial and industrial customers in New Jersey. Revenues are also generated from a variety of wholesale energy sales and other ancillary and miscellaneous services. GAS The gas segment of PSE&G's business generates revenue from its bundled tariff rates under which it provides for the sale and distribution of gas to its residential, commercial and industrial customers. Revenues are also generated from a variety of other activities such as capacity sales, off-system sales, sundry sales and other miscellaneous services. RESOURCES Resources receives revenues from its passive investments including leveraged leases, limited partnerships, leveraged buyout funds and marketable securities. OTHER NON-UTILITY PSEG's non-utility activities, other than Resources, generate revenues from Global, Energy Technologies and EGDC. Global receives revenues from its investment, development and operation of projects in the generation and distribution of energy both domestically and internationally. Energy Technologies receives revenues from a variety of energy related services to industrial and commercial customers. EGDC receives revenues from its nonresidential real estate development and investment business. 106 Information related to the segments of PSEG's business is detailed below:
OTHER NON-UTILITY CONSOLIDATED (MILLIONS OF DOLLARS) ELECTRIC GAS RESOURCES ACTIVITIES (A) TOTAL ---------------------------------------------------------------------- For the Year Ended December 31, 1998: Total Operating Revenues .................... $ 4,031 $ 1,559 $ 145 $ 196 $ 5,931 Depreciation, Depletion and Amortization .... 565 93 1 10 669 Interest Income ............................. 19 1 9 3 32 Net Interest Charges ........................ 353 70 49 76 548 Income Taxes ................................ 359 39 27 (5) 420 Net income from equity method subsidiaries .. -- -- 35 114 149 Operating Income Before Income Taxes ........ 1,257 159 86 104 1,606 Segment Net Income (Loss) ................... $ 552 $ 52 $ 56 $ (16) $ 644 ======== ======== ======== ======== ======== As of December 31, 1998: Total Assets ................................ $ 12,266 $ 2,482 $ 1,809 $ 1,440 $ 17,997 Investments in equity method subsidiaries ... -- -- 383 143 526 Gross Additions to Long-Lived Assets ........ $ 383 $ 152 $ -- $ 10 $ 545 ======== ======== ======== ======== ======== For the Year Ended December 31, 1997: Total Operating Revenues .................... $ 3,918 $ 1,937 $ 144 $ 101 $ 6,100 Depreciation, Depletion and Amortization .... 531 85 1 13 630 Interest Income ............................. 13 1 4 3 21 Net Interest Charges ........................ 345 79 46 39 509 Income Taxes ................................ 224 84 29 (1) 336 Net income from equity method subsidiaries .. -- -- 49 79 128 Extraordinary items ......................... (53) -- -- -- (53) Operating Income Before Income Taxes ........ 978 328 88 56 1,450 Segment Net Income (Loss) ................... $ 361 $ 167 $ 59 $ (27) $ 560 ======== ======== ======== ======== ======== As of December 31, 1997: Total Assets ................................ $ 12,448 $ 2,472 $ 1,616 $ 1,407 $ 17,943 Investments in equity method subsidiaries ... -- -- 407 274 681 Gross Additions to Long-Lived Assets ........ $ 395 $ 147 $ -- $ 6 $ 548 ======== ======== ======== ======== ======== For the Year Ended December 31, 1996: Total Operating Revenues .................... $ 3,944 $ 1,881 $ 143 $ 73 $ 6,041 Depreciation, Depletion and Amortization .... 517 87 2 1 607 Interest Income ............................. 4 1 11 4 20 Net Interest Charges ........................ 321 89 43 14 467 Income Taxes ................................ 217 48 28 2 295 Net income from equity method subsidiaries .. -- -- 73 48 121 Operating Income Before Income Taxes ........ 978 234 85 55 1,352 Segment Net Income .......................... $ 438 $ 97 $ 57 $ 20 $ 612 ======== ======== ======== ======== ======== As of December 31, 1996: Total Assets ................................ $ 12,406 $ 2,393 $ 1,443 $ 673 $ 16,915 Investments in equity method subsidiaries ... -- -- 408 225 633 Gross Additions to Long-Lived Assets ........ $ 463 $ 123 $ -- $ 3 $ 589 ======== ======== ======== ======== ========
(A) Other Non-utility Activities include amounts applicable to PSEG, the parent corporation, and Energy Holdings, excluding Resources. 107 Information related to Property, Plant and Equipment of PSE&G is detailed below:
DECEMBER 31, -------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- (MILLIONS OF DOLLARS) Utility Plant--Original Cost Electric Plant in Service: Fossil Production ..................... $ 2,802 $ 1,840 $ 1,843 Nuclear Production .................... 6,246 6,162 6,001 Transmission .......................... 1,200 1,163 1,146 Distribution .......................... 3,545 3,315 3,171 Other ................................. 276 1,212 1,153 ---------- ---------- ---------- Total Electric Plant in Service .. 14,069 13,692 13,314 ---------- ---------- ---------- Gas Plant in Service: Transmission .......................... 69 67 67 Distribution .......................... 2,608 2,472 2,358 Other ................................. 170 158 131 ---------- ---------- ---------- Total Gas Plant in Service ....... 2,847 2,697 2,556 ---------- ---------- ---------- Common Plant in Service: Capital Leases ........................ 59 59 59 General ............................... 519 499 471 ---------- ---------- ---------- Total Common Plant in Service .... 578 558 530 ---------- ---------- ---------- Total ....................... $ 17,494 $ 16,947 $ 16,400 ========== ========== ==========
Geographic Information for PSEG is disclosed below. PSE&G does not have foreign investments or operations. IDENTIFIABLE REVENUES (1) ASSETS ---------- ---------- United States $ 5,831 $ 16,387 Foreign Countries 100 1,610 ---------- ---------- Total $ 5,931 $ 17,997 ========== ========== Identifiable Assets from Foreign Countries include amounts from: Argentina $307 Brazil (2) 482 Netherlands 400 (1) Revenues are attributed to countries based on the locations of the investments. (2) Amount is net of foreign currency translation adjustment of $39 million. NOTE 16. DISCONTINUED OPERATIONS On July 31, 1996, Energy Holdings sold EDC to Samedan Oil Corporation, a subsidiary of Noble Affiliates, Inc., for an aggregate purchase price of $779 million subject to various purchase price adjustments resulting in an after-tax gain of $13 million. As a result, Consolidated Financial Statements previously issued have been restated to give effect to the classification of EDC as discontinued operations. 108 Operating results of EDC for 1996 (7 months) are summarized in the following table: (7 MONTHS) ---------- 1996 ---- (MILLIONS OF DOLLARS) Revenues ............................... $ 128 Operating income ....................... 24 Earnings before income taxes ........... 9 Income taxes ........................... (2) Net income ............................. 11 NOTE 17. JOINTLY OWNED FACILITIES--UTILITY PLANT PSE&G has ownership interests in and is responsible for providing its share of the necessary financing for the following jointly owned facilities. All amounts reflect the share of PSE&G's jointly owned projects and the corresponding direct expenses are included in Consolidated Statements of Income as operating expenses.
PLANT--DECEMBER 31, 1998 ------------------------------------------------------------- OWNERSHIP PLANT IN ACCUMULATED PLANT UNDER INTEREST SERVICE DEPRECIATION CONSTRUCTION ------------ ------------ --------------- -------------- (MILLIONS OF DOLLARS) Coal Generating Conemaugh.................... 22.50% $199 $56 $2 Keystone..................... 22.84% 124 44 3 Nuclear Generating Peach Bottom................. 42.49% 808 395 28 Salem........................ 42.59% 1,255 483 12 Hope Creek................... 95.00% 4,144 1,439 26 Nuclear Support Facilities... Various 201 52 7 Pumped Storage Facilities Yards Creek.................. 50.00% 28 11 4 Transmission Facilities........... Various 124 43 -- Merrill Creek Reservoir........... 13.91% 37 17 -- Linden SNG Plant.................. 90.00% 16 23 --
NOTE 18. SELECTED QUARTERLY DATA (UNAUDITED) The information shown below, in the opinion of PSEG, includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the utility business, quarterly amounts vary significantly during the year.
CALENDAR QUARTER ENDED ----------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, -------------------- --------------------- -------------------- --------------------- 1998 1997 1998 1997 1998 1997 1998 1997 -------- -------- -------- -------- -------- -------- -------- -------- (MILLIONS WHERE APPLICABLE) Operating Revenues......... $1,632 $1,701 $1,348 $1,308 $1,425 $1,448 $1,526 $1,643 Operating Income........... 318 309 251 219 312 301 305 286 Net Income................. 191 140 122 91 180 176 151 153 Earnings per Share (Basic and Diluted)...... 0.82 0.60 0.53 0.39 0.78 0.76 0.66 0.66 Weighted Average Common Shares and Potential Dilutive Effect of Stock Options Outstanding..... 232 232 232 232 232 232 228 232
109 NOTE 19. ACCOUNTING MATTERS In response to the continuing deregulation of the electric utility industry, the Financial Accounting Standards Board (FASB), through its Emerging Issues Task Force (EITF), undertook an initiative designated as EITF Issue 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF 97-4). The purpose of this initiative was to develop guidance for the application of SFAS 101, "Regulated Enterprises Accounting for the Discontinuation of Application of FASB Statement No. 71" (SFAS 101). SFAS 101 addresses how an enterprise that ceases to meet the criteria for application of SFAS 71 to all or part of its operations should report that event in its general-purpose financial statements. This authoritative pronouncement will dictate the timing for the accounting for the outcome of the Energy Master Plan Proceedings. The EITF's consensus on this issue is that an enterprise is required to discontinue the application of SFAS 71 for the deregulated portion of its business once legislation is passed or a rate order is issued which contains a sufficiently detailed plan to transition from regulated pricing to market pricing. In addition, the EITF concluded that an enterprise may continue to carry on its books the regulatory assets and liabilities of the portion of the business to which SFAS 101 is being applied, provided that regulators have approved a regulated cash flow stream. This also applies to costs or obligations not yet recorded as regulatory assets or liabilities regardless of when incurred. The discontinuance of SFAS 71 also requires an enterprise to reevaluate the impact of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS 121 requires that regulatory assets be written off once they are no longer probable of recovery and that impairment losses be recorded for long-lived assets when related future cash flows or appraised value are less than the carrying value of the assets. The impact of these accounting standards to PSEG and PSE&G will be determined based on the outcome of the Energy Master Plan Proceedings. Under PSE&G's proposal and the Energy Competition Act, PSE&G would have the opportunity, through various mechanisms, to recover its electric generation related potentially stranded costs. Management cannot predict the outcome of the Energy Master Plan Proceedings on PSEG's and PSE&G's future financial condition, results of operations and net cash flows. However, depending on regulatory actions taken in New Jersey with respect to electric utility deregulation, there could be a material adverse effect on such results. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is effective for financial statements for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives, within the scope of this statement, as assets or liabilities on the balance sheet at fair value. Also, derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings or be recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the nature of the hedge. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. PSEG and PSE&G are currently evaluating the impact of SFAS 133. In November 1998, the EITF issued EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." EITF 98-10 is effective for financial statements issued for fiscal years beginning after December 15, 1998. EITF 98-10 requires that energy trading contracts be marked to market with gains and losses included in earnings and separately disclosed in the financial statements and footnotes. The EITF described indicators that should be considered in determining whether an identifiable operation enters into contracts that would fall under the scope of this issue. PSE&G has determined that EITF 98-10 does apply to its operations and will be adopted in January 1999. The impact of applying EITF 98-10 is not expected to have a material adverse impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1), which is effective for financial statements for fiscal years beginning after December 15, 1998. SOP 98-1 provides criteria for capitalizing certain internal-use software costs. The adoption of SOP 98-1 is not expected to have a material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G. 110 In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5), which is effective for financial statements for fiscal years beginning after December 15, 1998. SOP 98-5 requires the expensing of the costs of start-up activities as incurred. Additionally, previously capitalized start-up costs must be written off as a Cumulative Effect of a Change in Accounting Principle. The adoption of SOP 98-5 is not expected to have a material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G. NOTE 20. SUBSEQUENT EVENTS On January 1, 1999, the outstanding stock of PSCRC was dividended by PSE&G to PSEG, which contributed such stock indirectly to Energy Technologies as an additional equity investment. PSCRC had earnings/(losses) of $2 million, $0.2 million and $(9) million for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, PSCRC had assets of $89 million and $117 million, respectively. Future earnings and assets will be reflected in the consolidated financial statements of Energy Technologies, Energy Holdings and PSEG. In January 1999, Brazil abandoned its managed devaluation strategy and allowed its currency, the Real, to float against other currencies. As of January 31, 1999, the Real has devalued approximately 40% against the U.S. dollar since December 31, 1998. Based on the December 31, 1998 Brazilian investment balance of $482 million, there was a 40% devaluation as of January 31, 1999 which resulted in a charge of $172 million to cumulative foreign currency translation adjustment (a separate component of stockholders' equity). PSEG cannot predict to what extent, if any, further devaluation may occur, and, therefore, cannot predict the impact of potential devaluation of currencies on PSEG's results of operations, financial condition and net cash flows. However, assuming no further significant devaluation, PSEG does not expect this to have a material adverse effect on its 1999 results of operations, financial condition or net cash flows. For additional information, see Note 15. Financial Information by Business Segment. As PSEG increases its international investments, the financial statements of PSEG will be increasingly affected by changes in the global economy. PSE&G Except as modified below, the Notes to Consolidated Financial Statements of PSEG are incorporated herein by reference insofar as they relate to PSE&G and its subsidiaries: Note 1. Organization and Summary of Significant Accounting Policies Note 2. Regulatory Issues Note 3. Regulatory Assets and Liabilities Note 4. Long-Term Investments Note 5. Leasing Activities--As Lessee Note 6. Schedule of Consolidated Capital Stock and Other Securities Note 7. Schedule of Consolidated Debt Note 8. Financial Instruments and Risk Management Note 10. Commitments and Contingent Liabilities Note 11. PSE&G Nuclear Decommissioning Note 12. Income Taxes Note 13. Pension, Other Postretirement Benefit and Savings Plans Note 14. Stock Options, Stock Purchase Plan and Stock Repurchase Program Note 15. Financial Information by Business Segments Note 17. Jointly Owned Facilities--Utility Plant Note 19. Accounting Matters Note 20. Subsequent Events 111 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PSEG owns all of PSE&G's common stock (without nominal or par value). Of the 150,000,000 authorized shares of common stock at December 31, 1998, 1997 and 1996, there were 132,450,344 shares outstanding, with an aggregate book value of $2.6 billion. NOTE 9. CASH AND CASH EQUIVALENTS The December 31, 1998 and 1997 balances consist primarily of working funds. 112 NOTE 12. INCOME TAXES A reconciliation of reported Net Income with pretax income and of income tax expense with the amount computed by multiplying pretax income by the statutory Federal income tax rate of 35% is as follows:
1998 1997 1996 ---------- ---------- ---------- (MILLIONS OF DOLLARS) Net Income ........................................................... $604 $528 $535 ---------- ---------- ---------- Income taxes: Operating income: Current provision-Federal and State ............................. 453 292 241 Provision for deferred income taxes--net(A)-Federal and State ... (35) 34 43 Investment tax credits--net ..................................... (20) (19) (19) ---------- -------------------------- Total included in operating income .............................. 398 307 265 Miscellaneous other income: Current provision-Federal and State ............................. 8 (24) 1 Provision for deferred income taxes(A)-Federal and State ........ (1) -- -- SFAS 90 deferred income taxes(A) ................................ 1 1 2 ---------- ---------- ---------- Total income tax provisions ................................ 406 284 268 ---------- ---------- ---------- Pretax income ........................................................ $1,010 $812 $803 ---------- ---------- ----------
Reconciliation between total income tax provisions and tax computed at the statutory tax rate on pretax income:
1998 1997 1996 ---------- ---------- ---------- (MILLIONS OF DOLLARS) Tax computed at the statutory rate ................................... $354 $284 $281 ---------- ---------- ---------- Increase (decrease) attributable to flow through of certain tax adjustments: Depreciation .................................................... 23 27 11 Amortization of investment tax credits .......................... (20) (19) (19) New Jersey Corporate Business Tax ............................... 59 -- -- Other ........................................................... (10) (8) (5) ---------- ---------- ---------- Subtotal ................................................... 52 -- (13) ---------- ---------- ---------- Total income tax provisions ................................ $406 $284 $268 ========== ========== ========== Effective income tax rate ............................................ 40.2% 35.0% 33.3%
(A) The provision for deferred income taxes represents the tax effects of the following items:
1998 1997 1996 ---------- ---------- ---------- (MILLIONS OF DOLLARS) Deferred Credits: Additional tax depreciation and amortization .................... $(28) $16 $31 Conservation Costs .............................................. 36 27 15 Deferred Fuel Costs--net ........................................ (60) (4) 6 Pension Cost .................................................... 26 8 3 New Jersey Corporate Business Tax ............................... (8) -- -- Other ........................................................... (1) (12) (10) ---------- ---------- ---------- Total ...................................................... $(35) $35 $45 ========== ========== ==========
113 SFAS 109 The following is an analysis of deferred income taxes:
DECEMBER 31, ------------------------- 1998 1997 ---------- ---------- DEFERRED INCOME TAXES (MILLIONS OF DOLLARS) Assets: Current (net) ...................................... $30 $25 Non-current: Unrecovered Investment Tax Credits ............... 110 117 Nuclear Decommissioning .......................... 27 33 Construction Period Interest and Taxes ........... 13 15 New Jersey Corporate Business Tax ................ 15 -- Vacation Pay ..................................... 6 7 Other ............................................ 22 17 ---------- ---------- Total Non-current ............................. 193 189 ---------- ---------- Total Assets .................................. 223 214 ---------- ---------- Liabilities: Non-current: Plant Related Items .............................. 2,212 2,246 Conservation Costs ............................... 75 39 Hope Creek O&M Costs ............................. 19 21 Deferred Electric Energy & Gas Costs ............. -- 60 Unamortized Debt Expense ......................... 45 44 Taxes Recoverable Through Future Rates (Net) ..... 242 249 Other ............................................ 127 99 ---------- ---------- Total Non-current ............................. 2,720 2,758 ---------- ---------- Total Liabilities ............................. 2,720 2,758 ---------- ---------- Summary--Deferred Income Taxes Net Current Assets ................................. 30 25 Net Non-current Liability .......................... 2,527 2,569 ---------- ---------- Total ......................................... $2,497 $2,544 ========== ==========
The balance of Federal income tax payable by (receivable from) PSE&G to PSEG was $9 million and $5 million as of December 31, 1998 and December 31, 1997, respectively. NOTE 18. SELECTED QUARTERLY DATA (UNAUDITED) The information shown below, in the opinion of PSE&G, includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the utility business, quarterly amounts vary significantly during the year.
CALENDAR QUARTER ENDED ----------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ----------------- ----------------- ----------------- ----------------- 1998 1997 1998 1997 1998 1997 1998 1997 ------ ------ ------ ------ ------ ------ ------ ------ (MILLIONS OF DOLLARS) Operating Revenues ...... $1,519 $1,662 $1,258 $1,255 $1,416 $1,377 $1,397 $1,561 Operating Income ........ 259 292 208 195 321 264 231 247 Net Income .............. 157 140 111 87 217 159 119 142 Earnings Available to PSEG .................. 155 136 109 81 215 157 116 139
114 FINANCIAL STATEMENT RESPONSIBILITY--PSEG Management of PSEG is responsible for the preparation, integrity and objectivity of the consolidated financial statements and related notes of PSEG. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly PSEG's financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes. The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit PSEG's consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche's audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all the corporation's financial records and related data, as well as the minutes of directors' meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate. Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management's authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls. The Internal Auditing Department of PSE&G conducts audits and appraisals of accounting and other operations of PSEG and its subsidiaries and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management has considered the internal auditors' and Deloitte & Touche's recommendations concerning the corporation's system of internal accounting controls and has taken actions that, in its opinion, are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 1998, the Corporation's system of internal accounting controls is adequate to accomplish the objectives discussed herein. The Board of Directors of PSEG carries out its responsibility of financial overview through its Audit Committee, which presently consists of five directors who are not employees of PSEG or any of its affiliates. The Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that its respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche periodically meet alone with the Audit Committee and have free access to the Audit Committee, and its individual members, at all times. E. JAMES FERLAND ROBERT C. MURRAY Chairman of the Board, Vice President and President and Chief Executive Officer Chief Financial Officer PATRICIA A. RADO Vice President and Controller (Principal Accounting Officer) February 12, 1999 115 FINANCIAL STATEMENT RESPONSIBILITY--PSE&G Management of PSE&G is responsible for the preparation, integrity and objectivity of the consolidated financial statements and related notes of PSE&G. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly PSE&G's financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes. The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit PSE&G's consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche's audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all the corporation's financial records and related data, as well as the minutes of directors' meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate. Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management's authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls. The Internal Auditing Department conducts audits and appraisals of accounting and other operations and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management has considered the internal auditors' and Deloitte & Touche's recommendations concerning the corporation's system of internal accounting controls and has taken actions that are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 1998, the Corporation's system of internal accounting controls is adequate to accomplish the objectives discussed herein. The Board of Directors carries out its responsibility of financial overview through the Audit Committee of PSEG, which presently consists of five directors who are not employees of PSE&G or any of its affiliates. The PSEG Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that their respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche, periodically meet alone with the Audit Committee and have free access to the Audit Committee, and its individual members, at all times. E. JAMES FERLAND ROBERT C. MURRAY Chairman of the Board and Executive Vice President--Finance Chief Executive Officer (Principal Financial Officer) PATRICIA A. RADO Vice President and Controller (Principal Accounting Officer) February 12, 1999 116 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Public Service Enterprise Group Incorporated: We have audited the consolidated balance sheets of Public Service Enterprise Group Incorporated and its subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the consolidated financial statement schedule listed in the Index in Item 14(B)(1). These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Public Service Enterprise Group Incorporated and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets as of December 31, 1996, 1995, and 1994, and the related consolidated statements of income, common stockholders' equity and cash flows for the years ended December 31, 1995 and 1994 (none of which are presented herein) and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Selected Financial Data for each of the five years in the period ended December 31, 1998 for the Company, presented in Item 6, is fairly stated in all material respects, in relation to the consolidated financial statements from which it has been derived. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 12, 1999 117 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Public Service Electric and Gas Company: We have audited the consolidated balance sheets of Public Service Electric and Gas Company and its subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the consolidated financial statement schedule listed in the Index in Item 14(B)(2). These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Public Service Electric and Gas Company and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets as of December 31, 1996, 1995, and 1994, and the related consolidated statements of income, common stockholder's equity and cash flows for the years ended December 31, 1995 and 1994 (none of which are presented herein) and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Selected Financial Data for each of the five years in the period ended December 31, 1998 for the Company, presented in Item 6, is fairly stated in all material respects, in relation to the consolidated financial statements from which it has been derived. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 12, 1999 118 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PSEG and PSE&G, none. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS DIRECTORS OF THE REGISTRANTS PSEG The information required by Item 10 of Form 10-K with respect to present directors who are nominees for election as directors at PSEG's Annual Meeting of Stockholders to be held on April 20, 1999, and directors whose terms will continue beyond the meeting, is set forth under the heading "Election of Directors" in PSEG's definitive Proxy Statement for such Annual Meeting of Stockholders, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 2, 1999 and which information set forth under said heading is incorporated herein by this reference thereto. PSE&G There is shown as to each present director information as to the period of service as a director of PSE&G, age as of April 20, 1999, present committee memberships, business experience during the last five years and other present directorships. For discussion of certain litigation involving the directors of PSE&G, except Forrest J. Remick and Conrad K. Harper, see Part I--Business, Item 3--Legal Proceedings. LAWRENCE R. CODEY has been a director since 1988. Age 54. Member of Executive Committee. Has been President and Chief Operating Officer of PSE&G since 1991. Director of PSEG. Director of Sealed Air Corporation, The Trust Company of New Jersey, United Water Resources Inc. and Horizon Blue Cross Blue Shield of New Jersey. E. JAMES FERLAND has been a director since 1986. Age 57. Chairman of Executive Committee. Chairman of the Board, President and Chief Executive Officer of PSEG since July 1986, Chairman of the Board and Chief Executive Officer of PSE&G since September 1991 and Chairman of the Board and Chief Executive Officer of Energy Holdings since June 1989. Director of PSEG and of Energy Holdings. Director of Foster Wheeler Corporation and The HSB Group, Inc. CONRAD K. HARPER has been a director since May 1997. Age 58. Director of PSEG. Has been a partner in the law firm of Simpson Thacher & Bartlett, New York, New York since October 1996 and from 1974 to May 1993. Was Legal Adviser, U.S. Department of State from May 1993 to June 1996. Director of New York Life Insurance Company. IRWIN LERNER has been a director since 1993. Age 68. Member of Executive Committee. Was previously a director from 1981 to February 1988. Director of PSEG. Retired. Until retirement was Chairman, Board of Directors of Hoffmann-La Roche Inc., Nutley, New Jersey (prescription pharmaceuticals, vitamins and fine chemicals, and diagnostic products and services) from January 1993 to September 1993 and President and Chief Executive Officer from 1980 to December 1992. Director of Humana Inc., AXYS Pharmaceuticals, Inc., Medarex, Inc., Covance Inc. and V.I. Technologies, Inc. MARILYN M. PFALTZ has been a director since 1998 and was a Director of Energy Holdings from 1989 to 1998. Age 66. Director of PSEG. Has been a partner of P and R Associates, Summit, New Jersey (communication specialists), since 1968. Director of AAA National Association and Beacon Trust Company. FORREST J. REMICK has been a director since 1995. Age 68. Director of PSEG. Has been an engineering consultant since 1994. Was Commissioner, U.S. Nuclear Regulatory Commission, from December 1989 to June 1994. Was Associate Vice President--Research and Professor of Nuclear Engineering at Pennsylvania State University, from 1985 to 1989. 119 EXECUTIVE OFFICERS OF THE REGISTRANTS The following table sets forth certain information concerning the executive officers of PSEG and PSE&G, respectively.
AGE EFFECTIVE DATE NAME DECEMBER 31, 1998 OFFICE FIRST ELECTED TO PRESENT POSITION - -------------------------- ----------------- ------------------------------------- ----------------------------------- E. James Ferland.......... 56 Chairman of the Board, President and July 1986 to present Chief Executive Officer (PSEG) Chairman of the Board and Chief July 1986 to present Executive Officer (PSE&G) Chairman of the Board and Chief June 1989 to present Executive Officer (Energy Holdings) Lawrence R. Codey......... 54 President and Chief Operating Officer September 1991 to present (PSE&G) Robert C. Murray.......... 53 Vice President and Chief Financial January 1992 to present Officer (PSEG) Executive Vice President--Finance June 1997 to present (PSE&G) Senior Vice President and Chief January 1992 to June 1997 Financial Officer (PSE&G) Robert J. Dougherty, Jr... 47 President and Chief Operating Officer January 1997 to present (Energy Holdings) President (Enterprise Ventures and February 1995 to December 1996 Services Corporation) Senior Vice President--Electric September 1991 to February 1995 (PSE&G) Harold W. Keiser.......... 55 Chief Nuclear Officer & President-- May 1998 to present Nuclear Business Unit (PSE&G) Executive Vice President--Nuclear January 1998 to April 1998 Business Unit (PSE&G) Private Consultant October 1997 to January 1998 Vice President and Chief Nuclear March 1996 to October 1997 Operating Officer, Commonwealth Edison Vice President, Pressurized Water December 1995 to March 1996 Reactor, Commonwealth Edison Executive Vice President and Chief April 1993 to December 1995 Operating Officer, Entergy Operations Incorporated R. Edwin Selover.......... 53 Vice President and General Counsel April 1988 to present (PSEG) Senior Vice President and General January 1988 to present Counsel (PSE&G)
120
AGE EFFECTIVE DATE NAME DECEMBER 31, 1998 OFFICE FIRST ELECTED TO PRESENT POSITION - -------------------------- ----------------- ------------------------------------- ----------------------------------- Alfred C. Koeppe............ 52 Senior Vice President--Corporate October 1996 to present Services and External Affairs (PSE&G) Senior Vice President--External October 1995 to October 1996 Affairs (PSE&G) President and Chief Executive February 1993 to October 1995 Officer, Bell Atlantic--New Jersey Frank Cassidy.............. 51 President November 1996 to present (Energy Technologies) Senior Vice President--Fossil February 1995 to November 1996 Generation (PSE&G) Vice President--Transmission November 1989 to February 1995 Systems (PSE&G) Eileen A. Moran............. 44 President (Resources) May 1990 to present President (EGDC) January 1997 to present Michael J. Thomson.......... 40 President (Global) January 1997 to present Senior Vice President and Chief February 1994 to December 1996 Operating Officer (Global) Senior Vice President (Global) July 1993 to February 1994 Patricia A. Rado........... 56 Vice President and Controller April 1993 to present (PSEG) Vice President and Controller April 1993 to present (PSE&G)
ITEM 11. EXECUTIVE COMPENSATION PSEG The information required by Item 11 of Form 10-K is set forth under the heading "Executive Compensation" in PSEG's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 20 1999 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 2, 1999 and such information set forth under such heading is incorporated herein by this reference thereto. PSE&G Information regarding the compensation of the Chief Executive Officer and the four most highly compensated executive officers of PSE&G as of December 31, 1998 is set forth below. Amounts shown were paid or awarded for all services rendered to PSEG and its subsidiaries and affiliates including PSE&G. 121
SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION -------------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ---------------------------- ----------------------------------- BONUS/ANNUAL LTIP ALL OTHER SALARY INCENTIVE RESTRICTED OPTIONS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR $ AWARD($)(1) STOCK ($) (#)(2) ($)(3) ($)(4) - --------------------------------------- ---- ------- ------------ ------------ ------- ------- ------------ E. James Ferland....................... 1998 762,070 621,400 5,184,375 (5) 150,000 92,684 28,647 Chairman of the Board and Chief 1997 712,261 425,200 0 118,000 108,702 15,747 Executive Officer of PSE&G 1996 712,261 279,811 0 6,500 168,084 10,994 Lawrence R. Codey...................... 1998 455,250 274,200 0 75,000 44,744 5,043 President and Chief Operating 1997 435,327 249,400 0 59,200 50,325 5,459 Officer of PSE&G 1996 435,327 141,968 0 3,000 81,144 5,934 Robert C. Murray....................... 1998 373,564 225,000 0 50,000 31,960 4,962 Executive Vice President - Finance 1997 345,671 154,900 0 32,000 36,234 5,260 of PSE&G 1996 332,721 83,887 0 2,000 57,960 5,248 Harold W. Keiser....................... 1998 308,047 155,400 0 37,500 0 5,888 Chief Nuclear Officer and President Nuclear Business Unit of PSE&G (6) R. Edwin Selover....................... 1998 293,871 154,900 0 25,000 22,372 19,210 Senior Vice President and General 1997 278,928 117,900 0 14,300 26,169 9,065 Counsel of PSE&G 1996 268,967 59,828 0 1,400 40,572 7,172
(1) Amount awarded in given year was earned under Management Incentive Compensation Plan (MICP) and determined in following year based on individual performance and financial and operating performance of PSEG and PSE&G, including comparison to other companies. (2) All grants of options to purchase shares of PSEG Common Stock were made under the Long-Term Incentive Plan (LTIP). For 1998, all options granted were non-tandem (as described below) except for 2,500 options granted to Mr. Keiser. For 1997, 100,000; 50,000; 25,000 and 10,000 were non-tandem and 18,000; 9,200; 7,000 and 4,300 of the options granted to Messrs. Ferland, Codey, Murray, and Selover, respectively, were tandem. For 1996, all options granted were in tandem with performance units and dividend equivalents. Tandem grants are made with an equal number of performance units and dividend equivalents which may provide cash payments, dependent upon future financial performance of PSEG in comparison to other companies and dividend payments by PSEG, to assist recipients in exercising options granted. The tandem grant is made at the beginning of a three-year performance period and cash payment of the value of such performance units and dividend equivalents is made following such period in proportion to the options, if any, exercised at such time. Non-tandem grants are made without performance units and dividend equivalents. (3) Amount paid in proportion to options exercised, if any, based on value of previously granted performance units and dividend equivalents, each as measured during three-year period ending the year prior to the year in which payment is made. (4) Includes employer contribution to Thrift and Tax-Deferred Savings Plan and value of 5% discount on phantom stock dividend reinvestment under MICP:
FERLAND CODEY MURRAY KEISER SELOVER -------------- ---------------- --------------- -------------- -------------- THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP ($) ($) ($) ($) ($) ($) ($) ($) ($) ($) ------ ----- ------ ----- ------ ---- ------ ---- ----- ----- 1998..................... 4,801 383 4,802 241 4,805 157 5,888 0 4,806 112 1997..................... 4,801 1,122 4,802 657 4,802 458 -- -- 4,802 325 1996..................... 4,150 2,861 4,502 1,432 4,502 746 -- -- 4,502 1,272
In addition, 1998, 1997 and 1996 amounts include for Mr. Ferland $23,463, $9,824 and $3,983 and for Mr. Selover $14,292, $3,938 and $1,398, respectively, representing interest on compensation deferred under PSE&G's Deferred Compensation Plan in excess of 120% of the applicable Federal long-term rate as prescribed under Section 1274(d) 122 of the Internal Revenue Code. Under PSE&G's Deferred Compensation Plan, interest is paid at prime rate plus 1/2%, adjusted quarterly. (5) Value as of original grant date, based on the closing price on the New York Stock Exchange on June 16, 1998, with respect to an award to Mr. Ferland of 150,000 shares of restricted stock, of which 60,000 shares vest in 2002; 20,000 shares vest in 2003; 30,000 shares vest in 2004 and 40,000 shares vest in 2005. Dividends on the entire grant are paid in cash from the date of grant. (6) Mr. Keiser was first employed in January 1998. OPTION GRANTS IN LAST FISCAL YEAR (1998)
NUMBER OF % OF TOTAL SECURITIES OPTIONS UNDERLYING GRANTED TO EXERCISE OR OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE NAME GRANTED FISCAL YEAR ($/SH) DATE PRESENT VALUE ($) (4) - ------------------------------ ---------- ------------ ----------- ---------- --------------------- E. James Ferland.............. 150,000(1) 17.8 39.3125 12/03/08 657,000 Lawrence R. Codey............. 75,000(1) 8.9 39.3125 12/03/08 328,500 Robert C. Murray.............. 50,000(1) 5.9 39.3125 12/03/08 219,000 Harold W. Keiser.............. 25,000(1) 3.0 39.3125 12/03/08 109,500 10,000(2) 1.2 29.5625 1/20/08 34,800 2,500(3) 0.3 31.5625 1/21/08 25,325 R. Edwin Selover.............. 25,000(1) 3.0 39.3125 12/03/08 109,500
(1) Granted under LTIP not in tandem with performance units and dividend equivalents, with exercisability commencing December 3, 1999, December 3, 2000 and December 3, 2001, respectively, with respect to one-third of the options at each such date. (2) Granted under LTIP in tandem with equal number of performance units and dividend equivalents with exercisability commencing December 16, 1998, December 16, 1999 and December 16, 2000, respectively, with respect to one-third of the options at each such date. (3) Granted under LTIP in tandem with equal number of performance units and dividend equivalents which may provide cash payments, dependent on future financial performance of PSEG in comparison to other companies and dividend payments by PSEG, to assist recipients in exercising options, with exercisability commencing January 1, 2000. Cash payment is made, based on the value, if any, of performance units awarded and dividend equivalents accrued, if any, as measured during the three-year period ending the year prior to the year in which payment, if any, is made, only if the specified performance level is achieved, dividend equivalents have accrued and options are exercised. (4) Determined using the Black-Scholes model, incorporating the following material assumptions and adjustments for the grants expiring January 20, 2008, January 21, 2008 and December 3, 2008, respectively: (a) exercise prices of $29.5625, $31.5625 and $39.3125, equal to the fair market value of the underlying PSEG Common Stock on the date of grant (or as of December 16, 1997 for the grant expiring January 20, 2008), to replicate grants previously given to other executive officers for similar performance periods; (b) an option term of ten years on all grants; (c) interest rates of 5.54%, 5.81% and 4.65% that represent the interest rates on U.S. Treasury securities on the dates of grant (or December 16, 1997 for the grant (expiring January 20, 2008) with a maturity date corresponding to that of the option terms; (d) volatilities of 19.12%, 19.12% and 20.17% calculated using daily PSEG Common Stock prices for the one-year period prior to the grant dates; (e) a dividend yield of 0% with respect to the dividend equivalent feature of the tandem grants (expiring January 21, 2008) since dividend payments accrue while the option is held; (f) dividend yields of 6.84% and 5.49% on the non-tandem (expiring January 20, 2008 and December 3, 2008); and (g) reductions of approximately 7.8% and 7.82% for the non-tandem and 11.53% for the tandem grants, respectively, to reflect the probability of forfeiture due to termination prior to vesting, and approximately 2.4%, 20% and 6.23% for the grants 123 expiring January 20, 2008, January 21, 2008 and December 3, 2008, respectively, to reflect the probability of a shortened option term due to termination of employment prior to the option expiration date. Actual values which may be realized, if any, upon any exercise of such options, will be based on the market price of PSEG Common Stock at the time of any such exercise and thus are dependent upon future performance of PSEG Common Stock. There is no assurance that any such value realized will be at or near the value estimated by the Black-Scholes model utilized. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1998) AND FISCAL YEAR END OPTION VALUES (12/31/98)
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FY-END(#)(1) AT FY-END($)(3) ---------------------------- ---------------------------- SHARES ACQUIRED VALUE ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE NAME (#)(1) ($)(2) (#) (#) ($) ($) - --------------------------------- ---------------------- ---------------------------- ---------------------------- E. James Ferland................. 5,800 63,075 33,340 241,160 347,986 1,061,576 Lawrence R. Codey................ 2,800 18,375 17,370 120,530 185,018 530,982 Robert C. Murray................. 2,000 21,875 8,335 75,665 86,997 305,441 Harold W. Keiser................. 0 0 3,334 34,166 34,799 107,858 R. Edwin Selover................. 1,400 8,525 4,334 37,366 45,049 147,908
(1) Does not reflect any options granted and/or exercised after year end (12/31/98). The net effect of any such grants and exercises is reflected in the table appearing under Security Ownership of Directors and Management. (2) Represents difference between exercise price and market price of PSEG Common Stock on date of exercise. (3) Represents difference between market price of PSEG Common Stock and the respective exercise prices of the options at fiscal year end (12/31/98). Such amounts may not necessarily be realized. Actual values which may be realized, if any, upon any exercise of such options will be based on the market price of PSEG Common Stock at the time of any such exercise and thus are dependent upon future performance of PSEG Common Stock. EMPLOYMENT CONTRACTS AND ARRANGEMENTS PSEG has entered into an employment agreement dated as of June 16, 1998 with Mr. Ferland covering his employment as Chief Executive Officer through March 31, 2005. Under the Agreement, Mr. Ferland has agreed not to retire prior to March 31, 2002, but may retire thereafter. The Agreement provides that Mr. Ferland will be re-nominated for election as a Director during his employment under the Agreement. The Agreement provides that Mr. Ferland's base salary, target annual incentive bonus and long term incentive bonus will be determined based on compensation practices for CEO's of similar companies and that his annual salary will not be reduced during the term of the Agreement and awards him 150,000 shares of restricted PSEG Stock, of which 60,000 shares vest 2002; 20,000 shares vest in 2003; 30,000 shares vest in 2004 and 40,000 shares vest in 2005. Any non-vested shares are forfeited upon his retirement unless the Board of Directors, in its discretion, determines to make payment. The Agreement provides for the granting of 22 years of pension credit for Mr. Ferland's prior service, which was awarded at the time of his employment. The Agreement further provides that if Mr. Ferland is terminated without "Cause" or resigns for "Good Reason" (as those terms are defined in the Agreement) during the term of the Agreement, the entire stock award becomes vested, he will be paid a benefit of two times base salary and target bonus and welfare benefits will be continued for two years unless sooner employed. In the event such a termination occurs after a "Change in Control" (as defined), the payment to Mr. Ferland becomes three times the sum of salary and target bonus, continuation of welfare benefits for three years unless sooner reemployed, payment of the net present value providing three years additional service under PSEG's retirement plans, and a gross-up for excise taxes on any termination payments due under the Internal Revenue Code. The Agreement provides that Mr. Ferland is prohibited from competing with or recruiting employees from PSEG or its subsidiaries of affiliates for two years after termination of employment. Violation of these provisions requires a forfeiture of a portion of the restricted stock grant and certain other benefits. 124 The principal remaining applicable terms of an employment agreement entered into with Mr. Murray at the time of his employment, as modified in 1998, provide for the grant of additional years of credited service for retirement purposes in light of allied work experience of five years after completion of five years of employment, and up to seventeen years after completion of approximately nine years of employment. The principal remaining applicable terms of an employment agreement entered into with Mr. Keiser at the time of his employment provide that his salary may not be decreased during the first five years of employment, if discharged without cause during such period, he will be paid his salary for a twelve-month period or the remainder of the five year period, whichever is less, and the grant of twenty years of additional credited service for retirement purposes after completion of five years of employment, in light of allied work experience. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION PSE&G does not have a compensation committee. Decisions regarding compensation of PSE&G's executive officers are made by the Organization and Compensation Committee of PSEG. Hence, during 1998 the PSE&G Board of Directors did not have, and no officer, employee or former officer of PSE&G participated in any deliberations of such Board, concerning executive officer compensation. COMPENSATION OF DIRECTORS AND CERTAIN BUSINESS RELATIONSHIPS A director who is not an officer of PSEG or its subsidiaries and affiliates, including PSE&G, is paid an annual retainer of $22,000 and a fee of $1,200 for attendance at any Board or committee meeting, inspection trip, conference or other similar activity relating to PSEG, PSE&G or Energy Holdings. Beginning in 1999, each committee Chair will receive an additional annual retainer of $3,000. Each of the directors of PSE&G is also a director of PSEG. No additional retainer is paid for service as a director of PSE&G. Fifty percent of the annual retainer is paid in PSEG Common Stock. PSEG also maintains a Stock Plan for Outside Directors pursuant to which directors who are not employees of PSEG or its subsidiaries receive 300 shares of restricted stock for each year of service as a director. Beginning in 1999, this amount will be increased to 600 shares annually. Such shares held by each non-employee director are included in the table in Item 12 below under the heading Security Ownership of Directors and Management. The restrictions on the stock granted under the Stock Plan for Outside Directors provide that the shares are subject to forfeiture if the director leaves service at any time prior to the Annual Meeting of Stockholders following his or her 70th birthday. This restriction would be deemed to have been satisfied if the director's service were terminated after a "Change in Control" as defined in the Plan or if the director were to die in office. PSEG also has the ability to waive this restriction for good cause shown. Restricted stock may not be sold or otherwise transferred prior to the lapse of the restrictions. Dividends on shares held subject to restrictions are paid directly to the director, and the director has the right to vote the shares. COMPENSATION PURSUANT TO PENSION PLANS The table below illustrates annual retirement benefits expressed in terms of single life annuities based on the average final compensation and service shown and retirement at age 65. A person's annual retirement benefit is based upon a percentage that is equal to years of credited service plus 30, but not more than 75%, times average final compensation at the earlier of retirement, attainment of age 65 or death. These amounts are reduced by Social Security benefits and certain retirement benefits from other employers. Pensions in the form of joint and survivor annuities are also available. 125 PENSION PLAN TABLE LENGTH OF SERVICE AVERAGE FINAL ------------------------------------------------------ COMPENSATION 30 YEARS 35 YEARS 40 YEARS 45 YEARS - ------------- ------------ ----------- ----------- ----------- $300,000 $180,000 $195,000 $210,000 $225,000 400,000 240,000 260,000 280,000 300,000 500,000 300,000 325,000 350,000 375,000 600,000 360,000 390,000 420,000 450,000 700,000 420,000 455,000 490,000 525,000 800,000 480,000 520,000 560,000 600,000 900,000 540,000 585,000 630,000 675,000 1,000,000 600,000 650,000 700,000 750,000 1,100,000 660,000 715,000 770,000 825,000 1,200,000 720,000 780,000 840,000 900,000 1,300,000 780,000 845,000 910,000 975,000 Average final compensation, for purposes of retirement benefits of executive officers, is generally equivalent to the average of the aggregate of the salary and bonus amounts reported in the Summary Compensation Table above under 'Annual Compensation' for the five years preceding retirement, not to exceed 130% of the average annual salary for such five year period. Messrs. Ferland, Codey, Murray, Keiser and Selover will have accrued approximately 48, 41, 41, 30 and 43 years of credited service, respectively, as of age 65. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PSEG The information required by Item 12 of Form 10-K with respect to directors, executive officers and certain beneficial owners is set forth under the heading 'Security Ownership of Directors, Management and Certain Beneficial Owners' in PSEG's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 1999 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 2, 1999 and such information set forth under such heading is incorporated herein by this reference thereto. PSE&G All of PSE&G's 132,450,344 outstanding shares of Common Stock are owned beneficially and of record by PSE&G's parent, PSEG, 80 Park Plaza, P.O. Box 1171, Newark, New Jersey. The following table sets forth beneficial ownership of PSEG Common Stock, including options, by the directors and executive officers named below as of January 31, 1999. None of these amounts exceed 1% of the PSEG Common Stock outstanding at such date. No director or executive officer owns any PSE&G Preferred Stock of any class. 126 AMOUNT AND NATURE OF NAME BENEFICIAL OWNERSHIP - -------------------------------------------------------- -------------------- Lawrence R. Codey....................................... 155,816 (1) E. James Ferland........................................ 483,578 (2) Conrad K. Harper........................................ 940 Harold W. Keiser........................................ 37,512 (3) Irwin Lerner............................................ 11,359 Robert C. Murray........................................ 96,322 (4) Marilyn M. Pfaltz....................................... 8,473 Forrest J. Remick....................................... 2,838 R. Edwin Selover........................................ 50,691 (5) All directors and executive officers (11) as a group.... 905,686 (6) (1) Includes the equivalent of 5 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 137,200 shares, 16,670 of which are currently exercisable. (2) Includes the equivalent of 11,531 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 274,500 shares, 33,340 of which are currently exercisable. Includes 150,000 shares of restricted stock, which vest as described in the Summary Compensation Table Note 5. (3) Includes the equivalent of 12 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 37,500 shares, 3,334 of which are currently exercisable. (4) Includes the equivalent of 1,322 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 84,000 shares, 8,335 of which are currently exercisable. (5) Includes options to purchase 41,700 shares, of which 4,334 are currently exercisable. (6) Includes the equivalent of 18,163 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 625,700 shares, of which 69,407 are currently exercisable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PSEG The information required by Item 13 of Form 10-K is set forth under the heading "Executive Compensation" in PSEG's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 1999, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 2, 1999. Such information set forth under such heading is incorporated herein by this reference thereto. PSE&G None. 127 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) Financial Statements: (1) PSEG Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996, on page 57. PSEG Consolidated Balance Sheets for the years ended December 31, 1998 and 1997, on pages 58 and 59. PSEG Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 on page 60. PSEG Statements of Common Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996 on page 61. PSEG Notes to Consolidated Financial Statements on pages 68 through 111. (2) PSE&G Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996, on page 63. PSE&G Consolidated Balance Sheets for the years ended December 31, 1998 and 1997, on pages 64 and 65. PSE&G Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 on page 66. PSE&G Statements of Common Stockholder's Equity for the years ended December 31, 1998, 1997, and 1996 on page 67. PSE&G Notes to Consolidated Financial Statements on pages 111 through 114. (B) The following documents are filed as a part of this report: (1) PSEG Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1998 (page 130). (2) PSE&G Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1998 (page 130). Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (C) The following exhibits are filed herewith: (1) PSEG: Exhibit 4f Indenture dated as of November 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank providing for the issuance of Senior Debt Securities Exhibit 10a(1) Directors' Deferred Compensation Plan Exhibit 10a(2) Deferred Compensation Plan for Certain Employees 128 Exhibit 10a(3) Limited Supplemental Benefits Plan for Certain Employees Exhibit 10a(4) Mid Career Hire Supplemental Retirement Plan Exhibit 10a(5) Retirement Income Reinstatement Plan Exhibit 10a(6) Long-Term Incentive Plan Exhibit 10a(14) Directors' Stock Plan Exhibit 10a(16) Global Deferred Compensation Plan Exhibit 10a(17) Global Executive Incentive Compensation Plan Exhibit 10a(18) Energy Holdings Management Incentive Compensation Plan Exhibit 10a(19) Energy Holdings Deferred Compensation Plan Exhibit 10a(20) Energy Technologies Executive Incentive Compensation Plan Exhibit 10a(21) Energy Holdings Limited Supplemental Benefits Plan for Certain Employees Exhibit 10a(22) Resources Annual Incentive Compensation Plan Exhibit 12 Computation of Ratios of Earnings to Fixed Charges Exhibit 21 Subsidiaries of Registrant Exhibit 23 Independent Auditors' Consent Exhibit 27 Financial Data Schedule (See Exhibit Index on pages 135 through 143.) (2) PSE&G: Exhibit 10a(1) Directors' Deferred Compensation Plan Exhibit 10a(2) Deferred Compensation Plan for Certain Employees Exhibit 10a(3) Limited Supplemental Benefits Plan for Certain Employees Exhibit 10a(4) Mid Career Hire Supplemental Retirement Plan Exhibit 10a(5) Retirement Income Reinstatement Plan Exhibit 10a(6) Long-Term Incentive Plan Exhibit 10a(14) Directors' Stock Plan Exhibit 12(a) Computation of Ratios of Earnings to Fixed Charges Exhibit 12(b) Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements Exhibit 23 Independent Auditors' Consent Exhibit 27 Financial Data Schedule (See Exhibit Index on pages 143 through 149.) (D) The following reports on Form 8-K were filed by the registrant(s) named below during the last quarter of 1998 and the 1999 period covered by this report under Item 5: REGISTRANT DATE OF REPORT ITEM REPORTED ---------- -------------- ------------- None. 129 SCHEDULE II PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998 -- DECEMBER 31, 1996
COLUMN B COLUMN C COLUMN D COLUMN E ---------- --------------------------- ----------- ---------- ADDITIONS --------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COST AND OTHER ACCOUNTS DEDUCTIONS- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - --------------------------------------------- ---------- --------------------------- ----------- ---------- (MILLIONS OF DOLLARS) 1998: Allowance for Doubtful Accounts.............. $41 $40 $-- $43 (A) $38 Discount on Property Abandonments............ 2 -- -- 1 (B) 1 Inventory Valuation Reserve.................. 12 -- -- -- 12 Other Valuation Allowances................... 15 1 -- 5 11 1997: Allowance for Doubtful Accounts.............. $46 $44 $-- $49 (A) $41 Discount on Property Abandonments............ 4 -- -- 2 (B) 2 Inventory Valuation Reserve.................. 16 -- -- 4 12 Other Valuation Allowances................... 10 5 -- -- 15 1996: Allowance for Doubtful Accounts.............. $38 $46 $-- $38 (A) $46 Discount on Property Abandonments............ 7 -- -- 3 (B) 4 Inventory Valuation Reserve.................. 20 -- -- 4 16 Other Valuation Allowances................... -- 10 -- -- 10
(A) Accounts Receivable/Investments written off. (B) Amortization of discount to income. PUBLIC SERVICE ELECTRIC AND GAS COMPANY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998 -- DECEMBER 31, 1996
COLUMN B COLUMN C COLUMN D COLUMN E ---------- --------------------------- ----------- ---------- ADDITIONS --------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COST AND OTHER ACCOUNTS DEDUCTIONS- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - --------------------------------------------- ---------- --------------------------- ----------- ---------- (MILLIONS OF DOLLARS) 1998: Allowance for Doubtful Accounts.............. $41 $40 $-- $43 (A) $38 Discount on Property Abandonments............ 2 -- -- 1 (B) 1 Inventory Valuation Reserve.................. 12 -- -- -- 12 Other Valuation Allowances................... 15 1 -- 5 11 1997: Allowance for Doubtful Accounts.............. $46 $44 $-- $49 (A) $41 Discount on Property Abandonments............ 4 -- -- 2 (B) 2 Inventory Valuation Reserve.................. 16 -- -- 4 12 Other Valuation Allowances................... 10 5 -- -- 15 1996: Allowance for Doubtful Accounts.............. $38 $46 $-- $38 (A) $46 Discount on Property Abandonments............ 7 -- -- 3 (B) 4 Inventory Valuation Reserve.................. 20 -- -- 4 16 Other Valuation Allowances................... -- 10 -- -- 10
(A) Accounts Receivable/Investments written off. (B) Amortization of discount to income. 130 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED By E. JAMES FERLAND ----------------------------------------- E. JAMES FERLAND CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: February 22, 1999 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- E. JAMES FERLAND Chairman of the Board, February 22, 1999 - --------------------- President and Chief Executive E. JAMES FERLAND Officer and Director (Principal Executive Officer) ROBERT C. MURRAY Vice President and Chief Financial February 22, 1999 - --------------------- Officer (Principal Financial Officer) ROBERT C. MURRAY PATRICIA A. RADO Vice President and Controller February 22, 1999 - --------------------- (Principal Accounting Officer) PATRICIA A. RADO LAWRENCE R. CODEY Director February 22, 1999 - --------------------- LAWRENCE R. CODEY ERNEST H. DREW Director February 22, 1999 - --------------------- ERNEST H. DREW T. J. DERMOT DUNPHY Director February 22, 1999 - --------------------- T. J. DERMOT DUNPHY RAYMOND V. GILMARTIN Director February 22, 1999 - --------------------- RAYMOND V. GILMARTIN CONRAD K. HARPER Director February 22, 1999 - --------------------- CONRAD K. HARPER IRWIN LERNER Director February 22, 1999 - --------------------- IRWIN LERNER MARILYN M. PFALTZ Director February 22, 1999 - --------------------- MARILYN M. PFALTZ FORREST J. REMICK Director February 22, 1999 - --------------------- FORREST J. REMICK RICHARD J. SWIFT Director February 22, 1999 - --------------------- RICHARD J. SWIFT JOSH S. WESTON Director February 22, 1999 - --------------------- JOSH S. WESTON 131 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED By E. JAMES FERLAND ----------------------------------------- E. JAMES FERLAND CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: February 22, 1999 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- E. JAMES FERLAND Chairman of the Board and Chief February 22, 1999 - --------------------- Executive Officer and Director E. JAMES FERLAND (Principal Executive Officer) ROBERT C. MURRAY Executive Vice President--Finance February 22, 1999 - --------------------- (Principal Financial Officer) ROBERT C. MURRAY PATRICIA A. RADO Vice President and Controller February 22, 1999 - --------------------- (Principal Accounting Officer) PATRICIA A. RADO LAWRENCE R. CODEY Director February 22, 1999 - --------------------- LAWRENCE R. CODEY CONRAD K. HARPER Director February 22, 1999 - --------------------- CONRAD K. HARPER IRWIN LERNER Director February 22, 1999 - --------------------- IRWIN LERNER MARILYN M. PFALTZ Director February 22, 1999 - --------------------- MARILYN M. PFALTZ FORREST J. REMICK Director February 22, 1999 - --------------------- FORREST J. REMICK 132 EXHIBIT INDEX Certain Exhibits previously filed with the Commission and the appropriate securities exchanges are indicated as set forth below. Such Exhibits are not being refiled, but are included because inclusion is desirable for convenient reference. (a) Filed by PSE&G with Form 8-A under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (b) Filed by PSE&G with Form 8-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (c) Filed by PSE&G with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (d) Filed by PSE&G with Form 10-Q under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (e) Filed by PSEG with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-9120. (f) Filed with registration statement of PSE&G under the Securities Exchange Act of 1934, File No. 1-973, effective July 1, 1935, relating to the registration of various issues of securities. (g) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-4995, effective May 20, 1942, relating to the issuance of $15,000,000 First and Refunding Mortgage Bonds, 3% Series due 1972. (h) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-7568, effective July 1, 1948, relating to the proposed issuance of 200,000 shares of Cumulative Preferred Stock. (i) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-8381, effective April 18, 1950, relating to the issuance of $26,000,000 First and Refunding Mortgage Bonds, 2 3/4% Series due 1980. (j) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-12906, effective December 4, 1956, relating to the issuance of 1,000,000 shares of Common Stock. (k) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-59675, effective September 1, 1977, relating to the issuance of $60,000,000 First and Refunding Mortgage Bonds, 8 1/8% Series I due 2007. (l) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-60925, effective March 30, 1978, relating to the issuance of 750,000 shares of Common Stock through an Employee Stock Purchase Plan. (m) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-65521, effective October 10, 1979, relating to the issuance of 3,000,000 shares of Common Stock. (n) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-74018, filed on June 16, 1982, relating to the Thrift Plan of PSE&G. (o) Filed with registration statement of Public Service Enterprise Group Incorporated under the Securities Act of 1933, No. 33-2935 filed January 28, 1986, relating to PSE&G's plan to form a holding company as part of a corporate restructuring. (p) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 33-13209 filed April 9, 1987, relating to the registration of $575,000,000 First and Refunding Mortgage Bonds pursuant to Rule 415. 133 PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 3a (o) 3a (o) 3a Certificate of Incorporation Public Service Enterprise Group Incorporated 3b (e) 3b (e) 3b By-Laws of Public Service 4/11/88 Enterprise Group Incorporated 3c (e) 3c (e) 3c Certificate of Amendment of 4/11/88 Certificate of Incorporation of Public Service Enterprise Group 3d (f) (f) Trust Agreements for 12/24/97 Enterprise Capital Trust I and III 3e (d) 3 (d) 3 Amended and Restated Trust 8/14/98 8/14/98 Agreement for Enterprise Capital Trust II 4a(1) (f) B-1 (c) 4b(1) Incorporated, effective April 2/18/81 23, 1987 Indenture between PSE&G and Fidelity Union Trust Company, (now First Union National Bank) as Trustee, dated August 1, 1924, securing First and Refunding Mortgage Bonds Indentures between PSE&G and First Union National Bank as Trustee, supplemental to Exhibit 4a(1), dated as follows: 4a(2) (i) 7(1a) (c) 4b(2) April 1, 1927 2/18/81 4a(3) (k) 2b(3) (c) 4b(3) June 1, 1937 2/18/81 4a(4) (k) 2b(4) (c) 4b(4) July 1, 1937 2/18/81 4a(5) (k) 2b(5) (c) 4b(5) December 19, 1939 2/18/81 4a(6) (g) B-10 (c) 4b(6) March 1, 1942 2/18/81 4a(7) (k) 2b(7) (c) 4b(7) June 1, 1949 2/18/81 4a(8) (k) 2b(8) (c) 4b(8) May 1, 1950 2/18/81 4a(9) (k) 2b(9) (c) 4b(9) October 1, 1953 2/18/81 4a(10) (k) 2b(10) (c) 4b(10) May 1, 1954 2/18/81 4a(11) (j) 4b(16) (c) 4b(11) November 1, 1956 2/18/81 4a(12) (k) 2b(12) (c) 4b(12) September 1, 1957 2/18/81 4a(13) (k) 2b(13) (c) 4b(13) August 1, 1958 2/18/81 4a(14) (k) 2b(14) (c) 4b(14) June 1, 1959 2/18/81 134 PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(15) (k) 2b(15) (c) 4b(15) September 1, 1960 2/18/81 4a(16) (k) 2b(16) (c) 4b(16) August 1, 1962 2/18/81 4a(17) (k) 2b(17) (c) 4b(17) June 1, 1963 2/18/81 4a(18) (k) 2b(18) (c) 4b(18) September 1, 1964 2/18/81 4a(19) (k) 2b(19) (c) 4b(19) September 1, 1965 2/18/81 4a(20) (k) 2b(20) (c) 4b(20) June 1, 1967 2/18/81 4a(21) (k) 2b(21) (c) 4b(21) June 1, 1968 2/18/81 4a(22) (k) 2b(22) (c) 4b(22) April 1, 1969 2/18/81 4a(23) (k) 2b(23) (c) 4b(23) March 1, 1970 2/18/81 4a(24) (k) 2b(24) (c) 4b(24) May 15, 1971 2/18/81 4a(25) (k) 2b(25) (c) 4b(25) November 15, 1971 2/18/81 4a(26) (k) 2b(26) (c) 4b(26) April 1, 1972 2/18/81 4a(27) (a) 2 (c) 4b(27) March 1, 1974 3/29/74 2/18/81 4a(28) (a) 2 (c) 4b(28) October 1, 1974 10/11/74 2/18/81 4a(29) (a) 2 (c) 4b(29) April 1, 1976 4/6/76 2/18/81 4a(30) (a) 2 (c) 4b(30) September 1, 1976 9/16/76 2/18/81 4a(31) (k) 2b(31) (c) 4b(31) October 1, 1976 2/18/81 4a(32) (a) 2 (c) 4b(32) June 1, 1977 6/29/77 2/18/81 4a(33) (l) 2b(33) (c) 4b(33) September 1, 1977 2/18/81 135 PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(35) (a) 2 (c) 4b(35) July 1, 1979 7/25/79 2/18/81 4a(36) (m) 2d(36) (c) 4b(36) September 1, 1979 (No. 1) 2/18/81 4a(37) (m) 2d(37) (c) 4b(37) September 1, 1979 (No. 2) 2/18/81 4a(38) (a) 2 (c) 4b(38) November 1, 1979 12/3/79 2/18/81 4a(39) (a) 2 (c) 4b(39) June 1, 1980 6/10/80 2/18/81 4a(40) (a) 2 (a) 2 August 1, 1981 8/19/81 8/19/81 4a(41) (b) 4e (b) 4e April 1, 1982 4/29/82 5/5/82 4a(42) (a) 2 (a) 2 September 1, 1982 9/17/82 9/20/82 4a(43) (a) 2 (a) 2 December 1, 1982 12/21/82 12/21/82 4a(44) (d) 4(ii) (d) 4(ii) June 1, 1983 7/26/83 7/27/83 4a(45) (a) 4 (a) 4 August 1, 1983 8/19/83 8/19/83 4a(46) (d) 4(ii) (d) 4(ii) July 1, 1984 8/14/84 8/17/84 4a(47) (d) 4(ii) (d) 4(ii) September 1, 1984 11/2/84 11/9/84 4a(48) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 1) 1/4/85 1/9/85 4a(49) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 2) 1/4/85 1/9/85 4a(50) (a) 2 (a) 2 July 1, 1985 8/2/85 8/2/85 4a(51) (c) 4a(51) (c) 4a(51) January 1, 1986 2/11/86 2/11/86 4a(52) (a) 2 (a) 2 March 1, 1986 3/28/86 3/28/86 136 PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(53) (a) 2(a) (a) 2(a) April 1, 1986 (No. 1) 5/1/86 5/1/86 4a(54) (a) 2(b) (a) 2(b) April 1, 1986 (No. 2) 5/1/86 5/1/86 4a(55) (p) 4a(55) (p) 4a(55) March 1, 1987 4/9/87 4/9/87 4a(56) (a) 4 (a) 4 July 1, 1987 (No. 1) 8/17/87 8/17/87 4a(57) (d) 4 (d) 4 July 1, 1987 (No. 2) 11/13/87 11/20/87 4a(58) (a) 4 (a) 4 May 1, 1988 5/17/88 5/18/88 4a(59) (a) 4 (a) 4 September 1, 1988 9/27/88 9/28/88 4a(60) (a) 4 (a) 4 July 1, 1989 7/25/89 7/26/89 4a(61) (a) 4 (a) 4 July 1, 1990 (No. 1) 7/25/90 7/26/90 4a(62) (a) 4 (a) 4 July 1, 1990 (No. 2) 7/25/90 7/26/90 4a(63) (a) 4 (a) 4 June 1, 1991 (No. 1) 7/1/91 7/2/91 4a(64) (a) 4 (a) 4 June 1, 1991 (No. 2) 7/1/91 7/2/91 4a(65) (a) 4 (a) 4 November 1, 1991 (No. 1) 12/2/91 12/3/91 4a(66) (a) 4 (a) 4 November 1, 1991 (No. 2) 12/2/91 12/3/91 4a(67) (a) 4 (a) 4 November 1, 1991 (No. 3) 12/2/91 12/3/91 4a(68) (a) 4 (a) 4 February 1, 1992 (No. 1) 2/27/92 2/28/92 4a(69) (a) 4 (a) 4 February 1, 1992 (No. 2) 2/27/92 2/28/92 4a(70) (a) 4 (a) 4 June 1, 1992 (No. 1) 6/17/92 6/11/92 4a(71) (a) 4 (a) 4 June 1, 1992 (No. 2) 6/17/92 6/11/92 137 PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(72) (a) 4 (a) 4 June 1, 1992 (No. 3) 6/17/92 6/11/92 4a(73) (a) 4 (a) 4 January 1, 1993 (No.1) 2/2/93 2/2/93 4a(74) (a) 4 (a) 4 January 1, 1993 (No. 2) 2/2/93 2/2/93 4a(75) (a) 4 (a) 4 March 1, 1993 3/17/93 3/18/93 4a(76) (b) 4 (a) 4 May 1, 1993 5/27/93 5/28/93 4a(77) (a) 4 (a) 4 May 1, 1993 (No. 2) 5/25/93 5/25/93 4a(78) (a) 4 (a) 4 May 1, 1993 (No. 3) 5/25/93 5/25/93 4a(79) (b) 4 (b) 4 July 1, 1993 12/1/93 12/1/93 4a(80) (a) 4 (a) 4 August 1, 1993 8/3/93 8/3/93 4a(81) (b) 4 (b) 4 September 1, 1993 12/1/93 12/1/93 4a(82) (b) 4 (b) 4 September 1, 1993 (No. 2) 12/1/93 12/1/93 4a(83) (b) 4 (b) 4 November 1, 1993 12/1/93 12/1/93 4a(84) (a) 4 (a) 4 February 1, 1994 2/3/94 2/14/94 4a(85) (a) 4 (a) 4 March 1, 1994 (No. 1) 3/15/94 3/16/94 4a(86) (a) 4 (a) 4 March 1, 1994 (No. 2) 3/15/94 3/16/94 4a(87) (d) 4 (d) 4 May 1, 1994 11/8/94 12/2/94 4a(88) (d) 4 (d) 4 June 1, 1994 11/8/94 12/2/94 4a(89) (d) 4 (d) 4 August 1, 1994 11/8/94 12/2/94 4a(90) (d) 4 (d) 4 October 1, 1994 (No. 1) 11/8/94 12/2/94 4a(91) (d) 4 (d) 4 October 1, 1994 (No. 2) 11/8/94 12/2/94 138 PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(92) (a) 4 (a) 4 January 1, 1996 (No. 1) 1/26/96 1/26/96 4a(93) (a) 4 (a) 4 January 1, 1996 (No. 2) 1/26/96 1/26/96 4a(94) (e) 4 December 1, 1996 2/26/97 4a(95) (a) 4 (a) 4 June 1, 1997 6/17/97 6/17/97 4a(96) (a) 4 (a) 4 May 1, 1998 5/15/98 5/15/98 4b (b) 4 (b) 4 Indenture of Trust between 12/1/93 12/1/93 PSE&G and The Chase Manhattan Bank (National Association), as Trustee, providing for Secured Medium-Term Notes dated July 1, 1993 4c(1) (c) (c) Indenture between PSE&G and 2/23/95 2/23/95 First Union National Bank, National Association (now known as First Union National Bank), as Trustee, dated November 1, 1994, providing for Deferrable Interest Subordinated Debentures in Series 4c(2) (a) (a) Supplemental Indenture between 9/11/95 9/11/95 PSE&G and First Fidelity Bank, (d) 4d (2) (d) 4d (2) National Association (now 5/13/98 5/13/98 known as First Union National Bank), as Trustee, dated September 1, 1995 providing for Deferrable Interest Subordinated Debentures, Series B (relating to Monthly Preferred Securities) 4d(1) (d) 4e (1) (d) 4e (2) Indenture between PSE&G and 5/13/98 5/13/98 First Union National Bank, as Trustee, dated June 1, 1996 providing for Deferrable Interest Subordinated Debentures in Series (relating to Quarterly Preferred Securities) 4d(2) (d) 4e(2) (d) 4e(2) Supplemental Indenture between 5/13/98 5/13/98 PSE&G and First Union National Bank, as Trustee, dated February 1, 1997 providing for Deferrable Interest Subordinated Debentures, Series B (relating to Quarterly Preferred Securities) 4e(1) (d) 4f (d) 4f Indenture between Public 5/13/98 5/13/98 Service Enterprise Group Incorporated and First Union National Bank, as Trustee, dated January 1, 1998 providing for Deferrable Interest Subordinated Debentures in Series (relating to Quarterly Preferred Securities) 4e(2) (d) 4a (d) 4a First Supplemental Indenture 8/14/98 8/14/98 to Indenture dated as of January 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank, as Trustee, dated June 1, 1998 providing for the issuance of Floating Rate Deferrable Interest Subordinated Debentures, Series B (relating to Trust Preferred Securities) 4e(3) (d) 4b (d) 4b Second Supplemental Indenture 8/14/98 8/14/98 to Indenture dated as of January 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank, as Trustee, dated July 1, 1998 providing for the issuance of Deferrable Interest Subordinated Debentures, Series C (relating to Trust Preferred Securities) 4f Indenture dated as of November 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank providing for the issuance of Senior Debt Securities 9 Inapplicable 139 PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 10a(1) Directors' Deferred Compensation Plan 10a(2) Deferred Compensation Plan for Certain Employees 10a(3) Limited Supplemental Benefits Plan for Certain Employees 10a(4) Mid Career Hire Supplemental Retirement Plan 10a(5) Retirement Income Reinstatement Plan 10a(6) Long-Term Incentive Plan 10a(7) (e) 10a(20) (e) 10a(20) Management Incentive 2/26/97 2/26/97 Compensation Plan 10a(8) (d) 10 (d) 10 Employment Agreement with E. 8/14/98 8/14/98 James Ferland, dated June 16, 1998 10a(9) (c) 10a(15) (c) 10a(15) Letter Agreement with Robert 2/10/93 2/11/93 C. Murray dated December 17, 1991 10a(9)(i) (c) 10a(9)(i) (c) 10a(9)(i) Amendment to Letter Agreement 2/23/98 2/23/98 with Robert C. Murray dated January 6, 1998 10a(10) (c) 10a(14) (c) 10a(14) Letter Agreement with Patricia 2/26/94 3/9/94 A. Rado dated March 24, 1993 10a(11) (d) 10a(15) (d) 10a(15) Letter Agreement with Louis 8/14/95 8/14/95 F. Storz dated July 7, 1995 10a(12) (d) 10a(16) (d) 10a(16) Letter Agreement with Elbert 8/14/95 8/14/95 C. Simpson dated May 31, 1995 10a(13) (d) 10a(17) (d) 10a(17) Letter Agreement with Alfred 11/14/95 11/14/95 C. Koeppe dated August 23, 1995 140 PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 10a(14) Directors' Stock Plan 10a(15) (c) 10a(16) (c) 10a(16) Letter Agreement with Harold 2/23/98 2/23/98 W. Keiser dated January 5, 1998 10a(16) Global Deferred Compensation Plan 10a(17) Global Executive Incentive Compensation Plan 10a(18) Energy Holdings Management Incentive Compensation Plan 10a(19) Energy Holdings Deferred Compensation Plan 10a(20) Energy Technologies Executive Incentive Compensation Plan 10a(21) Energy Holdings Limited Supplemental Benefits Plan for Certain Employees 10a(22) Resources Annual Incentive Compensation Plan 11 Inapplicable 12 Computation of Ratios of Earnings to Fixed Charges 13 Inapplicable 16 Inapplicable 18 Inapplicable 21 Subsidiaries of the Registrant 22 Inapplicable 23 Independent Auditors' Consent 141 PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 24 Inapplicable 27 Financial Data Schedule 28 Inapplicable 99 Inapplicable PSE&G - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 3a(1) (b) 3a (b) 3a Restated Certificate of 8/28/86 8/29/86 Incorporation of PSE&G 3a(2) (c) 3a(2) (c) 3a(2) Certificate of Amendment of 4/10/87 Certificate of Restated Certificate of Incorporation of PSE&G filed February 18, 1987 with the State of New Jersey adopting limitations of liability provisions in accordance with an amendment to New Jersey Business Corporation Act 3a(3) (a) 3(a)3 (a) 3(a)3 Certificate of Amendment of 2/3/94 2/14/94 Restated Certificate of Incorporation of PSE&G filed June 17, 1992 with the State of New Jersey, establishing the 7.44% Cumulative Preferred Stock ($100 Par) as a series of the Preferred Stock 3a(4) (a) 3(a)4 (a) 3(a)4 Certificate of Amendment of 2/3/94 2/14/94 Restated Certificate of Incorporation of PSE&G filed March 11, 1993 with the State of New Jersey, establishing the 5.97% Cumulative Preferred Stock ($100 Par) as a series of Preferred Stock 3a(5) (a) 3(a)5 (a) 3(a)5 Certificate of Amendment of 2/3/94 2/14/94 Restated Certificate of Incorporation of PSE&G filed January 27, 1995 with the State of New Jersey, establishing the 6.92% Cumulative Preferred Stock ($100 Par) and the 6.75% Cumulative Preferred Stock -- $25 Par as series of Preferred Stock 3b (a) (a) Copy of By-Laws of PSE&G 2/23/95 2/23/95 4a(1) (f) B-1 (c) 4b(1) Indenture between PSE&G and 2/18/81 Fidelity Union Trust Company, 2/18/81 (now First Union National Bank, National Association), as Trustee, dated August 1, 1924, securing First and Refunding Mortgage Bond Indentures between PSE&G and First Fidelity Bank, National Association, as Trustee, supplemental to Exhibit 4a(1), dated as follows: 4a(2) (i) 7(1a) (c) 4b(2) April 1, 1927 2/18/81 4a(3) (k) 2b(3) (c) 4b(3) June 1, 1937 2/18/81 142 PSE&G - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(4) (k) 2b(4) (c) 4b(4) July 1, 1937 2/18/81 4a(5) (k) 2b(5) (c) 4b(5) December 19, 1939 2/18/81 4a(6) (g) B-10 (c) 4b(6) March 1, 1942 2/18/81 4a(7) (k) 2b(7) (c) 4b(7) June 1, 1949 2/18/81 4a(8) (k) 2b(8) (c) 4b(8) May 1, 1950 2/18/81 4a(9) (k) 2b(9) (c) 4b(9) October 1, 1953 2/18/81 4a(10) (k) 2b(10) (c) 4b(10) May 1, 1954 2/18/81 4a(11) (j) 4b(16) (c) 4b(11) November 1, 1956 2/18/81 4a(12) (k) 2b(12) (c) 4b(12) September 1, 1957 2/18/81 4a(13) (k) 2b(13) (c) 4b(13) August 1, 1958 2/18/81 4a(14) (k) 2b(14) (c) 4b(14) June 1, 1959 2/18/81 4a(15) (k) 2b(15) (c) 4b(15) September 1, 1960 2/18/81 4a(16) (k) 2b(16) (c) 4b(16) August 1, 1962 2/18/81 4a(17) (k) 2b(17) (c) 4b(17) June 1, 1963 2/18/81 4a(18) (k) 2b(18) (c) 4b(18) September 1, 1964 2/18/81 4a(19) (k) 2b(19) (c) 4b(19) September 1, 1965 2/18/81 4a(20) (k) 2b(20) (c) 4b(20) June 1, 1967 2/18/81 4a(21) (k) 2b(21) (c) 4b(21) June 1, 1968 2/18/81 4a(22) (k) 2b(22) (c) 4b(22) April 1, 1969 2/18/81 4a(23) (k) 2b(23) (c) 4b(23) March 1, 1970 2/18/81 143 PSE&G - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(24) (k) 2b(24) (c) 4b(24) May 15, 1971 2/18/81 4a(25) (k) 2b(25) (c) 4b(25) November 15, 1971 2/18/81 4a(26) (k) 2b(26) (c) 4b(26) April 1, 1972 2/18/81 4a(27) (a) 2 (c) 4b(27) March 1, 1974 3/29/74 2/18/81 4a(28) (a) 2 (c) 4b(28) October 1, 1974 10/11/74 2/18/81 4a(29) (a) 2 (c) 4b(29) April 1, 1976 4/6/76 2/18/81 4a(30) (a) 2 (c) 4b(30) September 1, 1976 9/16/76 2/18/81 4a(31) (k) 2b(31) (c) 4b(31) October 1, 1976 2/18/81 4a(32) (a) 2 (c) 4b(32) June 1, 1977 6/29/77 2/18/81 4a(33) (l) 2b(33) (c) 4b(33) September 1, 1977 2/18/81 4a(34) (a) 2 (c) 4b(34) November 1, 1978 11/21/78 2/18/81 4a(35) (a) 2 (c) 4b(35) July 1, 1979 7/25/79 2/18/81 4a(36) (m) 2d(36) (c) 4b(36) September 1, 1979 (No. 1) 2/18/81 4a(37) (m) 2d(37) (c) 4b(37) September 1, 1979 (No. 2) 2/18/81 4a(38) (a) 2 (c) 4b(38) November 1, 1979 12/3/79 2/18/81 4a(39) (a) 2 (c) 4b(39) June 1, 1980 6/10/80 2/18/81 4a(40) (a) 2 (a) 2 August 1, 1981 8/19/81 8/19/81 4a(41) (b) 4e (b) 4e April 1, 1982 4/29/82 5/5/82 4a(42) (a) 2 (a) 2 September 1, 1982 9/17/82 9/20/82 4a(43) (a) 2 (a) 2 December 1, 1982 12/21/82 12/21/82 4a(44) (d) 4(ii) (d) 4(ii) June 1, 1983 7/26/83 7/27/83 144 PSE&G - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(45) (a) 4 (a) 4 August 1, 1983 8/19/83 8/19/83 4a(46) (d) 4(ii) (d) 4(ii) July 1, 1984 8/14/84 8/17/84 4a(47) (d) 4(ii) (d) 4(ii) September 1, 1984 11/2/84 11/9/84 4a(48) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 1) 1/4/85 1/9/85 4a(49) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 2) 1/4/85 1/9/85 4a(50) (a) 2 (a) 2 July 1, 1985 8/2/85 8/2/85 4a(51) (c) 4a(51) (c) 4a(51) January 1, 1986 2/11/86 2/11/86 4a(52) (a) 2 (a) 2 March 1, 1986 3/28/86 3/28/86 4a(53) (a) 2(a) (a) 2(a) April 1, 1986 (No. 1) 5/1/86 5/1/86 4a(54) (a) 2(b) (a) 2(b) April 1, 1986 (No. 2) 5/1/86 5/1/86 4a(55) (p) 4a(55) (p) 4a(55) March 1, 1987 4/9/87 4/9/87 4a(56) (a) 4 (a) 4 July 1, 1987 (No. 1) 8/17/87 8/17/87 4a(57) (d) 4 (d) 4 July 1, 1987 (No. 2) 11/13/87 11/20/87 4a(58) (a) 4 (a) 4 May 1, 1988 5/17/88 5/18/88 4a(59) (a) 4 (a) 4 September 1, 1988 9/27/88 9/28/88 4a(60) (a) 4 (a) 4 July 1, 1989 7/25/89 7/26/89 4a(61) (a) 4 (a) 4 July 1, 1990 (No. 1) 7/25/90 7/26/90 4a(62) (a) 4 (a) 4 July 1, 1990 (No. 2) 7/25/90 7/26/90 4a(63) (a) 4 (a) 4 June 1, 1991 (No. 1) 7/1/91 7/2/91 4a(64) (a) 4 (a) 4 June 1, 1991 (No. 2) 7/1/91 7/2/91 4a(65) (a) 4 (a) 4 November 1, 1991 (No. 1) 12/2/91 12/3/91 145 PSE&G - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(66) (a) 4 (a) 4 November 1, 1991 (No. 2) 12/2/91 12/3/91 4a(67) (a) 4 (a) 4 November 1, 1991 (No. 3) 12/2/91 12/3/91 4a(68) (a) 4 (a) 4 February 1, 1992 (No. 1) 2/27/92 2/28/92 4a(69) (a) 4 (a) 4 February 1, 1992 (No. 2) 2/27/92 2/28/92 4a(70) (a) 4 (a) 4 June 1, 1992 (No. 1) 6/17/92 6/11/92 4a(71) (a) 4 (a) 4 June 1, 1992 (No. 2) 6/17/92 6/11/92 4a(72) (a) 4 (a) 4 June 1, 1992 (No. 3) 6/17/92 6/11/92 4a(73) (a) 4 (a) 4 January 1, 1993 (No. 1) 2/2/93 2/2/93 4a(74) (a) 4 (a) 4 January 1, 1993 (No. 2) 2/2/93 2/2/93 4a(75) (a) 4 (a) 4 March 1, 1993 3/17/93 3/18/93 4a(76) (b) 4 (a) 4 May 1, 1993 5/27/93 5/28/93 4a(77) (a) 4 (a) 4 May 1, 1993 (No. 2) 5/25/93 5/25/93 4a(78) (a) 4 (a) 4 May 1, 1993 (No. 3) 5/25/93 5/25/93 4a(79) (b) 4 (b) 4 July 1, 1993 12/1/93 12/1/93 4a(80) (a) 4 (a) 4 August 1, 1993 8/3/93 8/3/93 4a(81) (b) 4 (b) 4 September 1, 1993 12/1/93 12/1/93 4a(82) (a) 4 (a) 4 September 1, 1993 (No. 2) 12/1/93 12/1/93 4a(84) (a) 4 (a) 4 February 1, 1994 2/3/94 2/14/94 4a(85) (a) 4 (a) 4 March 1, 1994 (No. 1) 3/15/94 3/16/94 4a(86) (a) 4 (a) 4 March 1, 1994 (No. 2) 3/15/94 3/16/94 4a(87) (d) 4 (d) 4 May 1, 1994 11/8/94 12/2/94 4a(88) (d) 4 (d) 4 June 1, 1994 11/8/94 12/2/94 146 PSE&G - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 4a(89) (d) 4 (d) 4 August 1, 1994 11/8/94 12/2/94 4a(90) (d) 4 (d) 4 October 1, 1994 (No. 1) 11/8/94 12/2/94 4a(91) (d) 4 (d) 4 October 1, 1994 (No. 2) 11/8/94 12/2/94 4a(92) (a) 4 (a) 4 January 1, 1996 (No.1) 1/26/96 1/26/96 4a(93) (a) 4 (a) 4 January 1, 1996 (No. 2) 1/26/96 1/26/96 4a(94) (c) 4 December 1, 1996 2/26/97 4a(95) (a) 4 (a) 4 June 1, 1997 6/17/97 6/17/97 4a(96) (a) 4 (a) 4 May 1, 1998 5/15/98 5/15/98 4b (b) 4 (b) 4 Indenture of Trust between 12/1/93 12/1/93 PSE&G and Chase Manhattan Bank (National Association), as Trustee, providing for Secured Medium-Term Notes dated July 1, 1993 4c(1) (b) (c) Indenture between PSE&G and 2/23/95 2/23/95 First Fidelity Bank, National Association (now known as First Union National Bank), as Trustee, dated November 1, 1994, providing for Deferrable Interest Subordinated Debentures in Series 4c(2) (a) 4b(5) (a) 4b(5) Supplemental Indenture between PSE&G and First Fidelity Bank, (d) 4d(2) (d) 4d(2) National Association (now 5/13/98 5/13/98 known as First Union National Bank), as Trustee, dated September 1, 1995 providing for Deferrable Interest Subordinated Debentures, Series B (relating to Monthly Preferred Securities) 4d(1) (d) 4e(1) (d) 4e(1) Indenture between PSE&G and 5/13/98 5/13/98 First Union National Bank, as Trustee, dated June 1, 1996 providing for Deferrable Interest Subordinated Debentures in Series (relating to Quarterly Preferred Securities) 4d(2) (d) 4e(2) (d) 4e(2) Supplemental Indenture between 5/13/98 5/13/98 PSE&G and First Union National Bank, as Trustee, dated February 1, 1997 providing for Deferrable Interest Subordinated Debentures, Series B (relating to Quarterly Preferred Securities) 10a(1) Directors' Deferred Compensation Plan 10a(2) Deferred Compensation Plan for Certain Employees 10a(3) Limited Supplemental Benefits Plan for Certain Employees 10a(4) Mid Career Hire Supplemental Retirement Plan 10a(5) Retirement Income Reinstatement Plan 147 PSE&G - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 10a(6) Long-Term Incentive Plan 10a(7) (c) 10a(20) (c) 10a(20) Management Incentive 2/26/97 2/26/97 Compensation Plan 10a(8) (d) 10 (d) 10 Employment Agreement with E. 8/14/98 8/14/98 James Ferland, dated June 16, 1998 10a(9) (c) 10a(12) (c) 10a(12) Letter Agreement with Robert 2/10/93 2/11/93 C. Murray dated December 17, 1991 10a(9)(i) (c) 10a(9)(i) (c) 10a(9)(i) Amendment to Letter Agreement 2/23/98 2/23/98 with Robert C. Murray dated January 6, 1998 10a(10) (c) 10a(13) (c) 10a(13) Letter Agreement with Patricia 2/26/94 3/9/94 A. Rado dated March 24, 1993 10a(11) (d) 10a(15) (d) 10a(15) Letter Agreement with Louis F. 8/14/95 8/14/95 Storz dated July 7, 1995 10a(12) (d) 10a(16) (d) 10a(16) Letter Agreement with Elbert 8/14/95 8/14/95 C. Simpson dated May 31, 1995 10a(13) (d) 10a(17) (d) 10a(17) Letter Agreement with Alfred 11/14/95 11/14/95 C. Koeppe dated August 23, 1995 10a(14) Directors' Stock Plan 10a(15) (c) 10a(16) (c) 10a(16) Letter Agreement with Harold 2/23/98 2/23/98 W. Keiser dated January 5, 1998 11 Inapplicable 12(a) Computation of Ratios of Earnings to Fixed Charges 12(b) Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements 13 Inapplicable 16 Inapplicable 19 Inapplicable 21 Inapplicable 23 Independent Auditors' Consent 27 Financial Data Schedule 148 GLOSSARY OF TERMS The following is a glossary of frequently used abbreviations or acronyms that are found in this report: TERM MEANING - ---- ------- ACE.................... Atlantic City Electric Company ACO.................... Administrative Consent Order AFDC................... Allowance for Funds used During Construction AMT.................... Alternative Minimum Tax APB 25................. Accounting Principles Board Opinion, No. 25 "Accounting for Stock Issued to Employees" Bonds.................. First and Refunding Mortgage Bonds BPU.................... New Jersey Board of Public Utilities BTU.................... British Thermal Units BWR.................... Boiling Water Nuclear Reactor CAA.................... Federal Clean Air Act CERCLA................. Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 Combe Site............. Combe Fill South Sanitary Landfill in Washington and Chester Township, Morris County, New Jersey December 31st Order.... BPU's December 31, 1996 Order settling outstanding Salem and other outstanding regulatory issues Directive.............. Spill Act Multi-Site Directive Directive One.......... Directive and Notice to Insurers Number One Directive Two.......... Directive and Notice to Insurers Number Two DOE.................... U.S. Department of Energy DOJ.................... U.S. Department of Justice DP&L................... Delmarva Power & Light Company DRBC................... Delaware River Basin Commission DSAF................... Demand Side Adjustment Factor DSM.................... Demand Side Management Eagle Point............ PSEG Eagle Point, Inc. EBIT................... Earnings before interest and taxes EDC.................... Energy Development Corporation EGDC................... Enterprise Group Development Corporation EITF................... FASB's Emerging Issues Task Force EITF 92-12............. Emerging Issues Task Force, Issue No. 92-12 "Accounting for OPEB Costs by Rate-Regulated Enterprises" EITF 97-4.............. Emerging Issues Task Force, Issue No. 97-4 "Deregulation of the Pricing of Electricity; Issues Related to the Application of FASB Statements No. 71 and 101" EITF 98-10............. Emerging Issues Task Force, Issue No. 98-10 "Accounting for Energy Trading and Risk Management Activities" Energy Holdings........ PSEG Energy Holdings Inc. Energy Technologies.... PSEG Energy Technologies Inc. EPA.................... U.S. Environmental Protection Agency EPAct.................. National Energy Policy Act of 1992 EPC.................... Eagle Point Cogeneration Facility EWGs................... Exempt Wholesale Generators FASB................... Financial Accounting Standards Board Fault Act.............. New Jersey Public Utility Accident Fault Determination Act FERC................... Federal Energy Regulatory Commission FUCO................... Foreign Utility Company 149 GLOSSARY OF TERMS -- (CONTINUED) TERM MEANING - ---- ------- Fuelco................. PSE&G Fuel Corporation Funding................ Enterprise Capital Funding Corporation FWPCA.................. Federal Water Pollution Control Act GAAP................... Generally Accepted Accounting Principles GE..................... General Electric Company Global................. PSEG Global Inc. Global Site............ Global Landfill Site in Old Bridge Township, Middlesex County, New Jersey Hope Creek............. Hope Creek Nuclear Generating Station HWCS Project........... Hydrogen Water Chemistry System ICTC................... Interim Competitive Transition Charge IPP.................... Independent Power Producers IRS.................... Internal Revenue Service ISO.................... Independent System Operator KWH.................... Kilowatt-hour LEAC................... Electric Levelized Energy Adjustment Clause LGAC................... Levelized Gas Adjustment Clause LLRW................... Low Level Radioactive Waste LMP.................... Locational Marginal Pricing LNG.................... Liquefied Natural Gas LPG.................... Liquid Petroleum Air Gas LTIP................... Long-Term Incentive Plan MD&A................... Management's Discussion and Analysis of Financial Condition and Results of Operations MICP................... Management Incentive Compensation Plan MOA.................... Memorandum of Agreement Mortgage............... First and Refunding Mortgage of PSE&G MOU.................... Memorandum of Understanding MTNs................... Medium-Term Notes MW..................... Megawatts MWH.................... Megawatt-hours NAAQS.................. National Ambient Air Quality Standards NEIL................... Nuclear Electric Insurance Limited NJDEP.................. New Jersey Department of Environmental Protection NJGRT.................. New Jersey Gross Receipts and Franchise Tax NJPDES................. New Jersey Pollution Discharge Elimination System NJWPCA................. New Jersey Water Pollution Control Act NML.................... Nuclear Mutual Limited Notes.................. Notes to Consolidated Financial Statements Notice................. Notice of Potential Liability NOV.................... Notice of Violation November 25th Order.... November 25, 1997 PJM Restructuring Order NOx.................... Nitrogen Oxides NPDES.................. National Pollutant Discharge Elimination System NPS.................... The BPU's nuclear performance standard established for nuclear generating stations owned by New Jersey electric utilities NRC.................... Nuclear Regulatory Commission NUGs................... Non-utility Generators NWPA................... Nuclear Waste Policy Act of 1982, as amended 150 GLOSSARY OF TERMS -- (CONTINUED) TERM MEANING - ---- ------- OAL.................... Office of the Administrative Law ODEC................... Old Dominion Electric Cooperative OPEB................... Other Postretirement Benefits Order No. 888.......... FERC Order No. 888, effective July 9, 1996 OTAG................... Ozone Transport Assessment Group OTR.................... Ozone Transport Region OTRA................... Off-Tariff Rate Agreement Peach Bottom........... Peach Bottom Atomic Power Station, Units 2 and 3 PECO Energy............ PECO Energy Company PJM.................... PJM Interconnection, L.L.C. PJM Board.............. An independent, 7-Member Board of Managers responsible for supervision of PJM operations PPG.................... PPG Industries, Inc. PPUC................... Pennsylvania Public Utility Commission PRPs................... Potentially Responsible Parties PSCRC.................. Public Service Conservation Resources Corporation PSE&G.................. Public Service Electric and Gas Company PSEG................... Public Service Enterprise Group Incorporated PSEG Capital........... PSEG Capital Corporation PSETC.................. Public Service Energy Trading Company PUHCA.................. Public Utility Holding Company Act of 1935 PWR.................... Pressurized Water Nuclear Reactor QFs.................... Qualifying Facilities RAC.................... Remediation Adjustment Charge RCRA................... Federal Resource Conservation and Recovery Act of 1976 Remediation Program.... PSE&G Manufactured Gas Plant Remediation Program Resources.............. PSEG Resources Inc. RI..................... Remedial Investigation RI/FS.................. Remedial Investigation and Feasibility Study ROD.................... Record of Decision Salem.................. Salem Nuclear Generating Station, Units 1 and 2 SEC.................... Securities and Exchange Commission Sewell Site............ Marvin Jonas Transfer Station SFAS 71................ Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" SFAS 88................ Statement of Financial Accounting Standards No. 88, "Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" SFAS 90................ Statement of Financial Accounting Standards No. 90, "Regulated Enterprises Accounting for Abandonments and Disallowances of Plant Costs Statement No. 90" SFAS 101............... Statement of Financial Accounting Standards No. 101, "Regulated Enterprises Accounting for Discontinuation of Application of FASB Statement No. 71" SFAS 106............... Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" SFAS 109............... Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" SFAS 121............... Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" SFAS 123............... Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" SFAS 130............... Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" 151 GLOSSARY OF TERMS -- (CONTINUED) TERM MEANING - ---- ------- SFAS 131............... Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" SFAS 132............... Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106" SFAS 133............... Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" SO2.................... Sulfur Dioxide SOP 96-1............... Statement of Position 96-1, "Environmental Remediation Liabilities" SPCC................... Spill Prevention Control and Countermeasure Spill Act.............. New Jersey Spill Compensation and Control Act Superfund.............. Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 TEFA................... Transitional Energy Facility Assessment Trust.................. PSE&G Capital Trust I UGI.................... UGI Utilities, Inc. Westinghouse........... Westinghouse Electric Corporation 152 EX-4.F 2 INDENTURE - -------------------------------------------------------------------------------- PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED TO FIRST UNION NATIONAL BANK, Trustee Indenture Dated as of November 1, 1998 ---------- Providing for the Issuance of Senior Debt Securities - -------------------------------------------------------------------------------- PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of November 1, 1998 TRUST INDENTURE INDENTURE ACT SECTION SECTION ss.310(a)(1) 607 (a)(2) 607 (b) 608 ss.312(c) 701 ss.314(a) 703 (a)(4) 1005 (c)(1) 102 (c)(2) 102 (e) 102 ss.315(b) 601 ss.316(a) (last sentence) 101 ("Outstanding") (a)(1)(A) 502, 512 (a)(1)(B) 513 (b) 508 ss.317(a)(1) 503 (a)(2) 504 ss.318(a) 111 (c) 111 - ---------- NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. TABLE OF CONTENTS ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 101. Definitions......................................................1 Section 102. Compliance Certificates and Opinions.............................8 Section 103. Form of Documents Delivered to Trustee...........................8 Section 104. Acts of Holders..................................................9 Section 105. Notices, Etc., to Trustee and Company...........................10 Section 106. Notice to Holders; Waiver.......................................11 Section 107. Effect of Headings and Table of Contents........................12 Section 108. Successors and Assigns..........................................12 Section 109. Separability Clause.............................................12 Section 110. Benefits of Indenture...........................................12 Section 111. Governing Law...................................................12 Section 112. Legal Holidays..................................................12 ARTICLE TWO SECURITIES FORMS Section 201. Forms of Securities.............................................12 Section 202. Form of Trustee's Certificate of Authentication.................13 Section 203. Securities Issuable in Global Form..............................13 ARTICLE THREE THE SECURITIES Section 301. Amount Unlimited; Issuable in Series............................14 Section 302. Denominations...................................................17 Section 303. Execution, Authentication, Delivery and Dating..................17 Section 304. Temporary Securities............................................19 Section 305. Registration, Registration of Transfer and Exchange.............22 Section 306. Mutilated, Destroyed, Lost and Stolen Securities................25 Section 307. Payment of Interest; Interest Rights Preserved; Optional Interest Reset.........................................26 Section 308. Optional Extension of Maturity..................................28 Section 309. Persons Deemed Owners...........................................29 Section 310. Cancellation....................................................30 Section 311. Computation of Interest.........................................30 3 Section 312. CUSIP Numbers...................................................30 ARTICLE FOUR SATISFACTION AND DISCHARGE Section 401. Satisfaction and Discharge of Indenture.........................31 Section 402. Application of Trust Funds......................................32 ARTICLE FIVE REMEDIES Section 501. Events of Default...............................................32 Section 502. Acceleration of Maturity; Rescission and Annulment..............33 Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee......................................................34 Section 504. Trustee May File Proofs of Claim................................35 Section 505. Trustee May Enforce Claims Without Possession of Securities or Coupons...........................................36 Section 506. Application of Money Collected..................................36 Section 507. Limitation on Suits.............................................36 Section 508. Unconditional Right of Holders to Receive Principal, Premium and Interest............................................37 Section 509. Restoration of Rights and Remedies..............................37 Section 510. Rights and Remedies Cumulative..................................37 Section 511. Delay or Omission Not Waiver....................................37 Section 512. Control by Holders of Securities................................38 Section 513. Waiver of Past Defaults.........................................38 Section 514. Waiver of Stay or Extension Laws................................38 ARTICLE SIX THE TRUSTEE Section 601. Notice of Defaults..............................................39 Section 602. Certain Rights of Trustee.......................................39 Section 603. Not Responsible for Recitals or Issuance of Securities..........40 Section 604. May Hold Securities.............................................40 Section 605. Money Held in Trust.............................................41 Section 606. Compensation and Reimbursement. The Company agrees:.............41 Section 607. Corporate Trustee Required; Eligibility.........................41 Section 608. Resignation and Removal; Appointment of Successor...............41 Section 609. Acceptance of Appointment by Successor..........................43 4 Section 610. Merger, Conversion, Consolidation or Succession to Business.....44 Section 611. Appointment of Authenticating Agent.............................44 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 701. Disclosure of Names and Addresses of Holders....................46 Section 702. Reports by Trustee..............................................46 Section 703. Reports by Company. The Company will:...........................46 Section 704. Calculation of Original Issue Discount..........................47 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER Section 801. Company May Consolidate, Etc., Only on Certain Terms............47 Section 802. Successor Person Substituted....................................47 ARTICLE NINE SUPPLEMENTAL INDENTURES Section 901. Supplemental Indentures Without Consent of Holders..............48 Section 902. Supplemental Indentures with Consent of Holders.................49 Section 903. Execution of Supplemental Indentures............................50 Section 904. Effect of Supplemental Indentures...............................51 Section 905. Conformity with Trust Indenture Act.............................51 Section 906. Reference in Securities to Supplemental Indentures..............51 ARTICLE TEN COVENANTS Section 1001. Payment of Principal, Premium, if any, and Interest............51 Section 1002. Maintenance of Office or Agency................................51 Section 1003. Money for Securities Payments to Be Held in Trust..............53 Section 1004. Additional Amounts.............................................54 Section 1005. Statement as to Compliance.....................................55 Section 1006. Waiver of Certain Covenants....................................56 5 ARTICLE ELEVEN REDEMPTION OF SECURITIES Section 1101. Applicability of Article.......................................56 Section 1102. Election to Redeem; Notice to Trustee..........................57 Section 1103. Selection by Trustee of Securities to Be Redeemed..............57 Section 1104. Notice of Redemption...........................................57 Section 1105. Deposit of Redemption Price....................................58 Section 1106. Securities Payable on Redemption Date..........................59 Section 1107. Securities Redeemed in Part....................................59 ARTICLE TWELVE SINKING FUNDS Section 1201. Applicability of Article.......................................60 Section 1202. Satisfaction of Sinking Fund Payments with Securities..........60 Section 1203. Redemption of Securities for Sinking Fund......................60 ARTICLE THIRTEEN REPAYMENT AT THE OPTION OF HOLDERS Section 1301. Applicability of Article.......................................61 Section 1302. Repayment of Securities........................................61 Section 1303. Exercise of Option.............................................61 Section 1304. When Securities Presented for Repayment Become Due and Payable................................................62 Section 1305. Securities Repaid in Part......................................62 ARTICLE FOURTEEN DEFEASANCE AND COVENANT DEFEASANCE Section 1401. Applicability of Article; Company's Option to Effect Defeasance or Covenant Defeasance..............................63 Section 1402. Defeasance and Discharge.......................................63 Section 1403. Covenant Defeasance............................................63 Section 1404. Conditions to Defeasance or Covenant Defeasance................64 Section 1405. Deposited Money and Government Obligations to Be Held in Trust; Other Miscellaneous Provisions.......................65 6 ARTICLE FIFTEEN MEETINGS OF HOLDERS OF SECURITIES Section 1501. Purposes for Which Meetings May Be Called......................66 Section 1502. Call, Notice and Place of Meetings.............................66 Section 1503. Persons Entitled to Vote at Meetings...........................67 Section 1504. Quorum; Action.................................................67 Section 1505. Determination of Voting Rights; Conduct and Adjournment of Meetings........................................68 Section 1506. Counting Votes and Recording Action of Meetings................69 EXHIBIT A EXHIBIT A-1 EXHIBIT A-2 INDENTURE, dated as of November 1, 1998, between PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED, a New Jersey corporation (hereinafter called the "Company"), having its principal office at 80 Park Plaza, Newark, NJ 07102, and FIRST UNION NATIONAL BANK, a national banking association organized and existing under the laws of the United States of America, as Trustee (hereinafter called the "Trustee"), having a Corporate Trust Office at 765 Broad Street, Newark, NJ 07101. RECITALS OF THE COMPANY The Company deems it necessary to issue from time to time for its lawful purposes senior debt securities (hereinafter called the "Securities") evidencing its unsecured and unsubordinated indebtedness, which may or may not be convertible into or exchangeable for any securities of any Person (including the Company), and has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of the Securities, unlimited as to principal amount, to bear such rates of interest, to mature at such times and to have such other provisions as shall be fixed as hereinafter provided. This Indenture is subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. 7 All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities and coupons, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. DEFINITIONS. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein, and the terms "cash transaction" and "self-liquidating paper", as used in TIA Section 311, shall have the meanings assigned to them in the rules of the Commission adopted under the Trust Indenture Act; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with Generally Accepted Accounting Principles; and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Three, Article Five, Article Six and Article Ten, are defined in those Articles. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Additional Amounts" means any additional amounts which are required by a Security or by or pursuant to a Board Resolution, under circumstances specified therein, to be paid by the Company in respect of certain taxes imposed on certain Holders and which are owing to such Holders. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or 8 indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means any authenticating agent appointed by the Trustee pursuant to Section 611. "Authorized Newspaper" means a newspaper, in the English language or in an official language of the country of publication, customarily published on each Business Day, whether or not published on Saturdays, Sundays or holidays, and of general circulation in each place in connection with which the term is used or in the financial community of each such place. Where successive publications are required to be made in Authorized Newspapers, the successive publications may be made in the same or in different newspapers in the same city meeting the foregoing requirements and in each case on any Business Day. "Bearer Security" means any Security established pursuant to Section 201 which is payable to bearer. "Board of Directors" means the board of directors of the Company, the executive committee or any committee of that board duly authorized to act on behalf of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day", when used with respect to any Place of Payment or any other particular location referred to in this Indenture or in the Securities, means, unless otherwise specified with respect to any Securities pursuant to Section 301, each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment or particular location are authorized or obligated by law or executive order to close. "CEDEL" means Cedel Bank or its successor. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. "Company" means the Person named as the "Company" in the first paragraph of this Indenture until a successor Corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Corporation. "Company Request" and "Company Order" mean, respectively, a written request or order signed in the name of the Company by the Chairman, the President or a Vice President, the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. 9 "Corporate Trust Office" means the office of the Trustee at which, at any particular time, its corporate trust business shall be administered, which office at the date hereof is located at 765 Broad Street, Newark, NJ 07101. "Corporation" includes corporations, associations, companies, limited liability companies and business trusts. "Coupon" means any interest coupon appertaining to a Bearer Security. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Defaulted Interest" has the meaning specified in Section 307. "Dollar", "Dollars" or "$" means a dollar or other equivalent unit in such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts. "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels Office, or its successor as operator of the Euroclear System. "European Communities" means the European Union, the European Coal and Steel Community and the European Atomic Energy Community. "Event of Default" has the meaning specified in Article Five. "Generally Accepted Accounting Principles" means the generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board. "Government Obligations" means securities which are (i) direct obligations of the United States of America or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depository receipt. 10 "Holder" means, in the case of a Registered Security, the Person in whose name a Security is registered in the Security Register and, in the case of a Bearer Security, the bearer thereof and, when used with respect to any coupon, shall mean the bearer thereof. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including the provisions of the TIA that are deemed to be a part hereof, and shall include the terms of particular series of Securities established as contemplated by Section 301; provided, however, that, if at any time more than one Person is acting as Trustee under this instrument, "Indenture" shall mean, with respect to any one or more series of Securities for which such Person is Trustee, this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of the or those particular series of Securities for which such Person is Trustee established as contemplated by Section 301, exclusive, however, of any provisions or terms which relate solely to other series of Securities for which such Person is not Trustee, regardless of when such terms or provisions were adopted, and exclusive of any provisions or terms adopted by means of one or more indentures supplemental hereto executed and delivered after such Person had become such Trustee but to which such Person, as such Trustee, was not a party. "Indexed Security" means a Security as to which all or certain interest payments and/or the principal amount payable at Maturity are determined by reference to prices, changes in prices, or differences between prices, of securities, Currencies, intangibles, goods, articles or commodities or by such other objective price, economic or other measures as are specified in Section 301 hereof. "Interest", when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, shall mean interest payable after Maturity, and, when used with respect to a Security which provides for the payment of Additional Amounts pursuant to Section 1004, includes such Additional Amounts. "Interest Payment Date", when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security. "Issue Date", when used with respect to any Security, means the date on which the Security is originally issued. "Maturity", when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption, notice of option to elect repayment, notice of exchange or conversion or otherwise. "Officer" means the Chairman, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Controller, any Assistant Controller, the Secretary or any Assistant Secretary of the Company. 11 "Officers' Certificate" means a certificate signed on behalf of the Company by any one of its Officers and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company or who may be an employee of or other counsel for the Company. "Original Issue Discount Security" means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities, or portions thereof, for whose payment or redemption or repayment at the option of the Holder money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities and any coupons appertaining thereto, provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Securities, except to the extent provided in Sections 1402 and 1403, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Fourteen; and (iv) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder or are present at a meeting of Holders for quorum purposes, and for the purpose of making the calculations required by TIA Section 313, (i) the principal amount of an Original Issue Discount Security that may be counted in making such determination or calculation and that shall be deemed to be Outstanding for such purpose shall be equal to the amount of principal thereof that would be (or shall have been declared to be) due and payable, at the time of such determination, upon a declaration of acceleration of the Maturity thereof pursuant to Section 502, (ii) the principal amount of any Indexed Security that may be counted in making such determination or calculation and that shall be deemed outstanding for such purpose shall be equal to the principal face amount of such Indexed Security at original issuance, unless 12 otherwise provided with respect to such Security pursuant to Section 301 and (iii) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee actually knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (or premium, if any) or interest, if any, on any Securities or coupons on behalf of the Company. "Person" means any individual, Corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment", when used with respect to the Securities of or within any series, means the place or places where the principal of (and premium, if any) and interest, if any, on such Securities are payable as specified and as contemplated by Sections 301 and 1002. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security or a Security to which a mutilated, destroyed, lost or stolen coupon appertains shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security or the Security to which the mutilated, destroyed, lost or stolen coupon appertains. "Record Date", when used with respect to any Security, means the Regular Record Date, the Special Record Date or any date set to determine the Holders of such Security entitled to vote, make a request, consent, receive a payment or exercise any other right with respect to such Security. "Redemption Date", when used with respect to any Security to be redeemed, in whole or in part, means the date specified for such redemption in accordance with the terms thereof or by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to the terms thereof and this Indenture. "Registered Security" shall mean any Security which is registered in the Security Register. 13 "Regular Record Date" for the interest payable on any Interest Payment Date on the Registered Securities of or within any series means the date specified for that purpose as contemplated by Section 301, whether or not a Business Day. "Repayment Date" means, when used with respect to any Security to be repaid at the option of the Holder, the date fixed for such repayment by or pursuant to this Indenture. "Repayment Price" means, when used with respect to any Security to be repaid at the option of the Holder, the price at which it is to be repaid by or pursuant to this Indenture. "Responsible Officer", when used with respect to the Trustee, means any officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Security" or "Securities" has the meaning stated in the first recital of this Indenture and, more particularly, means any Security or Securities authenticated and delivered under this Indenture; provided, however, that, if at any time there is more than one Person acting as Trustee under this Indenture, "Securities" with respect to the Indenture as to which such Person is Trustee shall have the meaning stated in the first recital of this Indenture and shall more particularly mean Securities authenticated and delivered under this Indenture, exclusive, however, of Securities of any series as to which such Person is not Trustee. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Special Record Date" for the payment of any Defaulted Interest on the Registered Securities of or within any series means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security or a coupon representing such installment of interest as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable, as such date may be extended pursuant to the provisions of Section 308. "Subsidiary" means any Corporation a majority of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries of the Company. For the purposes of this definition, "voting stock" means stock (or other interests, including partnership interests) having voting power for the election of directors, managers or trustees thereof, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was executed, except as provided in Section 905. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions 14 of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder; provided, however, that if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean only the Trustee with respect to Securities of that series. "United States" means, unless otherwise specified with respect to any Securities pursuant to Section 301, the United States of America (including the states and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. "United States person" means, unless otherwise specified with respect to any Securities pursuant to Section 301, an individual who is a citizen or resident of the United States, a Corporation, partnership or other entity created or organized in or under the laws of the United States or an estate or trust the income of which is subject to United States federal income taxation regardless of its source. "Yield to Maturity" means the yield to maturity, computed at the time of issuance of a Security (or, if applicable, at the most recent redetermination of interest on such Security) and as set forth in such Security in accordance with generally accepted United States bond yield computation principles. SECTION 102. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 1005) shall include: (1) a statement that each individual signing such certificate or opinion has read such condition or covenant and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such condition or covenant has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. 15 SECTION 103. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion as to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon an Opinion of Counsel, or a certificate or representations by counsel, unless such officer knows, or in the exercise of reasonable care should know, that the opinion, certificate or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such Opinion of Counsel or certificate or representations may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information as to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations as to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. ACTS OF HOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of the Outstanding Securities of all series or one or more series, as the case may be, may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing. If Securities of a series are issuable as Bearer Securities, any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of Securities of such series may, alternatively, be embodied in and evidenced by the record of Holders of Securities of such series voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders of Securities of such series duly called and held in accordance with the provisions of Article Fifteen, or a combination of such instruments and any such record. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record or both are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments and any such record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments or so voting at any such meeting. Proof of execution of any such instrument or of a writing appointing any such agent, or of the holding by any Person of a Security, shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company and any agent of the Trustee or the Company, if made in the manner provided in this Section. The record of any meeting of Holders of Securities shall be proved in the manner provided in Section 1506. 16 (b) The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may be proved in any manner that the Trustee deems reasonably sufficient. (c) The ownership of Registered Securities shall be proved by the Security Register. (d) The ownership of Bearer Securities may be proved by the production of such Bearer Securities or by a certificate executed, as depository, by any trust company, bank, banker or other depository, wherever situated, if such certificate shall be deemed by the Trustee to be satisfactory, showing that at the date therein mentioned such Person had on deposit with such depository, or exhibited to it, the Bearer Securities therein described; or such facts may be proved by the certificate or affidavit of the Person holding such Bearer Securities, if such certificate or affidavit is deemed by the Trustee to be satisfactory. The Trustee and the Company may assume that such ownership of any Bearer Security continues until (1) another certificate or affidavit bearing a later date issued in respect of the same Bearer Security is produced, or (2) such Bearer Security is produced to the Trustee by some other Person, or (3) such Bearer Security is surrendered in exchange for a Registered Security, or (4) such Bearer Security is no longer Outstanding. The ownership of Bearer Securities may also be proved in any other manner that the Trustee deems sufficient. (e) If the Company shall solicit from the Holders of Registered Securities any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, in or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date. (f) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the 17 Trustee, any Security Registrar, any Paying Agent, any Authenticating Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Security. SECTION 105. NOTICES, ETC., TO TRUSTEE AND COMPANY. Any notice, request or other communication required or permitted to be given hereunder shall be in writing and delivered, telecopied or mailed by first-class mail, postage prepaid, addressed as follows: if to the Company: Public Service Enterprise Group Incorporated 80 Park Plaza P.O. Box 1171 Newark, New Jersey 07101 Facsimile No.: (973) 596-6309 Attention: Treasurer if to the Trustee: First Union National Bank 21 South Street, 3rd Floor Morristown, New Jersey 07960 Facsimile No.: (973) 682-4531 Attention: Corporate Trust Bond Administration The Company or the Trustee, by giving notice to the other, may designate additional or different addresses for subsequent notices or communications. The Company shall notify the Holders of any such additional or different addresses of which the Company receives notice from the Trustee. SECTION 106. NOTICE TO HOLDERS; WAIVER. Where this Indenture provides for notice of any event to Holders of Registered Securities by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each such Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders of Registered Securities is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders of Registered Securities or the sufficiency of any notice to Holders of Bearer Securities given as provided herein. Any notice mailed to a Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. If by reason of the suspension of or irregularities in regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such 18 notification to Holders of Registered Securities as shall be made with the approval of the Trustee shall constitute a sufficient notification to such Holders for every purpose hereunder. Except as otherwise expressly provided herein or otherwise specified with respect to any Securities pursuant to Section 301, where this Indenture provides for notice to Holders of Bearer Securities of any event, such notice shall be sufficiently given if published in an Authorized Newspaper in The City of New York and in such other city or cities as may be specified in such Securities on a Business Day, such publication to be not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. Any such notice shall be deemed to have been given on the date of such publication or, if published more than once, on the date of the first such publication. If by reason of the suspension of publication of any Authorized Newspaper or Authorized Newspapers or by reason of any other cause it shall be impracticable to publish any notice to Holders of Bearer Securities as provided above, then such notification to Holders of Bearer Securities as shall be given with the approval of the Trustee shall constitute sufficient notice to such Holders for every purpose hereunder. Neither the failure to give notice by publication to Holders of Bearer Securities as provided above, nor any defect in any notice so published, shall affect the sufficiency of such notice with respect to other Holders of Bearer Securities or the sufficiency of any notice to Holders of Registered Securities given as provided herein. Any request, demand, authorization, direction, notice, consent or waiver required or permitted under this Indenture shall be in the English language, except that any published notice may be in an official language of the country of publication. If the Company mails a notice or communication to the Holders, it shall mail a copy to the Trustee and each Registrar, Paying Agent or co-Registrar. Holders may communicate, pursuant to TIA Section 312(b), with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar, the Paying Agent and anyone else shall have the protection of TIA Section 312(c). SECTION 107. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 108. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 109. SEPARABILITY CLAUSE. In case any provision in this Indenture or in any Security or coupon shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 110. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Securities or coupons, express or implied, shall give to any Person, other than the parties hereto, 19 any Security Registrar, any Paying Agent, any Authenticating Agent and their successors hereunder and the Holders any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 111. GOVERNING LAW. This Indenture and the Securities and coupons shall be governed by and construed in accordance with the law of the State of New Jersey without regard to principles of conflicts of laws. This Indenture is subject to the provisions of the Trust Indenture Act that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. SECTION 112. LEGAL HOLIDAYS. In any case where any Interest Payment Date, Redemption Date, Repayment Date, sinking fund payment date, Stated Maturity or Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or any Security or coupon other than a provision in the Securities of any series which specifically states that such provision shall apply in lieu of this Section), payment of principal (or premium, if any) or interest, if any, need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date, Redemption Date, Repayment Date or sinking fund payment date, or at the Stated Maturity or Maturity; provided that no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, Redemption Date, Repayment Date, sinking fund payment date, Stated Maturity or Maturity, as the case may be. ARTICLE TWO SECURITIES FORMS SECTION 201. FORMS OF SECURITIES. The Registered Securities, if any, of each series and the Bearer Securities, if any, of each series and related coupons shall be in substantially the forms as shall be established in one or more indentures supplemental hereto or approved from time to time by or pursuant to a Board Resolution in accordance with Section 301, shall have such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture or any indenture supplemental hereto, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements placed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Securities may be listed, or to conform to usage. Unless otherwise specified as contemplated by Section 301, Bearer Securities shall have interest coupons attached. The definitive Securities and coupons shall be printed, lithographed or engraved or produced by any combination of these methods on a steel engraved 20 border or steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities or coupons, as evidenced by their execution of such Securities or coupons. SECTION 202. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION. Subject to Section 611, the Trustee's certificate of authentication shall be in substantially the following form: This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. FIRST UNION NATIONAL BANK, as Trustee By___________________________ Authorized Signatory SECTION 203. SECURITIES ISSUABLE IN GLOBAL FORM. If Securities of or within a series are issuable in global form, as specified as contemplated by Section 301, then, notwithstanding clause (8) of Section 301 and the provisions of Section 302, any such Security shall represent such of the Outstanding Securities of such series as shall be specified therein and may provide that it shall represent the aggregate amount of Outstanding Securities of such series from time to time endorsed thereon and that the aggregate amount of Outstanding Securities of such series represented thereby may from time to time be increased or decreased to reflect exchanges. Any endorsement of a Security in global form to reflect the amount, or any increase or decrease in the amount, of Outstanding Securities represented thereby shall be made by the Trustee in such manner and upon instructions given by such Person or Persons as shall be specified therein or in the Company Order to be delivered to the Trustee pursuant to Section 303 or 304. Subject to the provisions of Section 303 and, if applicable, Section 304, the Trustee shall deliver and redeliver any Security in permanent global form in the manner and upon instructions given by the Person or Persons specified therein or in the applicable Company Order. If a Company Order pursuant to Section 303 or 304 has been, or simultaneously is, delivered, any instructions by the Company with respect to endorsement, delivery or redelivery of a Security in global form shall be in writing but need not comply with Section 102 and need not be accompanied by an Opinion of Counsel. The provisions of the last sentence of Section 303 shall apply to any Security represented by a Security in global form if such Security was never issued and sold by the Company and the Company delivers to the Trustee the Security in global form together with written instructions (which need not comply with Section 102 and need not be accompanied by an Opinion of Counsel) with regard to the reduction in the principal amount of Securities represented thereby, together with the written statement contemplated by the last sentence of Section 303. Notwithstanding the provisions of Section 307, unless otherwise specified as contemplated by Section 301, payment of principal of (and premium, if any) and interest, if any, 21 on any Security in permanent global form shall be made to the Person or Persons specified therein. Notwithstanding the provisions of Section 309 and except as provided in the preceding paragraph, the Company, the Trustee and any agent of the Company and the Trustee shall treat as the Holder of such principal amount of Outstanding Securities represented by a permanent global Security (i) in the case of a permanent global Security in registered form, the Holder of such permanent global Security in registered form, or (ii) in the case of a permanent global Security in bearer form, Euroclear or CEDEL. ARTICLE THREE THE SECURITIES SECTION 301. AMOUNT UNLIMITED; ISSUABLE IN SERIES. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities shall rank equally and pari passu and may be issued in one or more series. There shall be established in one or more Board Resolutions or pursuant to authority granted by one or more Board Resolutions and, subject to Section 303, set forth, or determined in the manner provided, in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, any or all of the following, as applicable (each of which (except for the matters set forth in clauses (1), (2) and (15) below), if so provided, may be determined from time to time by the Company with respect to unissued Securities of the series when issued from time to time): (1) the title of the Securities of the series (which shall distinguish the Securities of such series from all other series of Securities); (2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 304, 305, 306, 906, 1107 or 1305); (3) the date or dates, or the method by which such date or dates will be determined or extended, on which the principal of the Securities of the series shall be payable; (4) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such rate or rates shall be determined, the date or dates from which such interest shall accrue or the method by which such date or dates shall be determined, the Interest Payment Dates on which such interest will be payable and the Regular Record Date, if any, for the interest payable on any Registered Security on any Interest Payment Date, or the method by which such date shall be determined, and the 22 basis upon which such interest shall be calculated if other than that of a 360-day year of twelve 30-day months; (5) the place or places, if any, other than or in addition to the Borough of Manhattan, The City of New York, where the principal of (and premium, if any) and interest, if any, on Securities of the series shall be payable, any Registered Securities of the series may be surrendered for registration of transfer, Securities of the series may be surrendered for exchange, where Securities of any series that are convertible or exchangeable may be surrendered for conversion or exchange, as applicable, and where notices or demands to or upon the Company in respect of the Securities of the series and this Indenture may be served; (6) the period or periods within which, or the date or dates on which, the price or prices at which and other terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company, if the Company is to have the option; (7) the obligation, if any, of the Company to redeem, repay or purchase Securities of the series pursuant to any sinking fund or analogous provision or at the option of a Holder thereof, and the period or periods within which or the date or dates on which, the price or prices at which and other terms and conditions upon which Securities of the series shall be redeemed, repaid or purchased, in whole or in part, pursuant to such obligation; (8) if other than denominations of $1,000 and any integral multiple thereof, the denomination or denominations in which any Registered Securities of the series shall be issuable and, if other than denominations of $5,000, the denomination or denominations in which any Bearer Securities of the series shall be issuable; (9) if other than the Trustee, the identity of each Security Registrar and/or Paying Agent; (10) if other than the principal amount thereof, the portion of the principal amount of Securities of the series that shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502 or the method by which such portion shall be determined; (11) whether the amount of payments of principal of (or premium, if any) or interest, if any, on the Securities of the series may be determined with reference to an index, formula or other method (which index, formula or method may be based, without limitation, on one or more Currencies, commodities, equity indices or other indices), and the manner in which such amounts shall be determined; (12) provisions, if any, granting special rights to the Holders of Securities of the series upon the occurrence of such events as may be specified; 23 (13) any deletions from, modifications of or additions to the Events of Default or covenants (including any deletions from, modifications of or additions to any of the provisions of Section 1006) of the Company with respect to Securities of the series, whether or not such Events of Default or covenants are consistent with the Events of Default or covenants set forth herein; (14) whether Securities of the series are to be issuable as Registered Securities, Bearer Securities (with or without coupons) or both, any restrictions applicable to the offer, sale or delivery of Bearer Securities and the terms upon which Bearer Securities of the series may be exchanged for Registered Securities of the series and vice versa (if permitted by applicable laws and regulations), whether any Securities of the series are to be issuable initially in temporary global form and whether any Securities of the series are to be issuable in permanent global form with or without coupons and, if so, whether beneficial owners of interests in any such permanent global Security may exchange such interests for Securities of such series in certificated form and of like tenor of any authorized form and denomination and the circumstances under which any such exchanges may occur, if other than in the manner provided in Section 305, and, if Registered Securities of the series are to be issuable as a global Security, the identity of the depository for such series; (15) the date as of which any Bearer Securities of the series and any temporary global Security representing Outstanding Securities of the series shall be dated if other than the date of original issuance of the first Security of the series to be issued; (16) the Person to whom any interest on any Registered Security of the series shall be payable, if other than the Person in whose name such Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, the manner in which, or the Person to whom, any interest on any Bearer Security of the series shall be payable, if otherwise than upon presentation and surrender of the coupons appertaining thereto as they severally mature, and the extent to which, or the manner in which, any interest payable on a temporary global Security on an Interest Payment Date will be paid if other than in the manner provided in Section 304; (17) the applicability, if any, of Sections 1402 and/or 1403 to the Securities of the series and any provisions in modification of, in addition to or in lieu of any of the provisions of Article Fourteen; (18) if the Securities of such series are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary Security of such series) only upon receipt of certain certificates or other documents or satisfaction of other conditions, then the form and/or terms of such certificates, documents or conditions; (19) whether, under what circumstances, the Company will pay Additional Amounts as contemplated by Section 1004 on the Securities of the series to any Holder who is not a United States person (including any modification to the definition of such term) in respect of any tax, assessment or governmental charge and, if so, whether the 24 Company will have the option to redeem such Securities rather than pay such Additional Amounts (and the terms of any such option); (20) if the Securities of the series are to be convertible into or exchangeable for any securities of any Person (including the Company), the terms and conditions upon which such Securities will be so convertible or exchangeable; and (21) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture or the requirements of the Trust Indenture Act). All Securities of any one series and the coupons appertaining to any Bearer Securities of such series shall be substantially identical except, in the case of Registered Securities, as to denomination and except as may otherwise be provided in or pursuant to such Board Resolution (subject to Section 303) and set forth in such Officers' Certificate or in any such indenture supplemental hereto. All Securities of any one series need not be issued at the same time and, unless otherwise provided, a series may be reopened, without the consent of the Holders, for issuances of additional Securities of such series. If any of the terms of the Securities of any series are established by action taken pursuant to one or more Board Resolutions, a copy of an appropriate record of such action(s) shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the Securities of such series. SECTION 302. DENOMINATIONS. The Securities of each series shall be issuable in such denominations as shall be specified as contemplated by Section 301. With respect to Securities of any series denominated in Dollars, in the absence of any such provisions with respect to the Securities of any series, the Registered Securities of such series, other than Registered Securities issued in global form (which may be of any denomination) shall be issuable in denominations of $1,000 and any integral multiple thereof, and the Bearer Securities of such series, other than Bearer Securities issued in global form (which may be of any denomination), shall be issuable in a denomination of $5,000. SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Securities and any coupons appertaining thereto shall be executed on behalf of the Company by its Chairman, its President or one of its Vice Presidents, under its corporate seal reproduced thereon, and attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities and coupons may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Securities. Securities or coupons bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities or coupons. 25 At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series, together with any coupon appertaining thereto, executed by the Company, to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities; provided, however, that, in connection with its original issuance, no Bearer Security shall be mailed or otherwise delivered to any location in the United States; and provided further that, unless otherwise specified with respect to any series of Securities pursuant to Section 301, a Bearer Security may be delivered in connection with its original issuance only if the Person entitled to receive such Bearer Security shall have furnished a certificate in the form set forth in Exhibit A-1 to this Indenture or such other certificate as may be specified with respect to any series of Securities pursuant to Section 301, dated no earlier than 15 days prior to the earlier of the date on which such Bearer Security is delivered and the date on which any temporary Security first becomes exchangeable for such Bearer Security in accordance with the terms of such temporary Security and this Indenture. If any Security shall be represented by a permanent global Bearer Security, then, for purposes of this Section and Section 304, the notation of a beneficial owner's interest therein upon original issuance of such Security or upon exchange of a portion of a temporary global Security shall be deemed to be delivery in connection with its original issuance of such beneficial owner's interest in such permanent global Security. Except as permitted by Section 306, the Trustee shall not authenticate and deliver any Bearer Security unless all appurtenant coupons for interest then matured have been detached and canceled. If all the Securities of any series are not to be issued at one time and if the Board Resolution or supplemental indenture establishing such series shall so permit, such Company Order may set forth procedures acceptable to the Trustee for the issuance of such Securities and determining the terms of particular Securities of such series, such as interest rate, maturity date, date of issuance and date from which interest shall accrue. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to TIA Section 315(a) through 315(d)) shall be fully protected in relying upon, (i) an Opinion of Counsel stating, (a) that the form or forms of such Securities and any coupons have been established in conformity with the provisions of this Indenture; (b) that the terms of such Securities and any coupons have been established in conformity with the provisions of this Indenture; and (c) that such Securities, together with any coupons appertaining thereto, when completed by appropriate insertions and executed and delivered by the Company to the Trustee for authentication in accordance with this Indenture, authenticated and delivered by the Trustee in accordance with this Indenture and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute legal, valid and binding obligations of the Company, enforceable in accordance with their terms, subject to applicable 26 bankruptcy, insolvency, reorganization and other similar laws of general applicability relating to or affecting the enforcement of creditors' rights, to general equitable principles and to such other qualifications as such counsel shall conclude do not materially affect the rights of Holders of such Securities and any coupons; and (ii) an Officers' Certificate stating, to the best of the knowledge of the signers of such certificate, that no Event of Default with respect to any of the Securities shall have occurred and be continuing. Notwithstanding the provisions of Section 301 and of this Section 303, if all the Securities of any series are not to be issued at one time, it shall not be necessary to deliver an Officers' Certificate otherwise required pursuant to Section 301 or the Company Order, Opinion of Counsel or Officers' Certificate otherwise required pursuant to the preceding paragraph at the time of issuance of each Security of such series, but such order, opinion and certificates, with appropriate modifications to cover such future issuances, shall be delivered at or before the time of issuance of the first Security of such series. If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee's own rights, duties, obligations or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. Each Registered Security shall be dated the date of its authentication and each Bearer Security shall be dated as of the date specified as contemplated by Section 301. No Security or coupon shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security or Security to which such coupon appertains a certificate of authentication substantially in the form provided for herein duly executed by the Trustee or an Authenticating Agent by manual signature of an authorized signatory, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 310 together with a written statement (which need not comply with Section 102 and need not be accompanied by an Opinion of Counsel) stating that such Security has never been issued and sold by the Company, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. SECTION 304. TEMPORARY SECURITIES. (a) Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued, in registered form, or, if 27 authorized, in bearer form with one or more coupons or without coupons, and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. In the case of Securities of any series, such temporary Securities may be in global form. Except in the case of temporary Securities in global form (which shall be exchanged in accordance with Section 304(b) or as otherwise provided in or pursuant to a Board Resolution), if temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series (accompanied by any non-matured coupons appertaining thereto), the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of the same series of authorized denominations; provided, however, that no definitive Bearer Security shall be delivered in exchange for a temporary Registered Security; and provided further that a definitive Bearer Security shall be delivered in exchange for a temporary Bearer Security only in compliance with the conditions set forth in Section 303. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series. (b) Unless otherwise provided in or pursuant to a Board Resolution, this Section 304(b) shall govern the exchange of temporary Securities issued in global form. If temporary Securities of any series are issued in global form, any such temporary global Security shall, unless otherwise provided therein, be delivered to the London office of a depository or common depository (the "Common Depository"), for the benefit of Euroclear and CEDEL, for credit to the respective accounts of the beneficial owners of such Securities (or to such other accounts as they may direct). Without unnecessary delay but in any event not later than the date specified in, or determined pursuant to the terms of, any such temporary global Security (the "Exchange Date"), the Company shall deliver to the Trustee definitive Securities, in aggregate principal amount equal to the principal amount of such temporary global Security, executed by the Company. On or after the Exchange Date, such temporary global Security shall be surrendered by the Common Depository to the Trustee, as the Company's agent for such purpose, to be exchanged, in whole or from time to time in part, for definitive Securities without charge, and the Trustee shall authenticate and deliver, in exchange for each portion of such temporary global Security, an equal aggregate principal amount of definitive Securities of the same series of authorized denominations and of like tenor as the portion of such temporary global Security to be exchanged. The definitive Securities to be delivered in exchange for any such temporary global Security shall be in bearer form, registered form, permanent global bearer form or permanent global registered form, or any combination thereof, as specified as contemplated by Section 301, and, if any combination thereof is so specified, as requested by the beneficial owner thereof; provided, however, that, unless otherwise specified in such temporary global Security, upon such 28 presentation by the Common Depository, such temporary global Security is accompanied by a certificate dated the Exchange Date or a subsequent date and signed by Euroclear as to the portion of such temporary global Security held for its account then to be exchanged and a certificate dated the Exchange Date or a subsequent date and signed by CEDEL as to the portion of such temporary global Security held for its account then to be exchanged, each in the form set forth in Exhibit A-2 to this Indenture or in such other form as may be established pursuant to Section 301; and provided further that definitive Bearer Securities shall be delivered in exchange for a portion of a temporary global Security only in compliance with the requirements of Section 303. Unless otherwise specified in such temporary global Security, the interest of a beneficial owner of Securities of a series in a temporary global Security shall be exchanged for definitive Securities of the same series and of like tenor following the Exchange Date when the account holder instructs Euroclear or CEDEL, as the case may be, to request such exchange on his behalf and delivers to Euroclear or CEDEL, as the case may be, a certificate in the form set forth in Exhibit A-1 to this Indenture (or in such other form as may be established pursuant to Section 301), dated no earlier than 15 days prior to the Exchange Date, copies of which certificate shall be available from the offices of Euroclear and CEDEL, the Trustee, any Authenticating Agent appointed for such series of Securities and each Paying Agent. Unless otherwise specified in such temporary global Security, any such exchange shall be made free of charge to the beneficial owners of such temporary global Security, except that a Person receiving definitive Securities must bear the cost of insurance, postage, transportation and the like unless such Person takes delivery of such definitive Securities in person at the offices of Euroclear or CEDEL. Definitive Securities in bearer form to be delivered in exchange for any portion of a temporary global Security shall be delivered only outside the United States. Until exchanged in full as hereinabove provided, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of the same series and of like tenor authenticated and delivered hereunder, except that, unless otherwise specified as contemplated by Section 301, interest payable on a temporary global Security on an Interest Payment Date for Securities of such series occurring prior to the applicable Exchange Date shall be payable to Euroclear and CEDEL on such Interest Payment Date upon delivery by Euroclear and CEDEL to the Trustee of a certificate or certificates in the form set forth in Exhibit A-2 to this Indenture (or in such other forms as may be established pursuant to Section 301), for credit without further interest on or after such Interest Payment Date to the respective accounts of Persons who are the beneficial owners of such temporary global Security on such Interest Payment Date and who have each delivered to Euroclear or CEDEL, as the case may be, a certificate dated no earlier than 15 days prior to the Interest Payment Date occurring prior to such Exchange Date in the form set forth as Exhibit A-1 to this Indenture (or in such other forms as may be established pursuant to Section 301). Notwithstanding anything to the contrary herein contained, the certifications made pursuant to this paragraph shall satisfy the certification requirements of the preceding two paragraphs of this Section 304(b) and of the third paragraph of Section 303 of this Indenture and the interests of the Persons who are the beneficial owners of the temporary global Security with respect to which such certification was made will be exchanged for definitive Securities of the same series and of 29 like tenor on the Exchange Date or the date of certification if such date occurs after the Exchange Date, without further act or deed by such beneficial owners. Except as otherwise provided in this paragraph, no payments of principal (or premium, if any) or interest, if any, owing with respect to a beneficial interest in a temporary global Security will be made unless and until such interest in such temporary global Security shall have been exchanged for an interest in a definitive Security. Any interest so received by Euroclear and CEDEL and not paid as herein provided shall be returned to the Trustee prior to the expiration of two years after such Interest Payment Date in order to be repaid to the Company. SECTION 305. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. The Company shall cause to be kept at the Corporate Trust Office of the Trustee or in any office or agency of the Company in a Place of Payment a register for each series of Securities (the registers maintained in such office or in any such office or agency of the Company in a Place of Payment being herein sometimes referred to collectively as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Registered Securities and of transfers of Registered Securities. The Security Register shall be in written form or any other form capable of being converted into written form within a reasonable time. The Trustee, at its Corporate Trust Office, is hereby initially appointed "Security Registrar" for the purpose of registering Registered Securities and transfers of Registered Securities on such Security Register as herein provided. In the event that the Trustee shall cease to be Security Registrar, it shall have the right to examine the Security Register at all reasonable times. Upon surrender for registration of transfer of any Registered Security of any series at any office or agency of the Company in a Place of Payment for that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Registered Securities of the same series, of any authorized denominations and of a like aggregate principal amount, bearing a number not contemporaneously outstanding and containing identical terms and provisions. At the option of the Holder, Registered Securities of any series may be exchanged for other Registered Securities of the same series, of any authorized denomination or denominations and of a like aggregate principal amount, containing identical terms and provisions, upon surrender of the Registered Securities to be exchanged at any such office or agency. Whenever any Registered Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Registered Securities which the Holder making the exchange is entitled to receive. Unless otherwise specified with respect to any series of Securities as contemplated by Section 301, Bearer Securities may not be issued in exchange for Registered Securities. If (but only if) permitted by the applicable Board Resolution and (subject to Section 303) set forth in the applicable Officers' Certificate, or in any indenture supplemental hereto, delivered as contemplated by Section 301, at the option of the Holder, Bearer Securities of any series may be exchanged for Registered Securities of the same series of any authorized denominations and of a like aggregate principal amount and tenor, upon surrender of the Bearer 30 Securities to be exchanged at any such office or agency, with all unmatured coupons and all matured coupons in default thereto appertaining. If the Holder of a Bearer Security is unable to produce any such unmatured coupon or coupons or matured coupon or coupons in default, any such permitted exchange may be effected if the Bearer Securities are accompanied by payment in funds acceptable to the Company in an amount equal to the face amount of such missing coupon or coupons, or the surrender of such missing coupon or coupons may be waived by the Company and the Trustee if there is furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Security shall surrender to any Paying Agent any such missing coupon in respect of which such a payment shall have been made, such Holder shall be entitled to receive the amount of such payment; provided, however, that, except as otherwise provided in Section 1002, interest represented by coupons shall be payable only upon presentation and surrender of those coupons at an office or agency located outside the United States. Notwithstanding the foregoing, in case a Bearer Security of any series is surrendered at any such office or agency in a permitted exchange for a Registered Security of the same series and like tenor after the close of business at such office or agency on (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, such Bearer Security shall be surrendered without the coupon relating to such Interest Payment Date or proposed date for payment, as the case may be, and interest or Defaulted Interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of the Registered Security issued in exchange for such Bearer Security, but will be payable only to the Holder of such coupon when due in accordance with the provisions of this Indenture. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. Notwithstanding the foregoing, except as otherwise specified as contemplated by Section 301, any permanent global Security shall be exchangeable only as provided in this paragraph. If any beneficial owner of an interest in a permanent global Security is entitled to exchange such interest for Securities of such series and of like tenor and principal amount of another authorized form and denomination, as specified as contemplated by Section 301 and provided that any applicable notice provided in the permanent global Security shall have been given, then without unnecessary delay but in any event not later than the earliest date on which such interest may be so exchanged, the Company shall deliver to the Trustee definitive Securities in aggregate principal amount equal to the principal amount of such beneficial owner's interest in such permanent global Security, executed by the Company. On or after the earliest date on which such interests may be so exchanged, such permanent global Security shall be surrendered by the Common Depository or such other depository as shall be specified in the Company Order with respect thereto to the Trustee, as the Company's agent for such purpose, to be exchanged, in whole or from time to time in part, for definitive Securities without charge and the Trustee shall authenticate and deliver, in exchange for each portion of such permanent global Security, an equal aggregate principal amount of definitive Securities of the same series of authorized 31 denominations and of like tenor as the portion of such permanent global Security to be exchanged which, unless the Securities of the series are not issuable both as Bearer Securities and as Registered Securities, as specified as contemplated by Section 301, shall be in the form of Bearer Securities or Registered Securities, or any combination thereof, as shall be specified by the beneficial owner thereof; provided, however, that no such exchanges may occur during a period beginning at the opening of business 15 days before any selection of Securities to be redeemed and ending on the relevant Redemption Date if the Security for which exchange is requested may be among those selected for redemption; and provided further that no Bearer Security delivered in exchange for a portion of a permanent global Security shall be mailed or otherwise delivered to any location in the United States. If a Registered Security is issued in exchange for any portion of a permanent global Security after the close of business at the office or agency where such exchange occurs on (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, interest or Defaulted Interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of such Registered Security, but will be payable on such Interest Payment Date or proposed date for payment, as the case may be, only to the Person to whom interest in respect of such portion of such permanent global Security is payable in accordance with the provisions of this Indenture. All Securities issued upon any registration of transfer or exchange of Securities shall be valid obligations of the Company, evidencing the same debt and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Registered Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Security Registrar) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906, 1107 or 1305 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Security if such Security may be among those selected for redemption during a period beginning at the opening of business 15 days before selection of the Securities to be redeemed under Section 1103 and ending at the close of business on (A) if such Securities are issuable only as Registered Securities, the day of the mailing of the relevant notice of redemption and (B) if such Securities are issuable as Bearer Securities, the day of the first publication of the relevant notice of redemption or, if such Securities are also issuable as Registered Securities and 32 there is no publication, the mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Registered Security so selected for redemption in whole or in part, except, in the case of any Registered Security to be redeemed in part, the portion thereof not to be redeemed, or (iii) to exchange any Bearer Security so selected for redemption except that such a Bearer Security may be exchanged for a Registered Security of that series and like tenor, provided that such Registered Security shall be simultaneously surrendered for redemption, or (iv) to issue, register the transfer of or exchange any Security which has been surrendered for repayment at the option of the Holder, except the portion, if any, of such Security not to be so repaid. SECTION 306. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES. If any mutilated Security or a Security with a mutilated coupon appertaining to it is surrendered to the Trustee or the Company, together with, in proper cases, such security or indemnity as may be required by the Company or the Trustee to save each of them or any agent of either of them harmless, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and principal amount, containing identical terms and provisions and bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to the surrendered Security. If there shall be delivered to the Company and to the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security or coupon, and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security or coupon has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security or in exchange for the Security to which a destroyed, lost or stolen coupon appertains (with all appurtenant coupons not destroyed, lost or stolen), a new Security of the same series and principal amount, containing identical terms and provisions and bearing a number not contemporaneously outstanding, with coupons corresponding to the coupons, if any, appertaining to such destroyed, lost or stolen Security or to the Security to which such destroyed, lost or stolen coupon appertains. Notwithstanding the provisions of the previous two paragraphs, in case any such mutilated, destroyed, lost or stolen Security or coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, with coupons corresponding to the coupons, if any, appertaining to such mutilated, destroyed, lost or stolen Security or to the Security to which such mutilated, destroyed, lost or stolen coupon appertains, pay such Security or coupon; provided, however, that payment of principal of (and premium, if any) and interest, if any, on Bearer Securities shall, except as otherwise provided in Section 1002, be payable only at an office or agency located outside the United States and, unless otherwise specified as contemplated by Section 301, any interest on Bearer Securities shall be payable only upon presentation and surrender of the coupons appertaining thereto. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may 33 be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security of any series with its coupons, if any, issued pursuant to this Section in lieu of any destroyed, lost or stolen Security, or in exchange for a Security to which a destroyed, lost or stolen coupon appertains, shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security and its coupons, if any, or the destroyed, lost or stolen coupon shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series and their coupons, if any, duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or coupons. SECTION 307. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED; OPTIONAL INTEREST RESET. (a) Except as otherwise specified with respect to a series of Securities in accordance with the provisions of Section 301, interest, if any, on any Registered Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 1002; provided, however, that each installment of interest, if any, on any Registered Security may at the Company's option be paid by (i) mailing a check for such interest, payable to or upon the written order of the Person entitled thereto pursuant to Section 309, to the address of such Person as it appears on the Security Register or (ii) transfer to an account maintained by the payee inside the United States. Unless otherwise provided as contemplated by Section 301 with respect to the Securities of any series, payment of interest, if any, may be made, in the case of a Bearer Security, by transfer to an account maintained by the payee with a bank located outside the United States. Unless otherwise provided as contemplated by Section 301, every permanent global Security will provide that interest, if any, payable on any Interest Payment Date will be paid to each of Euroclear and CEDEL with respect to that portion of such permanent global Security held for its account by the Common Depository, for the purpose of permitting each of Euroclear and CEDEL to credit the interest, if any, received by it in respect of such permanent global Security to the accounts of the beneficial owners thereof. In case a Bearer Security of any series is surrendered in exchange for a Registered Security of such series after the close of business (at an office or agency in a Place of Payment for such series) on any Regular Record Date and before the opening of business (at such office or agency) on the next succeeding Interest Payment Date, such Bearer Security shall be surrendered without the coupon relating to such Interest Payment Date and interest will not be payable on such Interest Payment Date in respect of the Registered Security issued in exchange for such 34 Bearer Security, but will be payable only to the Holder of such coupon when due in accordance with the provisions of this Indenture. Except as otherwise specified with respect to a series of Securities in accordance with the provisions of Section 301, any interest on any Registered Security of any series that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered Holder thereof on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Registered Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Registered Security of such series and the date of the proposed payment (which shall not be less than 20 days after such notice is received by the Trustee), and at the same time the Company shall deposit with the Trustee an amount of money in Dollars equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Registered Securities of such series at his address as it appears in the Security Register not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names the Registered Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). In case a Bearer Security of any series is surrendered at the office or agency in a Place of Payment for such series in exchange for a Registered Security of such series after the close of business at such office or agency on any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, such Bearer Security shall be surrendered without the coupon relating to such proposed date of payment and Defaulted Interest will not be payable on such proposed date of payment in respect of the Registered Security issued in exchange for such Bearer Security, but will be payable only to the Holder of such coupon when due in accordance with the provisions of this Indenture. 35 (2) The Company may make payment of any Defaulted Interest on the Registered Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. (b) The provisions of this Section 307(b) may be made applicable to any series of Securities pursuant to Section 301 (with such modifications, additions or substitutions as may be specified pursuant to such Section 301). The interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable) on any Security of such series may be reset by the Company on the date or dates specified on the face of such Security (each an "Optional Reset Date"). The Company may exercise such option with respect to such Security by notifying the Trustee of such exercise at least 45 but not more than 60 days prior to an Optional Reset Date for such Security. Not later than 40 days prior to each Optional Reset Date, the Trustee shall transmit, in the manner provided for in Section 106, to the Holder of any such Security a notice (the "Reset Notice") indicating whether the Company has elected to reset the interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable), and if so (i) such new interest rate (or such new spread or spread multiplier, if applicable) and (ii) the provisions, if any, for redemption during the period from such Optional Reset Date to the next Optional Reset Date or if there is no such next Optional Reset Date, to the Stated Maturity of such Security (each such period a "Subsequent Interest Period"), including the date or dates on which or the period or periods during which and the price or prices at which such redemption may occur during the Subsequent Interest Period. Notwithstanding the foregoing, not later than 20 days prior to the Optional Reset Date, the Company may, at its option, revoke the interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable) provided for in the Reset Notice and establish a higher interest rate (or a spread or spread multiplier providing for a higher interest rate, if applicable) for the Subsequent Interest Period by causing the Trustee to transmit, in the manner provided for in Section 106, notice of such higher interest rate (or such spread or spread multiplier providing for a higher interest rate, if applicable) to the Holder of such Security. Such notice shall be irrevocable. All Securities with respect to which the interest rate (or the spread or spread multiplier used to calculate such interest rate, if applicable) is reset on an Optional Reset Date, and with respect to which the Holders of such Securities have not tendered such Securities for repayment (or have validly revoked any such tender) pursuant to the next succeeding paragraph, will bear such higher interest rate (or such spread or spread multiplier providing for a higher interest rate, if applicable). The Holder of any such Security may have the option to elect repayment by the Company of the principal of such Security on each Optional Reset Date at a price equal to the principal amount thereof plus interest accrued to such Optional Reset Date. In order to obtain repayment on an Optional Reset Date, the Holder must follow the procedures set forth in Article Thirteen for repayment at the option of Holders except that the period for delivery or notification to the Trustee shall be at least 25 but not more than 35 days prior to such Optional Reset Date 36 and except that, if the Holder has tendered any Security for repayment pursuant to the Reset Notice, the Holder may, by written notice to the Trustee, revoke such tender or repayment until the close of business on the tenth day before such Optional Reset Date. Subject to the foregoing provisions of this Section and Section 305, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 308. OPTIONAL EXTENSION OF MATURITY. The provisions of this Section 308 may be made applicable to any series of Securities pursuant to Section 301 (with such modifications, additions or substitutions as may be specified pursuant to such Section 301). The Stated Maturity of any Security of such series may be extended at the option of the Company for the period or periods specified on the face of such Security (each an "Extension Period") up to but not beyond the date (the "Final Maturity") set forth on the face of such Security. The Company may exercise such option with respect to any Security by notifying the Trustee of such exercise at least 45 but not more than 60 days prior to the Stated Maturity of such Security in effect prior to the exercise of such option (the "Original Stated Maturity"). If the Company exercises such option, the Trustee shall transmit, in the manner provided for in Section 106, to the Holder of such Security not later than 40 days prior to the Original Stated Maturity a notice (the "Extension Notice") indicating (i) the election of the Company to extend the Stated Maturity, (ii) the new Stated Maturity, (iii) the interest rate (or spread, spread multiplier or other formula to calculate such interest rate, if applicable), if any, applicable to the Extension Period and (iv) the provisions, if any, for redemption during such Extension Period. Upon the Trustee's transmittal of the Extension Notice, the Stated Maturity of such Security shall be extended automatically and, except as modified by the Extension Notice and as described in the next paragraph, such Security will have the same terms as prior to the transmittal of such Extension Notice. Notwithstanding the foregoing, not later than 20 days before the Original Stated Maturity of such Security, the Company may, at its option, revoke the interest rate (or spread, spread multiplier or other formula used to calculate such interest rate, if applicable) provided for in the Extension Notice and establish a higher interest rate (or spread, spread multiplier or other formula used to calculate such higher interest rate, if applicable) for the Extension Period by causing the Trustee to transmit, in the manner provided for in Section 106, notice of such higher interest rate (or spread, spread multiplier or other formula used to calculate such interest rate, if applicable) to the Holder of such Security. Such notice shall be irrevocable. All Securities with respect to which the Stated Maturity is extended will bear such higher interest rate. If the Company extends the Stated Maturity of any Security, the Holder will have the option to elect repayment of such Security by the Company on the Original Stated Maturity at a price equal to the principal amount thereof, plus interest accrued to such date. In order to obtain repayment on the Original Stated Maturity once the Company has extended the Stated Maturity thereof, the Holder must follow the procedures set forth in Article Thirteen for repayment at the option of Holders, except that the period for delivery or notification to the 37 Trustee shall be at least 25 but not more than 35 days prior to the Original Stated Maturity and except that, if the Holder has tendered any Security for repayment pursuant to an Extension Notice, the Holder may by written notice to the Trustee revoke such tender for repayment until the close of business on the tenth day before the Original Stated Maturity. SECTION 309. PERSONS DEEMED OWNERS. Prior to due presentment of a Registered Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Registered Security is registered as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Sections 305 and 307) interest, if any, on such Registered Security and for all other purposes whatsoever, whether or not such Registered Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. Title to any Bearer Security and any coupons appertaining thereto shall pass by delivery. The Company, the Trustee and any agent of the Company or the Trustee may treat the bearer of any Bearer Security and the bearer of any coupon as the absolute owner of such Security or coupon for the purpose of receiving payment thereof or on account thereof and for all other purposes whatsoever, whether or not such Security or coupon be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. None of the Company, the Trustee, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Security in global form or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, with respect to any global Security, nothing herein shall prevent the Company, the Trustee, or any agent of the Company or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by any depository, as a Holder, with respect to such global Security or impair, as between such depository and owners of beneficial interests in such global Security, the operation of customary practices governing the exercise of the rights of such depository (or its nominee) as Holder of such global Security. SECTION 310. CANCELLATION. All Securities and coupons surrendered for payment, redemption, repayment at the option of the Holder, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee, and any such Securities and coupons and Securities and coupons surrendered directly to the Trustee for any such purpose shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly canceled by the Trustee. If the Company shall so acquire any of the Securities, however, such acquisition shall not operate 38 as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. Canceled Securities and coupons held by the Trustee shall be destroyed by the Trustee and the Trustee shall deliver a certificate of such destruction to the Company, unless by a Company Order the Company directs their return to it. SECTION 311. COMPUTATION OF INTEREST. Except as otherwise specified as contemplated by Section 301 with respect to Securities of any series, interest, if any, on the Securities of each series shall be computed on the basis of a 360-day year consisting of twelve 30-day months. SECTION 312. CUSIP NUMBERS. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall indicate the "CUSIP" numbers of the Securities in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall upon Company Request cease to be of further effect with respect to any series of Securities specified in such Company Request (except as to any surviving rights of registration of transfer or exchange of Securities of such series expressly provided for herein or pursuant hereto and any right to receive Additional Amounts, as provided in Section 1004), and the Trustee, upon receipt of a Company Order, and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture as to such series when (1) either (A) all Securities of such series theretofore authenticated and delivered and all coupons, if any, appertaining thereto (other than (i) coupons appertaining to Bearer Securities surrendered for exchange for Registered Securities and maturing after such exchange, whose surrender is not required or has been waived as provided in Section 305, (ii) Securities and coupons of such series which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306, (iii) coupons appertaining to Securities called for redemption and maturing after the relevant Redemption Date, whose surrender has been waived as provided in Section 1106, and (iv) Securities and coupons of such series for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged 39 from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all Securities of such series and, in the case of (i) or (ii) below, any coupons appertaining thereto not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) if redeemable at the option of the Company, are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose an amount in Dollars sufficient to pay and discharge the entire indebtedness on such Securities and such coupons not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest, if any, to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture as to such series have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee and any predecessor Trustee under Section 606, the obligations of the Company to any Authenticating Agent under Section 611 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402. APPLICATION OF TRUST FUNDS. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities, the coupons and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest, if any, for whose 40 payment such money has been deposited with or received by the Trustee, but such money need not be segregated from other funds except to the extent required by law. ARTICLE FIVE REMEDIES SECTION 501. EVENTS OF DEFAULT. "Event of Default", wherever used herein with respect to any particular series of Securities, means any one of the following events (whatever the reason for such Event of Default and whether or not it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security of that series or of any coupon appertaining thereto, when such interest or coupon becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of (or premium, if any, on) any Security of that series when it becomes due and payable at its Maturity; or (3) default in the deposit of any sinking fund payment, when and as due by the terms of any Security of that series; or (4) default in the performance, or breach, of any covenant or agreement of the Company in this Indenture with respect to any Security of that series (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) the Company pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property and such Custodian is not discharged within 60 days, or (D) makes a general assignment for the benefit of its creditors; or 41 (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company in an involuntary case, (B) appoints a Custodian of the Company or for all or substantially all of its property, or (C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 90 days; or (7) any other Event of Default provided with respect to Securities of that series. The term "Bankruptcy Law" means title 11, U.S. Code or any similar Federal or State law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or other similar official under any Bankruptcy Law. SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default with respect to Securities of any series at the time Outstanding occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may declare the principal (or, if any Securities are Original Issue Discount Securities or Indexed Securities, such portion of the principal as may be specified in the terms thereof) of all the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by the Holders), and upon any such declaration such principal or specified portion thereof shall become immediately due and payable. At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (1) the Company has paid or deposited with the Trustee a sum sufficient to pay in Dollars (except as otherwise specified pursuant to Section 301 for the Securities of such series): (A) all overdue installments of interest, if any, on all Outstanding Securities of that series and any related coupons, (B) the principal of (and premium, if any, on) all Outstanding Securities of that series which have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates borne by or provided for in such Securities, 42 (C) to the extent that payment of such interest is lawful, interest upon overdue installments of interest at the rate or rates borne by or provided for in such Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default with respect to Securities of that series, other than the nonpayment of the principal of (or premium, if any) or interest on Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. The Company covenants that if: (1) default is made in the payment of any installment of interest on any Security of any series and any related coupon when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security of any series at its Maturity, then the Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of Securities of such series and coupons, the whole amount then due and payable on such Securities and coupons for principal (and premium, if any) and interest, if any, with interest upon any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installments of interest, if any, at the rate or rates borne by or provided for in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company or any other obligor upon Securities of such series and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities of such series, wherever situated. If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series and any related coupons by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such 43 rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities of any series shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of any overdue principal, premium or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise: (i) to file and prove a claim for the whole amount of principal (or in the case of Original Issue Discount Securities or Indexed Securities, such portion of the principal as may be provided for in the terms thereof) (and premium, if any) and interest, if any, owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator (or other similar official) in any such judicial proceeding is hereby authorized by each Holder of Securities of such series and coupons to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee and any predecessor Trustee, their agents and counsel, and any other amounts due the Trustee or any predecessor Trustee under Section 606. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder of a Security or coupon any plan of reorganization, arrangement, adjustment or composition affecting the Securities or coupons or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder of a Security or coupon in any such proceeding. SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES OR COUPONS. All rights of action and claims under this Indenture or any of the Securities or coupons may be prosecuted and enforced by the Trustee without the possession of any of the Securities or coupons or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and 44 counsel, be for the ratable benefit of the Holders of the Securities and coupons in respect of which such judgment has been recovered. SECTION 506. APPLICATION OF MONEY COLLECTED. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, if any, upon presentation of the Securities or coupons, or both, as the case may be, and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee and any predecessor Trustee under Section 606; SECOND: To the payment of the amounts then due and unpaid upon the Securities and coupons for principal (and premium, if any) and interest, if any, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the aggregate amounts due and payable on such Securities and coupons for principal (and premium, if any) and interest, if any, respectively; and THIRD: To the payment of the remainder, if any, to the Company or any other Person or Persons entitled thereto. SECTION 507. LIMITATION ON SUITS. No Holder of any Security of any series or any related coupon shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series; 45 it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders. SECTION 508. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND INTEREST. Notwithstanding any other provision in this Indenture, the Holder of any Security or coupon shall have the right which is absolute and unconditional to receive payment of the principal of (and premium, if any) and (subject to Sections 305 and 307) interest, if any, on such Security or payment of such coupon on the respective due dates expressed in such Security or coupon (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder of a Security or coupon has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Trustee and the Holders of Securities and coupons shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or coupons in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders of Securities or coupons is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Security or coupon to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders of Securities or coupons, as the case may be. SECTION 512. CONTROL BY HOLDERS OF SECURITIES. The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or 46 exercising any trust or power conferred on the Trustee with respect to the Securities of such series, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (3) the Trustee need not take any action which might involve it in personal liability or be unjustly prejudicial to the Holders of Securities of such series not consenting. SECTION 513. WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series and any related coupons waive any past default hereunder with respect to such series and its consequences, except a default (1) in the payment of the principal of (or premium, if any) or interest, if any, on any Security of such series or any related coupons, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 514. WAIVER OF STAY OR EXTENSION LAWS. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. NOTICE OF DEFAULTS. Within 90 days after the occurrence of any Default hereunder with respect to the Securities of any series, the Trustee shall transmit in the 47 manner and to the extent provided in TIA Section 313(c), notice of such Default hereunder known to the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of (or premium, if any) or interest, if any, on any Security of such series, or in the payment of any sinking or purchase fund installment with respect to the Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Securities and coupons of such series; and provided further that in the case of any Default or breach of the character specified in Section 501(4) with respect to the Securities and coupons of such series, no such notice to Holders shall be given until at least 60 days after the occurrence thereof. SECTION 602. CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of TIA Section 315(a) through 315(d): (1) The Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. (2) Any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order (other than delivery of any Security, together with any coupons appertaining thereto, to the Trustee for authentication and delivery pursuant to Section 303 which shall be sufficiently evidenced as provided therein) and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution. (3) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon a Board Resolution, an Opinion of Counsel or an Officers' Certificate. (4) The Trustee may consult with counsel and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (5) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders of Securities of any series or any related coupons pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. 48 (6) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, coupon or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney. (7) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (8) The Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 603. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. The recitals contained herein and in the Securities, except the Trustee's certificate of authentication, and in any coupons shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities or coupons, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder and that the statements made by it in a Statement of Eligibility on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth therein. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 604. MAY HOLD SECURITIES. The Trustee, any Paying Agent, Security Registrar, Authenticating Agent or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and coupons and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar, Authenticating Agent or such other agent. SECTION 605. MONEY HELD IN TRUST. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. 49 SECTION 606. COMPENSATION AND REIMBURSEMENT. The Company agrees: (1) To pay to the Trustee from time to time such compensation for all services rendered by it hereunder as has been agreed upon in writing (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust). (2) Except as otherwise expressly provided herein, to reimburse each of the Trustee and any predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith. (3) To indemnify each of the Trustee and any predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its own part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. As security for the performance of the obligations of the Company under this Section, the Trustee shall have a claim prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (or premium, if any) or interest, if any, on particular Securities or any coupons. When the Trustee incurs expenses or renders services after an Event of Default specified in ss.501(5) or (6) occurs, the expenses and compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 607. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined capital and surplus of at least $50,000,000. If such Corporation publishes reports of condition at least annually, pursuant to law or the requirements of Federal, State, Territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 608. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of 50 appointment by the successor Trustee in accordance with the applicable requirements of Section 609. (b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. (c) The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Company or by any Holder of a Security who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 607 and shall fail to resign after written request therefor by the Company or by any Holder of a Security who has been a bona fide Holder of a Security for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by or pursuant to a Board Resolution may remove the Trustee and appoint a successor Trustee with respect to all Securities, or (ii) subject to TIA Section 315(e), any Holder of a Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees. (e) If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of a notice of resignation or the delivery of an Act of removal, the Trustee resigning or being removed may petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause with respect to the Securities of one or more series, the Company, by or pursuant to a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series). If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities 51 of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders of Securities and accepted appointment in the manner hereinafter provided, any Holder of a Security who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to Securities of such series. (g) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series in the manner provided for notices to the Holders of Securities in Section 106. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office. SECTION 609. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. (a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee, and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, subject nevertheless to its claim, if any, provided for in Section 606. (b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered 52 by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. (c) Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be. (d) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 610. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any Corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any Corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such Corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities or coupons shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities or coupons so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities or coupons. In case any Securities or coupons shall not have been authenticated by such predecessor Trustee, any such successor Trustee may authenticate and deliver such Securities or coupons, in either its own name or that of its predecessor Trustee, with the full force and effect which this Indenture provides for the certificate of authentication of the Trustee. SECTION 611. APPOINTMENT OF AUTHENTICATING AGENT. At any time when any of the Securities remain Outstanding, the Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon exchange, registration of transfer or partial redemption thereof, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Any such appointment shall be evidenced by an instrument in writing signed by a Responsible Officer of the Trustee, a copy of which instrument shall be promptly furnished to the Company. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an 53 Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and, except as may otherwise be provided pursuant to Section 301, shall at all times be a bank or trust company or Corporation organized and doing business and in good standing under the laws of the United States of America or of any State or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $1,500,000 and subject to supervision or examination by Federal or State authorities. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any Corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any Corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any Corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such Corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent for any series of Securities may at any time resign by giving written notice of resignation to the Trustee for such series and to the Company. The Trustee for any series of Securities may at any time terminate the agency of an Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee for such series may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment to all Holders of Securities of the series with respect to which such Authenticating Agent will serve in the manner set forth in Section 106. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent herein. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation including reimbursement of its reasonable expenses for its services under this Section. If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to or in lieu of the Trustee's certificate of authentication, an alternate certificate of authentication substantially in the following form: 54 This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. FIRST UNION NATIONAL BANK, as Trustee By_________________________________ as Authenticating Agent By_________________________________ Authorized Signatory ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. DISCLOSURE OF NAMES AND ADDRESSES OF HOLDERS. Every Holder of Securities or coupons, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any Authenticating Agent nor any Paying Agent nor any Security Registrar shall be held accountable by reason of the disclosure of any information as to the names and addresses of the Holders of Securities in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b). SECTION 702. REPORTS BY TRUSTEE. Within 60 days after May 15 of each year commencing with the first May 15 after the first issuance of Securities pursuant to this Indenture, the Trustee shall transmit by mail to all Holders of Securities as provided in TIA Section 313(c) a brief report dated as of such May 15 if required by TIA Section 313(a). A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange, if any, upon which the Securities are listed, with the Commission and with the Company. The Company will promptly notify the Trustee of the listing of the Securities on any stock exchange. SECTION 703. REPORTS BY COMPANY. The Company will: (1) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; or, if the Company is not required 55 to file information, documents or reports pursuant to either of such Sections, then it will file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (3) transmit by mail to the Holders of Securities, within 30 days after the filing thereof with the Trustee, in the manner and to the extent provided in TIA Section 313(c), such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. SECTION 704. CALCULATION OF ORIGINAL ISSUE DISCOUNT. Upon request of the Trustee, the Company shall file with the Trustee promptly at the end of each calendar year a written notice specifying the amount of original issue discount (including daily rates and accrual periods), if any, accrued on Outstanding Securities as of the end of such year. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER SECTION 801. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Company shall not consolidate with or merge with or into any other Corporation or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (1) either the Company shall be the continuing Corporation, or the Corporation (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer the properties and assets of the Company substantially as an entirety shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest, if any, on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction, no Default or Event of Default shall have happened and be continuing; and 56 (3) the Company and the successor Person have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance or transfer and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 802. SUCCESSOR PERSON SUBSTITUTED. Upon any consolidation or merger, or any conveyance or transfer of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Corporation formed by such consolidation or into which the Company is merged or the successor Person to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor had been named as the Company herein; and in the event of any such conveyance or transfer, the Company shall be discharged from all obligations and covenants under this Indenture and the Securities and coupons and may be dissolved and liquidated. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS. Without the consent of any Holders of Securities or coupons, the Company, when authorized by or pursuant to a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities contained; or (2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default for the benefit of the Holders of all or any series of Securities (and if such Events of Default are to be for the benefit of less than all series of Securities, stating that such Events of Default are expressly being included solely for the benefit of such series); provided, however, that in respect of any such additional Events of Default such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default or may limit the right of the Holders of a majority in aggregate principal amount of that or those 57 series of Securities to which such additional Events of Default apply to waive such default; or (4) to add to or change any of the provisions of this Indenture to provide that Bearer Securities may be registrable as to principal, to change or eliminate any restrictions on the payment of principal of or any premium or interest on Bearer Securities, to permit Bearer Securities to be issued in exchange for Registered Securities, to permit Bearer Securities to be issued in exchange for Bearer Securities of other authorized denominations or to permit or facilitate the issuance of Securities in uncertificated form; provided that any such action shall not adversely affect the interests of the Holders of Securities of any series or any related coupons in any material respect; or (5) to change or eliminate any of the provisions of this Indenture; provided that any such change or elimination shall become effective only when there is no Security Outstanding of any series created prior to the execution of such supplemental indenture which is entitled to the benefit of such provision; or (6) to secure the Securities pursuant to the requirements of Section 801, or otherwise; or (7) to establish the form or terms of Securities of any series and any related coupons as permitted by Sections 201 and 301, including the provisions and procedures relating to Securities convertible into or exchangeable for any securities of any Person (including the Company); or (8) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee; or (9) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; provided that such action shall not adversely affect the interests of the Holders of Securities of any series or any related coupons in any material respect; or (10) to supplement any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the defeasance and discharge of any series of Securities pursuant to Sections 401, 1402 and 1403; provided that any such action shall not adversely affect the interests of the Holders of Securities of such series and any related coupons or any other series of Securities in any material respect. SECTION 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS. With the consent of the Holders of not less than a majority in principal amount of all Outstanding Securities affected by such supplemental indenture, by Act of said Holders delivered to the 58 Company and the Trustee, the Company, when authorized by or pursuant to a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities and any related coupons under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby: (1) change the Stated Maturity of the principal of (or premium, if any, on) or any installment of principal of or interest on, any Security, subject to the provisions of Section 309; or reduce the principal amount thereof or the rate of interest (or change the manner of calculating the rate of interest, thereon, or any premium payable upon the redemption thereof, or change any obligation of the Company to pay Additional Amounts pursuant to Section 1004 (except as contemplated by Section 801(1) and permitted by Section 901(1)), or reduce the portion of the principal of an Original Issue Discount Security or Indexed Security that would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502 or the amount thereof provable in bankruptcy pursuant to Section 504, or adversely affect any right of repayment at the option of the Holder of any Security, or change any Place of Payment where any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption or repayment at the option of the Holder, on or after the Redemption Date or the Repayment Date, as the case may be), or adversely affect any right to convert or exchange any Security as may be provided pursuant to Section 301 herein, or (2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver with respect to such series (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or reduce the requirements of Section 1504 for quorum or voting, or (3) modify any of the provisions of this Section, Section 513 or Section 1006, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of 59 such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Persons entitled to consent to any indenture supplemental hereto. If a record date is fixed, the Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to consent to such supplemental indenture, whether or not such Holders remain Holders after such record date; provided, that unless such consent shall have become effective by virtue of the requisite percentage having been obtained prior to the date which is 90 days after such record date, any such consent previously given shall automatically and without further action by any Holder be canceled and of no further effect. SECTION 903. EXECUTION OF SUPPLEMENTAL INDENTURES. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modification thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder and of any coupon appertaining thereto shall be bound thereby. SECTION 905. CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 906. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall, if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series. ARTICLE TEN COVENANTS SECTION 1001. PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST. The Company covenants and agrees for the benefit of the Holders of each series of Securities that it 60 will duly and punctually pay the principal of (and premium, if any) and interest, if any, on the Securities of that series in accordance with the terms of such series of Securities, any coupons appertaining thereto and this Indenture. Any interest due on Bearer Securities on or before Maturity, other than Additional Amounts, if any, payable as provided in Section 1004 in respect of principal of (or premium, if any, on) such a Security, shall be payable only upon presentation and surrender of the several coupons for such interest installments as are evidenced thereby as they severally mature. Unless otherwise specified with respect to Securities of any series pursuant to Section 301, at the option of the Company, all payments of principal may be paid by check to the registered Holder of the Registered Security or other person entitled thereto against surrender of such Security. Unless otherwise specified as contemplated by Section 301 with respect to any series of Securities, any interest due on Bearer Securities on or before Maturity shall be payable only upon presentation and surrender of the several coupons for such interest installments as are evidenced thereby as they severally mature. SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY. If Securities of a series are issuable only as Registered Securities, the Company shall maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange, where Securities of that series that are convertible or exchangeable may be surrendered for conversion or exchange, as applicable, and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. If Securities of a series are issuable as Bearer Securities, the Company will maintain (A) in the Borough of Manhattan, The City of New York, an office or agency where any Registered Securities of that series may be presented or surrendered for payment, where any Registered Securities of that series may be surrendered for registration of transfer, where Securities of that series may be surrendered for exchange, where Securities of that series that are convertible or exchangeable may be surrendered for conversion or exchange, as applicable, and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served and where Bearer Securities of that series and related coupons may be presented or surrendered for payment in the circumstances described in the following paragraph (and not otherwise), (B) subject to any laws or regulations applicable thereto, in a Place of Payment for that series which is located outside the United States, an office or agency where Securities of that series and related coupons may be presented and surrendered for payment; provided, however, that if the Securities of that series are listed on the Luxembourg Stock Exchange or any other stock exchange located outside the United States and such stock exchange shall so require, the Company will maintain a Paying Agent for the Securities of that series in Luxembourg or any other required city located outside the United States, as the case may be, so long as the Securities of that series are listed on such exchange, and (C) subject to any laws or regulations applicable thereto, in a Place of Payment for that series located outside the United States an office or agency where any Registered Securities of that series may be surrendered for registration of transfer, where Securities of that series may be surrendered for exchange, where Securities of that series that are convertible or exchangeable may be surrendered for conversion or exchange, as applicable and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of each such office or agency. If at 61 any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, except that Bearer Securities of that series and the related coupons may be presented and surrendered for payment at the offices specified in the Security, in London, England, and the Company hereby appoints the same as its agent to receive such respective presentations, surrenders, notices and demands, and the Company hereby appoints the Trustee its agent to receive all such presentations, surrenders, notices and demands. Unless otherwise specified with respect to any Securities pursuant to Section 301, no payment of principal, premium or interest on Bearer Securities shall be made at any office or agency of the Company in the United States or by check mailed to any address in the United States or by transfer to an account maintained with a bank located in the United States; provided, however, that, if the Securities of a series are payable in Dollars, payment of principal of (and premium, if any) and interest, if any, on any Bearer Security shall be made at the office of the Company's Paying Agent in the Borough of Manhattan, The City of New York, if (but only if) payment in Dollars of the full amount of such principal, premium or interest, as the case may be, at all offices or agencies outside the United States maintained for such purpose by the Company in accordance with this Indenture, is illegal or effectively precluded by exchange controls or other similar restrictions. The Company may from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all of such purposes, and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in accordance with the requirements set forth above for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. Unless otherwise specified with respect to any Securities pursuant to Section 301 with respect to a series of Securities, the Company hereby designates as Places of Payment for each series of Securities the office or agency of the Company in the Borough of Manhattan, The City of New York, and initially appoints the Trustee at its Corporate Trust Office as Paying Agent in such city and as its agent to receive all such presentations, surrenders, notices and demands. SECTION 1003. MONEY FOR SECURITIES PAYMENTS TO BE HELD IN TRUST. If the Company shall at any time act as its own Paying Agent with respect to any series of any Securities and any related coupons, it will, on or before each due date of the principal of (or premium, if any) or interest, if any, on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum in Dollars (except as otherwise specified pursuant to Section 301 for the Securities of such series) sufficient to pay the principal (and premium, if any) and interest, if any, on Securities of such series so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. 62 Whenever the Company shall have one or more Paying Agents for any series of Securities and any related coupons, it will, on or before each due date of the principal of (or premium, if any) or interest, if any, on any Securities of that series, deposit with a Paying Agent a sum (in Dollars, as described in the preceding paragraph) sufficient to pay the principal (or premium, if any) or interest, if any, so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Except as otherwise provided in the Securities of any series, any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (or premium, if any) or interest, if any, on any Security of any series and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be paid to the Company upon Company Request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment of such principal, premium or interest on any Security, without interest thereon, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in an Authorized Newspaper, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. ADDITIONAL AMOUNTS. If the Securities of a series provide for the payment of Additional Amounts, the Company will pay to the Holder of a Security of such series or any coupon appertaining thereto Additional Amounts as may be specified as contemplated by Section 301. Whenever in this Indenture there is mentioned, in any context, the payment of the principal of (or premium, if any) or interest, if any, on any Security of any series or payment of any related coupon or the net proceeds received on the sale or exchange of any Security of any series, such mention shall be deemed to include mention of the payment of Additional Amounts provided by the terms of such series established pursuant to Section 301 to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to such terms and express mention of the payment of Additional Amounts (if applicable) in any provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made. Except as otherwise specified as contemplated by Section 301, if the Securities of a series provide for the payment of Additional Amounts, at least 10 days prior to the first Interest 63 Payment Date with respect to that series of Securities (or if the Securities of that series will not bear interest prior to Maturity, the first day on which a payment of principal premium is made), and at least 10 days prior to each date of payment of principal, premium or interest if there has been any change with respect to the matters set forth in the below-mentioned Officers' Certificate, the Company will furnish the Trustee and the Company's principal Paying Agent or Paying Agents, if other than the Trustee, with an Officers' Certificate instructing the Trustee and such Paying Agent or Paying Agents whether such payment of principal, premium or interest on the Securities of that series shall be made to Holders of Securities of that series or any related coupons who are not United States persons without withholding for or on account of any tax, assessment or other governmental charge described in the Securities of the series. If any such withholding shall be required, then such Officers' Certificate shall specify by country the amount, if any, required to be withheld on such payments to such Holders of Securities of that series or related coupons and the Company will pay to the Trustee or such Paying Agent the Additional Amounts required by the terms of such Securities. In the event that the Trustee or any Paying Agent, as the case may be, shall not so receive the above-mentioned certificate, then the Trustee or such Paying Agent shall be entitled (i) to assume that no such withholding or deduction is required with respect to any payment of principal or interest with respect to any Securities of a series or related coupons until it shall have received a certificate advising otherwise and (ii) to make all payments of principal and interest with respect to the Securities of a series or related coupons without withholding or deductions until otherwise advised. The Company covenants to indemnify the Trustee and any Paying Agent for, and to hold them harmless against, any loss, liability or expense reasonably incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any Officers' Certificate furnished pursuant to this Section or in reliance on the Company's not furnishing such an Officers' Certificate. SECTION 1005. STATEMENT AS TO COMPLIANCE. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Company's compliance with all conditions and covenants under this Indenture. For purposes of this Section 1005, such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. SECTION 1006. WAIVER OF CERTAIN COVENANTS. The Company may omit in any particular instance to comply with any term, provision or condition, and as specified pursuant to Section 301(15) for Securities of any series, in any covenants of the Company added to Article Ten pursuant to Section 301(14) or Section 301 (15) in connection with the Securities of a series, if before or after the time for such compliance the Holders of at least a majority in principal amount of all outstanding Securities, by Act of such Holders, waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. 64 ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. APPLICABILITY OF ARTICLE. Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for Securities of any series) in accordance with this Article. SECTION 1102. ELECTION TO REDEEM; NOTICE TO TRUSTEE. The election of the Company to redeem any Securities shall be evidenced by or pursuant to a Board Resolution. In case of any redemption at the election of the Company of less than all of the Securities of any series, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee in writing of such Redemption Date and of the principal amount of Securities of such series to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with such restriction. SECTION 1103. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED. If less than all the Securities of any series issued on the same day with the same terms are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series issued on such date with the same terms not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series. The Trustee shall promptly notify the Company and the Security Registrar (if other than itself) in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 1104. NOTICE OF REDEMPTION. Notice of redemption shall be given in the manner provided in Section 106, not less than 30 days nor more than 60 days prior to the Redemption Date, unless a shorter period is specified by the terms of such series established pursuant to Section 301, to each Holder of Securities to be redeemed, but failure to give such notice in the manner herein provided to the Holder of any Security designated for redemption as a whole or in part, or any defect in the notice to any such Holder, shall not affect the validity of the proceedings for the redemption of any other such Security or portion thereof. 65 Any notice that is mailed to the Holders of Registered Securities in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price and accrued interest, if any, to the Redemption Date payable as provided in Section 1106, (3) if less than all Outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption, the principal amount) of the particular Security or Securities to be redeemed, (4) in case any Security is to be redeemed in part only, the notice which relates to such Security shall state that on and after the Redemption Date, upon surrender of such Security, the Holder will receive, without a charge, a new Security or Securities of authorized denominations for the principal amount thereof remaining unredeemed, (5) that on the Redemption Date, the Redemption Price and accrued interest, if any, to the Redemption Date payable as provided in Section 1106 will become due and payable upon each such Security, or the portion thereof, to be redeemed and, if applicable, that interest thereon shall cease to accrue on and after said date, (6) the Place or Places of Payment where such Securities, together in the case of Bearer Securities with all coupons appertaining thereto, if any, maturing after the Redemption Date, are to be surrendered for payment of the Redemption Price and accrued interest, if any, (7) that the redemption is for a sinking fund, if such is the case, (8) that, unless otherwise specified in such notice, Bearer Securities of any series, if any, surrendered for redemption must be accompanied by all coupons maturing subsequent to the date fixed for redemption or the amount of any such missing coupon or coupons will be deducted from the Redemption Price, unless security or indemnity satisfactory to the Company, the Trustee for such series and any Paying Agent is furnished, (9) if Bearer Securities of any series are to be redeemed and any Registered Securities of such series are not to be redeemed, and if such Bearer Securities may be exchanged for Registered Securities not subject to redemption on this Redemption Date pursuant to Section 305 or otherwise, the last date, as determined by the Company, on which such exchanges may be made, and (10) the CUSIP number of such Security, if any. 66 Notice of redemption of Securities to be redeemed shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1105. DEPOSIT OF REDEMPTION PRICE. On or prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, which it may not do in the case of a sinking fund payment under Article Twelve, segregate and hold in trust as provided in Section 1003) an amount of money in Dollars (except as otherwise specified pursuant to Section 301 for the Securities of such series) sufficient to pay on the Redemption Date the Redemption Price of, and (unless otherwise specified pursuant to Section 301) accrued interest on, all the Securities or portions thereof which are to be redeemed on that date. SECTION 1106. SECURITIES PAYABLE ON REDEMPTION DATE. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified in Dollars (except as otherwise specified pursuant to Section 301 for the Securities of such series) (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest, if any) such Securities shall if the same were interest-bearing cease to bear interest and the coupons for such interest appertaining to any Bearer Securities so to be redeemed, except to the extent provided below, shall be void. Upon surrender of any such Security for redemption in accordance with said notice, together with all coupons, if any, appertaining thereto maturing after the Redemption Date, such Security shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided, however, that installments of interest on Bearer Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 1002) and, unless otherwise specified as contemplated by Section 301, only upon presentation and surrender of coupons for such interest; and provided further that installments of interest on Registered Securities whose Stated Maturity is prior to (or, if specified pursuant to Section 301, on) the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Bearer Security surrendered for redemption shall not be accompanied by all appurtenant coupons maturing after the Redemption Date, such Security may be paid after deducting from the Redemption Price an amount equal to the face amount of all such missing coupons, or the surrender of such missing coupon or coupons may be waived by the Company and the Trustee if there be furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Security shall surrender to the Trustee or any Paying Agent any such missing coupon in respect of which a deduction shall have been made from the Redemption Price, such Holder shall be entitled to receive the amount so deducted; provided, however, that interest represented by coupons shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 1002) and, unless otherwise specified as contemplated by Section 301, only upon presentation and surrender of those coupons. 67 If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the Redemption Price shall, until paid, bear interest from the Redemption Date at the rate of interest set forth in such Security or, in the case of Original Issue Discount Security, at the Yield to Maturity of such Security. SECTION 1107. SECURITIES REDEEMED IN PART. Any Registered Security which is to be redeemed only in part (pursuant to the provisions of this Article or of Article Twelve) shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security without service charge a new Security or Securities of the same series, of any authorized denomination as requested by such Holder in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. However, if less than all the Securities of any series with differing issue dates, interest rates and stated maturities are to be redeemed, the Company in its sole discretion shall select the particular Securities to be redeemed and shall notify the Trustee in writing thereof at least 45 days prior to the relevant redemption date. ARTICLE TWELVE SINKING FUNDS SECTION 1201. APPLICABILITY OF ARTICLE. The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 301 for Securities of such series. The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a "mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of such Securities of any series is herein referred to as an "optional sinking fund payment". If provided for by the terms of any Securities of any series, the cash amount of any mandatory sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series. SECTION 1202. SATISFACTION OF SINKING FUND PAYMENTS WITH SECURITIES. The Company may, in satisfaction of all or any part of any mandatory sinking fund payment with respect to the Securities of a series, (1) deliver Outstanding Securities of such series (other than any previously called for redemption) together in the case of any Bearer Securities of such series with all unmatured coupons appertaining thereto and (2) apply as a credit Securities of such series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, as provided for by the terms of such Securities; provided that such Securities so delivered or applied as a credit have not been previously so credited. Such 68 Securities shall be received and credited for such purpose by the Trustee at the applicable Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such mandatory sinking fund payment shall be reduced accordingly. SECTION 1203. REDEMPTION OF SECURITIES FOR SINKING FUND. Not less than 60 days prior to each sinking fund payment date for Securities of any series, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing mandatory sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash in Dollars (except as otherwise specified pursuant to Section 301 for the Securities of such series) and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities of that series pursuant to Section 1202, and the optional amount, if any, to be added in cash to the next ensuing mandatory sinking fund payment, and will also deliver to the Trustee any Securities to be so delivered and credited. If such Officers' Certificate shall specify an optional amount to be added in cash to the next ensuing mandatory sinking fund payment, the Company shall thereupon be obligated to pay the amount therein specified. Not less than 30 days before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107. ARTICLE THIRTEEN REPAYMENT AT THE OPTION OF HOLDERS SECTION 1301. APPLICABILITY OF ARTICLE. Repayment of Securities of any series before their Stated Maturity at the option of Holders thereof shall be made in accordance with the terms of such Securities and (except as otherwise specified by the terms of such series established pursuant to Section 301) in accordance with this Article. SECTION 1302. REPAYMENT OF SECURITIES. Securities of any series subject to repayment in whole or in part at the option of the Holders thereof will, unless otherwise provided in the terms of such Securities, be repaid at the Repayment Price thereof, together with interest, if any, thereon accrued to the Repayment Date specified in or pursuant to the terms of such Securities. The Company covenants that on or before the Repayment Date it will deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money in Dollars (except as otherwise specified pursuant to Section 301 for the Securities of such series) sufficient to pay the Repayment Price of, and (unless otherwise specified pursuant to Section 301) accrued interest on, all the Securities or portions thereof, as the case may be, to be repaid on such date. SECTION 1303. EXERCISE OF OPTION. Securities of any series subject to repayment at the option of the Holders thereof will contain an "Option to Elect Repayment" form on the reverse of such Securities. To be repaid at the option of the Holder, any Security so 69 providing for such repayment, with the "Option to Elect Repayment" form on the reverse of such Security duly completed by the Holder (or by the Holder's attorney duly authorized in writing), must be received by the Company at the Place of Payment therefor specified in the terms of such Security (or at such other place or places of which the Company shall from time to time notify the Holders of such Securities) not earlier than 45 days nor later than 30 days prior to the Repayment Date. If less than the entire Repayment Price of such Security is to be repaid in accordance with the terms of such Security, the portion of the Repayment Price of such Security to be repaid, in increments of the minimum denomination for Securities of such series, and the denomination or denominations of the Security or Securities to be issued to the Holder for the portion of such Security surrendered that is not to be repaid, must be specified. Any Security providing for repayment at the option of the Holder thereof may not be repaid in part if, following such repayment, the unpaid principal amount of such Security would be less than the minimum authorized denomination of Securities of the series of which such Security to be repaid is a part. Except as otherwise may be provided by the terms of any Security providing for repayment at the option of the Holder thereof, exercise of the repayment option by the Holder shall be irrevocable unless waived by the Company. SECTION 1304. WHEN SECURITIES PRESENTED FOR REPAYMENT BECOME DUE AND PAYABLE. If Securities of any series providing for repayment at the option of the Holders thereof shall have been surrendered as provided in this Article and as provided by or pursuant to the terms of such Securities, such Securities or the portions thereof, as the case may be, to be repaid shall become due and payable and shall be paid by the Company on the Repayment Date therein specified, and on and after such Repayment Date (unless the Company shall default in the payment of such Securities on such Repayment Date) such Securities shall, if the same were interest-bearing, cease to bear interest and the coupons for such interest appertaining to any Bearer Securities so to be repaid, except to the extent provided below, shall be void. Upon surrender of any such Security for repayment in accordance with such provisions, together with all coupons, if any, appertaining thereto maturing after the Repayment Date, the Repayment Price of such Security so to be repaid shall be paid by the Company, together with accrued interest, if any, to the Repayment Date; provided, however, that coupons whose Stated Maturity is on or prior to the Repayment Date shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 1002) and, unless otherwise specified pursuant to Section 301, only upon presentation and surrender of such coupons; and provided further that installments of interest on Registered Securities, whose Stated Maturity is prior to (or, if specified pursuant to Section 301, on) the Repayment Date shall be payable (but without interest thereon, unless the Company shall default in the payment thereof) to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Bearer Security surrendered for repayment shall not be accompanied by all appurtenant coupons maturing after the Repayment Date, such Security may be paid after deducting from the amount payable therefor as provided in Section 1302 an amount equal to the face amount of all such missing coupons, or the surrender of such missing coupon or coupons may be waived by the Company and the Trustee if there be furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter 70 the Holder of such Security shall surrender to the Trustee or any Paying Agent any such missing coupon in respect of which a deduction shall have been made as provided in the preceding sentence, such Holder shall be entitled to receive the amount so deducted; provided, however, that interest represented by coupons shall be payable only at an office or agency located outside the United States (except as otherwise provided in Section 1002) and, unless otherwise specified as contemplated by Section 301, only upon presentation and surrender of those coupons. If any Security surrendered for repayment shall not be so repaid upon surrender thereof, the Repayment Price shall, until paid, bear interest from the Repayment Date at the rate of interest set forth in such Security or, in the case of an Original Issue Discount Security, at the Yield to Maturity of such Security. SECTION 1305. SECURITIES REPAID IN PART. Upon surrender of any Registered Security which is to be repaid in part only, the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge and at the expense of the Company, a new Registered Security or Securities of the same series, of any authorized denomination specified by the Holder, in an aggregate principal amount equal to and in exchange for the portion of the principal of such Security so surrendered which is not to be repaid. ARTICLE FOURTEEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1401. APPLICABILITY OF ARTICLE; COMPANY'S OPTION TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. If pursuant to Section 301 provision is made for either or both of (a) defeasance of the Securities of or within a series under Section 1402 or (b) covenant defeasance of the Securities of or within a series under Section 1403, then the provisions of such Section or Sections, as the case may be, together with the other provisions of this Article (with such modifications thereto as may be specified pursuant to Section 301 with respect to any Securities), shall be applicable to such Securities and any coupons appertaining thereto, and the Company may at its option by Board Resolution, at any time, with respect to such Securities and any coupons appertaining thereto, elect to have Section 1402 (if applicable) or Section 1403 (if applicable) be applied to such Outstanding Securities and any coupons appertaining thereto upon compliance with the conditions set forth below in this Article. SECTION 1402. DEFEASANCE AND DISCHARGE. Upon the Company's exercise of the above option applicable to this Section with respect to any Securities of or within a series, the Company shall be deemed to have been discharged from its obligations with respect to such Outstanding Securities and any coupons appertaining thereto on the date the conditions set forth in Section 1404 are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by such Outstanding Securities and any coupons appertaining thereto, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 1405 and the other Sections of this Indenture referred to in clauses (A) and (B) of this Section, and to have satisfied all its other obligations under such Securities and any coupons appertaining thereto and this 71 Indenture insofar as such Securities and any coupons appertaining thereto are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of such Outstanding Securities and any coupons appertaining thereto to receive, solely from the trust fund described in Section 1404 and as more fully set forth in such Section, payments in respect of the principal of (and premium, if any) and interest, if any, on such Securities and any coupons appertaining thereto when such payments are due, (B) the Company's obligations with respect to such Securities under Sections 305, 306, 1002 and 1003 and with respect to the payment of Additional Amounts, if any, on such Securities as contemplated by Section 1004, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article. Subject to compliance with this Article Fourteen, the Company may exercise its option under this Section notwithstanding the prior exercise of its option under Section 1403 with respect to such Securities and any coupons appertaining thereto. Money and securities held in trust pursuant to this Section 1402 shall not be subject to Article Sixteen. SECTION 1403. COVENANT DEFEASANCE. Upon the Company's exercise of the above option applicable to this Section with respect to any Securities of or within a series, the Company shall be released from any obligations under any covenant specified pursuant to Section 301, with respect to such Outstanding Securities and any coupons appertaining thereto on and after the date the conditions set forth in Section 1404 are satisfied (hereinafter, "covenant defeasance"), and such Securities and any coupons appertaining thereto shall thereafter be deemed to be not "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenant, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to such Outstanding Securities and any coupons appertaining thereto, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or such other covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or such other covenant or by reason of reference in any such Section or such other covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 501(4) or 501(7) or otherwise, as the case may be, but, except as specified above, the remainder of this Indenture and such Securities and any coupons appertaining thereto shall be unaffected thereby. SECTION 1404. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The following shall be the conditions to application of Section 1402 or Section 1403 to any Outstanding Securities of or within a series and any coupons appertaining thereto: (a) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 607 who shall agree to comply with the provisions of this Article Fourteen applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities and any coupons appertaining 72 thereto, (1) an amount in Dollars, or (2) Government Obligations applicable to such Securities and coupons appertaining thereto which, through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment of principal of (and premium, if any) and interest, if any, on such Securities and any coupons appertaining thereto, money in an amount, or (3) a combination thereof in an amount, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, (i) the principal of (and premium, if any) and interest, if any, on such Outstanding Securities and any coupons appertaining thereto on the Stated Maturity of such principal or installment of principal or interest and (ii) any mandatory sinking fund payments or analogous payments applicable to such Outstanding Securities and any coupons appertaining thereto on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities and any coupons appertaining thereto. (b) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound. (c) No Default or Event of Default with respect to such Securities and any coupons appertaining thereto shall have occurred and be continuing on the date of such deposit or, insofar as Sections 501(5) and 501(6) are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (d) In the case of an election under Section 1402, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of execution of this Indenture, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of such Outstanding Securities and any coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. (e) In the case of an election under Section 1403, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that 73 the Holders of such Outstanding Securities and any coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. (f) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance under Section 1402 or the covenant defeasance under Section 1403 (as the case may be) have been complied with and an Opinion of Counsel to the effect that either (i) as a result of a deposit pursuant to subsection (a) above and the related exercise of the Company's option under Section 1402 or Section 1403 (as the case may be), registration is not required under the Investment Company Act of 1940, as amended, by the Company, with respect to the trust funds representing such deposit or by the trustee for such trust funds or (ii) all necessary registrations under said Act have been effected. (g) Notwithstanding any other provisions of this Section, such defeasance or covenant defeasance shall be effected in compliance with any additional or substitute terms, conditions or limitations which may be imposed on the Company in connection therewith pursuant to Section 301. SECTION 1405. DEPOSITED MONEY AND GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS. Subject to the provisions of the last paragraph of Section 1003, all money and Government Obligations (or other property as may be provided pursuant to Section 301) (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 1405, the "Trustee") pursuant to Section 1404 in respect of any Outstanding Securities of any series and any coupons appertaining thereto shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and any coupons appertaining thereto and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities and any coupons appertaining thereto of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, if any, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the Government Obligations deposited pursuant to Section 1404 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of such Outstanding Securities and any coupons appertaining thereto. 74 Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or Government Obligations (or other property and any proceeds therefrom) held by it as provided in Section 1404 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect a defeasance or covenant defeasance, as applicable, in accordance with this Article. ARTICLE FIFTEEN MEETINGS OF HOLDERS OF SECURITIES SECTION 1501. PURPOSES FOR WHICH MEETINGS MAY BE CALLED. If Securities of a series are issuable as Bearer Securities, a meeting of Holders of Securities of such series may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders of Securities of such series. SECTION 1502. CALL, NOTICE AND PLACE OF MEETINGS. (a) The Trustee may at any time call a meeting of Holders of Securities of any series for any purpose specified in Section 1501, to be held at such time and at such place in the Borough of Manhattan, The City of New York or in London as the Trustee shall determine. Notice of every meeting of Holders of Securities of any series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided in Section 106, not less than 21 nor more than 180 days prior to the date fixed for the meeting. (b) In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 10% in principal amount of the Outstanding Securities of any series shall have requested the Trustee to call a meeting of the Holders of Securities of such series for any purpose specified in Section 1501, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have made the first publication of the notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities of such series in the amount above specified, as the case may be, may determine the time and the place in the Borough of Manhattan, The City of New York or in London for such meeting and may call such meeting for such purposes by giving notice thereof as provided in subsection (a) of this Section. SECTION 1503. PERSONS ENTITLED TO VOTE AT MEETINGS. To be entitled to vote at any meeting of Holders of Securities of any series, a Person shall be (1) a Holder of one or more Outstanding Securities of such series, or (2) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities of such series by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Holders of Securities of any series shall be the Persons entitled to vote at such 75 meeting and their counsel, any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 1504. QUORUM; ACTION. The Persons entitled to vote a majority in principal amount of the Outstanding Securities of a series shall constitute a quorum for a meeting of Holders of Securities of such series; provided, however, that if any action is to be taken at such meeting with respect to a consent or waiver which this Indenture expressly provides may be given by the Holders of not less than a specified percentage in principal amount of the Outstanding Securities of a series, the Persons entitled to vote such specified percentage in principal amount of the Outstanding Securities of such series shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities of such series, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 1502(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of any adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Outstanding Securities of such series which shall constitute a quorum. Except as limited by the proviso to Section 902, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the Holders of a majority in principal amount of the Outstanding Securities of that series; provided, however, that, except as limited by the proviso to Section 902, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action which this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in principal amount of the Outstanding Securities of a series may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid by the affirmative vote of the Holders of such specified percentage in principal amount of the Outstanding Securities of that series. Any resolution passed or decision taken at any meeting of Holders of Securities of any series duly held in accordance with this Section shall be binding on all the Holders of Securities of such series and the related coupons, whether or not present or represented at the meeting. Notwithstanding the foregoing provisions of this Section 1504, if any action is to be taken at a meeting of Holders of Securities of any series with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage in principal 76 amount of all Outstanding Securities affected thereby, or of the Holders of such series and one or more additional series: (i) there shall be no minimum quorum requirement for such meeting; and (ii) the principal amount of the Outstanding Securities of such series that vote in favor of such request, demand, authorization, direction, notice, consent, waiver or other action shall be taken into account in determining whether such request, demand, authorization, direction, notice, consent, waiver or other action has been made, given or taken under this Indenture. SECTION 1505. DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT OF MEETINGS. (a) Notwithstanding any provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities of a series in regard to proof of the holding of Securities of such series and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Securities shall be proved in the manner specified in Section 104 and the appointment of any proxy shall be proved in the manner specified in Section 104 or by having the signature of the Person executing the proxy witnessed or guaranteed by any trust company, bank or banker authorized by Section 104 to certify to the holding of Bearer Securities. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 104 or other proof. (b) The Trustee shall, by an instrument in writing appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders of Securities as provided in Section 1502(b), in which case the Company or the Holders of Securities of the series calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting. (c) At any meeting each Holder of a Security of such series or proxy shall be entitled to one vote for each $1,000 principal amount of the Outstanding Securities of such series held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security of such series or proxy. (d) Any meeting of Holders of Securities of any series duly called pursuant to Section 1502 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting, and the meeting may be held as so adjourned without further notice. 77 SECTION 1506. COUNTING VOTES AND RECORDING ACTION OF MEETINGS. The vote upon any resolution submitted to any meeting of Holders of Securities of any series shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities of such series or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities of such series held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities of any Series shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the fact, setting forth a copy of the notice of the meeting and showing that said notice was given as provided in Section 1502 and, if applicable, Section 1504. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Company and another to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. 78 * * * * * This Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Indenture. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED By /s/ MORTON A. PLAWNER ---------------------------- [SEAL] Treasurer Attest: /s/ PATRICK M. BURKE - ----------------------- Assistant Secretary FIRST UNION NATIONAL BANK, as Trustee By /s/ F. GALLAGHER ---------------------------------- Vice President [SEAL] Attest: J. Waters - ----------------------- Assistant Secretary 79 STATE OF NEW JERSEY ) ) ss: COUNTY OF ESSEX ) On the 23rd day of November, 1998, before me personally came Morton A. Plawner to me known, who, being by me duly sworn, did depose and say that he resides at East Brunswick, New Jersey; that he is Treasurer of Public Service Enterprise Group Incorporated, one of the Corporations described in and which executed the foregoing instrument; that he knows the seal of said Corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said Corporation; and that he signed his name thereto by like authority. [Notarial Seal] /s/ JACQUELYN E. COYLE ----------------------------------- Notary Public of New Jersey My Commission Expires July 22, 2002 STATE OF NEW JERSEY ) ) ss: COUNTY OF ESSEX ) On the 23rd day of November, 1998, before me personally came Frank Gallagher, to me known, who, being by me duly sworn, did depose and say that he resides at Secaucus, New Jersey; that he is a Vice President of First Union National Bank, one of the Corporations described in and which executed the foregoing instrument; that he knows the seal of said Corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said Corporation; and that he signed his name thereto by like authority. [Notarial Seal] /s/ CHERRI WELDON ---------------------------------- Notary Public of New Jersey My Commission Expires June 4, 2003 80 EXHIBIT A FORMS OF CERTIFICATION EXHIBIT A-1 FORM OF CERTIFICATE TO BE GIVEN BY PERSON ENTITLED TO RECEIVE BEARER SECURITY OR TO OBTAIN INTEREST PAYABLE PRIOR TO THE EXCHANGE DATE CERTIFICATE [Insert title or sufficient description of Securities to be delivered] This is to certify that, as of the date hereof, and except as set forth below, the above-captioned Securities held by you for our account (i) are owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States federal income taxation regardless of its source ("United States person(s)"), (ii) are owned by United States person(s) that are (a) foreign branches of United States financial institutions (financial institutions, as defined in United States Treasury Regulations Section 1.165-12(c)(1)(v) are herein referred to as "financial institutions") purchasing for their own account or for resale, or (b) United States person(s) who acquired the Securities through foreign branches of United States financial institutions and who hold the Securities through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution hereby agrees, on its own behalf or through its agent, that you may advise Public Service Enterprise Group Incorporated or its agent that such financial institution will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the United States Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) are owned by United States or foreign financial institution(s) for purposes of resale during the restricted period (as defined in United States Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and, in addition, if the owner is a United States or foreign financial institution described in clause (iii) above (whether or not also described in clause (i) or (ii)), this is to further certify that such financial institution has not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions. As used herein, "United States" means the United States of America (including the States and the District of Columbia); and its "possessions" include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands. A-1 We undertake to advise you promptly by tested telex on or prior to the date on which you intend to submit your certification relating to the above-captioned Securities held by you for our account in accordance with your Operating Procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certification applies as of such date. This certificate excepts and does not relate to [U.S.$] ____________of such interest in the above-captioned Securities in respect of which we are not able to certify and as to which we understand an exchange for an interest in a Permanent Global Security or an exchange for and delivery of definitive Securities (or, if relevant, collection of any interest) cannot be made until we do so certify. We understand that this certificate may be required in connection with certain tax legislation in the United States. If administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorize you to produce this certificate or a copy thereof to any interested party in such proceedings. Dated: ________________, 19__ [To be dated no earlier than the 15th day prior to (i) the Exchange Date or (ii) the relevant Interest Payment Date occurring prior to the Exchange Date, as applicable] [Name of Person Making Certification] _____________________________________ (Authorized Signatory) Name: Title: A-2 EXHIBIT A-2 FORM OF CERTIFICATE TO BE GIVEN BY EUROCLEAR AND CEDEL BANK IN CONNECTION WITH THE EXCHANGE OF A PORTION OF A TEMPORARY GLOBAL SECURITY OR TO OBTAIN INTEREST PAYABLE PRIOR TO THE EXCHANGE DATE CERTIFICATE [Insert title or sufficient description of Securities to be delivered] This is to certify that, based solely on written certifications that we have received in writing, by tested telex or by electronic transmission from each of the persons appearing in our records as persons entitled to a portion of the principal amount set forth below (our "Member Organizations") substantially in the form attached hereto, as of the date hereof, [U.S.$] principal amount of the above-captioned Securities (i) is owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source ("United States person(s)"), (ii) is owned by United States person(s) that are (a) foreign branches of United States financial institutions (financial institutions, as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(v) are herein referred to as "financial institutions") purchasing for their own account or for resale, or (b) United States person(s) who acquired the Securities through foreign branches of United States financial institutions and who hold the Securities through such United States financial institutions on the date hereof (and in either case (a) or (b), each such financial institution has agreed, on its own behalf or through its agent, that we may advise Public Service Enterprise Group Incorporated or its agent that such financial institution will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) is owned by United States or foreign financial institution(s) for purposes of resale during the restricted period (as defined in United States Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and, to the further effect, that financial institutions described in clause (iii) above (whether or not also described in clause (i) or (ii)) have certified that they have not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions. As used herein, "United States" means the United States of America (including the States and the District of Columbia); and its "possessions" include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands. A-2-1 We further certify that (i) we are not making available herewith for exchange (or, if relevant, collection of any interest) any portion of the temporary global Security representing the above-captioned Securities excepted in the above-referenced certificates of Member Organizations and (ii) as of the date hereof we have not received any notification from any of our Member Organizations to the effect that the statements made by such Member Organizations with respect to any portion of the part submitted herewith for exchange (or, if relevant, collection of any interest) are no longer true and cannot be relied upon as of the date hereof. We understand that this certification is required in connection with certain tax legislation in the United States. If administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorize you to produce this certificate or a copy thereof to any interested party in such proceedings. Dated:_______________, 19__ [To be dated no earlier than the Exchange Date or the relevant Interest Payment Date occurring prior to the Exchange Date, as applicable] [Morgan Guaranty Trust Company of New York, Brussels Office,] as Operator of the Euroclear System [Cedel Bank] By___________________________ A-2-2 EX-10.A(1) 3 DEFERRED COMPENSATION PLAN FOR DIRECTORS PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED DEFERRED COMPENSATION PLAN FOR DIRECTORS AMENDED DECEMBER 15, 1998 2 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED DEFERRED COMPENSATION PLAN FOR DIRECTORS January 1, 1988 1. PURPOSE. The Plan is designed to provide a method of deferring payment to non-employee Directors of their fees and annual retainers, as fixed from time to time by the Board of Directors, until termination of their services on the Board. 2. PLAN PERIODS. The first Plan Period shall commence upon the election of Directors at the 1987 Annual Stockholders' Meeting and terminate upon the election of Directors at the 1988 Annual Stockholders' Meeting. Subsequent Plan Periods shall relate to successive similar periods between Annual Stockholders Meetings. 3. ADMINISTRATION. The Plan shall be administered by a Committee consisting of the Chief Executive Officer of the Company and two other officers appointed by him. The Committee shall have the power to interpret the Plan and, subject to its provisions, to make all determinations necessary or desirable for the Plan's administration. 4. PARTICIPATION. (a) An individual who serves as a Director and is not otherwise employed by the Company or any of its subsidiaries shall be eligible to participate in the Plan if he elects to have payment of his annual retainer, his fees or his annual retainer and fees in respect of a Plan Period deferred as provided herein. (b) The election shall be made by written notice on Schedule A to the Plan filed with the Company's Secretary prior to the first day of such Plan Period or, in the case of a Director who first becomes eligible during a Plan Period, not later than 30 days after he first becomes eligible. Each such election shall be irrevocable. 5. DEFERRED COMPENSATION ACCOUNTS. (a) An account shall be established for each eligible, electing Director (a "Participant") which shall be designated as his Deferred Compensation Account. If a Participant elects to have payment deferred of his annual 3 retainer, the amount of the annual retainer payable to him with respect to a Plan Period shall be credited, in four equal installments on or about the last day of June, September, December and March in the Plan Period to which such retainer relates, to his Deferred Compensation Account, subject to the provisions of Section 5(c). If a Participant elects to have payment deferred of his fees, the amount of each fee payable to him for attendance at a meeting during a Plan Period shall be credited to his Deferred Compensation Account on or about the first business day following such meeting. The Company shall not be required to segregate any amounts credited to the Deferred Compensation Accounts, which shall be established merely as an accounting convenience. Amounts credited to the Deferred Compensation Accounts shall at all times remain solely the property of the Company subject to the claims of its general creditors and available for the Company's use for whatever purpose desired. (b) The amounts credited to a Deferred Compensation Account shall accrue interest each calendar quarter at an annual rate equal to the rate charged by The Chase Manhattan Bank, N.A., on the first business day of such calendar quarter for prime commercial loans of 90-day maturity (based on actual numbers of days, 360 days to the year), plus 1/2 of 1%. Such interest shall be computed on the average daily balance in a Deferred Compensation Account during each such calendar quarter and shall be credited to such Account and compounded on the last day of March, June, September and December. Interest shall continue to accrue and be compounded on the unpaid balance in a Deferred Compensation Account until such Account is fully distributed. (c) If, prior to the end of a Plan Period, a Participant becomes an employee of the Company or one of its subsidiaries or dies or ceases for any reason to be a Director, or if the effective date of participation by a Participant for any Plan Period shall be other than the first day thereof, he will be entitled 4 to be credited with that proportion of the annual retainer for the full Plan Period which the number of days of his participation in the Plan during such Plan Period bears to the total number of days in such Plan Period. 6. PAYMENT. (a) Following termination of a Participant's service on the Board, the Company shall distribute his Deferred Compensation Account. (b) By written notice on Schedule A to the Plan filed with the Company's Secretary, a Participant may elect to have distribution of his Deferred Compensation Account commence either (l) within thirty (30) days after the date he ceases to be a Director of the Company, or, in the alternative, (2) in the month of January of any calendar year following termination of the Participant's service on the Board, but not later than the month of January following the Participant's 71st birthday, unless the Participant is still a Director at such time, in which case distribution shall commence within thirty (30) days after the date he ceases to be a Director. Any such election, or any change in such election (by such subsequent written notice to the Secretary of the Company), shall apply only to future deferrals. In the event no election is made as to the commencement of distribution, such distribution shall commence within 30 days after the date the Participant ceases to be a Director of the Company. The actual date that distribution shall commence shall be a date within the appropriate period determined by the Committee in its sole discretion. (c) By written notice on Schedule A to the Plan filed with the Company's Secretary, a Participant may elect to receive the distribution of his Deferred Compensation Account in the form of (l) one lump-sum payment, or (2) monthly distributions over a period selected by the Participant of up to ten years. Any such election, or any change in such election (by such subsequent written notice to the Secretary of the Company), shall apply only to future deferrals. In the event a lump-sum 5 payment is made under the Plan, the amount then standing to the Participant's credit in his Deferred Compensation Account, including interest at the rate provided in Section 5(b) to the date of distribution, shall be paid to the Participant on the date determined under Section 6(b). In the case of a distribution over a period of years, the Company shall pay to the Participant, commencing on the date determined under Section 6(b), monthly installments from the amount then standing to his credit in his Deferred Compensation Account, including interest on the unpaid balance at the rate provided in Section 5(b) to the date of distribution. The amount of each installment shall be determined by dividing the then unpaid balance, plus accrued interest, in the Participant's Deferred Compensation Account by the number of installments remaining to be paid. If a Participant does not make an election as to the manner of distribution of his Deferred Compensation Account, such distribution shall be made in the form of monthly installments paid over a five-year period. Notwithstanding the above, a Participant may at any time elect, by written notice to the Secretary of the Company, to have the monthly payments scheduled to be made to him within a tax year paid to him in one installment within such year. (d) In the event of a Participant's death, the balance of the Participant's Deferred Compensation Account shall be distributed to the Participant's Beneficiary(ies) in annual installments over a period of not more than five years, in accordance with his election on Schedule B to the Plan filed with the Secretary of the Company. Any change in the period over which such payments are made shall only apply to future deferrals. Such distribution shall be made in a manner consistent with Section 6(c) of the Plan and shall commence within 30 days after the Participant's death, on a date within said month to be determined by the Committee in its sole discretion. Additional annual payments for distributions made over a 6 period of more than one year shall be made on the yearly anniversaries of such date. In the event of a Participant's death after distribution of this Deferred Compensation Account has commenced, any election under this Section 6(d) shall not extend the time of payment of his Deferred Compensation Account beyond the time when distribution would have been completed if he had lived. A Participant may change Beneficiary designations by filing a subsequent Schedule B with the Secretary of the Company. If a Participant does not make an election as to the manner of distribution of his Deferred Compensation Account in the event of his death, any such distribution shall be made as a lump-sum payment to his estate within 30 days after the Participant's death. (e) Notwithstanding any other provision of the Plan, if the Committee shall determine in its sole discretion that the time of payment of a Participant's Deferred Compensation Account should be advanced because of protracted illness or other undue hardship, then the Committee may advance the time or times of payment (whether before or after the Retirement Date) only if the Committee determines that an emergency beyond the control of the Participant exists and which would cause such Participant severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. A Participant who receives a hardship distribution may not reenter the Plan for twelve months after the date of such distribution. Any distribution for hardship under this Section 6(e) shall commence within thirty days after the Committee determines to make such hardship distribution. (f) Notwithstanding any other provision of the Plan if the Committee shall determine in its sole discretion that the time of payment of a Participant's Deferred Compensation Account should be advanced because it is important to terminate such Account in the interest of the Company, then 7 the Committee may advance the time or times of payment whether before or after the Retirement Date). 7. ASSIGNMENT. No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Participant or Beneficiary or subject to attachment, garnishment or other legal process. 8. TERMINATION AND AMENDMENT. (a) The Board may terminate the Plan at any time so that no further amounts shall be credited to Deferred Compensation Accounts or may, from time to time, amend the Plan, without the consent of Participants or Beneficiaries; provided, however, that no such amendment or termination shall impair any rights, including rights to income credits pursuant to Section 5(b) hereof, which have accrued under the Plan without the consent of the Participant or Beneficiary, or the legal representative of such person, so affected. (b) Notwithstanding any other provision of this Plan, upon the occurrence of a Change in Control (as defined below), the income credit calculated pursuant to Section 5(b) hereof may not be reduced below the prime commercial lending rate described therein. For purposes of this Plan, "Change in Control" shall mean the occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such person any securities acquired directly from the Corporation or its affiliates) representing 25% or more of the combined voting power of the Corporation's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (1) of paragraph (iii) below; or 8 (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board of Directors or nomination for election by the Corporation's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Corporation or any direct or indirect wholly owned subsidiary of the Corporation with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any subsidiary of the Corporation, at least 75% of the combined voting power of the securities of the Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (2) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (iv) the stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets, other than a sale or disposition by the Corporation of all or substantially all of the Corporation's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Corporation in substantially the same proportions as their ownership of the Corporation immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change 9 in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Corporation immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Corporation immediately following such transaction or series of transactions. SCHEDULE A DEFERRED COMPENSATION PLAN FOR DIRECTORS OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED (THE "PLAN") Elections in Connection with Deferral of Compensation Section 1 Election as to Compensation to be Deferred Note: THIS SECTION IS TO BE USED TO MAKE OR TO CHANGE AN ELECTION UNDER SECTION 4 OF THE PLAN. ANY CHANGE IN ELECTION WILL ONLY APPLY TO SUBSEQUENT PLAN PERIODS. I hereby elect to defer, in accordance with the provisions of the Plan: _____(a) My retainer. _____(b) My fees. _____(c) My retainer and my fees. Section 2. Election as to Commencement of Distribution From Account Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING A DIRECTOR COVERED BY THE PLAN AND (B) PRIOR TO EACH ANNUAL MEETING IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have distribution from my Account commence: _____(a) Within thirty (30) days after I cease to be a director of the Company. _____(b) In the month of January after I cease to be a director of the Company. _____(c) In the month of January,_______, (which is not later than the January following my 71st birthday), unless I am a director of the Company at such time, in which case within 30 days after I cease to be a director of the Company. Participant's Initials________ Date________ SCHEDULE A-2 Section 3. Election as to the Timing of the Distribution Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING A DIRECTOR COVERED BY THE PLAN AND (B) PRIOR TO EACH ANNUAL MEETING IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid: _____(a) In one lump sum. _____(b) In monthly installments over a period of _____ years. Date:_____ - ------------------------------------ ------------------------------------ Witness Participant's Signature SCHEDULE B DEFERRED COMPENSATION PLAN FOR DIRECTORS OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED (THE "PLAN") Section 1. Election as to Method of Distribution in Case of Death In case of my death, I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Deferred Compensation Account paid over a period of _______ year(s) to my Beneficiary(ies) designated in Section 2 hereof. Section 2. Designation of Beneficiary(ies) In the event of my death, I hereby designate the following individuals, fiduciaries or other entities, in their own right or in their representative capacity, in the proportions and in the priority of interest designated, to be the beneficiaries of any benefits owing to me, under the Plan. PRIMARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder. If any one or more of the primary beneficiaries designated hereunder shall predecease me, such beneficiary's share(s) shall be divided equally among the remaining primary beneficiaries. PROPORTIONATE NAME AND PRESENT INTEREST OF RELATIONSHIP ADDRESS OF PRIMARY PRIMARY TO BENEFICIARY(IES) BENEFICIARY(IES) PARTICIPANT - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- Participant's Initials______ Date______ SCHEDULE B-2 SECONDARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder only if all of my Primary Beneficiaries have predeceased me. If all Primary Beneficiaries have predeceased me and if any one or more of the Secondary Beneficiaries designated hereunder shall predecease me, such Secondary Beneficiary's share(s) shall be divided equally among the Secondary Beneficiaries. PROPORTIONATE NAME AND PRESENT INTEREST OF RELATIONSHIP ADDRESS OF SECONDARY SECONDARY TO BENEFICIARY(IES) BENEFICIARY(IES) PARTICIPANT - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- ESTATE - In the event I have declined to designate a Beneficiary hereunder or if all of the Beneficiaries that I have designated predecease me, then all benefits payable under the Plan shall be payable to my Estate. Date:_______________ - ------------------------------------ ------------------------------------ Witness Participant's Signature EX-10.A(2) 4 DEFERRED COMP. PLAN FOR CERTAIN EMPLOYEES DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AS AMENDED DECEMBER 15, 1998 DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AS AMENDED DECEMBER 15, 1998 1. PURPOSE. The purpose of this Plan is to provide a method to certain select and key employees of the Company to defer compensation as provided herein. 2. DEFINITIONS OF TERMS USED IN THIS PLAN. As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Account" - The Deferred Compensation Account described in Paragraph 4 of this Plan. (b) "Assets" - All Compensation and interest that have been credited to an Employee's Account in accordance with Paragraph 4 of this Plan. (c) "Beneficiary" - The individual(s) and/or entity(ies) designated and defined by Schedule B of the Plan. (d) "Change in Control" - The occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of Public Service Enterprise Group Incorporated ("Parent") (not including in the securities beneficially owned by such person any securities acquired directly from Parent or its affiliates) representing 25% or more of the combined voting power of Parent's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the board of directors of Parent ("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 Parent) whose appointment or election by the Board or nomination for election by Parent's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or 3 nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of Parent or any direct or indirect wholly owned subsidiary of Parent with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of Parent outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of Parent or any subsidiary of Parent, at least 75% of the combined voting power of the securities of Parent or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (2) a merger or consolidation effected to implement a recapitalization of Parent (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of Parent representing 25% or more of the combined voting power of Parent's then outstanding securities; or (iv) the stockholders of Parent approve a plan of complete liquidation or dissolution of Parent or there is consummated an agreement for the sale or disposition by Parent of all or substantially all of Parent's assets, other than a sale or disposition by Parent of all or substantially all of Parent's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of Parent in substantially the same proportions as their ownership of Parent immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Parent 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 Parent immediately following such transaction or series of transactions. (e) "Committee" - The Employee Benefits Committee of the Company. (f) "Company" - Public Service Electric and Gas Company. 4 (g) "Compensation" - The total remuneration paid to an Employee for services rendered to the Company, excluding the Company's cost for any public or private employee benefit plan. Compensation deferrable under this Plan shall specifically include any and all amounts transferred from the deferred compensation accounts of the Management Incentive Compensation Plan of Public Service Electric and Gas Company. (h) "Deferred Compensation" - The amount of Compensation deferred pursuant to Paragraph 3 of this Plan. (i) "Disability" - Disability so as to be incapable of performing further work for the Company that results in termination of employment. (j) "Employee" - Each individual member of the Operating Committee of the Company and such other employees of the Company as may be designated by the Committee. (k) "Pension Plan" - The Pension Plan of Public Service Electric and Gas Company. (l) "Plan" - The Deferred Compensation Plan for Certain Employees of Public Service Electric and Gas Company. 3. ELECTION AS TO THE AMOUNT OF COMPENSATION THAT IS TO BE DEFERRED. An Employee may elect to defer any portion of his Compensation otherwise payable for services rendered for the Company after the date of adoption of this Plan. Any such election must be made by filing with the Committee an "Election in Connection with Deferral of Compensation", the form of which is attached to this Plan as Schedule A and is hereinafter referred to as "Schedule A". An Employee may change (using Schedule A for such purposes), not later than December 31 of any year, the amount of Compensation to be deferred by him with respect to the next succeeding calendar year or years. In the calendar year that an Employee first becomes eligible to participate in this Plan, such Employee may elect to defer Compensation f or part of that calendar year but only if such election is made within thirty (30) days after the Employee first becomes eligible to participate in this Plan. Compensation may be deferred prospectively only, and the amount of Compensation to be deferred may be changed only with respect to future calendar years. 5 4. HOW THE ACCOUNT IS TO BE MAINTAINED. (a) Establishment of Account - The Company shall establish an Account for each Employee who elects to participate in the Plan. Each Employee's Account shall be credited at the end of each month with an amount equal to the Deferred Compensation which would have otherwise been payable to him that month. (b) Interest on Assets in the Account - The Assets credited to each Employee's Account shall accrue interest each calendar quarter at an annual rate equal to the rate charged by The Chase Manhattan Bank, N.A. on the first business day of such calendar quarter for prime commercial loans of 90 day maturity (based on actual number of days, 360 days to the year), plus 1/2 of 1%. Such interest shall be computed on the average daily balance in the Employee's Account during each calendar quarter, excluding any Assets which have been distributed from the Employee's Account during such quarter, and shall be credited to the Employee's Account and compounded on the last day of March, June, September and December, and interest on Assets distributed from an Employee's Account shall accrue in the same manner to the date of, be credited to the Employee's Account on the date of, and be paid with, such distribution. (c) Title to and Beneficial Ownership of Assets - The Plan shall be unfunded. The Company shall not be required to segregate any amounts credited to any Employee's Account, which shall be established merely as an accounting convenience. Title to and beneficial ownership of any Assets, whether Deferred Compensation or interest credited to an Employee's Account pursuant to Paragraphs 4(a) and (b) hereinabove, shall at all times remain in the Company, and no Employee nor Beneficiary shall have any interest whatsoever in any specific assets of the Company. All Assets shall at all times remain solely the property of the Company subject to the claims of its general creditors and available f or the Company's use for whatever purpose desired. 5. DISTRIBUTION FROM THE ACCOUNT (a) Election as to the Commencement of the Distribution - By election on Schedule A filed with the Committee, an Employee may elect to have distribution from his Account commence either (l) within thirty (30) days after the date he ceases to be employed by 6 the Company or, in the alternative, (2) in the month of January of any calendar year following termination of employment elected by the Employee, but in any event no later than the later of (a) the January of the year following the year of the Employee's 70th birthday or (b) the January following termination of employment. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. The actual date that distribution shall commence shall be a date within the elected period to be determined by the Committee in its sole discretion. (b) Election as to the Timing of the Distribution(s) - By election on Schedule A filed with the Committee, an Employee may elect to receive the distribution of his Account in the form of (l) one lump-sum payment, (2) annual distributions over a five-year period or (3) annual distributions over a 10-year period. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. In the event a lump-sum payment is made under this Plan, the Assets credited to an Employee's Account, including interest at the rate provided in Paragraph 4(b) of this Plan to the date of distribution, shall be paid to the Employee on the date determined under Paragraph 5(a) of this Plan. In the case of a distribution over a period of years, the Company shall pay to the Employee on the date determined under Paragraph S(a) of this Plan and on the yearly anniversaries of such date, annual installments of the unpaid balance of the Assets in the Employee's Account, including interest on the unpaid balance at the rate provided in Paragraph 4(b) of this Plan to the date of distribution. The amount of each installment shall be determined by multiplying the then unpaid balance, plus accrued interest, in the Employee's Account by a fraction, the numerator of which is one and the denominator of which is the number of annual installments remaining to be paid. (c) Distribution in Case of Certain Disability - In the event of an Employee's Disability prior to a calendar year elected by the Employee under Paragraph 5(a) (2) of this Plan for distribution to commence, distribution of the Employee's Account shall commence in the month following the month in which the Employee terminates employment for disability, in accordance with the Employee's election under Paragraph S(b) of this Plan as to the form of distribution. The actual date that distribution shall commence shall be a date within such month determined by the Committee in its sole discretion. 7 (d) Distribution in Case of Death - In the event of an Employee's death, the balance of the Employee's Account shall be distributed to the Employee's Beneficiary(ies) over a period of not more than five (S) years, in accordance with his election on Schedules A and B (filed with the Committee) for distribution in case of death. Any change in the period over which such payments are made shall only apply to future deferrals. Such distribution shall be made in a manner consistent with Paragraph 5(b) of this Plan and shall commence in the month of January of the year after the year of the Employee's death, on a date within said month to be determined by the Committee in its sole discretion. Additional annual payments for distributions made over a period of more than one year shall be made on the yearly anniversaries of such date. In the event of an Employee's death after distribution of his Account has commenced, any election under this Paragraph S(d) shall not extend the time of payment of his Account beyond the time when distribution would have been completed if he had lived. An Employee may change Beneficiary designations by filing a subsequent Schedule B with the Committee. (e) Request for Change in Distribution - An Employee, Beneficiary or a legal representative may request a change in the timing, frequency or amount of payments made from an Employee's Account by filing a written request therefor with the Committee. The Committee may, in its sole discretion, grant such request only if the Committee determines that an emergency beyond the control of the Employee, Beneficiary or legal representative exists and which would cause such Employee, beneficiary or legal representative severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. An Employee who makes a hardship withdrawal may not reenter this Plan for 12 months after the date of withdrawal. Any distribution under this Paragraph 5(e) shall commence within 30 days after the Committee grants such request for hardship withdrawal. (f) Employment not Terminated if Transferred to Company-Owned Corporation - For the purposes of this Paragraph 5, an Employee shall not be deemed to have terminated his employment if he is transferred to the employ of a corporation in which the Company owns a majority equity interest. (g) Company may Distribute in Lump-Sum if Distributable Amount Less 8 Than $5,000 - The Company reserves the right to make a lump-sum distribution, notwithstanding any other provision of this Plan, if the total Assets in an Employee's Account are $5,000 or less at any time after the Employee ceases to be employed by the Company. 6. UNFUNDED ADJUSTMENTS To MAKE UP FOR REDUCED BENEFIT UNDER PENSION PLAN. If an Employee, on termination of employment or thereafter, or a Beneficiary of the Employee under the Pension Plan, is entitled to any benefit under the Pension Plan, the Company shall pay out of its general funds a supplementary benefit (at such time after the Employee's retirement and in such manner as the Committee in its sole discretion shall determine) equivalent to the excess of the amount computed in (a) below over the amount computed in (b) below: (a) The benefit to which the Employee or such Beneficiary would have been entitled if the Employee's Final Earnings, as defined in the Pension Plan, had included all Compensation earned which would have been included in his Final Earnings if this Plan were not in effect. (b) The actual benefit to which the Employee or such Beneficiary is entitled under the Pension Plan. 7. ASSIGNMENT. No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Employee or Beneficiary under the Plan or subject to attachment, garnishment or other legal process. 8 PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT. This Plan shall not constitute a contract f or the continued employment of any Employee by the Company. The Company reserves the right to modify an Employee's compensation at any time and from time to time as it considers appropriate and to terminate his employment for any reason at any time notwithstanding this Plan. 9 9. AMENDMENT OR TERMINATION OF THE PLAN BY THE COMPANY. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall adversely affect the right of an Employee in respect of Deferred Compensation previously earned by him which has not been paid, unless such Employee or his legal representative shall consent to such change; provided, further, that notwithstanding any other provision of this Plan, upon the occurrence of a Change in Control, the income credit calculated pursuant to Paragraph 4 may not be reduced below the prime commercial lending rate described therein. 10. WHAT CONSTITUTES NOTICE. Any notice to an Employee, Beneficiary or legal representative hereunder shall be given either by delivering it or by depositing it in the United States mail, postage prepaid, addressed to his last known address. Any notice to the Company or the Committee hereunder (including the filing of Schedules A and B) shall be given either by delivering it, or depositing it in the United States mail, postage prepaid, to the Secretary of the Employee Benefits Committee, Public Service Electric and Gas Company, 80 Park Plaza T2B, P. 0. Box 570, Newark, New Jersey 07101. 11. ADVANCE DISCLAIMER OF ANY WAIVER ON THE PART OF THE COMPANY. Failure by the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 12. EFFECT ON INVALIDITY OF ANY PART OF THE PLAN. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 13. PLAN BINDING ON ANY SUCCESSOR OWNER. Except as otherwise 10 provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 14. LAWS GOVERNING THIS PLAN. Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 15. MISCELLANEOUS. The masculine pronoun shall mean the feminine wherever appropriate. 11 SCHEDULE A DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY (THE "PLAN") Elections in Connection With Deferral of Compensation Section 1. Election as to Compensation to be Deferred. Note: THIS SECTION IS TO BE USED TO MAKE OR TO CHANGE AN ELECTION UNDER PARAGRAPH 3 OF THE PLAN. ANY CHANGE IN ELECTION MUST BE MADE NO LATER THAN DECEMBER 31 OF THE YEAR PRECEDING THE YEAR IN WHICH YOU WISH THE CHANGE TO APPLY. I hereby elect to defer, in accordance with the provisions of the Plan: _________ (a) a month of my Compensation; or _________ (b) All of my Compensation in excess of $___________ per year. Section 2. Election as to Commencement of Distribution From Account Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31ST OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have distribution from my Account commence: _________ (a) Within thirty (30) days after I cease to be employed by the Company. _________ (b) In the month of January, _________, unless I am employed by the Company at such time, in which case within 30 days after I cease to be employed by the Company. Employee's Initials______________ Date_____________ SCHEDULE A-2 Section 3. Election as to the Timing of the Distribution Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31ST OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid: _________ (a) In one lump sum. _________ (b) In annual installments over a period of five (5) years. _________ (c) In annual installments over a period of ten (10) years. Section 4. Election As To Method Of Distribution In Case of Death Note: THIS SECTION TO BE USED TO SELECT THE METHOD OF DISTRIBUTION IN THE CASE OF DEATH. PERIOD SELECTED MAY NOT BE MORE THAN FIVE (5) YEARS. In case of my death, I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid over a period of ______ year(s) to my Beneficiary(ies) designated on Schedule B. __________________, 19__ - ------------------------------------ ------------------------------------------ Witness Employee Signature SCHEDULE B DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY (THE "PLAN") DESIGNATION OF BENEFICIARY(IES) In the event of my death, I hereby designate the following individuals, fiduciaries or other entities, either in their own right or in their representative capacity, in the proportions and in the priority of interest designated, to be the beneficiaries of any benefits owing to me, under the Plan. PRIMARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder. If any one or more of the primary beneficiaries designated hereunder shall predecease me, such beneficiary's share(s) shall be divided equally among the remaining primary beneficiaries. PROPORTIONATE NAME AND PRESENT ADDRESS INTEREST OF PRIMARY RELATIONSHIP OF PRIMARY BENEFICIARY(IES) BENEFICIARY(IES) TO EMPLOYEE - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- SCHEDULE B SECONDARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder only if all of my Primary Beneficiaries have predeceased me. If all Primary Beneficiaries have predeceased me and if any one or more of the Secondary Beneficiaries designated hereunder shall predecease me, such Secondary Beneficiary's share(s) shall be divided equally among the Secondary Beneficiaries. PROPORTIONATE NAME AND PRESENT ADDRESS INTEREST OF PRIMARY RELATIONSHIP OF PRIMARY BENEFICIARY(IES) BENEFICIARY(IES) TO EMPLOYEE - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- ESTATE - In the event I have declined to designate a Beneficiary hereunder or if all of the Beneficiaries that I have designated predecease me, then all benefits payable under the Plan shall be payable to my Estate. Date:________ - ------------------------------------ ------------------------------------ Witness Employee's Signature EX-10.A(3) 5 LIMITED SUPPLEMENTAL BENEFITS PLAN LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AS AMENDED DECEMBER 15, 1998 LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY TABLE OF CONTENTS Page 1. PURPOSE............................................................... 1 2. DEFINITIONS OF TERMS USED IN THE PLAN................................. 1 3. DEATH BENEFIT.......................................................... 5 4. RETIREMENT BENEFIT..................................................... 6 5. ADMINISTRATION OF ACCOUNTS............................................ 12 6. DESIGNATION OF BENEFICIARIES.......................................... 13 7. LIMITATION OF BENEFITS................................................ 16 8. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT...................... 16 9. AMENDMENT OR TERMINATION OF THE PLAN.................................. 16 10. WHAT CONSTITUTES NOTICE............................................... 17 11. ADVANCE DISCLAIMER OF WAIVER.......................................... 17 12. EFFECT OF INVALIDITY OF ANY PART OF THE PLAN.......................... 17 13. PLAN BINDING ON ANY SUCCESSOR......................................... 17 14. FUNCTION OF THE COMMITTEE............................................. 18 15. COMPANY SHALL PAY LEGAL FEES.......................................... 18 16. LAW GOVERNING THE PLAN................................................ 18 17. MISCELLANEOUS......................................................... 18 -i- LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY 1. PURPOSE. The purpose of this Plan is to assist the Company in attracting and retaining a stable pool of key managerial talent and to encourage long-term key employee commitment to the Company by providing selected employees of the Company with certain limited supplemental death and retirement benefits as defined herein. The Plan is intended to provide such benefits to a select group of management or highly compensated employees within the meaning of ERISA. 2. DEFINITIONS OF TERMS USED IN THE PLAN. As used in the Plan, the following words and phrases shall have the meanings indicated: (a) "ACCOUNT" -- Any account established pursuant to Paragraph 3(b) or 4(f) of the Plan. (b) "ANNUITY" -- A fully-funded contract with an independent insurance company purchased by the Company pursuant to Paragraph 4(f) of the Plan. (c) "ASSETS" -- All amounts that have been credited to an Employee's Account in accordance with Paragraph 3(b), 4(f), or 5(b) of the Plan. (d) "BENEFICIARY" -- The individual(s) and/or entity(ies) designated in writing by a Participant in the form attached to the Plan as Schedule A. (e) "CASH BALANCE PLAN" -- The Cash Balance Pension Plan of Public Service Electric and Gas Company. (f) "CHANGE IN CONTROL" -- For the purposes of the Plan, a Change in Control of the Company shall mean the occurrence of any of the following events: -1- (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of Public Service Enterprise Group Incorporated ("Parent") (not including in the securities beneficially owned by such person any securities acquired directly from Parent or its affiliates) representing 25% or more of the combined voting power of Parent's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the board of directors of Parent ("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 Parent) whose appointment or election by the Board or nomination for election by Parent's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of Parent or any direct or indirect wholly owned subsidiary of Parent with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Parent outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of Parent or any subsidiary of Parent, at least 75% of the combined voting power of the securities of Parent or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Parent (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of Parent representing 25% or more of the combined voting power of Parent's then outstanding securities; or -2- (iv) the stockholders of Parent approve a plan of complete liquidation or dissolution of Parent or there is consummated an agreement for the sale or disposition by Parent of all or substantially all of Parent's assets, other than a sale or disposition by Parent of all or substantially all of Parent's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of Parent in substantially the same proportions as their ownership of Parent immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Parent 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 Parent immediately following such transaction or series of transactions. (g) "CODE" -- The Internal Revenue Code of 1986, as amended. (h) "COMMITTEE" -- The Employee Benefits Committee of the Company as selected by its Board of Directors. (i) "COMPANY" -- Public Service Electric and Gas Company. (j) "COMPENSATION" -- (i) For the purposes of calculating the Death Benefit pursuant to Paragraph 3 of the Plan, as to any Participant, Compensation shall be equal to the annual rate of salary of the Participant in effect at the date of death; and (ii) For the purposes of calculating the Retirement Benefit pursuant to Paragraph 4 of the Plan, as to any Participant, Compensation shall be equal to the average of the total remuneration paid to such Participant for services rendered to the Company, excluding the Company's cost for any -3- public or private employee benefit plan (including, without limitation, the Long-Term Incentive Compensation Plan of Enterprise) but including all elective contributions that are made by the Company on behalf of a Participant which are not includable in income under Code Sections 125 or 401(k), for the five years ending at the earlier of such Participant's date of Retirement or attainment of normal retirement age under the Pension Plan; provided, however, that for the purposes of Paragraph 4 of the Plan, Compensation with respect to any Participant shall not exceed the amount which is 130% of the average annual base salary of the Participant for the applicable five-year period. (k) "ENTERPRISE" -- Public Service Enterprise Group Incorporated. (l) "ERISA" -- The Employee Retirement Income Security Act of 1974, as amended. (m) "PARTICIPANT" -- Each employee of the Company nominated by the Chief Executive Officer and designated by the Employee Benefits Policy Committee of Enterprise. The Chief Executive Officer of the Company shall nominate such select and key employees of the Company upon such terms as he shall deem appropriate due to the employee's responsibilities and opportunity to contribute substantially to the financial and operating objectives of the Company. (n) "PENSION PLAN" -- The Pension Plan of Public Service Electric and Gas Company. (o) "PLAN" -- The Limited Supplemental Benefits Plan for Certain Employees of Public Service Electric and Gas Company. -4- (p) "RETIREMENT" -- For the purposes of the Plan, Retirement of a Participant shall be deemed to have occurred upon either (i) termination of the Participant's service with the Company with the right to an immediately payable periodic retirement benefit under the Pension Plan or the Cash Balance Plan or (ii) upon a Change in Control of the Company. Retirement shall not include termination of service with the right to a deferred pension under the Pension Plan or a deferred retirement benefit or early commencement of payment of a participant's Cash Balance Account under the Cash Balance Plan. (q) "RETIREMENT PLAN" -- Any pension plan within the meaning of ERISA, excluding (i) the Pension Plan, the Cash Balance Plan and all defined contribution plans maintained by the Company, except insofar as any such defined contribution plan may provide supplementary benefits to the Pension Plan or the Cash Balance Plan, (ii) this Plan and (iii) all deferred compensation plans, tax credit employee stock ownership plans and thrift plans, and all other profit-sharing plans which are not the principal retirement benefit of a plan sponsor, maintained by sponsors other than the Company. (r) "VOTING STOCK" -- Outstanding stock of a corporation entitled to vote in the election of the directors of that corporation. 3. DEATH BENEFIT. (a) AMOUNT OF BENEFIT -- If a Participant dies while in the active employment of the Company, the Company shall provide a death benefit to such Participant's Beneficiary in an amount equal to 150% of the Participant's Compensation, adjusted to the nearest $1,000, or to the next highest $1,000 if such Compensation -5- is a multiple of $500 but not of $1,000. (b) ESTABLISHMENT OF ACCOUNT -- Upon the death of a Participant during employment with the Company, the Company shall establish an Account for the benefit of such Participant's Beneficiary. Such Account shall initially be credited with an amount equal to the benefit provided under Paragraph 3(a) and shall be held and administered as provided in Paragraph 5 of the Plan. 4. RETIREMENT BENEFIT. (a) GENERAL -- At Retirement, the Company shall provide each Participant with a retirement benefit calculated as provided in this Paragraph 4. (b) DETERMINATION OF BENEFIT -- (i) Pension Plan Participants: (A) The Participant's Compensation shall be multiplied by an amount equal to one one-hundredth of the sum of (X) the number of the Participant's years of credited service under the Pension Plan at Retirement, (Y) the number of any additional years of service credit to which the Participant may be entitled from the Company under the Mid-Career Supplemental Retirement Income Plan of Public Service Electric and Gas Company and its Affiliates or any written arrangement with the Company, and (Z) 30; but, in no event, shall the multiple be greater than 0.75. (B) The amount determined under subparagraph (A) of this Paragraph 4(b)(i) shall be reduced by the sum of (X) the amount the Participant would be entitled to at Retirement as an annual pension benefit under the Pension Plan and any supplemental retirement plan (other than this Plan) -6- maintained by the Company calculated as a single life annuity without reduction for any pre-retirement survivor's option coverage or any reduction for early retirement, (Y) 100% of the amount of the unreduced annual Social Security benefit to which the Participant would be entitled at age 65 (or such other age which may be established by the Social Security Administration from time to time as the earliest age at which a Participant may receive an unreduced benefit thereunder), assuming that the Participant has no earnings from the date of Retirement to age 65 (or such other applicable age), or, if greater, any disability benefit under Social Security to which the Participant may be entitled, and (Z) the aggregate of the annual benefits to which the Participant is entitled under all Retirement Plans as of the date the Participant is employed by the Company, such Social Security Benefits and benefits under all Retirement Plans to be calculated as single life annuities without any reductions, under rules, procedures and equivalents determined by the Committee. To determine the amounts referred to under (y) and (z) above, the Participant shall file a declaration of all such amounts with the Employee Benefits Department of the Company in such form as the Committee may require from time to time. No benefit shall be paid under the Plan until such a declaration, in satisfactory form, shall be filed with the Employee Benefits Department. If a Participant is granted a disability Social Security benefit, he shall notify the Employee Benefits Department thereof within 30 days thereof, and the Participant's retirement benefit under this Plan shall be adjusted -7- accordingly. The Company shall be entitled to rely on such statements in making payment, and if any such statement is incorrect or is not furnished, the Company shall be entitled to reimbursement from the Participant, the Beneficiary or their legal representatives for any overpayment and may reduce or suspend future payments to recover any such overpayment. In the event it is established to the satisfaction of the Committee, in its sole discretion, that any such statement was intentionally false or omitted, the Participant or Beneficiary shall be entitled to no further payments under the Plan, and the Company shall be entitled to recover any payments made hereunder. (ii) Cash Balance Plan Participants: (A) The Participant's Compensation shall be multiplied by an amount equal to one one-hundredth of the sum of (X) the number of the Participant's years of service under the Pension Plan with which such Participant would have been credited at Retirement had the Participant participated in the Pension Plan from his/her date of hire, (Y) the number of any additional years of service credit to which the Participant may be entitled from the Company under the Mid-Career Supplemental Retirement Income Plan of Public Service Electric and Gas Company and its Affiliates or any written arrangement with the Company, and (Z) 30; but, in no event, shall the multiple be greater than 0.75. (B) The amount determined under subparagraph (A) of this Paragraph 4(b)(ii) shall be reduced by the sum of (X) the amount the Participant would be -8- entitled to at Retirement as an annual pension benefit under the Cash Balance Plan and any supplemental retirement plan (other than this Plan) maintained by the Company calculated as a single life annuity without reduction for any pre-retirement survivor's option coverage or any reduction for early retirement, (Y) 100% of the amount of the unreduced annual Social Security benefit to which the Participant would be entitled at age 65 (or such other age which may be established by the Social Security Administration from time to time as the earliest age at which a Participant may receive an unreduced benefit thereunder), assuming that the Participant has no earnings from the date of Retirement to age 65 (or such other applicable age), or, if greater, any disability benefit under Social Security to which the Participant may be entitled, and (Z) the aggregate of the annual benefits to which the Participant is entitled under all Retirement Plans as of the date the Participant is employed by the Company, such Social Security Benefits and benefits under all Retirement Plans to be calculated as single life annuities without any reductions, under rules, procedures and equivalents determined by the Committee. To determine the amounts referred to under (y) and (z) above, the Participant shall file a declaration of all such amounts with the Employee Benefits Department of the Company in such form as the Committee may require from time to time. No benefit shall be paid under the Plan until such a declaration, in satisfactory form, shall be filed with the Employee Benefits Department. If a Participant is granted a disability Social Security benefit, he shall -9- notify the Employee Benefits Department thereof within 30 days thereof, and the Participant's retirement benefit under this Plan shall be adjusted accordingly. The Company shall be entitled to rely on such statements in making payment, and if any such statement is incorrect or is not furnished, the Company shall be entitled to reimbursement from the Participant, the Beneficiary or their legal representatives for any overpayment and may reduce or suspend future payments to recover any such overpayment. In the event it is established to the satisfaction of the Committee, in its sole discretion, that any such statement was intentionally false or omitted, the Participant or Beneficiary shall be entitled to no further payments under the Plan, and the Company shall be entitled to recover any payments made hereunder. (c) FORMS OF BENEFIT -- The annual amount determined under paragraph (b) of this Paragraph 4 shall be paid in one of the following forms: (i) a single life annuity in monthly installments equal to one twelfth of such annual amount; (ii) a joint and survivor annuity in monthly installments based upon such annual amount and calculated in accordance with any post-retirement survivorship option available under the Pension Plan or the Cash Balance Plan, as the case may be; (iii)a 10-year certain level payment annuity in monthly installments which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan or the Cash Balance Plan, as the case -10- may be, according to mortality assumptions used for the Pension Plan or the Cash Balance Plan, as the case may be, on the basis of a current interest rate assumption determined from time to time by the Committee; or (iv) a 10-year certain increasing payment annuity paid in accordance with Paragraph 5(c) of the Plan based upon the lump-sum amount which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan or the Cash Balance Plan, as the case may be, according to mortality assumptions used for the Pension Plan or the Cash Balance Plan, as the case may be, on the basis of a current market rate interest assumption determined from time to time by the Committee; or (v) a lump sum payment of the present value of any of the foregoing based upon the same assumptions used for lump sum payments under the Pension Plan or the Cash Balance Plan, as the case may be. The Committee in its sole discretion shall determine the form of benefit payment for each Participant; provided, however, that, notwithstanding any other provision of this Plan, the Participant shall determine the form of benefit from and after the occurrence of a Change in Control. (d) CHANGE IN CONTROL -- (i) If there shall occur a Change in Control, then each Participant who has not already retired under the Pension Plan or the Cash Balance Plan, as the case may be, shall be entitled to a retirement benefit under this Plan -11- calculated as if such Participant had retired under the Pension Plan or the Cash Balance Plan, as the case may be, as of the date of such Change in Control. (ii) The retirement benefit to be paid pursuant to Paragraph 4(d)(i) shall be paid to the Participant in a 10-year certain level payment annuity paid in accordance with Paragraph 5(c) of the Plan based upon the lump-sum amount which is the actuarial equivalent to the single-life annuity under Paragraph 4(c)(i) of the Plan as determined by the actuary for the Pension Plan or the Cash Balance Plan, as the case may be, according to mortality assumptions used for the Pension Plan or the Cash Balance Plan, as the case may be, on the basis of a current market rate interest assumption determined from time to time by the Committee. (iii) Notwithstanding anything contained in the Plan to the contrary, if a Change in Control shall occur, the Company shall purchase from an independent insurance company fully paid annuities which shall provide for the payment to all Participants and Beneficiaries of all accrued benefits under the Plan. (e) ESTABLISHMENT OF ACCOUNT -- If payment is made under either Paragraph 4(c)(iii) or 4(c)(iv) of the Plan, upon Retirement, the Company shall establish an Account for the benefit of the Participant and any Beneficiary. Such Account shall initially be credited with an amount equal to the amount of the lump-sum payment determined under Paragraph 4(c)(iii) or 4(c)(iv), as applicable, and shall be administered as provided in Paragraph 5 of the Plan. -12- (f) DISABILITY RETIREMENT -- If a Participant retires for disability under the Pension Plan or the Cash Balance Plan, as the case may be, payment of the Participant's retirement benefit and any joint and survivor benefit under Paragraph 4(c)(ii) of the Plan shall be subject to the same conditions as the disability pension under the Pension Plan or the Cash Balance Plan, as the case may be. 5. ADMINISTRATION OF ACCOUNTS. (a) GENERAL -- Accounts shall be established under the Plan only pursuant to Paragraphs 3(b) and 4(e) hereof. All Accounts shall be administered in accordance with the provisions of this Paragraph 5. (b) INTEREST ON ASSETS IN THE ACCOUNT -- The Assets credited to a Participant's Account shall accrue interest at a market rate of interest as may be determined from time to time by the Committee. (c) TIMING OF THE DISTRIBUTION(S) -- A Participant or Beneficiary shall receive the distribution of the Participant's Account in the form of monthly distributions over a ten-year period commencing in the month following the month of the Participant's death in the case of a death benefit, or over a ten-year period commencing in the month of the Participant's Retirement in the case of a retirement benefit. The amount of each installment shall be determined by dividing the then unpaid balance in the Participant's Account, including accrued and unpaid interest, by the number of installments remaining to be paid. (d) REQUEST FOR CHANGE IN DISTRIBUTION -- A Participant, Beneficiary or legal representative may request a change in the timing, frequency or amount of payments made from a Participant's Account by filing a written request therefor 13 with the Committee. The Committee may, in its sole discretion, grant such request only if the Committee determines that an emergency beyond the control of the Participant, Beneficiary or legal representative exists and which would cause such Participant, Beneficiary or legal representative severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. The Committee shall inform the Participant, Beneficiary or legal representative of its decision within sixty (60) days of receipt of the written request. 6. DESIGNATION OF BENEFICIARIES (a) GENERAL -- To designate an individual(s) and/or entity(ies) to receive the benefits of the Plan with respect to a Participant, such Participant must file a written designation in the form of Schedule A to the Plan with the Committee. Subject to the restrictions of this Paragraph 6, a Participant may change such designation by filing a subsequent written designation. (b) DEATH BENEFIT -- By designation on Section 1 of a Schedule A filed with the Committee, a Participant may name an individual(s) and/or entity(ies) to receive a death benefit under Paragraph 3 of the Plan with respect to such Participant. A Participant may change such designation by filing a subsequent notification in the form of Schedule A. (c) RETIREMENT BENEFITS -- (i) SINGLE LIFE ANNUITY. If a Participant's retirement benefit under the Plan is paid as a single life annuity under Paragraph 4(c)(i) of the Plan, there shall be no Beneficiary with respect to such benefit and all retirement benefits shall cease 14 upon the Participant's death. (ii) JOINT AND SURVIVOR ANNUITY. If a Participant's retirement benefit under Paragraph 4(c)(ii) of the Plan and the Participant's pension under the Pension Plan or the Cash Balance Plan, as the case may be, are both paid as joint and survivor annuities, any survivor annuity under the Plan shall be paid to the same beneficiary entitled to any post-retirement survivorship benefit under the Pension Plan or the Cash Balance Plan, as the case may be. If the Participant's pension under the Pension Plan or the Cash Balance Plan, as the case may be, is paid as a single life annuity, any survivor annuity paid under Paragraph 4(c)(ii) of the Plan shall be paid to the Beneficiary designated in Section 2 of Schedule A to the Plan. If a Beneficiary designated by the Participant under Paragraph 4(c)(ii) of the Plan predeceases the Participant within five years from the date of Participant's Retirement, the Participant's retirement benefit hereunder will automatically revert and return to a single life annuity commencing the first day of the month following the month in which the designated Beneficiary died. If, however, the Beneficiary predeceases the Participant more than five years after Participant's Retirement, the Participant's reduced retirement benefit shall continue during his life and no survivor benefit shall be paid. The election of such Beneficiary must be made prior to Retirement and may not be changed thereafter. (iii) 10-YEAR CERTAIN ANNUITIES. If a Participant's Retirement benefit is paid as a 10-year certain level payment annuity under Paragraph 4(c)(iii) or Paragraph 4(d)(ii) of the Plan, or a 10-year certain increasing payment annuity under Paragraph 4(c)(iv), the Beneficiary or Beneficiaries with respect to such benefit shall be as 15 specified in Section 1 of the most recent Schedule A filed with the Committee. (d) DESIGNATION BY LAST REMAINING BENEFICIARY -- After a Participant's death, if there is only one remaining Beneficiary with respect to a death benefit under Paragraph 3 of the Plan or a 10-year certain annuity under Paragraph 4(c)(iii), 4(c)(iv) or 4(d)(ii) of the Plan, such Beneficiary shall be entitled to designate in writing to the Committee an individual to be paid any remainder of such benefit under the Plan at such Beneficiary's death. If no such further designation is made, such remainder shall be paid to such Beneficiary's estate. In the event of such Beneficiary's death, and regardless of whether any such further designation has been made, the Committee in its sole discretion may require any such remainder to be paid as a lump sum. 7. LIMITATION OF BENEFITS. (a) The Plan shall be unfunded with respect to all benefits to be paid hereunder. In addition, except as provided in Paragraphs 4(d)(iii) and 16(b), the Company shall not be required to segregate any amounts credited to any Account, which shall be established merely as an accounting convenience; title to and beneficial ownership of any Assets credited to any Account shall at all times remain in the Company, and no Participant, Beneficiary or legal representative shall have any interest whatsoever in any specific assets of the Company. (b) The payment of any death or survivorship benefit under this Plan shall be contingent upon such evidence of death as may be required by the Committee. (c) If the Company should terminate the Plan pursuant to Paragraph 9 hereof, the Company's obligation to pay any benefits under the Plan shall likewise terminate; 16 provided, however, that, except as otherwise provided in said Paragraph 9, the Company may not terminate the Plan with respect to any Participant subsequent to that Participant's Retirement or death. 8. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT. The Plan shall not constitute a contract for the continued employment of any Participant by the Company. The Company reserves the right to modify a Participant's Compensation at any time and from time to time as it considers appropriate and to terminate any Participant's employment for any reason at any time notwithstanding the Plan. 9. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate the Plan at any time, provided, however, that no such amendment, modification or termination shall deprive any Participant or Beneficiary of a previously acquired right unless such Participant or Beneficiary or his legal representative shall consent to such change. No right to a death benefit under the Plan shall accrue until a Participant's death and no right to a retirement benefit shall accrue until a Participant's Retirement. 10. WHAT CONSTITUTES NOTICE. Any notice to a Participant, a Beneficiary or any legal representative hereunder shall be given in writing, by personal delivery, overnight express service or by United States mail, postage prepaid, addressed to such person's last known address. Any notice to the Company or the Committee hereunder (including the filing of Schedule A) shall be given by delivering it in person or by overnight express service, or depositing it in the United States mail, postage prepaid, to the Secretary of the Employee Benefits Committee, Public Service Electric and Gas Company, 80 Park Plaza, T10B, P.O. Box 570, Newark, New Jersey, 07101. 17 11. ADVANCE DISCLAIMER OF WAIVER. Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 12. EFFECT OF INVALIDITY OF ANY PART OF THE PLAN. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision of the Plan. 13. PLAN BINDING ON ANY SUCCESSOR. Except as otherwise provided herein, the Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 14. FUNCTION OF THE COMMITTEE. The Plan shall be administered by the Committee and the Committee shall be the final arbiter of any question that may arise under the Plan. 15. COMPANY SHALL PAY LEGAL FEES. (a) In the event of a Change in Control, the Company shall pay the legal fees and expenses of any Participant, Beneficiary or legal representative thereof incurred in any action to enforce such person's right to receive a benefit under the Plan. (b) In the event of a Change in Control, the Company shall establish a trust for the benefit of Participants and persons claiming though them which shall be funded in 18 an initial amount of $1,000,000 from which the Committee shall, according to reasonable rules that the Committee shall establish, pay the legal fees and expenses incurred by any Participant, Beneficiary or legal representative thereof in enforcing his rights under the Plan. The Company shall contribute such additional sums to such trust as shall be necessary to pay such legal fees and expenses. 16. LAW GOVERNING THE PLAN. Except to the extent federal law applies, the Plan shall be governed by the laws of the State of New Jersey without giving effect to principles of conflicts of law. 17. MISCELLANEOUS. (a) The masculine pronoun shall mean the feminine wherever appropriate. (b) The headings are for convenience only. In the event of a conflict between the headings of a paragraph and its contents, the contents shall control. 19 EX-10.A(4) 6 MID-CAREER HIRE SUP. RETIREMENT INCOME PLAN MID-CAREER HIRE SUPPLEMENTAL RETIREMENT INCOME PLAN FOR SELECTED EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AND ITS AFFILIATES Effective January 1, 1996 As Amended December 15, 1998 TABLE OF CONTENTS Section 1. Definitions.......................................................1 Section 2. Eligibility.......................................................4 Section 3. Supplemental Retirement Benefit...................................5 Section 4. Supplemental Surviving Spouse Benefit.............................7 Section 5. Administration of the Plan........................................8 Section 6. Claims Procedure and Status Determination........................10 Section 7. Amendment or Termination.........................................10 Section 8. General Provisions...............................................11 Section 9. Miscellaneous....................................................14 MID-CAREER HIRE SUPPLEMENTAL RETIREMENT INCOME PLAN FOR SELECTED EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AND ITS AFFILIATES This Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Electric and Gas Company and its Affiliates is adopted effective January 1, 1995. This Plan is established and maintained by Public Service Electric and Gas Company and its Participating Affiliates solely for the purpose of assisting in attracting and retaining a stable pool of key managerial and professional talent and long-term key employee commitment by providing certain supplemental retirement benefits based upon additional service credit for a selected number of their key employees who participate in the Pension Plan of Public Service Electric and Gas Company. This Plan is intended to constitute an unfunded plan of deferred compensation for a select group of management or highly compensated employees for purposes of Title 1 of ERISA. Accordingly, Public Service Electric and Gas Company hereby adopts this Plan pursuant to the terms and provisions set forth below: Section 1. Definitions When used herein, the words and phrases hereinafter defined shall have the following meanings unless a different meaning is clearly required by the context of the Plan: 1.1 "Affiliate" shall mean any organization which is a member of a controlled group of Companies (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)) 2 which includes the Company or any other entity required to be aggregated with the Company as required by regulations promulgated pursuant to Code Section 414(o). 1.2 "Beneficiary" shall mean any person or persons selected by a Participant on a form provided by the Company who may become eligible to receive the benefits provided under this Plan in the event of such Participant's death. 1.3 "Board of Directors" or "Board" shall mean the Board of Directors of the Company. 1.4 "Code" shall mean the Internal Revenue Code of 1986, as amended, and as same may be amended from time to time. 1.5 "Company" shall mean Public Service Electric and Gas Company. 1.6 "Compensation" shall mean compensation as defined in the Reinstatement Plan. 1.7 "Credited Service" shall mean the aggregate of all periods of employment with the Company or an Affiliate or former Affiliate and all periods of additional service credit granted by the Company for which a Participant will be given credit in computing his Supplemental Retirement Benefit. 1.8 "Employee Benefits Committee" or "Committee" shall mean the Employee Benefits Committee of Public Service Electric and Gas Company. 1.9 "Employee Benefits Policy Committee" or "Policy Committee" shall mean the Employee Benefits Policy Committee of Public Service Enterprise Group Incorporated, the Company's parent. 1.10 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as 3 amended, and as the same may be amended from time to time. 1.11 "Normal Retirement Date" shall mean the first day of the month coinciding with or next following a Participant's attainment of age 65. 1.12 "Participant" shall mean each employee or former employee of the Company or a Participating Affiliate who is selected by the Chief Executive Officer of the Company to participate in the Plan. The Chief Executive Officer of the Company shall select such key employees of the Company and Participating Affiliates upon such terms as he shall deem appropriate due to the employee's responsibilities and opportunity to contribute to the financial and operating objectives of the Company or Participating Affiliate. 1.13 "Participating Affiliate" shall mean any Affiliate of the Company which (a) is the sponsor or a Participating Affiliate of the Reinstatement Plan; (b) adopts this Plan with the approval of the Board of Directors; (c) authorizes the Board of Directors and the Employee Benefits Committee to act for it in all matters arising under or with respect to this Plan; and (d) complies with such other terms and conditions relating to this Plan as may be imposed by the Board of Directors. 1.14 "Pension Plan" shall mean the Pension Plan of Public Service Electric and Gas Company and each successor or replacement plan. 1.15 "Plan" shall mean this Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Electric and Gas Company and Its Affiliates. 1.16 "Plan Year" shall mean the calendar year. 1.17 "Reinstatement Plan" shall mean the Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and its Affiliates. 4 1.18 "Reinstatement Plan Retirement Benefit" shall mean the aggregate annual benefit payable to a Participant pursuant to the Reinstatement Plan by reason of his termination of employment with the Company and all Affiliates for any reason other than death. 1.19 "Reinstatement Plan Surviving Spouse Benefit" shall mean the aggregate annual benefit payable to the Surviving Spouse of a Participant pursuant to the Reinstatement Plan in the event of the death of the Participant at any time prior to commencement of payment of his Reinstatement Plan Retirement Benefit. 1.20 "Supplemental Retirement Benefit" shall mean the benefit payable to a Participant pursuant to this Plan by reason of his termination of employment with the Company and all Affiliates for any reason other than death. 1.21 "Surviving Spouse" shall mean a person who is married to a Participant at the date of his death. 1.22 "Year of Service" shall mean Year of Service as defined in the Pension Plan. 1.23 "Supplemental Surviving Spouse Benefit" shall mean the benefit payable to a Surviving Spouse pursuant to this Plan. Section 2. Eligibility 2.1 A Participant who is selected by the Chief Executive Officer of the Company to participate in this Plan shall be eligible to receive a Supplemental Retirement Benefit. The Surviving Spouse of a Participant described in the preceding sentence who dies prior to commencement of payment of his Reinstatement Plan Retirement Benefit shall be eligible to receive a Supplemental Surviving Spouse Benefit. 5 2.2 Upon selection for participation in the Plan, the Chief Executive Officer shall designate the number of years of additional Credited Service to which such Participant shall be entitled to be credited in calculating his Supplemental Retirement Benefit under this Plan. The Chief Executive Officer shall notify the Vice President - Human Resources in writing of such selection and designation. Section 3. Supplemental Retirement Benefit 3.1 The Supplemental Retirement Benefit payable to an eligible Participant shall be equal to the excess of (a) over (b) where: (a) is the sum of the amount of Pension Plan Retirement Benefit and Reinstatement Plan Retirement Benefit to which the Participant would have been entitled under the Pension Plan and the Reinstatement Plan if such benefits were computed with the additional years of Credited Service provided for in this Plan; and (b) is the sum of the Pension Plan Retirement Benefit and Reinstatement Plan Retirement Benefit actually payable to the Participant or payable to a third party on the Participant's behalf. The amounts described in (a) and (b) shall be computed as of the date of termination of employment of the Participant with the Company and all Affiliates in the form of a single life annuity payable over the lifetime of the Participant only commencing on his Normal Retirement Date. 3.2. The Supplemental Retirement Benefit payable to a Participant shall be paid in the same form under which the Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit, as applicable, is payable to the Participant (including the election to receive a lump sum 6 distribution of the present value of any benefit). The Participant's election under the Pension Plan of any optional form of payment of his Pension Plan Retirement Benefit (with the valid consent of his spouse where required under the Pension Plan) shall also be applicable to the payment of his Supplemental Retirement Benefit hereunder. 3.3 Payment hereunder of the Supplemental Retirement Benefit to a Participant shall commence on the same date as payment of the Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit, as applicable, to the Participant commences. 3.4 (a) Notwithstanding the provisions of Sections 3.2 and 3.3 above, an election made by the Participant with respect to the form of payment of his retirement benefits under the Pension Plan and Reinstatement Plan, or the date for commencement of payment thereof, shall not be effective with respect to the form of payment or date for commencement of payment of his Supplemental Retirement Benefits hereunder unless such election is expressly approved by the Committee with respect to his Supplemental Retirement Benefit; provided, however, that notwithstanding any other provision of this Plan, no such approval shall be required from and after the occurrence of a Change in Control (as defined below).. If the Committee shall not approve such election, then the form of payment or date for commencement of payment of the Participant's Supplemental Retirement Benefits shall be selected by the Committee in its sole discretion. (b) For the purposes hereof, a "Change in Control" shall mean the occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of 7 Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of Public Service Enterprise Group Incorporated ("Parent") (not including in the securities beneficially owned by such person any securities acquired directly from Parent or its affiliates) representing 25% or more of the combined voting power of Parent's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the board of directors of Parent ("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 Parent) whose appointment or election by the Board or nomination for election by Parent's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of Parent or any direct or indirect wholly owned subsidiary of Parent with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Parent outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of Parent or any subsidiary of Parent, at least 75% of the combined voting power of the securities of Parent or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Parent (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of Parent representing 25% or more of the combined voting power of Parent's then outstanding securities; or (iv) the stockholders of Parent approve a plan of complete liquidation or dissolution of Parent or there is consummated an agreement for 8 the sale or disposition by Parent of all or substantially all of Parent's assets, other than a sale or disposition by Parent of all or substantially all of Parent's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of Parent in substantially the same proportions as their ownership of Parent immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Parent 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 Parent immediately following such transaction or series of transactions. 3.5 A Supplemental Retirement Benefit which is payable in any form other than a single life annuity over the lifetime of the Participant, or which commences at any time prior to the Participant's Normal Retirement Date, shall be the actuarial equivalent of the Supplemental Retirement Benefit set forth in Subsection 3.1 above as determined by the same actuarial adjustments as those specified in the Pension Plan with respect to determination of the amount of retirement benefits payable pursuant to the Pension Plan on the date for commencement of payment hereunder. Section 4. Supplemental Surviving Spouse Benefit 4.1 If a Participant dies prior to commencement of payment of his Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit under circumstances in which a Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit is payable to his Surviving Spouse, then a Supplemental Surviving Spouse Benefit shall be payable 9 to his Surviving Spouse as hereinafter provided. The Supplemental Surviving Spouse Benefit payable to a Surviving Spouse shall be equal to the excess of (a) over (b) where: (a) is the sum of the amount of the Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit to which the Surviving Spouse would have been entitled under the Pension Plan and Reinstatement Plan, as applicable, if such benefits were computed with the additional years of Credited Service provided for in this Plan; and (b) is the sum of the Pension Plan Surviving Spouse Benefit and Reinstatement Plan Surviving Spouse Benefit actually payable to the Surviving Spouse. 4.2 A Supplemental Surviving Spouse Benefit shall be payable over the lifetime of the Surviving Spouse only in monthly installments commencing on the date for commencement of payment of the Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit, as applicable, (or if both are payable, the earlier to commence) to the Surviving Spouse and terminating on the date of the last payment of the Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit, as applicable, made before the Surviving Spouse's death. Section 5. Administration of the Plan 5.1 The Committee shall be the named fiduciary of this Plan responsible for the general operation and administration of this Plan and for carrying out the provisions thereof. The Committee shall have discretionary authority to construe the terms of this Plan. 5.2 The Committee shall adopt such rules and procedures as it deems necessary and advisable to administer this Plan and to transact its business. Subject to the other requirements of this Section 5, the Committee may-- 10 (a) employ agents to carry out non-fiduciary responsibility; (b) employ agents to carry out fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA); (c) consult with counsel, who may be counsel to the Company or an Affiliate; and (d) provide for the allocation of fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA) among its members. However, any action described in sub-paragraphs (b) or (d) of this Subsection 5.2, and any modification or rescission of any such action, may be effected by the Committee only by a resolution approved by a majority of the Committee. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to this Plan. 5.3 The Committee shall keep written minutes of all its proceedings, which shall be open to inspection by the Board of Directors. In the case of any decision by the Committee with respect to a claim for benefits under this Plan, such Committee shall include in its minutes a brief explanation of the grounds upon which such decision was based. 5.4 In performing their duties, the members of the Committee shall act solely in the interest of the Participants in this Plan and their Beneficiaries and (a) for the exclusive purpose of providing benefits to Participants and their Beneficiaries; 11 (b) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and (c) in accordance with the documents and instruments governing this Plan insofar as such documents and instruments are consistent with the provisions of Title I of ERISA. 5.5 In addition to any other duties the Committee may have, the Committee shall review the performance of all persons to whom the Committee shall have delegated or allocated fiduciary duties pursuant to the provisions of this Section 5. 5.6 The Company agrees to indemnify and reimburse, to the fullest extent permitted by law, members of the Committee, directors and employees of the Company and its Affiliates, and all such former members, directors and employees, for any and all expenses, liabilities or losses arising out of any act or omission relating to the rendition of services for or the management and administration of this Plan. 5.7 No member of the Committee nor any delegate thereof shall be personally liable by virtue of any contract, agreement or other instrument made or executed by him or on his behalf in such capacity. Section 6. Claims Procedure and Status Determination 6.1 Claims for benefits under this Plan and requests for a status determination shall be filed in writing with the Company. 6.2 In the case of a claim for benefits, written notice shall be given to the claiming Participant or Beneficiary of the disposition of such claim, setting forth specific reasons for any 12 denial of such claim in whole or in part. If a claim is denied in whole or in part, the notice shall state that such Participant or Beneficiary may, within sixty days of the receipt of such denial, request in writing that the decision denying the claim be reviewed by the Committee and provide the Committee with information in support of his position by submitting such information in writing to the Secretary of the Committee. 6.3 The Committee shall review each claim for benefits which has been denied in whole or in part and for which such review has been requested and shall notify, in writing, the affected Participant or Beneficiary of its decision and the reasons therefor. 6.4 In the case of a request for status determination, written notice shall be given to the requesting person within a reasonable time setting forth specific reasons for the decision. Section 7. Amendment or Termination 7.1 The Company reserves the right to amend or terminate this Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board or of the Employee Benefits Policy Committee and shall be effective as provided for in such resolution. 7.2 No amendment or termination of this Plan shall directly or indirectly deprive any current or former Participant, Beneficiary or Surviving Spouse of all or any portion of any Supplemental Retirement Benefit or Supplemental Surviving Spouse Benefit payment which has commenced prior to the effective date of such amendment or termination or the right to which has accrued on such effective date. 13 Section 8. General Provisions 8.1 This Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company or any Affiliate for payment of any benefits hereunder. No Participant, Beneficiary, Surviving Spouse or any other person shall have any interest in any particular assets of the Company or any Affiliate by reason of the right to receive a benefit under this Plan and any such Participant, Beneficiary, Surviving Spouse or other person shall have only the rights of a general unsecured creditor with respect to any rights under the Plan. 8.2 Except as otherwise expressly provided herein, all terms and conditions of the Pension Plan and the Reinstatement Plan applicable to a benefits paid to a Participant or a Surviving Spouse Benefit under such plans shall also be applicable to a Supplemental Retirement Benefit or a Supplemental Surviving Spouse Benefits payable hereunder. Any benefits payable under the Pension Plan or the Reinstatement Plan, shall be paid solely in accordance with the respective terms and conditions of the Pension Plan and the Reinstatement Plan and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan or the Reinstatement Plan. 8.3 Nothing contained in this Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company or any Affiliate will be sufficient to pay any benefit hereunder. 8.4 No Participant or Surviving Spouse shall have any right to a benefit under this Plan except in accordance with the terms of this Plan. Establishment of this Plan shall not be 14 construed to give any Participant the right to be retained in the service of the Company or any Affiliate. 8.5 No interest of any person or entity in, or right to receive a benefit under, this Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind; nor any such interest or right to receive a benefits be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 8.6 This Plan shall be construed and administered under the laws of the United States and the State of New Jersey to the extent not superseded by Federal law. 8.7 If the present value of any Supplemental Retirement Benefit or Supplemental Surviving Spouse benefit is less than $3,500, the Company may pay the present value of such Benefit to the Participant or Surviving Spouse in a single lump sum in lieu of any further benefit payments hereunder. 8.8 Actuarial assumptions to determine the present value of any benefit hereunder shall be the same as used to determine the present value of benefits under the Pension Plan. 8.9 If any person entitled to a benefit payment under this Plan is deemed by the Committee to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Committee may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account 15 of such person and a complete discharge of any liability of the Company and this Plan therefor. 8.10 This Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 8.11 Each Participant shall keep the Company informed of his current address and the current address of his spouse. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three (3) years after the date on which payment of the Participant's Supplemental Retirement Benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Company is unable to locate any Surviving Spouse of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Surviving Spouse or any other person and such benefit shall be irrevocably forfeited. 8.12 Notwithstanding any of the preceding provisions of this Plan, none of the Company, the Committee or any individual acting as an employee or agent of the Company or the Committee shall be liable to any Participant, former Participant, Surviving Spouse or any other person for any claim, loss, liability or expense incurred in connection with this Plan. Section 9. Miscellaneous 9.1 As used herein, words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless otherwise required by the context. Any 16 headings used herein are included for ease of reference only and are not to be construed so as to alter the terms hereof. EX-10.A(5) 7 RETIREMENT INCOME REINSTATEMENT PLAN RETIREMENT INCOME REINSTATEMENT PLAN FOR NON-REPRESENTED EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AND ITS AFFILIATES As Amended December 15, 1998 TABLE OF CONTENTS Section 1. Definitions........................................................1 Section 2. Eligibility........................................................5 Section 3. Supplemental Retirement Benefit....................................5 Section 4. Supplemental Surviving Spouse Benefit..............................7 Section 5. Administration of the Plan.........................................8 Section 6. Claims Procedure and Status Determination.........................10 Section 7. Amendment or Termination..........................................11 Section 8. General Provisions................................................11 Section 9. Miscellaneous.....................................................14 RETIREMENT INCOME REINSTATEMENT PLAN FOR NON-REPRESENTED EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AND ITS AFFILIATES This Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and its Affiliates is adopted effective January 1, 1995. This Plan is established and maintained by Public Service Electric and Gas Company and its Participating Affiliates solely for the purpose of assisting in attracting and retaining a stable pool of key managerial and professional talent and long-term key employee commitment by providing certain supplemental retirement benefits for certain of their employees who participate in the Pension Plan of Public Service Electric and Gas Company or the Cash Balance Pension Plan of Public Service Electric and Gas Company. This Plan is intended to constitute an unfunded "excess benefit plan" as defined in Section 3(36) of the ERISA, to the extent it provides benefits that would be paid under the Pension Plan of Public Service Electric and Gas Company or the Cash Balance Pension Plan of Public Service Electric and Gas Company but for the limitations of Section 415 of the Code, and an unfunded plan of deferred compensation for a select group of management or highly compensated employees for purposes of Title 1 of ERISA, to the extent it provides other benefits. Accordingly, Public Service Electric and Gas Company hereby adopts this Plan pursuant to the terms and provisions set forth below: Section 1. Definitions When used herein, the words and phrases hereinafter defined shall have the following meanings unless a different meaning is clearly required by the context of the Plan: -2- 1.1 "Affiliate" shall mean any organization which is a member of a controlled group of Companies (as defined in Code Section 414(b), as modified by Code Section 415(h)) which includes the Company; or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c), as modified by Code Section 415(h)) with the Company; or a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company or any other entity required to be aggregated with the Company as required by regulations promulgated pursuant to Code Section 414(o). 1.2 "Beneficiary" shall mean any person or persons selected by a Participant on a form provided by the Company who may become eligible to receive to receive the benefits provided under this Plan in the event of such Participant's death. 1.3 "Benefit Limitation" shall mean the maximum annual benefit payable to a Participant under the Pension Plan or the Cash Balance Plan in accordance with Section 415 of the Code. 1.4 "Board of Directors" or "Board" shall mean the Board of Directors of the Company. 1.5 "Cash Balance Plan" shall mean the Cash Balance Pension Plan of Public Service Electric and Gas Company and each successor or replacement plan. 1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended, and as same may be amended from time to time. 1.7 "Company" shall mean Public Service Electric and Gas Company. 1.8 "Compensation" shall mean compensation as defined in the Pension Plan or the Cash Balance Plan, as the case may be, except, for the purposes hereof, Compensation shall also -3- include amounts which have been deferred under any Deferred Compensation Plan of the Company or any Participating Affiliate which would otherwise be excluded solely on account of Subsection 1.6(a) of the Pension Plan or, as the case may be, Subsection 1.1(k)(1) of the Cash Balance Plan. 1.9 "Compensation Limitation" shall mean the maximum amount of annual compensation under Section 401(a)(17) of the Code that may be taken into account in any Plan Year for benefit accrual purposes under the Pension Plan or the Cash Balance Plan. 1.10 "Employee" shall mean any individual in the employ of the Company or a Participating Affiliate who is not included within a unit of employees covered by a collective bargaining agreement. The term "Employee" shall not include a director of the Company or a Participating Affiliate who serves in no capacity other than as a director, a consultant or independent contractor doing work for the Company or a Participating Affiliate or a person employed by a consultant or independent contractor doing work for the Company or a Participating Affiliate. 1.11 "Employee Benefits Committee" or "Committee" shall mean the Employee Benefits Committee of Public Service Electric and Gas Company. 1.12 "Employee Benefits Policy Committee" shall mean the Employee Benefits Policy Committee of Public Service Enterprise Group Incorporated, the Company's parent. 1.13 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and as the same may be amended from time to time. 1.14 "Normal Retirement Date" shall mean the first day of the month coinciding with or next following a Participant's attainment of age 65. -4- 1.15 "Participant" shall mean any Employee or former Employee of the Company or a Participating Affiliate who meets the requirements of Subsection 2.1 of the Plan. 1.16 "Participating Affiliate" shall mean any Affiliate of the Company which (a) is the sponsor or a Participating Affiliate of the Pension Plan and/or the Cash Balance Plan; (b) adopts this Plan with the approval of the Board of Directors; (c) authorizes the Board of Directors and the Employee Benefits Committee to act for it in all matters arising under or with respect to this Plan; and (d) complies with such other terms and conditions relating to this Plan as may be imposed by the Board of Directors. 1.17 "Pension Plan" shall mean the Pension Plan of Public Service Electric and Gas Company and each successor or replacement plan. 1.18 "Pension Plan Retirement Benefit" shall mean the aggregate annual benefit payable to a Participant pursuant to the Pension Plan or the Cash Balance Plan, as the case may be, by reason of the Participant's termination of employment with the Company and all Affiliates for any reason other than death. 1.19 "Pension Plan Surviving Spouse Benefit" shall mean the aggregate annual benefit payable to the Surviving Spouse of a Participant pursuant to the Pension Plan or the Cash Balance Plan, as the case may be, in the event of the death of the Participant at any time prior to commencement of payment of the Participant's Pension Plan Retirement Benefit. 1.20 "Plan" shall mean this Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and Its Affiliates. 1.21 "Plan Year" shall mean the calendar year. -5- 1.22 "Supplemental Retirement Benefit" shall mean the benefit payable to a Participant pursuant to this Plan by reason of the Participant's termination of employment with the Company and all Affiliates for any reason other than death. 1.23 "Surviving Spouse" shall mean a person who is married to a Participant at the date of the Participant's death. 1.24 "Supplemental Surviving Spouse Benefit" shall mean the benefit payable to a Surviving Spouse pursuant to this Plan. Section 2. Eligibility 2.1 A Participant who is eligible to receive a Pension Plan Retirement Benefit, the amount of which is reduced by reason of (a) the application of the limitations on benefits imposed by application of any provisions of the Code, as in effect on the date for commencement of the Pension Plan Retirement Benefit or as in effect at any time thereafter, to the Pension Plan or the Cash Balance Plan, as the case may be, or (b) the restrictions of Subsection 1.6(a) of the Pension Plan or Subsection 1.1(k)(1) of the Cash Balance Plan, shall be eligible to receive a Supplemental Retirement Benefit. The Surviving Spouse of a Participant described in the preceding sentence who dies prior to commencement of payment of his Pension Plan Retirement Benefit shall be eligible to receive a Supplemental Surviving Spouse Benefit. Section 3. Supplemental Retirement Benefit 3.1 The Supplemental Retirement Benefit payable to an eligible Participant shall be equal to the excess of (a) over (b) where: (a) is the amount of Pension Plan Retirement Benefit to which the Participant would have been entitled under the Pension Plan or the Cash Balance Plan, as the case may be, if -6- such benefit were computed without regard to (i) the exclusion of any amounts pursuant to Subsection 1.6(a) of the Pension Plan, (ii) the exclusion of any amounts pursuant to Subsection 1.1(k)(1) of the Cash Balance Plan, (iii) the Benefit Limitation or (iv) the Compensation Limitation; and (b) is the amount of the Pension Plan Retirement Benefit actually payable to the Participant or payable to a third party on the Participant's behalf under the Pension Plan or the Cash Balance Plan, as the case may be. The amounts described in (a) and (b) shall be computed as of the date of termination of employment of the Participant with the Company and all Affiliates in the form of a single life annuity payable over the lifetime of the Participant only commencing on his Normal Retirement Date. 3.2. The Supplemental Retirement Benefit payable to a Participant shall be paid in the same form under which the Pension Plan Retirement Benefit is payable to the Participant (including the election to receive a lump sum distribution of the present value of any benefit). The Participant's election under the Pension Plan or the Cash Balance Plan, as the case may be, of any optional form of payment of his Pension Plan Retirement Benefit (with the valid consent of his spouse where required under the Pension Plan or the Cash Balance Plan, as the case may be) shall also be applicable to the payment of his Supplemental Retirement Benefit. 3.3 Payment of the Supplemental Retirement Benefit to a Participant shall commence on the same date as payment of the Pension Plan Retirement Benefit to the Participant commences. Any election under the Pension Plan or the Cash Balance Plan, as the case may be, made by the Participant with respect to the commencement of payment of his Pension Plan -7- Retirement Benefit shall also be applicable with respect to the commencement of payment of his Supplemental Retirement Benefit. 3.4 (a) Notwithstanding the provisions of Sections 3.2 and 3.3 above, an election made by the Participant under the Pension Plan or the Cash Balance Plan, as the case may be, with respect to the form of payment of his Pension Plan Retirement Benefit (with the valid consent of his spouse where required under the Pension Plan), or the date for commencement of payment thereof, shall not be effective with respect to the form of payment or date for commencement of payment of his Supplemental Retirement Benefits hereunder unless such election is expressly approved by the Committee with respect to his Supplemental Retirement Benefit; provided, however, that, notwithstanding any other provision of this Plan, no such approval shall be required from and after the occurrence of a Change in Control (as defined below). If the Committee shall not approve such election, then the form of payment or date for commencement of payment of the Participant's Supplemental Retirement Benefits shall be selected by the Committee in its sole discretion. (b) "Change in Control. For the purposes hereof, a Change in Control shall mean the occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such person any securities acquired directly from the Corporation or its affiliates) representing 25% or more of the combined voting power of the Corporation's then outstanding securities, excluding -8- any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board of Directors or nomination for election by the Corporation's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Corporation or any direct or indirect wholly owned subsidiary of the Corporation with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any subsidiary of the Corporation, at least 75% of the combined voting power of the securities of the Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (iv) the stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets, other than a sale or disposition by the Corporation of all or substantially all of the Corporation's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Corporation in substantially the same proportions as their ownership of the Corporation immediately prior to such sale. -9- Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Corporation immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Corporation immediately following such transaction or series of transactions. 3.5 A Supplemental Retirement Benefit which is payable in any form other than a single life annuity over the lifetime of the Participant, or which commences at any time prior to the Participant's Normal Retirement Date, shall be the actuarial equivalent of the Supplemental Retirement Benefit set forth in Subsection 3.1 above as determined by the same actuarial adjustments as those specified in the Pension Plan or the Cash Balance Plan, as the case may be, with respect to determination of the amount of the Pension Plan Retirement Benefit on the date for commencement of payment hereunder. Section 4. Supplemental Surviving Spouse Benefit 4.1 If a Participant dies prior to commencement of payment of his Pension Plan Retirement Benefit under circumstances in which a Pension Plan Surviving Spouse Benefit is payable to his Surviving Spouse, then a Supplemental Surviving Spouse Benefit shall be payable to his Surviving Spouse as hereinafter provided. The Supplemental Surviving Spouse Benefit payable to a Surviving Spouse shall be equal to the excess of (a) over (b) where: (a) is the amount of Pension Plan Surviving Spouse Benefit to which the -10- Surviving Spouse would have been entitled under the Pension Plan or the Cash Balance Plan, as the case may be, if such benefit were computed without regard to (i) the exclusion of any amounts pursuant to Subsection 1.6(a) of the Pension Plan, (ii) the exclusion of any amounts pursuant to Subsection 1.1(k)(1) of the Cash Balance Plan, (iii) the Benefit Limitation or (iv) the Compensation Limitation; and (b) is the amount of the Pension Plan Surviving Spouse Benefit actually payable to the Surviving Spouse under the Pension Plan or the Cash Balance Plan, as the case may be. 4.2 A Supplemental Surviving Spouse Benefit shall be payable over the lifetime of the Surviving Spouse only in monthly installments commencing on the date for commencement of payment of the Pension Plan Surviving Spouse Benefit to the Surviving Spouse and terminating on the date of the last payment of the Pension Plan Surviving Spouse Benefit made before the Surviving Spouse's death. Section 5. Administration of the Plan 5.1 The Committee shall be the named fiduciary of this Plan responsible for the general operation and administration of this Plan and for carrying out the provisions thereof. The Committee shall have discretionary authority to construe the terms of this Plan. 5.2 The Committee shall adopt such rules and procedures as it deems necessary and advisable to administer this Plan and to transact its business. Subject to the other requirements of this Section 5, the Committee may-- (a) employ agents to carry out non-fiduciary responsibility; -11- (b) employ agents to carry out fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA); (c) consult with counsel, who may be counsel to the Company or an Affiliate; and (d) provide for the allocation of fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA) among its members. However, any action described in sub-paragraphs (b) or (d) of this Subsection 5.2, and any modification or rescission of any such action, may be effected by the Committee only by a resolution approved by a majority of the Committee. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to this Plan. 5.3 The Committee shall keep written minutes of all its proceedings, which shall be open to inspection by the Board of Directors. In the case of any decision by the Committee with respect to a claim for benefits under this Plan, such Committee shall include in its minutes a brief explanation of the grounds upon which such decision was based. 5.4 In performing their duties, the members of the Committee shall act solely in the interest of the Participants in this Plan and their Beneficiaries and (a) for the exclusive purpose of providing benefits to Participants and their Beneficiaries; (b) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use -12- in the conduct of an enterprise of a like character and with like aims; and (c) in accordance with the documents and instruments governing this Plan insofar as such documents and instruments are consistent with the provisions of Title I of ERISA. 5.5 In addition to any other duties the Committee may have, the Committee shall review the performance of all persons to whom the Committee shall have delegated or allocated fiduciary duties pursuant to the provisions of this Section 5. 5.6 The Company agrees to indemnify and reimburse, to the fullest extent permitted by law, members of the Committee, directors and employees of the Company and its Affiliates, and all such former members, directors and employees, for any and all expenses, liabilities or losses arising out of any act or omission relating to the rendition of services for or the management and administration of this Plan. 5.7 No member of the Committee nor any delegate thereof shall be personally liable by virtue of any contract, agreement or other instrument made or executed by him or on his behalf in such capacity. Section 6. Claims Procedure and Status Determination 6.1 Claims for benefits under this Plan and requests for a status determination shall be filed in writing with the Company. 6.2 In the case of a claim for benefits, written notice shall be given to the claiming Participant or Beneficiary of the disposition of such claim, setting forth specific reasons for any denial of such claim in whole or in part. If a claim is denied in whole or in part, the notice shall state that such Participant or Beneficiary may, within sixty days of the receipt of such denial, -13- request in writing that the decision denying the claim be reviewed by the Committee and provide the Committee with information in support of his position by submitting such information in writing to the Secretary of the Committee. 6.3 The Committee shall review each claim for benefits which has been denied in whole or in part and for which such review has been requested and shall notify, in writing, the affected Participant or Beneficiary of its decision and the reasons therefor. 6.4 In the case of a request for status determination, written notice shall be given to the requesting person within a reasonable time setting forth specific reasons for the decision. Section 7. Amendment or Termination 7.1 The Company reserves the right to amend or terminate this Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board or of the Employee Benefits Policy Committee and shall be effective as provided for in such resolution. 7.2 No amendment or termination of this Plan shall directly or indirectly deprive any current or former Participant, Beneficiary or Surviving Spouse of all or any portion of any Supplemental Retirement Benefit or Supplemental Surviving Spouse Benefit payment which has commenced prior to the effective date of such amendment or termination or the right to which has accrued on such effective date. Section 8. General Provisions 8.1 This Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company or any Affiliate for payment of any benefits hereunder. No Participant, Beneficiary, Surviving Spouse or any other person shall -14- have any interest in any particular assets of the Company or any Affiliate by reason of the right to receive a benefit under this Plan and any such Participant, Beneficiary, Surviving Spouse or other person shall have only the rights of a general unsecured creditor with respect to any rights under the Plan. 8.2 Except as otherwise expressly provided herein, all terms and conditions of the Pension Plan or the Cash Balance Plan, as the case may be, applicable to a Pension Plan Retirement Benefit or a Pension Plan Surviving Spouse Benefit shall also be applicable to a Supplemental Retirement Benefit or a Supplemental Surviving Spouse Benefits payable hereunder. Any Pension Plan Retirement Benefit or Pension Plan Surviving Spouse Benefit, or any other benefit payable under the Pension Plan or the Cash Balance Plan, as the case may be, shall be paid solely in accordance with the terms and conditions of the Pension Plan or the Cash Balance Plan, as the case may be, and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan or the Cash Balance Plan, as the case may be. 8.3 Nothing contained in this Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company or any Affiliate will be sufficient to pay any benefit hereunder. 8.4 No Participant or Surviving Spouse shall have any right to a benefit under this Plan except in accordance with the terms of this Plan. Establishment of this Plan shall not be construed to give any Participant the right to be retained in the service of the Company or any Affiliate. -15- 8.5 No interest of any person or entity in, or right to receive a benefit under, this Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind; nor any such interest or right to receive a benefits be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 8.6 This Plan shall be construed and administered under the laws of the United States and the State of New Jersey to the extent not superseded by Federal law. 8.7 If the present value of any Supplemental Retirement Benefit or Supplemental Surviving Spouse benefit is less than $3,500, the Company may pay the present value of such Benefit to the Participant or Surviving Spouse in a single lump sum in lieu of any further benefit payments hereunder. 8.8 Actuarial assumptions to determine the present value of any benefit hereunder shall be the same as used to determine the present value of benefits under the Pension Plan or the Cash Balance Plan, as the case may be. 8.9 If any person entitled to a benefit payment under this Plan is deemed by the Committee to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Committee may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and this Plan therefor. -16- 8.10 The Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets or businesses or with or into or which the Company may be consolidated or merged. 8.11 Each Participant shall keep the Company informed of his current address and the current address of his spouse. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three (3) years after the date on which payment of the Participant's Supplemental Retirement Benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Company is unable to locate any Surviving Spouse of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Surviving Spouse or any other person and such benefit shall be irrevocably forfeited. 8.12 Notwithstanding any of the preceding provisions of this Plan, none of the Company, the Committee or any individual acting as an employee or agent of the Company or the Committee shall be liable to any Participant, former Participant, Surviving Spouse or any other person for any claim, loss, liability or expense incurred in connection with this Plan. Section 9. Miscellaneous 9.1 As used herein, words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless otherwise required by the context. Any headings used herein are included for ease of reference only and are not to be construed so as to -17- alter the terms hereof. EX-10.A(6) 8 1989 LONG-TERM INCENTIVE PLAN PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 1989 LONG-TERM INCENTIVE PLAN Amended December 15, 1998 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 1989 LONG-TERM INCENTIVE PLAN ARTICLE I PURPOSE Section 1.1 Purpose. This Public Service Enterprise Group Incorporated 1989 Long-Term Incentive Plan is intended to advance the interests of the Company and its Affiliates by affording an incentive to officers and other key employees to acquire a proprietary interest in the Company in order to induce them to exert their maximum efforts toward the Company's success, to remain in its employ and to more closely align the interests of such key employees with the long-term interests of the Company's Stockholders. The Plan is also intended to attract to the Company and its Affiliates individuals of experience and ability by providing a more competitive total compensation program. Section 1.2 Types of Awards. This Plan allows the Company to grant Non-Qualified Stock Options, which Options may, at the discretion of the Committee, be granted in tandem with Dividend Equivalents and/or Performance Units, to officers and key employees of the Company and its Affiliates. ARTICLE II DEFINITIONS When used herein, the words and phrases hereinafter defined shall have the following meanings unless a different meaning is clearly required by the context of the Plan: Section 2.1 "Affiliate" shall mean any organization which is a member of a controlled group of corporations (as defined in Code section 414(b) as modified by Code section 415(h)) which includes the Company, or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code section 414(c) as modified by Code section 415(h)) with the Company, or a member of an affiliated service group (as defined in Code section 414(m)) which includes the Company, or any other entity required to be aggregated with the Company pursuant to regulations promulgated pursuant to Code section 414(o). Section 2.2 "Award Cycle" shall have the meaning specified in Section 6.1. Section 2.3 "Board of Directors" shall mean the Board of Directors of the Company. 1 Section 2.4 "Code" shall mean the Internal Revenue Code of 1986, as amended, or as it may be amended from time to time. Section 2.5 "Committee" shall mean the Organization and Compensation Committee of the Board of Directors. Section 2.6 "Common Stock" shall mean the Common Stock, without nominal or par value of the Company. Section 2.7 "Company" shall mean Public Service Enterprise Group Incorporated, a New Jersey corporation. Section 2.8 "Director" shall mean a member of the Board of Directors. Section 2.9 "Disability" shall mean any physical or mental condition which renders a Participant incapable of performing further work for his or her employer, as certified in writing by a medical practitioner designated and/or approved by the Committee. Section 2.10 "Dividend Equivalent" shall have the meaning specified in Section 6.2. Section 2.11 "Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended, or as it may be amended from time to time. Section 2.12 "Fair Market Value" shall mean, as of a given date, if the shares of Common Stock are listed as of such date on the NYSE, the closing price on such date. If the shares are not then listed on the NYSE, and if the shares of Common Stock are then listed on any other national securities exchange or traded on the over-the-counter market, the fair market value shall be the closing price on such exchange or on the NASDAQ National Market System or the mean of the closing bid and asked prices of the shares of Common Stock on the over-the-counter market, as reported by the NASDAQ, the National Association of Securities Dealers OTC Bulletin Board or the National Quotation Bureau, Inc., as the case may be, on such date or, if there is no closing price or bid or asked price on that day, the closing price or mean of the closing bid and asked prices on the most recent day preceding such date for which such prices are available. Section 2.13 "NASDAQ" shall mean the National Association of Securities Dealers Automated Quotation System. Section 2.14 "NYSE" shall mean the New York Stock Exchange, Inc. 2 Section 2.15 "Option" shall mean a non-qualified stock option, that is, a stock option which is not intended to qualify as an "incentive stock option" as that term is defined in Section 422(b) of the Code. Section 2.16 "Option Price" shall mean the exercise price for any Options granted pursuant to the Plan computed in accordance with Section 6.1(b) or 6.1(d), as appropriate. Section 2.17 "Participant" shall mean any officer or key employee of the Company or an Affiliate who has been granted an Option pursuant to this Plan. Section 2.18 "Performance Unit" shall have the meaning specified in Section 6.3 of this Plan. Section 2.19 "Plan" shall mean this Public Service Enterprise Group Incorporated 1989 Long-Term Incentive Plan, as amended. Section 2.20 "Purchase Price" shall mean the Option Price times the number of shares with respect to which an Option is exercised. Section 2.21 "Retirement" shall mean the termination of employment by a Participant other than by reason of his death: (a) under circumstances entitling the Participant to an immediately payable periodic retirement benefit under any pension plan of his employer, or (b) at or after age 65. Section 2.22 "Securities Act" shall mean the Securities Act of 1933, as amended, or as it may be amended from time to time. Section 2.23 "Share" shall mean a share of Common Stock. Section 2.24 "Stockholders" shall mean the holders of Common Stock entitled to vote in an election of Directors. ARTICLE III SHARES SUBJECT TO THE PLAN Section 3.1 Total Shares Available. The total number of shares of Common Stock that may be subject to Options granted under the Plan shall be 5,000,000 shares in the aggregate, subject to adjustment as provided in Article VIII. This shall include shares both granted pursuant 3 to Options and paid as Performance Units. Shares of Common Stock issued pursuant to this Plan may be either authorized but unissued shares or shares now or hereafter acquired in the open market by a agent independent of the Company, as selected by the Company. In the event any Option or Performance Unit granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject thereto shall again be available for the granting of Options or Performance Units under the Plan. ARTICLE IV ELIGIBILITY Section 4.1 Eligible Recipients. Options may be granted from time to time under the Plan to one or more officers or key employees of the Company or any Affiliate. ARTICLE V ADMINISTRATION OF THE PLAN. Section 5.1 Committee. The Plan shall be administered by the Committee. No member of the Committee shall be eligible to participate in the Plan. Within the limits of the express provisions of the Plan, the Committee shall have the authority, subject to such orders or resolutions, not inconsistent with the provisions of the Plan, as may from time to time be issued or adopted by the Board of Directors, in its discretion to determine the individuals to whom, and the time or times at which, Options shall be granted, the number of shares of Common Stock to be subject to each Option, whether any Option shall be granted in tandem with Dividend Equivalents and/or Performance Units, the limitations, restrictions and conditions applicable to each Option grant, the terms and provisions of option agreements that may be entered into in connection with Options (which need not be identical), to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan and to make all other determinations and take all other actions necessary or advisable for the administration of the Plan. In making its determinations relating to Option grants, the Committee may consult with the Chief Executive Officer of the Company and may take into account the recommendations of the Chief Executive Officer with respect to grants made to other employees. The Committee may also take into account the nature of the services rendered by such individuals, their present and potential contributions to the Company's success and such other factors as the Committee, in its discretion, shall deem relevant. The Committee's determinations on the matters regarding this Plan (including matters referred to in this Section 5.1) shall be conclusive and shall be binding on the Company, its Stockholders, its Affiliates, all Participants, all other employees and all other persons. 4 Section 5.2 Section 16 of the Exchange Act. Notwithstanding anything contained herein to the contrary, the Committee shall have the exclusive right to grant Options to persons subject to Section 16 of the Exchange Act and set forth the terms and conditions thereof. With respect to persons subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3, as amended from time to time (and its successor provisions, if any), under the Exchange Act. To the extent any provision of the Plan or action by the Board of Directors or the Committee fails to so comply, it shall be deemed null and void to the extent required by law and to the extent deemed advisable by the Board of Directors and/or the Committee. Section 5.3 Retention of Advisors. The Committee may retain such counsel, consultants or advisors as it shall deem necessary or appropriate in the performance of its duties and may rely upon any opinion or computation received from any such counsel, consultant or advisor. Expenses incurred by the Committee in the engagement of such counsel, consultant or advisor shall be paid by the Company or such Affiliate whose employees have benefited from the Plan, as determined by the Committee. The Company shall indemnify members of the Committee and any agent of the Committee who is an employee of the Company or an Affiliate against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of the Plan, except in circumstances involving such person's gross negligence or willful misconduct. ARTICLE VI TERMS OF OPTIONS Section 6.1 Option Provisions. The Committee may grant Options within the limits of the express provisions of the Plan. An Option shall enable the Participant to purchase from the Company, at any time during a specified exercise period, a specified number of shares of Common Stock at a specified Option Price. The character and terms of each Option granted under the Plan shall be determined by the Committee consistent with the provisions of the Plan, including the following: (a) The Option Price of the shares of Common Stock of Options granted in tandem with Dividend Equivalents and/or Performance Units shall not be less than the Fair Market Value of such shares of Common Stock as of the time such Option is granted. (b) Any Option granted in tandem with Dividend Equivalents and/or Performance Units shall be administered in Award Cycles relating to the performance of the Company and/or one or more of its Affiliates throughout a period determined by the Committee. The Committee shall define the length of any such Award 5 Cycle, as well as one or more goals for each such Award Cycle to measure such performance (c) The Option Price of the shares of Common Stock of Options not granted in tandem with Dividend Equivalents and Performance Units shall be determined by the Committee, in its sole discretion. (d) In no event shall any Option granted under the Plan have an expiration date later than ten (10) years from the date of its grant and all Options granted under the Plan shall be subject to earlier termination as expressly provided in this Article VI. (e) Unless otherwise provided in any option agreement under the Plan, an Option granted under the Plan shall become exercisable, in whole at any time or in part from time to time, but in no case may an Option (i) be exercised as to less than one hundred (100) shares of Common Stock at any one time, or the remaining shares of Common Stock covered by the Option if less than one hundred (100), and (ii) become fully exercisable more than ten (10) years from the date of its grant. Except as otherwise provided herein, (i) Options granted in tandem with Dividend Equivalents and/or Performance Units shall not be exercisable prior to the conclusion of their related Award Cycle and (ii) all other Options shall not be exercisable until one (1) year after the date of grant. (f) An Option granted under the Plan shall be exercised by the delivery by the holder thereof to the Company at its principal office (to the attention of the Compensation Manager of Public Service Electric and Gas Company, the Company's subsidiary) of written notice of the number of full shares of Common Stock with respect to which the Option is being exercised, accompanied by payment in full, in cash or by certified or bank check payable to the order of the Company, of the Option Price of such shares of Common Stock, or, at the discretion of the Committee, by the delivery of unexercised Options having an exercise value equal to the Option Price and/or shares of Common Stock having a Fair Market Value equal to the Option Price, or, at the option of the Committee, by a combination of cash and/or such unexercised Options and/or shares (subject to the restrictions above) held by a Participant that have an exercise value or a Fair Market Value together with such cash that shall equal the Option Price. The Option Price may also be paid in full by a broker-dealer to whom the Participant has submitted an exercise notice consisting of a fully endorsed Option, or through any other medium of payment as the Committee, in its discretion, shall authorize. 6 (g) The holder of an Option shall have none of the rights of a Stockholder with respect to the shares of Common Stock covered by such holder's Option until such shares of Common Stock shall be issued to such holder upon the exercise of the Option. (h) No Options granted under the Plan shall be transferable otherwise than by will or the laws of descent and distribution, and any Option granted under the Plan may be exercised during the lifetime of the holder thereof only by the holder. No Option granted under the Plan shall be subject to execution, attachment or other process. (i) Except as otherwise provided herein, the right to exercise an Option shall expire when the Participant shall no longer be an employee of the Company or Affiliate. Section 6. 2 Dividend Equivalents. Dividend Equivalents granted in tandem with an Option under the Plan shall be in such form and shall contain such terms and conditions as the Committee shall from time to time determine, subject to the following: (a) Number. The number of Dividend Equivalents granted to a Participant under the Plan with respect to an Award Cycle shall be equal to the number of shares of Common Stock with respect to which Options are granted to the Participant for such Award Cycle. (b) Amount. The amount of each Dividend Equivalent granted under the Plan shall be equal to the cumulative cash dividends per share actually paid by the Company on its Common Stock during the applicable Award Cycle. (c) Term of Dividend Equivalents. A Dividend Equivalent shall be paid to a Participant if, and only if, and to the extent that, the Participant exercises the Option that was granted in tandem with the Dividend Equivalent within the first nine months that the Option is initially exercisable. If a Participant partially exercises the Option within the first nine months that the Option is initially exercisable, Dividend Equivalents with respect to the same number of shares shall be paid to the Participant. If the Option, or portion thereof, is not exercised within the first nine months after it is initially exercisable, the related Dividend Equivalent or portion thereof shall terminate and be forfeited, and the Participant shall have no right whatsoever to such Dividend Equivalent or portion thereof. (d) Manner of Payment. Dividend Equivalents shall be paid in cash 7 Section 6. 3 Performance Units. Performance Units granted in tandem with an Option under the Plan shall be in such form and shall contain such terms and conditions as the Committee shall from time to time determine, subject to the following: (a) Number. The number of Performance Units granted to a Participant under the Plan with respect to an Award Cycle shall be equal to the number of shares of Common Stock which has been granted to the Participant for such Award Cycle pursuant to the related Option. (b) Amount. The Committee shall determine the target value of each Performance Unit as of the date it is granted. The actual value of the Performance Unit at the end of the Award Cycle shall be determined by the Committee by reference to performance by the Company and/or one or more Affiliate relative to the goal or goals established by the Committee for the Award Cycle at the time of grant; provided, however, that the Committee may, subsequent to the date of grant, adjust such goal or goals to account for extraordinary extenuating circumstances so as to equitably reflect what would be a consistent application of the goal or goals over the Award Cycle. (c) Term and Manner of Payment for Performance Units. A Performance Unit shall be paid to a Participant if, and only if, and to the extent that, the Participant exercises the Option that was granted in tandem with the Performance Unit within the first nine months that the Option is initially exercisable. The actual value of the Performance Units granted in tandem with such Option, determined as of the end of the Award Cycle, shall be paid to the Participant in cash. If a Participant does not exercise the Option within such initial nine month period, the related Performance Units shall terminate and be forfeited. If the Participant partially exercises the Option within the first nine months that the Option initially becomes exercisable, the Participant shall be so paid in cash with respect to the number of Performance Units equal to the number of Shares for which the Option is exercised, and shall forfeit the balance of such Performance Units. Section 6.4 Retirement or Disability. Except as otherwise provided herein, upon termination of employment with the Company or an Affiliate on account of Retirement or Disability, all Options not in tandem with Dividend Equivalents and Performance Units shall become exercisable in full, and any Participant holding any such Options may exercise such Options at any time within three (3) years after the date of such termination, subject to the provisions of Section 6.7. In addition, and anything contained hereto to the contrary notwithstanding, the term during which a Participant may exercise Options subsequent to the date of termination may, in the Committee's discretion, be modified, subject to applicable law 8 and regulation, from the term specified above, as of the date of grant and as specified in an option agreement evidencing the grant of Options under the Plan. With respect to a Participant holding one or more Options granted in tandem with Dividend Equivalents and/or Performance Units, who terminates employment prior to the end of the related Award Cycle(s) on account of Disability or Retirement, and who survives to the end of the Award Cycle(s), then, if the Participant had been actively employed for at least one year during such Award Cycle(s), the Committee may, in its sole discretion, at the end of the applicable Award Cycle(s), permit the Participant to participate in the Plan with respect to such Award Cycle(s). If the Committee permits the Participant to so participate with respect to such Award Cycle(s), such participation shall be upon the same terms and conditions as if the Participant continued to be employed by the Company or an Affiliate, except to the extent that the Committee in its sole discretion shall modify such terms and conditions and except that (1) the Participant's award (Options, Dividend Equivalents and Performance Units) shall be prorated to reflect his or her employment during the applicable Award Cycle(s), (2) any Dividend Equivalents and Performance Units shall expire no later than nine months following the end of the applicable Award Cycle(s) and (3) any related Options shall expire no later than three (3) years following termination of employment. In the event that a Participant holding one or more Options granted in tandem with Dividend Equivalents and/or Performance Units terminates employment following the conclusion of the related Award Cycle on account of Disability or Retirement, then to the extent the Participant has any unexercised Options with respect to such Award Cycle at the time of termination of employment, the Participant shall have the same rights as an active employee with respect to such Options, except that any Dividend Equivalents and Performance Units shall expire no later than nine months following the end of the applicable Award Cycle(s) and all such Options shall expire on the sooner of three (3) years following termination of employment or on the date specified in the related Option agreement. Section 6.5 Death. If a Participant dies holding an Option granted not in tandem with Dividend Equivalents or Performance Units (i) while employed by the Company or a Affiliate or (ii) within three (3) months after the termination of such Participant's employment on account of Retirement or Disability, such Options shall become exercisable in full and, subject to the provisions of Section 6.7, may be exercised by such Participant's personal representative at any time within three (3) years after the Participant's death. With respect to a Participant holding one or more Options granted in tandem with Dividend Equivalents and/or Performance Units, who terminates employment prior to the end of the related Award Cycle(s) on account of death, or dies prior to the end of the Award Cycle(s) following Disability or Retirement, then, if the Participant had been employed by the Company or an Affiliate for at least one year during such Award Cycle(s), the Committee, in its sole discretion, may determine that the Participant shall be entitled to an award with respect to the applicable 9 Award Cycle(s), in which case the Participant's personal representative shall have rights similar to the rights the Participant would have had at the end of the applicable Award Cycle(s), except that: (1) the right of the personal representative to exercise any Options shall commence as of the date of the Participant's death and shall expire no later than three (3) years after the date of the Participant's death; (2) the amount of the prorated Dividend Equivalents shall be paid to the Participant's personal representative in cash as soon as practicable; and (3) if appropriate in the sole discretion of the Committee, a prorated amount appropriately reflecting the value of the Performance Units shall be paid to the Participant's personal representative in cash as soon as practicable. If a Participant holding Options granted in tandem with Dividend Equivalents and/or Performance Units terminates employment on account of death after the end of the related Award Cycle, the Participant's personal representative shall have the same rights as the Participant had at the time of his or her death, except that: (1) the right of the Participant's personal representative to exercise any unexercised Option shall expire no later than three (3) years after the date of the Participant's death; (2) the amount of any remaining Dividend Equivalents shall be paid to the Participant's personal representative in cash as soon as practicable; and (3) the final value of any remaining Performance Units shall be paid to the Participant's personal representative in cash as soon as practicable. Section 6.6 Other Termination of Employment. In the event that Participant holding Options granted in tandem with Dividend Equivalents and/or Performance Units terminates employment following the conclusion of an Award Cycle otherwise than on account of death, Disability or Retirement, then such Participant shall have the same rights as an actively employed Participant, except that all Options, Dividend Equivalents and Performance Units shall expire on the earliest of nine months following termination of employment, the date specified in the related Option agreement, or the date otherwise applicable to the Dividend Equivalent and/or Performance Unit. Section 6.7 No Extension. An Option may not be exercised pursuant to this Article VI except to the extent that the Participant holding such Option was entitled to exercise the Option at the time of termination of employment or death and, in any event, may not be exercised after the original expiration date of the Option. Section 6.8 Change in Control. (a) Notwithstanding anything in this Plan to the contrary, if a Participant's employment is terminated by the Company following a Change in Control (as defined below), (i) all outstanding Options shall immediately vest and become exercisable in full and (ii) any Dividend Equivalents and/or Performance Units granted in tandem with such Option shall be paid immediately in the form of Common Stock 10 (unless the Committee determines that they should be paid in cash). The amount so payable in respect of such Performance Units shall be calculated as if the target value with respect to such Performance Units had been achieved and, in respect of such Dividend Equivalents, shall be calculated as if the Award Cycle had been completed and the most recent quarterly dividend had continued to be paid through the end of such Award Cycle. (b) "Change in Control" shall mean the occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such person any securities acquired directly from the Corporation or its affiliates) representing 25% or more of the combined voting power of the Corporation's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board of Directors or nomination for election by the Corporation's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of the Corporation or any direct or indirect wholly owned subsidiary of the Corporation with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent 11 thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any subsidiary of the Corporation, at least 75% of the combined voting power of the securities of the Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (iv) the stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets, other than a sale or disposition by the Corporation of all or substantially all of the Corporation's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Corporation in substantially the same proportions as their ownership of the Corporation immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Corporation immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Corporation immediately following such transaction or series of transactions. Section 6.9 Vesting on Account of Death. In addition, and notwithstanding anything contained herein to the contrary, in the event an Participant dies during such time as the Participant is employed by the Company or an Affiliate, then any outstanding Options which have not vested and are not exercisable by the Participant as of the date of death shall be automatically deemed vested and exercisable by the Participant's personal representative and/or his legatees in accordance with Section 6.5. 12 ARTICLE VII LEAVE OF ABSENCE Section 7.1 Leaves. For the purposes of the Plan, a Participant who is on military or sick leave or other bona fide leave of absence shall be considered as remaining in the employ of the Company or of a Affiliate or for ninety (90) days or such longer period as such Participant's right to reemployment is guaranteed either by statute or by contract. ARTICLE VIII ADJUSTMENT UPON CHANGES IN CAPITALIZATION Section 8.1 Recapitalization. In the event that the outstanding shares of Common Stock are hereafter changed by reason of recapitalization, reclassification, stock split, combination or exchange of shares of Common Stock or the like, or by the issuance of dividends payable in shares of Common Stock, an appropriate adjustment shall be made by the Committee in the aggregate number of shares of Common Stock available under the Plan, in the number of shares of Common Stock issuable upon exercise of outstanding Options or Performance Units and the Option Price per share. In the event of any consolidation or merger of the Company with or into another company or the conveyance of all or substantially all of the assets of the Company to another company, each then outstanding Option shall, upon exercise, thereafter entitle the holder thereof to such number of shares of Common Stock or other securities or property to which a holder of shares of Common Stock would have been entitled to upon such consolidation, merger or conveyance; and, in any such case, appropriate adjustment, as determined by the Committee, shall be made as set forth above with respect to any future changes in the capitalization of the Company or its successor entity. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options under the Plan will automatically terminate, unless otherwise provided by the Board or any authorized committee thereof; provided, however, that the Committee shall give at least 30 days prior written notice of such event to each Participant during which time he or she shall have a right to exercise his or her unexercised Options, and, subject to prior expiration as otherwise provided in this Plan, each such Stock Option shall be exercisable after receipt of such written notice and prior to the effective date of such transaction. In the event a Participant elects to so exercise any such Option, any related Dividend Equivalents and Performance Units shall also become payable to the Participant adjusted, in the discretion of the Committee, to proportionately reflect the partially completed Award Cycle(s). In the event a Participant does not elect to so exercise any such Option, any related Dividend Equivalent, adjusted, in the discretion of the Committee, to proportionately reflect the partially completed Award Cycle(s), shall terminate and be automatically paid to the Participant in cash, and any related Performance Units, adjusted, in the discretion of the Committee, to proportionately reflect the partially completed Award Cycle(s), shall be automatically paid to the Participant in Common Stock and/or cash as determined by the Committee, on such date within 30 days prior to the effective date of such transaction or dissolution as the Committee shall determine and, in the absence of such determination, on the last business day immediately prior to such effective date. 13 Section 8.2 Unexercised Options. Any adjustment in the number of shares of Common Stock shall apply proportionately to only the unexercised portion of the Options granted hereunder. If fractions of shares of Common Stock would result from any such adjustment, the adjustment shall be revised to the next higher whole number of shares of Common Stock. ARTICLE IX FURTHER CONDITIONS Section 9.1 Representation by the Participant. Unless the shares of Common Stock issuable upon the exercise of an Option to be awarded under the Plan have been registered with the Securities and Exchange Commission under the Securities Act prior to the exercise of the Option, the Participant receiving such Option must represent in writing to the Company that such shares of Common Stock are being acquired for investment purposes only and not with a view towards the further resale or distribution thereof and must supply to the Company such other documentation as may be required by the Company, unless in the opinion of counsel to the Company such representation, agreement or documentation is not necessary to comply with such law. Section 9.2 Exchange Listing. The Company shall not be obligated to deliver any shares of Common Stock until they have been listed on each securities exchange on which the shares of Common Sock may then be listed or until there has been qualification under or compliance with such state or federal laws, rules or regulations as the Company may deem applicable. The Company shall use reasonable efforts to obtain such listing, qualification and compliance. Section 9.3 Tax Withholding. The Committee may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes that the Company is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with the exercise of any Option, including, but not limited to, (i) the withholding of delivery of shares of Common Stock until the Participant reimburses the Company for the amount the Company is required to withhold with respect to such taxes, (ii) the canceling of any number of shares of Common Stock issuable in an amount sufficient to reimburse the Company for the amount it is required to so withhold or (iii) withholding the amount due from any such Participant's wages or other compensation. A Participant may request that the Company withhold from the shares of Common Stock to be issued upon exercise of an Option that number of shares having a Fair Market Value equal to the tax withholding amount due in order to provide for such withholding tax. 14 ARTICLE X TERMINATION, MODIFICATION AND AMENDMENT Section 10.1 Termination of Plan. The Committee or the Board of Directors may, at any time, terminate the Plan or from time to time make such modifications or amendments of the Plan it may deem advisable. Section 10.2 Modification of Outstanding Awards. The Committee may from time to time, at its discretion, alter, amend or suspend any previously granted Option, including any previously granted Option granted in tandem with a Dividend Equivalent and/or Performance Unit prior to the completion of the related Award Cycle. Section 10.3 Effect on Outstanding Awards. No action taken pursuant to Sections 10.1 or 10.2 may materially and adversely affect the rights of a Participant under any outstanding Option without the consent of such Participant. ARTICLE XI EFFECTIVE DATE OF THE PLAN Section 11.1 Effective Date. This Plan was initially adopted by the Board of Directors on December 20, 1988. ARTICLE XII NOT A CONTRACT OF EMPLOYMENT Section 12.1 No Employment Rights Conferred. Nothing contained in the Plan or in any option agreement executed pursuant hereto shall be deemed to confer upon any Participant to whom an Option is or may be granted hereunder any right to remain in the employ of the Company or of an Affiliate or in any way limit the right of the Company, or of any Affiliate, to terminate the employment of any Participant or to terminate any other relationship with a Participant. ARTICLE XIII OTHER COMPENSATION PLANS Section 13.1 No Effect on Other Plans. The adoption of this Plan shall not affect any other stock option plan, incentive 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 stock option plan, incentive plan or any other compensation plan. 15 ARTICLE XIV MISCELLANEOUS Section 14.1 Non-Assignability. No grant of any "derivative security" (as defined by Rule 16a-1(c) under the Exchange Act) made under the Plan or any rights or interests therein shall be assignable or transferable by a Participant except by will or the laws of descent and distribution and except to the extent it is otherwise permissible under the Exchange Act, nor shall any "derivative security" be subject to execution, attachment or similar process, it being understood that no grant of any "derivative security" shall be assignable or transferable pursuant to a domestic relations order. During the lifetime of a Participant, awards granted hereunder shall be exercisable only by the Participant or the Participant's guardian or legal representative. Any attempted assignment, transfer, pledge, hypothecation, other disposition, levy of attachment or similar process not specifically permitted herein shall be null and void and without effect. Section 14.2 Costs and Expenses. 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 nor to any Participant receiving an award. Section 14.3 Written Option Agreement. Notwithstanding anything to the contrary contained herein, the Company shall be under no obligation to sell or deliver Common Stock or to make any other payment under this Plan to any Participant unless and until such Participant shall execute a written option agreement in form and substance satisfactory to the Committee. Section 14.4 Non-Competition. Any option agreement may contain, among other things, provisions prohibiting Participants from competing with the Company or any Affiliate in a form or forms acceptable to the Committee, in its sole discretion. Section 14.5 Transfer of Employment. For the purposes hereof, a Participant shall not be considered as having terminated his/her employment if he/she transfers employment between the Company and an Affiliate or between Affiliates. Section 14.6 Governing Law. 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. Section 14.7 Rules of Construction. 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 this 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. Section 14.8 Time for Performance. Whenever the time for payment or performance hereunder shall fall on a weekend or public holiday, such payment or performance shall be 16 deemed to be timely if made on the next succeeding business day; provided, however, that this Section 14.6 shall not be construed to extend the ten (10) year period referred to in Section 6.1(d). Section 14.9 Notices. 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 Public Service Electric and Gas Company or (b) three business days after it is sent by registered or certified mail, postage prepaid, addressed to the Company (attn: Compensation Manager of Public Service Electric and Gas Company) 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. 17 EX-10.A(14) 9 STOCK PLAN FOR OUTSIDE DIRECTORS PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED STOCK PLAN FOR OUTSIDE DIRECTORS EFFECTIVE JANUARY 1, 1996 AMENDED DECEMBER 15, 1998 I. PURPOSE. The purpose of this Public Service Enterprise Group Incorporated Stock Plan for Outside Directors is to advance the interests of the Company and its stockholders by assisting the Company in attracting and retaining individuals of superior talent, ability and achievement to serve on its Board of Directors. II. DEFINITIONS. The following words and phrases shall have the meanings set forth below unless a different meaning is required by the context: (a) Adjustment Shares: New or additional or different shares of Common Stock or other securities (other than rights or warrants to purchase securities) received or entitled to be received by an owner of Restricted Stock as a result of a change in capitalization of the Company as set forth in Article VIII hereof. (b) Annual Meeting: The Annual Meeting of Stockholders of the Company. (c) Board: The Board of Directors of the Company. (d) Committee: Those persons who are members of the Board but who are not Outside Directors. (e) Common Stock: The Common Stock without nominal or par value of the Company. (f) Company: Public Service Enterprise Group Incorporated, a corporation organized and existing under the laws of the State of New Jersey, or its successor or successors. (g) Disability: Any physical or mental condition of a permanent nature which, in sole reasonable judgement of the Committee, renders an Outside Director incapable of performing the duties of a member of the Board. (h) Effective Date: January 1, 1996. -2- (i) Eligible Director: An Outside Director who meets the eligibility requirements for stock awards as set forth in Article IV hereof. (j) Exchange Act: The Securities and Exchange Act of 1934, as amended, or as it may be amended from time to time. (k) NYSE: The New York Stock Exchange, Inc. (l) Outside Director: A member of the Board on or after the Effective Date who never has been employed by the Company or any of its affiliates. (m) Outside Directors' Pension Plan: The Public Service Enterprise Group Incorporated Pension Plan for Outside Directors Effective January 1, 1989. (n) Plan: This Public Service Enterprise Group Incorporated Stock Plan for Outside Directors, as it may be amended from time to time. (o) Restricted Stock: Shares of Common Stock subject to restrictions awarded pursuant to Article IV hereof. (p) Securities Act: The Securities Act of 1933, as amended, or as it may be amended from time to time. (q) Service: A Director's service as a member of the Board. (r) Year of Service: The annual period commencing the day of each Annual Meeting and ending on the day before the next Annual Meeting. For any person first elected a member of the Board after the date of an Annual Meeting, his first Year of Service shall commence upon his election as a Director and shall end on the day before the next Annual Meeting. III. SHARES SUBJECT TO THE PLAN. Shares of Restricted Stock which may be awarded under the Plan shall be purchased on the open market by the Company or its agent. In the event that any shares of Restricted Stock shall be forfeited, the shares so forfeited shall again be available for the awarding of Restricted Stock under the Plan. IV. RESTRICTED STOCK AWARDS. A. After the Effective Date of this Plan, each Outside Director shall be granted an award of 600 shares of Restricted Stock upon the commencement of each Year of -3- Service as a member of the Board. The date of grant shall be the first business day of the month following the Annual Meeting or the Outside Director's first election as a member of the Board. B. Upon the Effective Date of this Plan, (i) each Outside Director who shall have completed five Years of Service as of December 31, 1995 shall be granted an award of shares of Restricted Stock equal to the present value (assuming commencement of payment at age 70) of what his vested accrued benefit under the Outside Directors' Pension Plan would have been had he terminated Service as of December 31, 1995. The actual number of shares will be determined by dividing said Outside Directors' Pension Plan assumed vested accrued benefit by the closing price of the Common Stock on the NYSE on December 29, 1995 and rounding up to the next whole share; (ii) each Outside Director who shall not have completed five Years of Service as of December 31, 1995 shall be granted an award of shares of Restricted Stock equal in number to 300 times the number of the years he has been a member of the Board; all as reflected in Schedule A to the Plan. C. The award of shares of Restricted Stock, including the restrictions thereon, shall be evidenced by a written instrument in such form and upon such terms and conditions as the Committee shall determine and as are consistent with the following provisions of the Plan: (i) Upon the retirement of an Outside Director as a member of the Board at the Annual Meeting next following the Outside Director's 70th birthday, the restrictions on the Restricted Stock shall lapse and the Company shall issue to the Outside Director a certificate for the shares which have been awarded to him without any legend or restriction of any kind and the Company shall return to the Outside Director or destroy any and all blank stock powers previously provided to it by such Outside Director. (ii) If the service as a member of the Board of an Outside Director who is the recipient of the shares of Restricted Stock terminates for any reason, other than on account of Disability, before the Annual Meeting next following said Outside Director's 70th birthday, such Outside Director shall forfeit any and all rights in and to the shares of Restricted Stock; provided, however, that, the Committee may, for good and valid business reasons, waive such restriction as the Committee deems appropriate. Notwithstanding any other provision of this Plan, upon the occurrence of a termination of Service following a Change in Control (as defined below), all restrictions on the Restricted Stock shall immediately lapse and be of no effect. -4- For the purposes of this Plan, "Change in Control" shall mean 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 from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such person any securities acquired directly from the Corporation or its affiliates) representing 25% or more of the combined voting power of the Corporation's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (1) of paragraph (c) below; or (b) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board of Directors or nomination for election by the Corporation's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (c) there is consummated a merger or consolidation of the Corporation or any direct or indirect wholly owned subsidiary of the Corporation with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any subsidiary of the Corporation, at least 75% of the combined voting power of the securities of the Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (2) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation representing -5- 25% or more of the combined voting power of the Corporation's then outstanding securities; or (d) the stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets, other than a sale or disposition by the Corporation of all or substantially all of the Corporation's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Corporation in substantially the same proportions as their ownership of the Corporation immediately prior to such sale. Notwithstanding the foregoing subparagraphs (a), (b), (c) and (d), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Corporation immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Corporation immediately following such transaction or series of transactions. (iii) Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for the period specified in or in accordance with Section IV(c)(i) and except in accordance with applicable laws and regulations. Any attempted sale, assignment, transfer, pledge, hypothecation or other disposition in contravention of the foregoing shall be null and void and without effect. (iv) Shares of Restricted Stock will be issued in the name of the Outside Director receiving the award, but will be held by the Company for the account of such Outside Director (together with a blank stock power which such Outside Director shall execute and deliver to the Company), subject to all of the terms and conditions of the Plan, for the period specified in or in accordance with Section IV(c)(i). (v) Except as otherwise provided herein and in the instrument evidencing the award of shares of Restricted Stock, the Outside Director receiving same shall have all rights of a stockholder with respect to shares of Restricted Stock issued in his name, including the right to vote and to receive dividends and other distributions. -6- (vi) If an Outside Director dies while serving as a member of the Board, and more than six months after the date on which the shares of Restricted Stock were awarded to him have elapsed, the restriction provided for in Section IV(c)(i) shall be deemed to have lapsed immediately prior to death. (vii) If an Outside Director, as owner of shares of Restricted Stock, receives or shall be entitled to receive Adjustment Shares, the certificates representing the Adjustment Shares (together with a blank stock power executed by such Outside Director) shall be delivered to and held by the Company, subject to all of the terms and conditions of the Plan, for the period specified in or in accordance with Section IV(c)(i). Any Adjustment Shares shall be Restricted Stock for all purposes of the Plan, subject to the same restrictions as the shares of Restricted Stock to which they relate. If such Participant shall receive rights or warrants with respect to any shares of Restricted Stock or any Adjustment Shares, such rights or warrants may be held, exercised, sold or otherwise disposed of by such Outside Director, and any shares or other securities acquired by such Outside Director as a result of the exercise of such rights or warrants likewise may be held, sold, or otherwise disposed of by such Outside Director, free and clear of any restrictions. V. FURTHER CONDITIONS. A. Unless the shares of Restricted Stock to be awarded under the Plan have been registered with the Securities and Exchange Commission under the Securities Act prior the issuance of the shares of Restricted Stock, the Outside Director receiving such Restricted Stock must represent in writing to the Company that such shares of Common Stock are being acquired for investment purposes only and not with a view towards the further resale or distribution thereof and must supply to the Company such other documentation as may be required by the Company, unless in the opinion of counsel to the Company such representation, agreement or documentation is not necessary to comply with the Securities Act. B. The Company shall not be obligated to deliver any shares of Common Stock until they have been listed on each securities exchange on which the shares of Common Sock may then be listed or until there has been qualification under or compliance with such state or federal laws, rules or regulations as the Company may deem applicable. The Company shall use reasonable efforts to obtain such listing, qualification and compliance. C The Committee may make such provisions and take such steps as it may deem -7- necessary or appropriate for the withholding of any taxes that the Company is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with the award of any Restricted Stock, including, but not limited to (i) the withholding of delivery of certificates for shares of Common Stock until the Outside Director reimburses the Company for the amount the Company is required to withhold with respect to such taxes, (ii) the cancelling of any number of shares of Common Stock issuable in an amount sufficient to reimburse the Company for the amount it is required to so withhold or (iii) withholding the amount due from any such Outside Director's other compensation. VI. FORFEITURE OF BENEFITS. As long as an Outside Director is receiving or is a recipient of a Restricted Stock Award under the Plan, such Outside Director will not directly or indirectly enter into or in any manner take part in any business or other endeavor, as an employee, agent, independent contractor, owner or otherwise, which in any manner competes or conflicts with the business of the Company or is detrimental to the best interests of the Company, unless the Company consents thereto in writing. The failure of an Outside Director to comply with the provisions of this Article shall result in the forfeiture all Restricted Stock grants under the Plan. Before any such forfeiture, the Company shall mail notice to the Outside Director that consideration is being given to forfeiture pursuant to this Article. On written request of the Outside Director within sixty days following the mailing by the Company of the notice, the Committee shall afford the Outside Director an opportunity to demonstrate to the Committee that forfeiture would not be justified. VII. ADMINISTRATION. The Plan shall be administered by the Committee, which shall have full and final authority to interpret the provisions of the Plan and to establish rules and regulations and otherwise make determinations regarding the administration and operation of the Plan. All decisions and determinations by the Committee with respect to the Plan or awards payable thereunder shall be final and binding upon all parties. VIII. ADJUSTMENT UPON CHANGES IN CAPITALIZATION In the event that the outstanding shares of Common Stock are hereafter changed by reason of recapitalization, reclassification, stock split, combination or exchange of shares of Common Stock or the like, or by the issuance of dividends payable in shares of Common Stock, an appropriate adjustment shall be made by the Committee in the number of shares of Restricted Stock outstanding. -8- IX. TERMINATION, MODIFICATION AND AMENDMENT A. The Board may, at any time, terminate the Plan or, from time to time, make such modifications or amendments of the Plan as it may deem advisable. B. No termination, modification or amendment of the Plan may adversely affect the rights under any outstanding shares of Restricted Stock without the consent of the Outside Director to whom such shares of Restricted Stock shall have been previously awarded. X. NOT A CONTRACT FOR CONTINUED SERVICE Nothing contained in the Plan or in any restricted stock agreement executed pursuant hereto shall be deemed to confer upon any Outside Director to whom shares of Restricted Stock are or may be awarded hereunder any right to remain a member of the Board or in any way limit the right of the Board or the Stockholders to terminate or fail to renominate or reelect any such Outside Director as a member of the Board. XI. MISCELLANEOUS A. The costs and expenses of administering the Plan shall be borne by the Company and shall not be charged against any award nor to any Outside Director receiving an award. B. Any restricted stock agreement may contain, among other things, provisions prohibiting the Outside Director from competing with the Company or any affiliate in a form or forms acceptable to the Committee, in its sole discretion. C. This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of New Jersey. D. 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 this 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. E. Whenever the time for payment or performance hereunder shall fall on a weekend or public holiday, such payment or performance shall be deemed to be timely if made on the next succeeding business day. EX-10.A(16) 10 DEFERRED COMP. PLAN FOR CERTAIN EMPLOYEES DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PSEG GLOBAL INC. February 1, 1995 As Amended December 21, 1998 TABLE OF CONTENTS 1. PURPOSE...............................................................1 2. DEFINITIONS OF THE TERMS USED IN THIS PLAN............................1 (a) "Account"....................................................1 (b) "Affiliate"..................................................1 (c) "Assets".....................................................1 (d) "Beneficiary"................................................1 (e) "Committee"..................................................1 (f) "Company"....................................................1 (g) "Compensation"...............................................2 (h) "Deferrable SAR".............................................2 (i) "Deferred Compensation"......................................2 (j) "Disability".................................................2 (k) "Employee"...................................................2 (l) "Plan".......................................................2 (m) "SAR Income".................................................2 (n) "SAR Plan"...................................................2 3. ELECTION AS TO THE AMOUNT OF COMPENSATION AND/OR SAR INCOME THAT IS TO BE DEFERRED.....................................2 4. HOW THE ACCOUNT IS TO BE MAINTAINED...................................3 (a) Establishment of Account.....................................3 (b) Interest on Assets in the Account............................3 (c) Title and Beneficial Ownership of Assets.....................4 5. DISTRIBUTION FROM THE ACCOUNT.........................................4 (a) Election as to the Commencement of the Distribution..........4 (b) Election as to the Timing of the Distribution(s) ............4 (c) Distribution in Case of Certain Disability...................5 (d) Distribution in Case of Death................................5 (e) Request for Change in Distribution...........................6 (f) Not Terminated if Transferred to an Affiliate................6 (g) Company may Distribution in Lump Sum if Distributable Amount Less than $5,000......................................6 (h) Delay of Certain Distributions...............................6 6. ASSIGNMENT............................................................7 7. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT......................7 8. AMENDMENT OR TERMINATION OF THE PLAN BY THE COMPANY...................7 9. WHAT CONSTITUTES NOTICE...............................................8 10. ADVANCE DISCLAIMER OF ANY WAIVER ON THE PART OF THE COMPANY...............................................................8 11. EFFECT ON INVALIDITY OF ANY PART OF THE PLAN..........................8 12. PLAN BINDING ON ANY SUCCESSOR OWNER...................................8 13. LAWS GOVERNING THIS PLAN..............................................9 14. WITHHOLDING FOR TAXES.................................................9 15. MISCELLANEOUS.........................................................9 SCHEDULE A....................................................................10 SCHEDULE B....................................................................12 DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PSEG GLOBAL INC. February 1, 1995 1. PURPOSE. The purpose of this Plan is to provide a method to certain select and key employees of the Company to defer compensation as provided herein. 2. DEFINITIONS OF THE TERMS USED IN THIS PLAN. As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Account" - The Deferred Compensation Account described in Paragraph 4 of this Plan. (b) "Affiliate" - Any organization which is a member of a controlled group of corporations (as defined in the Internal Revenue Code (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 promulgated pursuant to Code section 414(o). (c) "Assets" - All Compensation, SAR Income and interest that have been credited to an Employee's Account in accordance with Paragraph 4 of this Plan. (d) "Beneficiary" - The individual(s) and/or entity(ies) designated and defined by Schedule B of the Plan. (e) "Committee"- The Compensation Committee of the Company. (f) "Company" -- PSEG Global Inc. and Affiliates. (g) "Compensation" - The total remuneration paid to an Employee for services rendered to the Company or an Affiliate excluding the Company's or Affiliate's cost for any public or private employee benefit plan. (h) "Deferrable SAR" - A stock appreciation right under the SAR Plan granted no more than five years before the date of any deferral under Section 3 of this Plan. (i) "Deferred Compensation" - The amount of compensation deferred pursuant to Paragraph 3 of this Plan. (j) "Disability" - Disability so as to be incapable of performing further work for the Company. (k) "Employee" - Each employee of the Company as may be designated by the Committee. (l) "Plan" - This Deferred Compensation Plan for Certain Employees of PSEG Global Inc. (m) "SAR Income" - That amount to which an Employee may be entitled to receive pursuant to the SAR Plan with respect to Deferrable SARs. (n) "SAR Plan" - The Community Energy Alternatives, Incorporated 1987 Stock Appreciation Rights Plan. 3. ELECTION AS TO THE AMOUNT OF COMPENSATION AND/OR SAR INCOME THAT IS TO BE DEFERRED. An Employee may elect to defer any portion of his Compensation otherwise payable for services rendered for the Company after the date of adoption of this Plan. An Employee may also elect to defer any portion of SAR Income otherwise payable to him after the adoption of this Plan. 3 Any such election must be made by filing with the Committee an "Election in Connection With Deferral of Compensation", the form of which is attached to this Plan as Schedule A and is hereinafter referred to as "Schedule A". An Employee may change (using Schedule A for such purpose), not Later than December 31 of any year, the amount of Compensation and/or SAR Income to be deferred by him with respect to the next succeeding calendar year or years. In the calendar year this Plan is adopted, or in the calendar year that an Employee first becomes eligible to participate in this Plan, an election may be made to defer Compensation and/or SAR Income for a part of that calendar year. Compensation and/or SAR Income may be deferred prospectively only, and the amount of Compensation and/or SAR Income to be deferred may be changed only with respect to future calendar years. 4. HOW THE ACCOUNT IS TO BE MAINTAINED. (a) Establishment of Account - The Company shall establish an Account for each Employee who elects to participate in the Plan. Each Employee's Account shall be credited at the end of each month with an amount equal to the Deferred Compensation and/or SAR Income which would have otherwise been payable to him that month. (b) Interest on Assets in the Account - The Assets credited to each Employee's Account shall accrue interest each calendar quarter at an annual rate equal to the rate charged by The Chase Manhattan Bank, N.A. on the first business day of such calendar quarter for prime commercial loans of 90-day maturity (based on actual number of days, 360 days to the year), plus 1/2 of 1%. Such interest shall be computed on the average daily balance in the Employee's Account during each calendar quarter, excluding any Assets which have been distributed from the Employee's Account during such quarter, and shall be credited to the Employee's Account 4 and compounded on the last day of March, June, September and December, and interest in Assets distributed from an Employee's Account shall accrue in the same manner to the date of, be credited to the Employee's Account on the date of, and be paid with, such distribution. (c) Title and Beneficial Ownership of Assets - The Plan shall be unfunded. The Company shall be not be required to segregate any amounts credited to any Employee's Account, which shall be established merely as an accounting convenience. Title and beneficial ownership of any Assets, whether Deferred Compensation, Deferred SAR Income or interest credited to an Employee's Account pursuant to Paragraphs 4(a) and (b) hereinabove, shall at all times remain in the Company, and an Employee shall not have any interest whatsoever in any specific assets of the Company. 5. DISTRIBUTION FROM THE ACCOUNT. (a) Election as to the Commencement of the Distribution - By election on Schedule A filed with the Committee, an Employee may elect to have distribution from his Account commence either (1) within sixty (60) days after the date he ceases to be employed by the Company or, in the alternative, (2) in the month of January of the calendar year elected by the Employee. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. The actual date that distribution shall commence shall be a date within the elected period to be determined by the Committee in its sole discretion. (b) Election as to the Timing of the Distribution(s) - By election on Schedule A filed with the Committee, an Employee may elect to receive the distribution of his Account in the form of (1) one lump-sum payment, (2) annual distributions over a five-year period or (3) 5 annual distributions over a 10-year period. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. In the event a lump-sum payment is made under this Plan, the Assets credited to an Employee's Account, including interest at the rate provided in Paragraph 4(b) of this Plan to the date of distribution, shall be paid to the Employee on the date determined under Paragraph 5(a) of this Plan. In the case of a distribution over a period of years, the Company shall pay to the Employee on the date determined under Paragraph 5(a) of this Plan and on the yearly anniversaries of such date, annual installments of the unpaid balance of the Assets in the Employee's Account, including interest on the unpaid balance at the rate provided in Paragraph 4(b) of this Plan to the date of distribution. The amount of each installment shall be determined by multiplying the then unpaid balance, plus accrued interest, in the Employee's Account by a fraction, the numerator of which is one and the denominator of which is the number of annual installments remaining to be paid. (c) Distribution in Case of Certain Disability - In the event of an Employee's Disability prior to a calendar year elected by the Employee under Paragraph 5(a)(2) of this Plan for distribution to commence, distribution of the Employee's Account shall commence within six (6) months after such Disability, in accordance with the Employee's election under Paragraph 5(b) of this Plan as to the form of distribution. The actual date that distribution shall commence shall be a date within such six (6) month period to be determined by the Committee in its sole discretion. (d) Distribution in Case of Death - In the event of an Employee's death, the balance of the Employee's Account shall be distributed to the Employee's Beneficiary(ies) over a period of not more than five (5) years, in accordance with his election on Schedules A and B 6 filed with the Committee for distribution in case of death. Such distribution shall be made in a manner consistent with Paragraph 5(b) of this Plan and shall commence in the month of January of the year after the year of the Employee's death, on a date within said month to be determined by the Committee in its sole discretion. Additional annual payments for distributions made over a period of more than one year shall be made on the yearly anniversaries of such date. In the event of an Employee's death after distribution of his Account has commenced, any election under this paragraph 5(d) shall not extend the time of payment of his Account beyond the time when distribution would have been completed if he had lived. An Employee may change Beneficiary designations by filing a subsequent Schedule B with the Committee. (e) Request for Change in Distribution - An Employee, Beneficiary or a legal representative may request a change in the timing, frequency or amount of payments made from an Employee's Account by filing a written request therefor with the Committee. The Committee may, in its sole discretion, grant such request only if such request specifies appropriate circumstances to justify such a change to prevent undue hardship. The Committee shall inform the Employee, Beneficiary or representative of its decision within sixty (60) days of its receipt of the written request. (f) Not Terminated if Transferred to an Affiliate - For the purposes of this Paragraph 5, an Employee shall not be deemed to have terminated his employment if he is transferred to and remains in the employ of an Affiliate. (g) Company may Distribution in Lump Sum if Distributable Amount Less than $5,000 - The Company reserves the right to make a lump-sum distribution, notwithstanding any other provision of this Plan, if the total Assets in an Employee's Account are $5,000 or less 7 at any time after the Employee ceases to be employed by the Company. (h) Delay of Certain Distributions - Notwithstanding anything contained in this Plan to the contrary, distribution of an amount equal to 50% of what the Company's withholding obligation for Federal and applicable state income tax purposes had the Company been obligated to withhold in the year that the Employee elected to redeem such Deferrable SARs, would have been in respect of SARs which were vested under the terms of the SAR Plan at the time of the election to defer income related thereto, shall be deferred as described in this paragraph. Such deferred amount, and all interest accrued with respect thereto under this Plan, shall be paid in one lump sum upon the earlier of the end of (a) eleven (11) years from the date of the exercise of the vested SAR or (b) the date upon which the audit period for the Company's Federal or applicable state income tax return for the year in which the vested Deferrable SARs were exercised closes. Except, however, if at the time noted in (a), above the issue of the Company's withholding obligation in respect of such SAR Income is being contested, distribution of all amounts otherwise distributable, not exceeding the amount in controversy, will be delayed until resolution of such contest. 6. ASSIGNMENT. No benefit under the Plan shall in any manner or to any extent be assigned, alienated or transferred by any Employee or Beneficiary under the Plan or be subject to attachment, garnishment or other legal process. 7. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT. This Plan shall not constitute a contract for the continued employment of any Employee by the Company. The Company reserves the right to modify an Employee's Compensation at any time and from time to time as it considers appropriate and to terminate his employment for any reason 8 at any time notwithstanding this Plan. 8. AMENDMENT OR TERMINATION OF THE PLAN BY THE COMPANY. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of an Employee in respect of Deferred Compensation previously earned by him which has not been paid, unless such Employee or his legal representative shall consent to such change. 9. WHAT CONSTITUTES NOTICE. Any notice to an Employee, Beneficiary or legal representative hereunder shall be given either by delivering it or by depositing it in the United States mail, postage prepaid, addressed to his last-known address. Any notice to the Company or the Committee hereunder (including the filing of Schedules A and B) shall be given either by delivering it, or depositing it in the United States mail, postage prepaid, to the Secretary of the Employee Benefits Policy Committee, Public Service Enterprise Group Incorporated, 80 Park Plaza, T4B, Newark, New Jersey 07101. 10. ADVANCE DISCLAIMER OF ANY WAIVER ON THE PART OF THE COMPANY. Failure by the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 11. EFFECT ON INVALIDITY OF ANY PART OF THE PLAN. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of 9 any other provision. 12. PLAN BINDING ON ANY SUCCESSOR OWNER. Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 13. LAWS GOVERNING THIS PLAN. Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 14. WITHHOLDING FOR TAXES. The Company shall have the right to deduct from any payment any sums 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. 15. MISCELLANEOUS. The masculine pronoun shall mean the feminine wherever appropriate. 10 SCHEDULE A DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF COMMUNITY ENERGY ALTERNATIVES, INCORPORATED (THE "PLAN") Elections In Connection With Deferral Of Compensation Section 1. Election As To Compensation To Be Deferred. Note: THIS SECTION IS TO BE USED TO MAKE OR TO CHANGE ANY ELECTION UNDER PARAGRAPH 3 OF THE PLAN. ANY CHANGE IN ELECTION MUST BE MADE NO LATER THAN DECEMBER 31 OF THE YEAR PRECEDING THE YEAR IN WHICH YOU WISH THE CHANGE TO APPLY. I hereby elect to defer, in accordance with the provisions of the Plan: (a) _________________ a month of my Compensation; (b) All of my Compensation in excess of $_______________ per year; (c) __________% of any payments made pursuant to the grant of _________________________________ under the Community Energy Alternatives Incorporated 1987 Stock Appreciation Rights Plan; (d) __________% or $________________ of any award paid to me pursuant to the Community Energy Alternatives Incorporated Incentive Compensation Plan; (e) __________% or $_______________ of any project completion bonus paid to me. Section 2. Election As To Commencement Of Distribution From Account Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31ST OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have distribution from my Account commence: (a) Within sixty (60) days after I cease to be employed by the Company. (b) In the month of January of the calendar year following the year I cease to be employed by the Company. (c) In the month of January, _______________________. Employee's Initials___________ Date______________________ 11 SCHEDULE A Section 3. Election As To The Timing Of The Distribution Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31ST OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid: (a) In one lump sum (b) In annual installments over a period of five (5) years. (c) In annual installments over a period of ten (10) years. Section 4. Election As To Method Of Distribution In Case Of Death Note: THIS SECTION TO BE USED TO SELECT THE METHOD OF DISTRIBUTION IN THE CASE OF DEATH. PERIOD SELECTED MAY NOT BE MORE THAN FIVE (5) YEARS. In case of my death, I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid over a period of year(s) to my Beneficiary(ies) designated on Schedule B. ___________________, 19 - ------------------------------ ------------------------------------ WITNESS EMPLOYEE SIGNATURE 12 SCHEDULE B DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF COMMUNITY ENERGY ALTERNATIVES, INCORPORATED (THE "PLAN") DESIGNATION OF BENEFICIARY(IES) In the event of my death, I hereby designate the following individuals, fiduciaries or other entities, either in their own right or in their representative capacity, in the proportions and in the priority of interest designated, to be the beneficiaries of any benefits owing to me under the Plan. PRIMARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder. If any one or more of the primary beneficiaries designated hereunder shall predecease me, such beneficiary's share(s) shall be divided equally among the remaining primary beneficiaries. NAME AND PRESENT PROPORTIONATE INTEREST ADDRESS OF PRIMARY OF PRIMARY RELATIONSHIP BENEFICIARIES BENEFICIARY(IES) TO EMPLOYEE - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- ------------------------ Employee's Initials 13 SCHEDULE B SECONDARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder only if all of my primary beneficiaries have predeceased me. If all primary beneficiaries have predeceased me and if any one or more of the secondary beneficiaries designated hereunder shall predecease me, such secondary beneficiary's share(s) shall be divided equally among the remaining secondary beneficiaries. NAME AND PRESENT PROPORTIONATE INTEREST ADDRESS OF SECONDARY OF SECONDARY RELATIONSHIP BENEFICIARY(IES) BENEFICIARY(IES) TO EMPLOYEE - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- ESTATE - In the event I have declined to designate a beneficiary hereunder or if all of the beneficiaries that I have designated predecease me, then all benefits payable under the Plan shall be payable to my estate. Date: - ------------------------------------ ------------------------------------ WITNESS EMPLOYEE'S SIGNATURE EX-10.A(17) 11 1997 EXECUTIVE LONG-TERM INCENTIVE COMP. PLAN 1997 EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN PSEG GLOBAL INC. As Amended December 21, 1998 TABLE OF CONTENTS Page No. -------- 1. Purposes...............................................................1 2. Definitions............................................................1 3. Eligibility............................................................5 4. Administration.........................................................6 5. Phantom Stock Units....................................................7 6. Granting of Awards....................................................7 7. Vesting of Award Grants ...............................................8 8. Term of Award Grants...................................................8 9. Payment of Award Grants................................................9 10. Method of Exercise of Award Grants.....................................9 11. Termination of Employment.............................................10 12. Assignment............................................................11 13. Plan Does Not Constitute an Employment Agreement......................11 14. Amendment or Termination of this Plan by the Company..................11 15. What Constitutes Notice...............................................11 16. Advance Disclaimer of Any Waiver......................................12 17. Effect on Invalidity of Any Part of this Plan.........................12 18. Change In Control.....................................................12 19. Plan Binding on Any Successor Owner...................................12 20. Laws Governing This Plan..............................................12 21. Miscellaneous.........................................................13 22. Withholding...........................................................13 23. Effective Date........................................................13 PSEG GLOBAL INC. 1997 EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN 1. PURPOSES The purposes of this Plan are to foster attainment of the long-term financial and operating objectives of the Company by providing incentive to key members of the senior management of this Company and its Subsidiaries tied to changes in the total value of the Company as measured by the performance of units of Phantom Stock of the Company; to supplement the Company's salary and benefit programs so as to provide overall compensation for such executives which is competitive with corporations with which the Company must compete for executive talent; and to assist the Company in attracting and retaining executives who can materially influence its long-term financial and operating results. 2. DEFINITIONS As used in this Plan, the following words and phrases shall have the following meanings unless the context clearly requires otherwise: (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 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 promulgated pursuant to Code section 414(o). (b) "Award Grants" - options with respect to units of Phantom Stock of the Company awarded by the Committee pursuant to Paragraph 6 of this Plan. (c) "Award Year" - a Plan Year with respect to which Award Grants to Participants in this Plan are approved by the Committee. (d) "Change in Control" - for purposes of this Plan, a "Change in Control" of the Company shall have occurred if: 1 (i) any Person, other than Holdings, its parent, Public Service Enterprise Group Incorporated, their successors or assigns or any of their Subsidiaries or Affiliates, is or becomes the Beneficial Owner (as that term is defined in Rule 13-3 under the Securities and Exchange Act of 1934, as amended), 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) representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or (ii) a reorganization, merger or consolidation of the Company is consummated, other than a reorganization, merger or consolidation immediately following which more than fifty percent (50%) of the voting securities of the Company, are owned, directly or indirectly, by Holdings, Public Service Enterprise Group Incorporated, their successors or assigns or any of their Subsidiaries or Affiliates; or (iii) the shareholders of the Company approve (a) the sale or disposition by the Company (other than to a parent, Subsidiary or Affiliate of Holdings, or Public Service Enterprise Group Incorporated or to their successors or assigns) of all or substantially all of the assets of the Company (or any such sale or disposition is effected through condemnation proceedings), or (b) a complete liquidation or dissolution of the Company. For the purposes of this paragraph 2(d), any public offering of the common stock of the Company shall not be deemed to result in a Change in Control of the Company. 2 (e) "Committee" - the Compensation Committee of the Board of Directors of the Company. (f) "Company" - PSEG Global Inc. (g) "Disability" - any physical or mental condition which renders a Participant incapable of performing further work for his or her employer, as certified in writing by a medical practitioner designated and/or approved by the Committee. (h) "Holdings" - PSEG Holdings Inc., the Company's parent. (i) "Exercise Date" - the date upon which a Participant elects to "exercise" an Award Grant pursuant to Paragraphs 9 and 10 of this Plan. (j) "Exercise Period" - the annual 45 day period within which vested Award Grants may be exercised, as provided for in Paragraph 10 of this Plan. (k) "Fair Market Value" - as of a given date, if the shares of common stock of the Company are listed as of such date on any national securities exchange or traded on the over-the-counter market, the Fair Market Value shall be the closing price on such exchange or on the NASDAQ National Market System or the mean of the closing bid and asked prices of the shares of common stock on the over-the-counter market, as reported by the NASDAQ, the National Association of Securities Dealers OTC Bulletin Board or the National Quotation Bureau, Inc., as the case may be, on such date or, if there is no closing price or bid or asked price on that day, the closing price or mean of the closing bid and asked prices on the most recent day preceding such date for which such prices are available. (l) "Option Price" - the Unit Value of an Award Grant on the date of grant. (m) "Participant(s)" - such employee(s) of the Company and its Subsidiaries as may be designated by the Committee to participate in this Plan. 3 (n) "Phantom Stock" - fictitious units of common stock in the Company that will be the basis upon which the value of Award Grants shall be determined, as provided in Paragraph 5 of this Plan. (o) "Plan" - this PSEG Global Inc. 1997 Executive Long-Term Incentive Compensation Plan. (p) "Plan Year" - the calendar year. (q) "Retirement" - termination of employment with the Company or any Subsidiary (i) at or after the age of 62 or (ii) under circumstances entitling the Participant to an immediately payable periodic retirement benefit under the Public Service Electric and Gas Company Pension Plan or the Cash Balance Pension Plan for Non Represented Employees of Public Service Electric and Gas Company. 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 Participant's cash balance account under the Cash Balance Pension Plan; (r) "Subsidiary" - a corporation at least 80% of the voting shares of which are owned by this Company. (s) "Total Value" - the total value of the Company computed according to paragraph 5(c) of this Plan. (t) "Unit Value" - the value per unit of Phantom Stock computed according to paragraph 5(b) of this Plan. 3. ELIGIBILITY (a) The Committee may select such employees of the Company and its Subsidiaries (individually or by position) for participation in this Plan upon such terms as it deems 4 appropriate, due to the employee's responsibilities and his/ her opportunity to make substantial contributions to the attainment of the long-term financial and operating objectives of the Company. A determination with respect to participation for any particular Plan Year shall be made within 30 days of the beginning of the Plan Year, except that designation of Participants with respect to the first Plan Year following adoption of this Plan shall be made within 30 days of the initial adoption of this Plan and selection of new hires or newly transferred or promoted employees for participation shall be made within 30 days of hire, transfer or promotion. Further, the Committee may adjust an Award Grant of any Participant if the Committee deems it appropriate to so do reflect a change which may have occurred during an Award Year in such Participant's position or responsibilities. (b) Participation in this Plan in one Plan Year shall not guarantee participation in any other Plan Year. The Committee shall have sole discretion with respect to the selection of Participants, the making of Award Grants or whether to suspend operation of this Plan for any period of time. 4. ADMINISTRATION (a) This Plan shall be administered by the Committee. The Committee shall have full and final authority to select Participants and to designate an Award Grant for each Participant. The Committee shall have the authority, subject to such resolutions as may from time to time be issued or adopted by the Board of Directors, in its discretion to determine the individuals to whom, and the time or times at which, Award Grants shall be made, the number of units of Phantom Stock to be subject to each Award Grant, the limitations, restrictions and conditions applicable to each Award Grant, the terms and provisions of agreements that may be entered into in connection with Award Grants (which need not be identical), to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan and to make all other determinations and take all other actions necessary or advisable for the administration of the Plan. 5 (b) The Committee's determinations on the matters regarding this Plan (including matters referred to in this Paragraph 4) shall be conclusive and shall be binding on the Company, its stockholders, its Affiliates, all Participants, all other employees and all other persons. 5. PHANTOM STOCK UNITS The Company is a wholly owned subsidiary of Holdings and none of the Company's actual capital stock will be available for award or distribution under this Plan. Instead, "units" of Phantom Stock shall be the basis for the calculation of the value of Award Grants made pursuant to this Plan. Such Phantom Stock shall be subject to the following assumptions: (a) There are 10,000,000 total units; (b) The Unit Value (the value of each unit of Phantom Stock) on any date shall be equal to the Total Value of the Company at the close of business on the last business day of the Plan Year immediately prior to such date, divided by 10,000,000. Except that following any initial public offering of the common stock of the Company, Unit Value shall be equal to the Fair Market Value of the common stock. (c) The Total Value of the Company at the close of business on the last business day of any Plan Year shall be computed using such criteria and formulae as shall be approved by the Committee prior to the end of such Plan Year and shall be distributed, at least annually, to all Participants. In its discretion, the Committee may utilize such third party as it may choose to verify this computation for any Plan Year. 6. GRANTING OF AWARDS (a) Within 30 days of the beginning of each Plan Year, or in the case of the first Plan Year, within 30 days after the initial adoption of this Plan and, in the case of new hires or 6 newly transferred or promoted employees selected for participation, within 30 days from the date of hire, transfer or promotion, the Committee shall approve an Award Grant for each Participant based upon the Participant's position and his/ her potential to contribute to the attainment of the Company's long-term financial and operating objectives. The Award Grant shall be expressed as an "option" with respect to a certain number of units of Phantom Stock of the Company. The amount of any individual Award Grant and the total of Award Grants made in any Award Year shall be based upon any criteria that the Committee shall deem to be reasonable. The Option Price at which such "option" may be exercised shall be the Unit Value of the Phantom Stock as of the close of business on the last business day of the Plan Year immediately prior to the date of grant. (b) Also, notwithstanding anything contained in this Plan to the contrary, the Committee shall have the authority to adjust any Participant's Award Grant upon any basis it shall determine to be reasonable. 7. VESTING OF AWARD GRANTS Award Grants shall vest and become exercisable according to the following schedule on the first day of the Exercise Period in the respective Plan Year following the Plan Year for which they were awarded (each, an "Exercise Date"): Prior to three years from date of grant ..................Zero Beginning in the third Plan Year from date of grant ...... 50% Beginning in the fourth Plan Year from date of grant ..... 75% Beginning in the fifth Plan Year from date of grant ......100% (i.e., the first Exercise Date for Award Grants made for the 1997 Award Year shall be the first day of the Exercise Period in 2000). 8. TERM OF AWARD GRANTS The term of Award Grants shall be seven (7) years. Award Grants shall be exerciseable until the close of the Exercise Period in the Plan Year which is six years following the Plan Year for which the Award Grant was made (i.e., Award Grants made for the 1997 Award Year 7 must be exercised on or before the close of the Exercise Period in 2004). Award Grants not exercised prior to the close of such final Exercise Period shall lapse. 8 9. PAYMENT OF AWARD GRANTS All distributions under this Plan shall be made in money by check. The amount that shall be distributed to a Participant upon exercise of an Award Grant shall be equal to the difference in the Unit Value of the Award Grant on the Exercise Date and the Option Price, times the number of units of the Award Grant that are being exercised. Provided, however, that the Unit Value of an Award Grant that is exercised following an initial public offering of common stock of the Company shall not exceed the Fair Market Value of such common stock on the Exercise Date. If there is an initial public offering of the common stock of the Company and the number of shares of common stock of the Company outstanding immediately following such initial public offering is different than 10,000,000, then, in that case, the Option Price of any outstanding Award Grants shall be adjusted, upward or downward, in the same proportion as 10,000,000 is to the number of shares of common stock of the Company outstanding immediately following such initial public offering 10. METHOD OF EXERCISE OF AWARD GRANTS (a) Except as provided below in Subparagraph (b) or in Paragraphs 11(a) and 11(b) of this Plan, Award Grants may be exercised only during an Exercise Period. In each Plan Year, the Exercise Period shall be the 45-day period beginning on the date that the Committee publishes the Total Value of the Company as of the end of the prior Plan Year in accordance with Paragraph 5(c) of this Plan. (b) If there has been an initial public offering of the common stock of the Company, the exercise of Award Grants shall no longer be limited to the Exercise Period. (c) In order to exercise an Award Grant, the Participant desiring the exercise must deliver written notice to the Secretary of the Committee, at the address shown in Paragraph 15 of this Plan, indicating (i) the Participant's desire to exercise the Award Grant, (ii) the identification of the Award Year of the Award Grant elected to be exercised and (iii) the number of units of such 9 Award Grant (which may be less than the total number of units of such Award Grant but which must be a whole number of units) which have been elected to be exercised. 11. TERMINATION OF EMPLOYMENT (a) If a Participant's employment with the Company or a Subsidiary is terminated on account of the Participant's death after such Participant shall have received an Award Grant, but prior to the date that such Award Grant shall become vested, a prorated portion of such Award Grant (equal to the number of months which have transpired since the date of grant divided by 36) shall be deemed to be vested and all vested Award Grants shall be paid to the Participant's Estate within 90 days of Participant's death. Any Award Grant or portion thereof not so vested and paid shall be forfeited. (b) If a Participant's employment with the Company or a Subsidiary is terminated on account of the Participant's Retirement or Disability after such Participant shall have received an Award Grant, but prior to the date that such Award Grant shall become vested, a prorated portion of such Award Grant (equal to the number of months that have transpired since the date of grant divided by 36) shall be deemed to be vested and all vested Award Grants shall be paid to the Participant within 90 days of Participant's termination of employment. Any Award Grant or portion thereof not so vested and paid shall be forfeited. (c) If a Participant's employment with the Company or a Subsidiary is terminated on account of the Participant's transfer of employment to an Affiliate which is not a Subsidiary after such Participant shall have received an Award Grant, the Participant shall be treated, for the purposes of such Award Grant, as if he/she had remained in the employ of the Company or a Subsidiary for as long as the Participant remains in the employ of an Affiliate. (d) If the employment of a Participant is terminated for any reason other than death, Retirement or transfer to the employ of an Affiliate, any Award Grants not yet exercised on the date of termination shall lapse. 10 12. ASSIGNMENT No benefit under this Plan shall in any manner or to any extent be assigned, alienated or transferred by any Participant under this Plan or subject to attachment, garnishment or other legal process. 13. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT This Plan shall not constitute a contract for the continued employment of any Participant by the Company or any Subsidiary. The Company and each Subsidiary reserve the right to modify a Participant's compensation at any time and from time to time as it considers appropriate and to terminate any Participant's employment for any reason at any time notwithstanding this Plan. 14. AMENDMENT OR TERMINATION OF THIS PLAN BY THE COMPANY The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of a Participant in respect of a vested Award Grant, unless such Participant or his or her legal representative shall consent to such change. 15. WHAT CONSTITUTES NOTICE Any notice to a Participant or legal representative hereunder shall be given either by delivering it or by depositing it in the United States mail, postage prepaid, addressed to such person's last-known address. Any notice to the Company or the Committee hereunder shall be given either by delivering it or depositing it in the United States Mail, postage prepaid, to the Secretary, PSEG Glogal Inc., 80 Park Plaza, T4B, P. O. Box 1171, Newark, New Jersey 07101. 16. ADVANCE DISCLAIMER OF ANY WAIVER Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at 11 any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 17. EFFECT ON INVALIDITY OF ANY PART OF THIS PLAN The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 18. CHANGE IN CONTROL If a Change in Control of the Company shall occur, all Award Grants that have not yet vested shall immediately vest. 19. PLAN BINDING ON ANY SUCCESSOR OWNER Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 20. LAWS GOVERNING THIS PLAN Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 21. MISCELLANEOUS The masculine pronoun shall also mean the feminine and vice versa wherever appropriate. 22. WITHHOLDING The Company shall have the right to deduct from any 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 23. EFFECTIVE DATE This Plan shall be effective as of January 1, 1997. EX-10.A(18) 12 MANAGEMENT INCENTIVE COMPENSATION PLAN MANAGEMENT INCENTIVE COMPENSATION PLAN PSEG ENERGY HOLDINGS INC. AMENDED DECEMBER 15, 1998 PSEG ENERGY HOLDINGS INC. MANAGEMENT INCENTIVE COMPENSATION PLAN 1. PURPOSES The purposes of this Plan are to foster attainment of the financial and operating objectives of this Corporation which are important to customers and stockholders by providing incentive to members of management who contribute to attainment of these objectives; to supplement this Corporation's salary and benefit programs so as to provide overall compensation for such executives which is competitive with corporations with which this Corporation must compete for executive talent; and to assist this Corporation in attracting and retaining executives who are important to its continued success. 2. DEFINITIONS As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Account" - an Account established pursuant to Paragraph 8(a) of this Plan. (b) "Award" - the amount of final Incentive Award for a Participant approved by the Committee pursuant to Paragraphs 5 and 7 of the Plan. (c) "Award Year" - a Plan Year in which Incentive Awards are earned by Participants in the Plan. (d) "Committee" - the Compensation Committee appointed by the Board of Directors of this Corporation. 1 (e) "Corporation" - PSEG Energy Holdings Inc. (f) "Disability" - any physical or mental condition which renders a Participant incapable of performing further work for this Corporation and that results in termination of employment. (g) "Distribution Date" - for each Award Year, the first business day of January. (h) "Enterprise" - Public Service Enterprise Group Incorporated. (i) "Incentive Award" - the amount earned by a Participant in accordance with Paragraph 7. (j) "Participant" - each officer or other employee of this Corporation and its subsidiaries as may be designated by the Committee pursuant to Paragraph 3 of the Plan. (k) "Plan" - the PSEG Energy Holdings Inc. Management Incentive Compensation Plan. (l) "Plan Year" - the calendar year. (m) "Primary Award" - the amount determined under Paragraph 7(a)(1). (n) "PSE&G" - Public Service Electric and Gas Company. (o) "Retirement" - termination of service with this Corporation with the right to an immediately payable periodic normal or early retirement benefit under the Pension Plan of Public Service Electric and Gas Company or the Cash Balance Pension Plan of Public Service Electric and Gas Company. Retirement shall not include termination of service with the right to a deferred retirement benefits under either said plan. 2 (p) "Target Incentive Award" - the amount determined under paragraph 6. 3. ELIGIBILITY (a) The Committee may select such employees of this Corporation and its subsidiaries (individually or by position) for participation in the Plan upon such terms as it deems appropriate, due to the employee's responsibilities and his opportunity to contribute substantially to the attainment of financial and operating objectives of this Corporation. A determination of participation for a Plan Year shall be made no later than the beginning of that Plan Year. Provided, however, that employees whose duties and responsibilities change significantly during a Plan Year may be added or deleted as a Participant by the Committee. Provided further, the Committee may prorate the Incentive Award of any Participant if appropriate to reflect any such change in employee responsibilities during a Plan Year. (b) Participation in the Plan in one Plan Year shall not guarantee participation in another Plan Year. (c) The Committee shall have sole discretion as to whether to suspend operation of the Plan for any period of time. 4. ADMINISTRATION (a) The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have full and final authority to select Participants, to designate the Target Incentive Award for each Participant, and to determine the performance objectives and the amount of all Incentive Awards. The Committee shall also have, subject to the provisions of the Plan, full and final authority to 3 interpret the Plan, to establish and revise rules, regulations and guides relating to the Plan, and to make any other determinations that it believes necessary or advisable for the administration of the Plan. The Committee may delegate such responsibilities, other than final approval of Awards or appeals of alleged adverse determinations under the Plan, to the Chief Executive Officer of this Corporation or to any other officer of this Corporation. (b) All decisions and determinations by the Committee shall be final and binding upon all parties, including stockholders, Participants, legal representatives and other employees. 5. DETERMINATION OF AWARD YEAR Not later than 120 days after the close of each Plan Year, the Committee shall, in its sole discretion, determine whether any Participants shall be eligible to earn Incentive Awards with respect to such Plan Year. The discretion of the Committee with respect to this final approval of Awards shall be total. 6. DETERMINATION OF TARGET INCENTIVE AWARDS For each Award Year, the Committee shall establish a Target Incentive Award for each Participant based upon the Participant's position and potential for contribution to the attainment of this Corporation's financial and operating objectives. The Target Incentive Award shall be expressed as a percentage of the Participant's rate of base salary in effect as of the last day of the Plan Year to which such Target Incentive Award relates. 7. DETERMINATION OF INCENTIVE AWARD 4 (a) To determine each Participant's Incentive Award, the Participant's Target Incentive Award shall be adjusted based upon the following factors, provided that the Incentive Award for any Participant shall in no event exceed 1.5 times the Target Incentive Award and provided further that the Committee may determine, based upon the financial and operating results of this Corporation or any other business factors that it determines appropriate, that no Incentive Award shall be awarded for any Plan Year: (1) The Target Incentive Award shall be multiplied by a factor of between 0 and 1.5 to proportionately reflect Enterprise's return on capital for the Plan Year as reported to the Board of Directors in accordance with such rules and procedures as are approved by the Committee; provided, however, that if such return is below a minimum threshold established by the Committee prior to the beginning of the Plan Year, no Incentive Award shall be earned for such Plan Year. This adjusted amount is the Participant's Primary Award. (2) The Participant's Primary Award shall be adjusted by a factor of between -0.5 and +0.5 to proportionately reflect the relative annual increase or decrease in this PSE&G's weighted average of cost per unit of electricity and gas sold in the Plan Year as compared with similar increases or decreases of other designated comparison utilities, in accordance with such rules and procedures as are approved by the Committee. (3) The sum of items (1) and (2) above shall be multiplied by a factor of between 0 and 1.5 to reflect the Participant's level of individual 5 performance, in accordance with such rules and procedures as are approved by the Committee. (b) The Chief Executive Officer shall recommend to the Committee an Award for each Participant, except that the Committee shall have full responsibility for assessing the performance of the Chief Executive Officer and that the Committee shall make the final determination of all Awards. 8. AWARD PAYMENT (a) For Incentive Awards Relating to Plan Years Ending Prior to 1/1/96: (i) There shall be established an account for each Participant for each Plan Year which shall, to the extent not paid to the Participant, be initially credited with the amount of the Participant's Incentive Award. The Plan shall be unfunded. This Corporation shall not be required to segregate any amounts credited to any Participant's Account, which shall be established merely as an accounting convenience. Title to and beneficial ownership of any amounts credited to a Participant's Account shall at all times remain in this Corporation, and no Participant or shall have any interest whatsoever in any specific assets of this Corporation. All amounts credited to Participants' Accounts shall at all times remain solely the property of this Corporation subject to the claims of its general creditors and available for this Corporation's use for whatever purpose desired. (ii) The amount credited to a Participant's Account shall be treated for valuation purposes as if it had been used to purchase shares of the Common Stock of this Corporation or Enterprise, whichever is then listed on the New York Stock Exchange, on the date it is credited to the Participant's Account at a price equal to the average of the 6 high and low sale prices of such Common Stock on such date on the New York Stock Exchange. For the purpose of valuing a Participant's Account, the equivalent shares so credited to a Participant's Account shall be treated as if they were to accrue dividends the same as actual shares of Common Stock, and such equivalent dividends were used to purchase additional shares of such Common Stock at a price equal to 95% of the average of the high and low sale prices of such Common Stock on the New York Stock Exchange on the dividend payment date. (iii) When a distribution or partial distribution is to be made, cash in the amount of the equivalent number of shares of Common Stock to be distributed times the average of the high and low sale prices of such Common Stock on the New York Stock Exchange as of the Distribution Date shall be distributed. (iv) Distribution of a Participant's Account attributable to a Plan Year shall be made in yearly payments over a period of three years, commencing with the second year following the Plan Year to which the Incentive Award relates, each yearly payment to be determined by dividing the value of such Account by the number of payments remaining. (b) For Incentive Awards Related to Plan Years Beginning After 12/31/95: Participants' Incentive Awards shall be made in one lump sum cash payment as soon as practicable after the Determination Date. 9. DEFERRAL OF AWARDS (a) Effective January 1, 1997, receipt of payment of Incentive Awards earned pursuant to this Plan may no longer be voluntarily deferred pursuant to this 7 Plan. (b) Also effective on that date, all amounts previously deferred under the voluntary deferral provisions of this Plan shall be transferred (using the last sale price for the Common Stock on December 31, 1996 as a reference for the amount to be transferred) to the Deferred Compensation Plan for Certain Employees of Public Service Electric and Gas Company, as amended, and be treated in accordance with the terms of that plan. 10. TERMINATION (a) If the employment of a Participant by this Corporation is terminated by the Participant's death, Disability or Retirement, the entire value of the Participant's Account shall be distributed as soon as practicable. In addition, the Committee shall, if it determines that Incentive Awards may be earned for such year of termination, prorate an Award for that part of the year in which the Participant was participating prior to such termination and this Corporation shall pay the prorated Award as soon as practicable after determination, unless otherwise determined by the Committee. (b) If the employment of a Participant is terminated for any reason other than death, Disability or Retirement, any amounts held for the Account of Participant upon any such termination which have not been paid because of the mandatory deferral provisions of Paragraph 8(a) shall be forfeited, unless otherwise determined by the Committee, and the balance of the Participant's Account shall be distributed as soon as practicable. In addition, the Participant shall not receive an Award for that part of the 8 Plan Year in which the Participant was participating at the time of termination, unless otherwise determined by the Committee. (c) If a Participant becomes or ceases to be a Participant during a Plan Year, any Award to the Participant shall be appropriately prorated from the time the Participant entered or left the Plan to the end of the Plan Year. (d) In the case of a Participant's death, payment of the entire value of the Participant's Account under the Plan and/or any Award related to the Participant's final year of participation shall be made to the Participant's estate as a lump sum as soon as practicable after the Participant's death. 11. ASSIGNMENT No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Participant or be subject to attachment, garnishment or other legal process. 12. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT This Plan shall not constitute a contract for the continued employment of any Participant by this Corporation. This Corporation reserves the right to modify a Participant's compensation at any time and from time to time as it considers appropriate and to terminate his employment for any reason at any time notwithstanding this Plan. 13. AMENDMENT OR TERMINATION OF THE PLAN BY THIS CORPORATION The Board of Directors of this Corporation may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of a Participant in respect 9 of an Incentive Award previously earned by him which has not been paid, unless such Participant or his legal representative shall consent to such change. If this Plan is terminated during any Plan Year in which Participants have been selected to participate, the Board of Directors may authorize the Committee to prorate and make provision for payment of Awards for such period. 14. WHAT CONSTITUTES NOTICE Any notice hereunder to a Participant or his legal representative shall be given either by delivering it, or by depositing it in the United States mail, postage prepaid, addressed to his last-known address. Any notice to this Corporation or the Committee hereunder shall be given either by delivering it, or depositing it in the United States Mail, postage prepaid, to the Secretary, PSEG Energy Holdings Inc. c/o Public Service Enterprise Group Incorporated, 80 Park Plaza, T4B, P.O. Box 1171, Newark, New Jersey 07101. 15. ADVANCE DISCLAIMER OF ANY WAIVER Failure by this Corporation or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 16. EFFECT OF INVALIDITY OF ANY PART OF THE PLAN The invalidity or unenforceability of any provision hereof shall in no way affect the validity of enforceability of any other provision. 10 17. PLAN BINDING ON ANY SUCCESSOR OWNER Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon this Corporation, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of this Corporation's assets and business or with or into which this Corporation may be consolidated or merged. 18. LAWS GOVERNING THIS PLAN Except to the extent federal laws applies, this Plan shall be governed by the laws of the State of New Jersey. 19. MISCELLANEOUS The masculine pronoun shall also mean the feminine wherever appropriate. 20. WITHHOLDING This Corporation shall have the right to deduct from any payment any sums 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. 21. EFFECTIVE DATE This Plan shall be effective as of January 1, 1993. 11 EX-10.A(19) 13 DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PSEG HOLDINGS INC AS AMENDED DECEMBER 15, 1998 -1- TABLE OF CONTENTS Page Number ------ 1. Purpose 1 2. Definitions Of Terms Used In This Plan 1 (a) Account (b) Assets (c) Beneficiary (d) Change in Control (e) Company (f) Compensation (g) Deferred Compensation (h) Disability (i) Employee (j) Pension Plan (k) Plan 3. Election as to Amount of Compensation That Is To Be Deferred 2 4. How The Account Is To Be Maintained 2 (a) Establishment of Account (b) Interest on Assets in the Account (c) Title to be Beneficial Ownership of Assets 5. Distribution From The Account 3 (a) Election as to the Commencement of the Distribution (b) Election as to the Timing of the Distribution(s) (c) Distribution in Case of Certain Disability (d) Distribution in Case of Death (e) Request for Change in Distribution (f) Not Terminated if Transferred to Company-Owned Corporation (g) Company may Distribute in Lump-Sum if Distributable Amount Less Than $5,000 6. Unfunded Adjustments to Make Up For Reduced Benefit Under Pension Plan 6 7. Assignment 6 8. Plan Does Not Constitute An Employment Agreement 7 9. Amendment Or Termination Of The Plan By The Company 7 10. What Constitutes Notice 7 11. Advance Disclaimer Of Any Waiver On The Part Of The Company 7 12. Effect Of Invalidity Of Any Part Of The Plan 8 13. Plan Binding On Any Successor Owner 8 14. Laws Governing This Plan 8 15. Miscellaneous 8 -2- TABLE OF CONTENTS--(Continued) Page Number ------ Schedule A - Elections In Connection With Deferral Of Compensation 9 Schedule B - Designation Of Beneficiary(ies) 11 -3- DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PSEG HOLDINGS INC AMENDED DECEMBER 15, 1998 1. Purpose. The purpose of this Plan is to provide a method to certain select and key employees of the Company to defer compensation as provided herein. 2. Definitions Of Terms Used In This Plan. As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Account" - The Deferred Compensation Account described in Paragraph 4 of this Plan. (b) "Assets" - All Compensation and interest that have been credited to an Employee's Account in accordance with Paragraph 4 of this Plan. (c) "Beneficiary" - The individual(s) and/or entity(ies) designated and defined by Schedule B of the Plan. (d) "Change in Control" - The occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of Public Service Enterprise Group Incorporated ("Parent") (not including in the securities beneficially owned by such person any securities acquired directly from Parent or its affiliates) representing 25% or more of the combined voting power of Parent's then outstanding securities, excluding any person -4- who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the board of directors of Parent ("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 Parent) whose appointment or election by the Board or nomination for election by Parent's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of Parent or any direct or indirect wholly owned subsidiary of Parent with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of Parent outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of Parent or any subsidiary of Parent, at least 75% of the combined voting power of the securities of Parent or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (2) a merger or consolidation effected to implement a recapitalization of Parent (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of Parent representing 25% or more of the combined voting power of Parent's then outstanding securities; or (iv) the stockholders of Parent approve a plan of complete liquidation or dissolution of Parent or there is consummated an agreement for the sale or disposition by Parent of all or substantially all of Parent's assets, other than a sale or disposition by Parent of all or substantially all of Parent's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of Parent in substantially the same -5- proportions as their ownership of Parent immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Parent 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 Parent immediately following such transaction or series of transactions. (e) "Company" - PSEG Holdings Inc, formerly known as Enterprise Diversified Holdings Incorporated. (f) "Compensation" - The total remuneration paid to an Employee for services rendered to the Company, excluding the Company's cost for any public or private employee benefit plan. Compensation deferrable under this Plan shall specifically include any and all amounts transferred from the deferred compensation accounts of the Management Incentive Compensation Plan of PSEG Holdings Inc; (g) "Deferred Compensation" - The amount of Compensation deferred pursuant to Paragraph 3 of this Plan. (h) "Disability" - Disability so as to be incapable of performing further work for the Company that results in termination of employment. (i) "Employee" - Each employee of the Company as may be designated by the Company. (j) "Pension Plan" - The Pension Plan of Public Service Electric and Gas Company. (k) "Plan" - The Deferred Compensation Plan for Certain Employees of PSEG Holdings Inc. 3. Election As To The Amount Of Compensation That Is To Be Deferred. An employee may elect to defer any portion of his compensation otherwise payable for services rendered -6- for the Company after the date of adoption of this Plan. Any such election must be made by filing with the Company an "Election in Connection with Deferral of Compensation", the form of which is attached to this Plan as Schedule A and is hereinafter referred to as "Schedule A". An Employee may change (using Schedule A for such purposes), not later than December 31 of any year, the amount of Compensation to be deferred by him with respect to the next succeeding calendar year or years. In the calendar year that an Employee first becomes eligible to participate in this Plan, such Employee may elect to defer Compensation for part of that calendar year but only if such election is made within thirty (30) days after the Employee first becomes eligible to participate in this Plan. Compensation may be deferred prospectively only, and the amount of Compensation to be deferred may be changed only with respect to future calendar years. 4. How The Account Is To Be Maintained. (a) Establishment of Account - The Company shall establish an Account for each Employee who elects to participate in the Plan. Each Employee's Account shall be credited at the end of each month with an amount equal to the Deferred Compensation which would have otherwise been payable to him that month. (b) Interest on Assets in the Account - The Assets credited to each Employee's Account shall accrue interest each calendar quarter at an annual rate equal to the rate charged by The Chase Manhattan Bank, N.A. on the first business day of such calendar quarter for prime commercial loans of 90-day maturity (based on actual numbers of days, 360 days to the year), plus 1/2 of 1%. Such interest shall be computed on the average daily balance in the Employee's Account during each calendar quarter, excluding any Assets which have been distributed from the Employee's Account during such quarter, and shall be credited to the Employee's Account and compounded on the last day of March, June, September and December, and interest on Assets distributed from an Employee's Account shall accrue in the same manner to the date of, be credited to the Employee's -7- Account on the date of, and be paid with, such distribution. (c) Title to and Beneficial Ownership of Assets - The Plan shall be unfunded. The Company shall not be required to segregate any amounts credited to any Employee' s Account, which shall be established merely as an accounting convenience. Title to and beneficial ownership of any Assets, whether Deferred Compensation or interest credited to an Employee's Account pursuant to Paragraphs 4(a) and (b) herein above, shall at all times remain in the Company, and no Employee nor Beneficiary shall have any interest whatsoever in any specific assets of the Company. All Assets shall at all times remain solely the property of the Company subject to the claims of its general creditors and available for the Company's use for whatever purpose desired. 5. Distribution From The Account (a) Election as to the Commencement of the Distribution - By election on Schedule A filed with the Company, an Employee may elect to have distribution from his Account commence either (l) within thirty (30) days after the date he ceases to be employed by the Company or, in the alliterative, (2) in the month of January of any calendar year following termination of employment elected by the Employee, but in any event, no later than the later of (a) the January of the year following the year of the Employee's 70th birthday or (b) the January following termination of employment. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. The actual date that distribution shall commence shall be a date within the elected period to be determined by the Company in its sole discretion. (b) Election as to the Timing of the Distribution(s) - By election on Schedule A filed with the Company an Employee may elect to receive the distribution of his Account in the form of (l) one lump-sum payment, (2) annual distributions over a five-year period or (3) annual distributions over a 10-year period. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. In the event a lump-sum payment is made under this Plan, the Assets credited to an Employee's -8- Account, including interest at the rate provided in Paragraph 4(b) of this Plan to the date of distribution, shall be paid to the Employee on the date determined under Paragraph 5(a) of this Plan. In the case of a distribution over a period of years, the Company shall pay to the Employee on the date determined under Paragraph 5(a) of this Plan and on the yearly anniversaries of such date, annual installments of the unpaid balance of the Assets in the Employee' s Account, including interest on the unpaid balance at the rate provided in Paragraph 4(b) of this Plan to the date of distribution. The amount of each installment shall be determined by multiplying the then unpaid balance, plus accrued interest, in the Employee's Account by a fraction, the numerator of which is one and the denominator of which is the number of annual installments remaining to be paid. (c) Distribution in Case of Certain Disability - In the event of an Employee' s Disability prior to a calendar year elected by the Employee under Paragraph 5(a)(2) of this Plan for distribution to commence, distribution of the Employee's Account shall commence in the month following the month in which the Employee terminates employment for disability, in accordance with the Employee's election under Paragraph 5(b) of this Plan as to the form of distribution. The actual date that distribution shall commence shall be a date within such month determined by the Company in its sole discretion. (d) Distribution in Case of Death - In the event of an Employee's death, the balance of the Employee's Account shall be distributed to the Employee' s Beneficiary(ies) over a period of not more than five (5) years, in accordance with his election on Schedules A and B (filed with the Company) for distribution in case of death. Any change in the period over which such payments are made shall only apply to future deferrals. Such distribution shall be made in a manner consistent with Paragraph 5(b) of this Plan and shall commence in the month of January of the year after the year of the Employee's death, on a date within said month to be determined by the Company in its sole discretion. Additional annual payment for distributions made over a period of more than one year shall be made on the yearly anniversaries of such date. In the event of an -9- Employee's death after distribution of his Account has commenced, any election under this Paragraph 5(d) shall not extend the time of payment of his Account beyond the time when distribution would have been completed if he had lived. An Employee may change Beneficiary designations by filing a subsequent Schedule B with the Company. (e) Request for Change in Distribution - An Employee, Beneficiary or a legal representative may request a change in the timing, frequency or amount of payments made from an Employee's Account by filing a written request therefor with the Company. The Company may, in it sole discretion, grant such request only if the Company determines that an emergency beyond the control of the Employee, Beneficiary or legal representative exists and which would cause such Employee, Beneficiary or legal representative severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. An Employee who makes a hardship withdrawal may not reenter this Plan for 12 months after the date of withdrawal. Any distribution under this Paragraph S(e) shall commence within 30 days after the Company grants such request for hardship withdrawal. (f) Employment not Terminated if Transferred to Company-owned or Commonly Controlled Corporation. - For the purposes of this Paragraph 5, an Employee shall not be deemed to have terminated his employment if he is transferred to the employ of a corporation in which the Company owned a majority equity interest or in which a majority equity interest is owned, directly or indirectly, by a company under common control with the Company. (g) Company may Distribute in Lump-Sum if Distributable Amount Less Than $5,000 - The Company reserves the right to make a lump-sum distribution, notwithstanding any other provision of this Plan, if the total Assets in an Employee's Account are $5,000 or less at any time after the Employee ceases to be employed by the Company. -10- 6. Unfunded Adjustments To Make Up For Reduced Benefit Under Pension Plan. If an Employee, on termination of employment or thereafter, or a Beneficiary of the Employee under the Pension Plan, is entitled to any benefit under the Pension Plan, the Company shall pay out of its general funds a supplementary benefit (as such time after the Employee's retirement and in such manner as the Company in its sole discretion shall determine) equivalent to the excess of the amount computed in (a) below over the amount computed in (b) below: (a) The benefit to which the Employee or such Beneficiary would have been entitled if the Employee's Final Earnings, as defined in the Pension Plan, had included all Compensation earned which would have been included in his Final Earnings if this Plan were not in effect. (b) The actual benefit to which the Employee or such Beneficiary is entitled under the Pension Plan. 7. Assignment. No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Employee or Beneficiary under the Plan or subject to attachment, garnishment or other legal process. 8. Plan Does Not Constitute An Employment Agreement. This Plan shall not constitute a contract for the continued employment of any Employee by the Company. The Company reserves the right to modify an Employee's compensation at any time and from time to time as it considers appropriate and to terminate its employment for any reason at any time notwithstanding this Plan. 9. Amendment Or Termination Of The Plan By The Company. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or -11- termination shall adversely affect the right of an Employee in respect of Deferred Compensation previously earned by him which has not been paid, unless such Employee or his legal representative shall consent to such change; provided, further, that notwithstanding any other provision of this Plan, upon the occurrence of a Change in Control, the income credit calculated pursuant to Paragraph 4 may not be reduced below the prime commercial lending rate described therein. 10. What Constitutes Notice. Any notice to an Employee, Beneficiary or legal representative hereunder shall be give either by delivering it or by depositing it in the United States mail, postage prepaid, addressed to his last-known address. Any notice to the Company hereunder (including the filing of Schedules A and B) shall be given either by delivering it, or depositing it in the United States mail, postage prepaid, to the Secretary of the Company, c/o Public Service Enterprise Group Incorporated, 80 Park Plaza, T-4B, P.O. Box 570, Newark, New Jersey 07101. 11. Advance Disclaimer Of Any Waiver On The Part Of The Company. Failure by the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 12. Effect On Invalidity Of Any Part Of The Plan. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. -12- 13. Plan Binding On Any Successor Owner. Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 14. Laws Governing This Plan. Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 15. Miscellaneous. The masculine pronoun shall mean the feminine wherever appropriate. -13- Schedule A DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PSEG HOLDINGS INC (THE PLAN) Elections in Connection with Deferral of Compensation Section 1. Election as to Compensation to be Deferred. Note: THIS SECTION IS TO BE USED TO MAKE OR CHANGE AN ELECTION UNDER PARAGRAPH 3 OF THE PLAN, ANY CHANGE IN ELECTION MUST BE MADE NO LATER THAN DECEMBER 31 OF THE YEAR PRECEDING THE YEAR IN WHICH YOU WISH THE CHANGE TO APPLY. I hereby elect to defer, in accordance with the provisions of the Plan: (a)_______________ a month of my Compensation; or (b)_______________ All of my Compensation in excess of S____ per year. $_________________ per year. Section 2. Election as to Commencement of Distribution From Account Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31 OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have distribution from my Account commence: _____(a) Within thirty (30) days after I cease to be employed by the Company. _____(b) In the month of January, unless I am employed by the Company at such time, in which case within 30 days after I cease to be employed by the Company. Employee's Initials______________ Date_____________________________ -14- Schedule A Section 3. Election as to the Timing of the Distribution. Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31 OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid: __________ (a) In one lump-sum. __________ (b) In annual installments over a period of five (S) years. __________ (c) In annual installments over a period of ten (10) years. Section 4. Election As To Method Of Distribution In Case of Death. Note: THIS SECTION TO BE USED TO SELECT THE METHOD OF DISTRIBUTION IN THE CASE OF DEATH. PERIOD SELECTED MAY NOT BE MORE THAN FIVE (5) YEARS. In case of my death, I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid over a period of ______ year(s) to my Beneficiary(ies) designated on Schedule B. ___________________, 19___ - ---------------------------------- ------------------------------------- WITNESS EMPLOYEE SIGNATURE -15- Schedule B SECONDARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder only if all of my Primary Beneficiaries have predeceased me. If all Primary Beneficiaries have predeceased me and if any one or more of the Secondary Beneficiaries designated hereunder shall predecease me, such Secondary Beneficiary's share(s) shall be divided equally among the Secondary Beneficiaries. PROPORTIONATE INTEREST OF NAME AND PRESENT ADDRESS- SECONDARY RELATIONSHIP OF SECONDARY BENEFICIARY(IES) BENEFICIARY(IES) TO EMPLOYEE __________________________ _______ % ________ __________________________ __________________________ _______ % ________ __________________________ __________________________ _______ % ________ __________________________ __________________________ _______ % ________ __________________________ ESTATE - In the event I have declined to designate a Beneficiary hereunder or if all of the Beneficiaries that I have designated predecease me, then all benefits payable under the Plan shall be payable to my Estate. Date: - --------------------------------- ----------------------------------- WITNESS EMPLOYEE SIGNATURE -16- EX-10.A(20) 14 EXECUTIVE LONG-TERM INCENTIVE COMP. PLAN EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN PSEG ENERGY TECHNOLOGIES INC. JANUARY 1, 1997 AMENDED DECEMBER 21, 1998 -3- TABLE OF CONTENTS Page No. -------- 1. Purposes........................................................... 1 2. Definitions........................................................ 1 3. Eligibility........................................................ 2 4. Administration..................................................... 3 5. Determination of Target Incentive Award............................ 3 6. Determination of Performance Objectives............................ 3 7. Determination of Achievement of Performance Objectives ............ 3 8. Determination of Award Cycle....................................... 4 9. Determination of Final Incentive Performance Awards ............... 4 10. Payment of Final Incentive Performance Awards...................... 4 11. Termination........................................................ 4 12. Assignment......................................................... 5 13. Plan Does Not Constitute an Employment Agreement................... 5 14. Amendment or Termination of the Plan by the Company ............... 5 15. What Constitutes Notice............................................ 5 16. Advance Disclaimer of Any Waiver................................... 6 17. Effect on Invalidity of Any Part of the Plan....................... 6 18. Plan Binding on Any Successor Owner................................ 6 19. Laws Governing This Plan........................................... 6 20. Miscellaneous...................................................... 6 21. Withholding........................................................ 6 22. Effective Date..................................................... 7 -4- PSEG ENERGY TECHNOLOGIES INC. EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN January 1, 1997 1. PURPOSES The purposes of this Plan are to foster attainment of the long-term financial and operating objectives of the Company by providing incentive to members of the senior management of the Company tied to the achievement of those long-term objectives; to supplement the Company's salary and benefit programs so as to provide overall compensation for such executives which is competitive with corporations with which the Company must compete for executive talent; and to assist the Company in attracting and retaining executives who can have a material, positive influence on its long-term financial and operating results. 2. DEFINITIONS As used in this Plan, the following words and phrases shall have the following meanings unless the context clearly requires otherwise: (a) "Award Cycle" - a Performance Cycle with respect to which Final Incentive Performance Awards to Participants in the Plan are approved by the Committee in accordance with Section 9. (b) "Base Salary" - a sum equal to the annual rate of a Participant's base compensation as of the first day of any Performance Cycle. (c) "Committee" - the Compensation Committee of the Board of Directors of the Company. (d) "Company" - PSEG Energy Technologies Inc. (e) "Disability" - any physical or mental condition which renders a Participant incapable of performing further work for the Company and that results in termination of such Participant's employment. (f) "Distribution Date" - a date for distribution established by the Committee pursuant to Paragraph 10(b) of this Plan. -5- (g) "Final Incentive Performance Award" - the amount awarded to a Participant in accordance with Paragraph 9 of this Plan. (h) "Participant" - such senior employees of the Company as may be designated by the Committee to participate in this Plan. (i) "Performance Cycle" - a period of three consecutive Plan Years as designated by the Committee. (j) "Plan" - this PSEG Energy Technologies Inc. Executive Long-Term Incentive Compensation Plan. (k) "Plan Year" - the calendar year. (l) "Retirement" - termination of employment with the Company (i) at or after the age of 62 or (ii) under circumstances entitling the Participant to an immediately payable periodic retirement benefit under the Public Service Electric and Gas Company Pension Plan or the Cash Balance Pension Plan of Public Service Electric and Gas Company. (m) "Subsidiary" - a corporation at least 80% of the voting shares of which are owned by this Company. (n) "Target Incentive Award" - the amount determined under Paragraph 5 of this Plan. 3. ELIGIBILITY (a) The Committee may select such employees of the Company and its Subsidiaries (individually or by position) for participation in the Plan upon such terms as it deems appropriate, due to the employee's responsibilities and opportunity to contribute substantially to the attainment of the long-term financial and operating objectives of the Company. A determination with respect to participation for any particular Performance Cycle shall be made no later than the beginning of the Performance Cycle, except that designation of Participants with respect to the first Performance Cycle following adoption of the Plan shall be made within 30 days of the initial adoption of this Plan and selection for participation in the Plan of new hires or of employees newly promoted to executive positions shall be made within 30 days of hire or promotion. Further, the Committee may adjust a Final Incentive Performance Award of any Participant if the Committee deems it appropriate to so do reflect a change which may have occurred during a Performance Cycle in such Participant's position or responsibilities. (b) Participation in the Plan in one Plan Year or Performance Cycle shall not guarantee participation in any other Plan Year or Performance Cycle. The Committee shall have -6- sole discretion with respect to the selection of Participants or whether to suspend operation of the Plan for any period of time. 4. ADMINISTRATION (a) The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have full and final authority to select Participants, to designate the Target Incentive Award for each Participant, to determine Performance Objectives for a Performance Cycle and to determine the amount of all Final Incentive Performance Awards. Also, notwithstanding anything contained in this Plan to the contrary, the Committee may adjust a Participant's Final Incentive Award based upon any reasonable criteria it may determine. The Committee shall also have, subject to the provisions of the Plan, full and final authority to interpret the Plan, to establish and revise rules, regulations and guides relating to the Plan, to entertain appeals of Participants or beneficiaries regarding alleged adverse determinations under the Plan and to make any other determinations that it believes necessary or advisable for the administration of the Plan. (b) All decisions and determinations by the Committee shall be final and binding upon all parties, including the Company, Participants, beneficiaries and other employees. 5. DETERMINATION OF TARGET INCENTIVE AWARD Prior to each Performance Cycle, or in the case of the first Performance Cycle, within 30 days after the initial adoption of the Plan and, in the case of new hires or newly promoted executives selected for participation, within 30 days from the date of hire or promotion, the Committee shall approve a Target Incentive Award for each Participant based upon the Participant's position and potential to contribute to the attainment of the Company's long-term financial and operating objectives. The Target Incentive Award shall be expressed as a whole dollar amount equal to a percentage of the Participant's Base Salary. 6. DETERMINATION OF PERFORMANCE OBJECTIVES (a) Concurrent with the approval of Target Incentive Awards for Participants, the Committee shall establish Performance Objectives for the Company for the related Performance Cycle. The Company's actual performance during a Performance Cycle will be compared to these Performance Objectives in determining the amount, if any, of each Participant's Final Incentive Performance Award. Performance Objectives shall be measurable criteria regarding the Company's quality of earnings, earnings growth, asset growth, market share and/or such other indicators selected by the Committee to reflect the Company's business plan for the related Performance Cycle. -7- (b) At the time that it approves Performance Objectives for a Performance Cycle, the Committee shall assign to each a relative weight to be afforded the accomplishment of each such Performance Objective in calculating the Final Incentive Performance Award of each Participant. 7. DETERMINATION OF ACHIEVEMENT OF PERFORMANCE OBJECTIVES Within 90 days of the end of each Performance Cycle, the Committee shall certify the extent to which the Company has achieved the several Performance Objectives which have been established for such Performance Cycle. Certification shall be by resolution of the Committee, which resolution shall state the percentage of achievement of each respective Performance Objective. The determination of such achievement shall be by reference to the Company's audited financial statements. 8. DETERMINATION OF AWARD CYCLE Not later than 120 days after the close of each Performance Cycle, the Committee shall, in its sole discretion, determine whether any Participant shall be granted a Final Incentive Performance Award with respect to such Performance Cycle. A Performance Cycle for which the Committee has determined that a Final Incentive Performance Award shall be paid shall be deemed an Award Cycle. 9. DETERMINATION OF FINAL INCENTIVE PERFORMANCE AWARDS To determine each Participant's Final Incentive Performance Awards, the Participant's Target Incentive Award shall be multiplied by an applicable percentage based upon the Committee's certification of the Company's achievement of its Performance Objectives for the Performance Cycle and the following chart: ================================================================================ Weighted Average Final Incentive Performance Award* as Achievement of a Percent of Target Performance Objectives Incentive Award - -------------------------------------------------------------------------------- >150% 200% - - -------------------------------------------------------------------------------- 125% 150% - -------------------------------------------------------------------------------- 100% 100% - -------------------------------------------------------------------------------- 75% 50% - -------------------------------------------------------------------------------- < 50% 0% - - -------------------------------------------------------------------------------- *Awards for weighted average achievement of Performance Objectives at levels above 50% and below 150%, but not shown above, are to be interpolated. ================================================================================ -8- 10. PAYMENT OF FINAL INCENTIVE PERFORMANCE AWARDS Payment of a Participant's Final Incentive Performance Award shall be made within 30 days of the date that the Committee approves the amount of such award unless the Committee determines, in its sole discretion, that payment shall be made at some other time. Payment shall be paid in cash by check. 11. TERMINATION (a) If the employment of a Participant by the Company is terminated on account of the Participant's death, Disability or Retirement after such Participant shall have completed at least one year of a Performance Cycle, the Committee shall, if it determines that a Final Incentive Performance Award may be earned for any such Performance Cycle(s) which include the Plan Year of termination, prorate the Final Incentive Performance Award(s) for that part of such Performance Cycle(s) in which the Participant was participating prior to such termination and the Company shall pay the prorated Final Incentive Performance Award as soon as practicable after determination, unless otherwise determined by the Committee. (b) If the employment of a Participant is terminated for any reason other than death, Disability or Retirement, the Participant shall not receive any Final Incentive Performance Award for that part of any uncompleted Performance Cycle(s) in which the Participant was participating at the time of termination. (c) If a Participant becomes a Participant during a Performance Cycle, any Final Incentive Performance Award to the Participant shall be appropriately prorated from the time the Participant entered the Plan to the end of the Performance Cycle. (d) In the case of a Participant's death, payment of the entire value of the Participant's award under the Plan shall be made to the Participant's Estate. Such payment shall be made as a lump sum as soon as practicable after the Participant's death. 12. ASSIGNMENT No benefit under the Plan shall in any manner or to any extent be assigned, alienated or transferred by any Participant under the Plan or subject to attachment, garnishment or other legal process. 13. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT This Plan shall not constitute a contract for the continued employment of any Participant by the Company. The Company reserves the right to modify a Participant's compensation at any time and from time to time as it considers appropriate and to terminate any Participant's employment for any reason at any time notwithstanding this Plan. -9- 14. AMENDMENT OR TERMINATION OF THE PLAN BY THE COMPANY The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of a Participant in respect of a previously earned Final Incentive Performance Award which has not been paid, unless such Participant or his or her legal representative shall consent to such change. If this Plan is terminated during any Performance Cycle in which Participants have been selected to participate, the Board of Directors may authorize the Committee to prorate and make provision for payment of Final Incentive Performance Awards for such a period. 15. WHAT CONSTITUTES NOTICE Any notice to a Participant or legal representative hereunder shall be given either by delivering it, or by depositing it in the United States mail, postage prepaid, addressed to such person's last-known address. Any notice to the Company or the Committee hereunder shall be given either by delivering it, or depositing it in the United States Mail, postage prepaid, to the Secretary, PSEG Energy Technologies Inc., 80 Park Plaza, T4B, P. O. Box 1171, Newark, New Jersey 07101. 16. ADVANCE DISCLAIMER OF ANY WAIVER Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 17. EFFECT ON INVALIDITY OF ANY PART OF THE PLAN The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 18. PLAN BINDING ON ANY SUCCESSOR OWNER Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 19. LAWS GOVERNING THIS PLAN Except to the extent federal law applies, this Plan shall be governed by the laws of the -10- State of New Jersey. 20. MISCELLANEOUS The masculine pronoun shall also mean the feminine and vice versa wherever appropriate. 21. WITHHOLDING The Company shall have the right to deduct from any payment any sums 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. 22. EFFECTIVE DATE This Plan shall be effective as of January 1, 1997 although, at the Committee's discretion, the first year of the first Performance Cycle may be less than a full calender year and may commence prior to such date, but no earlier than June 1, 1996. EX-10.A(21) 15 LIMITED SUP. BEN. PLAN FOR CERTAIN EMPLOYEES LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PSEG HOLDINGS INC AMENDED AS OF DECEMBER 15, 1998 TABLE OF CONTENTS PAGE 1. Purpose...................................................................1 2. Definitions of Terms Used in the Plan ....................................1 3. Death Benefit.............................................................3 4. Retirement Benefit........................................................3 5. Administration of Accounts ...............................................7 6. Designations of Beneficiaries ............................................8 7. Limitation of Benefit ...................................................10 8. Company May Make Certain Lump-sum Distributions..........................10 9. Plan Does Not Constitute an Employment Agreement.........................11 10. Amendment or Termination of the Plan ....................................11 11. What Constitutes Notice..................................................11 12. Advance Disclaimer of Waiver ............................................12 13. Effect of Invalidity of Any Part of the Plan ............................12 14. Plan Binding on Any Successor ...........................................12 15. Law Governing the Plan ..................................................12 16. Miscellaneous ...........................................................12 LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PSEG HOLDINGS INC 1. Purpose. The purpose of this Plan is to assist the Company in attracting and retaining a stable pool of key managerial talent and to encourage long-term key employee commitment to the Company by providing selected employees of the Company with certain limited supplemental death and retirement benefits as defined herein. The Plan is intended to provide such benefits to a select group of management or highly compensated employees within the meaning of ERlSA. 2. Definitions Of Terms Used In The Plan. As used in the Plan, the following words and phrases shall have the meanings indicated: (a) "Account" - Any account established pursuant to Paragraph 3(b) or 4(d) of the Plan. (b) "Assets" - All amounts that have been credited to an Employee's Account in accordance with Paragraph 3(b), 4(d), or S(b) of the Plan. (c) "Beneficiary" - The individual(s) and/or entity(ies) designated in writing by a Participant in the form attached to the Plan as Schedule A. (d) "Change in Control" -The occurrence of any of the following events: (i) any "person" (within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended from time to time (the "Act")) is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Act (a "Beneficial Owner"), directly or indirectly, of securities of Public Service Enterprise Group Incorporated ("Parent") (not including in the securities beneficially owned by such person any securities acquired directly from Parent or its affiliates) representing 25% or more of the combined voting power of Parent's then outstanding securities, excluding any person 1 who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the board of directors of Parent ("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 Parent) whose appointment or election by the Board or nomination for election by Parent's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on December 15, 1998 or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of Parent or any direct or indirect wholly owned subsidiary of Parent with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Parent outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of Parent or any subsidiary of Parent, at least 75% of the combined voting power of the securities of Parent or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Parent (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of Parent representing 25% or more of the combined voting power of Parent's then outstanding securities; or (iv) the stockholders of Parent approve a plan of complete liquidation or dissolution of Parent or there is consummated an agreement for the sale or disposition by Parent of all or substantially all of Parent's assets, other than a sale or disposition by Parent of all or substantially all of Parent's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of Parent in substantially the same 2 proportions as their ownership of Parent immediately prior to such sale. Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Parent 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 Parent immediately following such transaction or series of transactions. (e) "Code" - The Internal Revenue Code of 1986, as amended. (f) "Company" - PSEG Holdings Inc, formerly known as Enterprise Diversified Holdings Incorporated and its Subsidiaries. (g) "Compensation" - (i) for the purposes of calculating the Death Benefit pursuant to Paragraph 3 of the Plan, as to any Participant, Compensation shall be equal to the annual rate of salary in effect at the date of death; and (ii) for the purposes of calculating the Retirement Benefit pursuant to Paragraph 4 of the Plan, as to any Participant, Compensation shall be equal to the average of the total remuneration paid to such Participant for services rendered to the Company or any of its subsidiaries or affiliates, excluding the Company's, or any such subsidiary's or affiliate's, cost for any public or private employee benefit plan (including, without limitation, the Long Term Incentive Compensation Plan of Public Service Enterprise Group Incorporated), but including all elective contributions that are made by the 3 Company or any subsidiary or affiliate on behalf of Participant which are not includable in income under Code Sections 125 or 401(k), for the five years ending at the earlier of such Participant's date of Retirement or the date he attains normal retirement age under the Pension Plan. Provided, however, that for the purposes of Paragraph 4 of the Plan, Compensation with respect to any Participant shall not exceed the amount which is 130% of the average of annual base salary of the Participant for the applicable five-year period. (g) "ERISA" - The Employee Retirement Income Security Act of 1974, as amended. (h) "Participant" -- Each employee of the Company or any one of its subsidiaries nominated by the Chief Executive Officer and designated by the Board of Directors of the Company. The Chief Executive Officer of the Company shall nominate such select and key employees of the Company or any one of its subsidiaries upon such terms as he shall deem appropriate due to the employee's responsibilities and opportunity to contribute substantially to the financial and operating objectives of the Company or the subsidiary. (i) "Pension Plan" - The Pension Plan of Public Service Electric and Gas Company. (j) "Plan" - The Limited Supplemental Benefits Plan for Certain Employees of PSEG Holdings Inc. (k) "Retirement" - For the purposes of the Plan, Retirement of a Participant shall be deemed to have occurred upon the termination of the Participant's service with the Company or its subsidiary with the right to an immediate benefit under the Pension Plan. Retirement shall not include termination of service with the right to a deferred pension. (l) "Retirement Plan" - Any pension plan within the meaning of ERISA, excluding: (i) the Pension Plan and all defined contribution plans maintained by the 4 Company or any subsidiary, except insofar as any such defined contribution plan may provide supplementary benefits to the Pension Plan (ii) this Plan (iii) all deferred compensation plans, tax credit employee stock ownership plans and thrift plans, and all other profit-sharing plans which are not the principal retirement benefit of a plan sponsor, maintained by sponsors other than the Company or one of its subsidiaries. 3. Death Benefit. (a) Amount of Benefit - If a Participant dies while in the active employment of the Company or one of its subsidiaries, the Company shall provide a death benefit to such Participant's Beneficiary in an amount equal to 150% of the Participant's Compensation, adjusted to the nearest $1,000, or to the next highest $1,000 if such Compensation is a multiple of $500 but not of $1,000. (b) Establishment of Account - Upon the death of a Participant during employment with the Company or one of its subsidiaries, the Company shall establish an Account for the benefit of such Participant's Beneficiary. Such Account shall initially be credited with an amount equal to the benefit provided under Paragraph 3(a) and shall be held and administered as provided in Paragraph 5 of the Plan. 4. Retirement Benefit. (a) General - At Retirement, the Company shall provide each Participant with a retirement benefit calculated as provided in this Paragraph 4. 5 (b) Determination of Benefit -- (i) The Participant's Compensation shall be multiplied by an amount equal to one one-hundredth of the sum of (A) the number of the Participant's years of credited service under the Pension Plan at Retirement, (B) the number of any additional years of service credit to which the Participant may be entitled from the Company, the Company's subsidiary, or any other company, more than fifty percent (50%) of which is owned by Public Service Enterprise Group Incorporated, if applicable, under any written arrangement with the Company, such subsidiary or other company, and (C) 30; but, in no event, shall the multiple be greater than 0.75. (ii) The amount determined under subparagraph (i) of this Paragraph 4(b) shall be reduced by the sum of (A) the amount the Participant would be entitled to at Retirement as an annual pension benefit under the Pension Plan calculated as a single life annuity without reduction for any pre-retirement survivor's option coverage or any reduction for early retirement, (B) 100% of the amount of the unreduced annual Social Security benefit to which the Participant would be entitled at age 65 (or such other age which may be established by the Social Security Administration from time to time as the earliest age at which a Participant may receive an unreduced benefit thereunder), assuming that the Participant has no earnings from the date of Retirement to age 65 (or such other applicable age), or, if greater, any disability benefit under Social Security to which the Participant may be entitled, and (C) the aggregate of the annual benefits to which the Participant is entitled under all Retirement Plans as of the date the Participant is employed by the Company or the Company's subsidiary, such Social Security Benefits 6 and benefits under all Retirement Plans to be calculated as single life annuities without any reductions, under rules, procedures and equivalents determined by the Company. To determine the amounts referred to under (B) and (C) above, the Participant shall file a declaration of all such amounts with the Company in such form as the Company may require from time to time. No benefit shall be paid under the Plan until such a declaration, in satisfactory form, shall be filed with the Company. If a Participant is granted a disability Social Security benefit, he shall notify the Company thereof within 30 days thereof, and the Participant's retirement benefit under this Plan shall be adjusted accordingly. The Company shall be entitled to rely on such statements in making payment, and if any such statement is incorrect or is not furnished, the Company shall be entitled to reimbursement from the Participant, the Beneficiary or their legal representatives for any overpayment and may reduce or suspend future payments to recover any such overpayment. In the event it is established to the satisfaction of the Company, in its sole discretion, that any such statement was intentionally false or omitted, the Participant or Beneficiary shall be entitled to no further payments under the Plan, and the Company shall be entitled to recover any payments made hereunder. (c) Forms of Benefit -- The annual amount determined under paragraph (b) of this Paragraph 4 shall be paid in one of the following forms: (i) a single life annuity in monthly installments equal to one twelfth of such annual amount; (ii) a joint and survivor annuity in monthly installments based upon such annual amount and calculated in accordance with any post-retirement survivorship option 7 available under the Pension Plan; (iii) a 10-year certain level payment annuity in monthly installments which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan according to mortality assumptions used for the Pension Plan on the basis of a current interest rate assumption determined from time to time by the Company; or (iv) a 10-year certain increasing payment annuity paid in accordance with Paragraph 5(c) of the Plan based upon the lump-sum amount which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan according to mortality assumptions used for the Pension Plan on the basis of a current market rate interest assumption determined from time to time by the Company. The Company in its sole discretion shall determine the form of benefit payment for each Participant; provided, however, that, notwithstanding any other provision of this Plan, the Participant shall determine the form of benefit payment from and after the occurrence of a Change in Control. (d) Establishment of Account - If payment is made under either Paragraph 4(c)(iii) or 4(c)(iv) of the Plan, upon Retirement, the Company shall establish an Account for the benefit of the Participant and any Beneficiary. Such Account shall initially be credited with an amount equal to the amount of the lump-sum payment determined under Paragraph 4(c)(iii) or 4(c)(iv), as applicable, and shall be administered as provided in Paragraph 5 of the Plan. (e) Disability Retirement - If a Participant retires for disability under the Pension Plan, payment of the Participant's retirement benefit and any joint and survivor benefit under 8 Paragraph 4(c)(ii) of the Plan shall be subject to the same conditions as the disability pension under the Pension Plan. 5. Administration Of Accounts. (a) General - Accounts shall be established under the Plan only pursuant to Paragraphs 3(b) and 4(d) hereof. All Accounts shall be administered in accordance with the provisions of this Paragraph 5. (b) Interest on Assets in the Account - The Assets credited to a Participant's Account shall accrue interest at a market rate of interest as may be determined from time to time by the Company. (c) Timing of the Distribution(s) - A Participant or Beneficiary shall receive the distribution of the Participant's Account in the form of monthly distributions over a ten-year period commencing in the month following the month of the Participant's death in the case of a death benefit, or over a ten-year period commencing in the month of the Participant's Retirement in the case of a retirement benefit. The amount of each installment shall be determined by dividing the then unpaid balance in the Participant's Account, including accrued and unpaid interest, by the number of installments remaining to be paid. (d) Request for Change in Distribution - A Participant, Beneficiary or legal representative may request a change in the timing, frequency or amount of payments made from a Participant's Account by filing a written request therefor with the Company. The Company may, in its sole discretion, grant such request only if the Company determines that an emergency beyond the control of the Participant, Beneficiary or legal representative exists and which would cause such Participant, Beneficiary or legal representative severe financial hardship if the 9 payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. The Company shall inform the Participant, Beneficiary or legal representative of its decision within sixty (60) days of receipt of the written request. 6. Designation Of Beneficiaries. (a) General - To designate an individual(s) and/or entity(ies) to receive the benefits of the Plan with respect to a Participant, such Participant must file a written designation in the form of Schedule A to the Plan with the Company. Subject to the restrictions of this Paragraph 6, a Participant may change such designation by filing a subsequent written designation. (b) Death Benefit - By designation on Section 1 of a Schedule A filed with the Company, a Participant may name an individual(s) and/or entity(ies) to receive a death benefit under Paragraph 3 of the Plan with respect to such Participant. A Participant may change such designation by filing a subsequent notification in the form of Schedule A. (c) Retirement Benefits - (i) Single Life Annuity. If a Participant's retirement benefit under the Plan is paid as a single life annuity under Paragraph 4(c)(i) of the Plan, there shall be no Beneficiary with respect to such benefit and all retirement benefits shall cease upon the Participant's death. (ii) Joint and Survivor Annuity. If a Participant's retirement benefit under Paragraph 4(c)(ii) of the Plan and the Participant's pension under the Pension Plan are both paid as joint and survivor annuities, any survivor annuity under the Plan shall be paid to the same beneficiary entitled to any post-retirement survivorship benefit 10 under the Pension Plan. If the Participant's pension under the Pension Plan is paid as a single life annuity, any survivor annuity paid under Paragraph 4(c)(ii) of the Plan shall be paid to the Beneficiary designated in Section 2 of Schedule A to the Plan. If a Beneficiary designated by the Participant under Paragraph 4(c)(ii) of the Plan predeceases the Participant within five years from the date of Participant's Retirement, the Participant's retirement benefit hereunder will automatically revert and return to a single life annuity commencing the first day of the month following the month in which the designated Beneficiary died. If, however, the Beneficiary predeceases the Participant more than five years after Participant's Retirement, the Participant's reduced retirement benefit shall continue during his life and no survivor benefit shall be paid. The election of such Beneficiary must be made prior to Retirement and may not be changed thereafter. (iii) 10-Year Certain Annuities. If a Participant's Retirement benefit is paid as a 10-year certain level payment annuity under Paragraph 4(c)(iii) of the Plan, or a 10 year certain increasing payment annuity under Paragraph 4(c)(iv) of the Plan, the Beneficiary or Beneficiaries with respect to such benefit shall be as specified in Section 1 of the most resent Schedule A filed with the Company. (d) Designation by Last Remaining Beneficiary - After a Participant's death, if there is only one remaining Beneficiary with respect to a death benefit under Paragraph 3 of the Plan or a l year certain annuity under Paragraph 4(c)(iii) or 4(c)(iv) of the Plan, such Beneficiary shall be entitled to designate in writing to the Company an individual to be paid any remainder of such benefit under the Plan at such Beneficiary's death. If no such further designation is made, such 11 remainder shall be paid to such Beneficiary's estate. In the event of such Beneficiary's death, and regardless of whether any such further designation has been made, the Company in its sole discretion may require any such remainder to be paid as a lump sum. 7. Limitation Of Benefits. (a) The Plan shall be unfunded with respect to all benefits to be paid hereunder In addition, and without limitation, the Company shall not be required to segregate any amounts credited to any Account, which shall be established merely as an accounting convenience; title to and beneficial ownership of any Assets credited to any Account shall at all times remain in the Company, and no Participant, Beneficiary or legal representative shall have any interest whatsoever in any specific assets of the Company. (b) The payment of any death or survivorship benefit under this Plan shall be contingent upon such evidence of death as may be required by the Company. (c) If the Company should terminate the Plan pursuant to Paragraph 10 hereof, the Company's obligation to pay any benefits under the Plan shall likewise terminate; provided, however, that, except as otherwise provided in said Paragraph 10, the Company may not terminate the Plan with respect to any Participant subsequent to that Participant's Retirement or death. 8. Company May Make Certain Lump-Sum Distributions. The Company reserves the right to make a lump-sum distribution, notwithstanding any other provision of the Plan, if the total benefit payable to a Participant, Beneficiary or legal representative is $20,000 or less at any time. 12 9. Plan Does Not Constitute An Employment Agreement. The Plan shall not constitute a contract for the continued employment of any Participant by the Company. The Company reserves the right to modify a Participant's Compensation at any time and from time to time as it considers appropriate and to terminate any Participant's employment for any reason at any time notwithstanding the Plan. 10. Amendment Or Termination Of The Plan. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate the Plan at any time, provided, however, that no such amendment, modification or termination shall deprive any Participant or Beneficiary of a previously acquired right unless such Participant or Beneficiary or his legal representative shall consent to such change. No right to a death benefit under the Plan shall accrue until a Participant's death and no right to a retirement benefit shall accrue until a Participant's Retirement. 11. What Constitutes Notice. Any notice to a Participant, a Beneficiary or any legal representative hereunder shall be given in writing, by personal delivery, overnight express service or by United States mail, postage prepaid, addressed to such person's last known address. Any notice to the Company hereunder (including the filing of Schedule A) shall be given by delivering it in person or by overnight express service, or depositing it in the United States mail, postage prepaid, to the Secretary, Enterprise Diversified Holdings Incorporated, 80 Park Plaza, T4B, P.O. Box 1171, Newark, New Jersey, 07101. 13 12. Advance Disclaimer Of Waiver. Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 13. Effect Of Invalidity Of Any Part Of The Plan. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision of the Plan. 14. Plan Binding On An Successor. Except as otherwise provided herein, the Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 15. Law Governing The Plan. Except to the extent federal law applies, the Plan shall be governed by the laws of the State of New Jersey without giving effect to principles of conflicts of law. 16. Miscellaneous. (a) The masculine pronoun shall mean the feminine wherever appropriate. (b) The headings are for convenience only. In the event of a conflict between the headings of a paragraph and its contents, the contents shall control. 14 EX-10.A(22) 16 ANNUAL INCENTIVE COMPENSATION PLAN ANNUAL INCENTIVE COMPENSATION PLAN FOR EMPLOYEES OF PSEG RESOURCES INC. JANUARY 1, 1995 AS AMENDED DECEMBER 21, 1998 TABLE OF CONTENTS Page No. -------- 1. Purposes....................................................... 1 2. Definitions.................................................... 1 3. Eligibility.................................................... 3 4. Administration................................................. 4 5. Determination of Target Incentive Amount....................... 5 6. Determination of Individual Performance Objectives............. 5 7. Determination of Planned Corporate Performance Goal and Incentive Award Pool....................................... 6 8. Determination of Preliminary Incentive Amount.................. 7 9. Determination of Final Incentive Award......................... 7 10. Distribution................................................... 9 11. Termination.................................................... 9 12. Assignment.....................................................10 13. Plan Does Not Constitute an Employment Agreement...............10 14. Amendment or Termination of the Plan by the Company............10 15. What Constitutes Notice........................................11 16. Advance Disclaimer of Any Waiver...............................11 17. Effect on Invalidity of Any Part of the Plan...................11 18. Plan Binding on Any Successor Owner............................12 19. Laws Governing This Plan.......................................12 20. Miscellaneous..................................................12 21. Withholding....................................................12 22. Effective Date.................................................12 PSEG RESOURCES INC. ANNUAL INCENTIVE COMPENSATION PLAN January 1, 1995 1. PURPOSES The purposes of this Plan are to foster attainment of the financial and operating objectives of the Company by providing incentive to employees who contribute significantly to attainment of those objectives; to promote individual accountability for achieving the Company's annual performance and operating goals; to supplement the Company's salary and benefit programs so as to provide overall compensation for employees which is competitive with corporations with which the Company must compete for talent; and to assist the Company in attracting and retaining employees who are important to its continued success. 2. DEFINITIONS As used in this Plan, the following words and phrases shall have the following meanings unless the context clearly requires otherwise: (a) "Base Salary" - a sum equal to the annual rate of a Participant's base compensation as of the last day of the Plan Year. (b) "Committee" - the Compensation Committee of the Board of Directors of the Company. (c) "Company" - PSEG Resources Inc. -2- (d) "Disability" - any physical or mental condition which renders a Participant incapable of performing further work for the Company and that results in termination of such Participant's employment. (e) "Employee" - each salaried exempt employee of the Company. (f) "Final Incentive Award" - the amount earned by a Participant in accordance with Paragraph 9 of this Plan. (g) "Incentive Award Pool" - the total amount of dollars to be awarded to all Participants in this Plan in any Plan Year as determined by the Committee pursuant to Paragraph 7(c) of this Plan. (h) "Participant" - each such Employee of the Company as may be designated by the Committee to participate in this Plan. (i) "Performance Objectives" - goals and objectives established in accordance with Paragraph 6 of this Plan, the achievement of which will be the basis upon which a Participant's Final Incentive Award will be computed. (j) "Plan" - this Annual Incentive Compensation Plan for Employees of PSEG Resources Inc. (k) "Planned Corporate Performance Goal" - the goal for the Company's corporate performance for a Plan Year established by the Committee as the standard against which the amount of an Incentive Award Pool will be determined in accordance with Paragraph 7 of this Plan. -3- (l) "Plan Year" - the calendar year. (m) "Preliminary Incentive Amount" - the amount determined under Paragraph 8 of this Plan. (n) "Retirement" - termination of employment with the Company (i) at or after the age of 62 or (ii) under circumstances entitling the Participant to an immediately payable retirement benefit under the Pension Plan of Public Service Electric and Gas Company. (o) "Subsidiary" - a corporation at least 80% of the voting stock of which is owned by the Company. (p) "Target Incentive Amount" - the amount determined under Paragraph 5 of this Plan. 3. ELIGIBILITY (a) All Employees of the Company and its subsidiaries shall be eligible to participate in this Plan. For each Plan Year, the Committee may select such Employees (individually or by position) for participation in the Plan upon such terms as it deems appropriate. A determination with respect to any Participant for any particular Plan Year shall be made no later than the beginning of the Plan Year, except that designation of Participants with respect to (i) the first Plan Year shall be made within 30 days of the initial adoption of this Plan and (ii) new hires shall be made within 30 days of the date of hire. Further, the Committee may adjust any Final Incentive Award of any Participant if the Committee deems it appropriate to so do to reflect a change which may have occurred during a Plan Year in such Participant's employee responsibilities. -4- (b) Participation in the Plan in one Plan Year shall not guarantee participation in any other Plan Year. The Committee shall have sole discretion with respect to the selection of Participants or whether to suspend operation of the Plan for any period of time. 4. ADMINISTRATION (a) The Plan shall be administered by the Committee. Subject to the provisions of the Plan, for each Plan Year the Committee shall have full and final authority to select Participants, to designate a Target Incentive Amount for each Participant, to establish an Incentive Award Pool, to approve the Performance Objectives of Participants, to establish the Planned Net Income and to determine or approve the amount of all Final Incentive Awards. The Committee shall also have, subject to the provisions of the Plan, full and final authority to interpret the Plan, to establish and revise rules, regulations and guides relating to the Plan, to entertain appeals of Participants or beneficiaries regarding alleged adverse determinations under the Plan and to make any other determinations that it believes necessary or advisable for the administration of the Plan. The Committee may delegate to the President of the Company or to any other officer of the Company any such responsibilities other than (i) final approval of the Incentive Award Pool, (ii) determination of Planned Corporate Performance Goal, (iii) approval of the President's Target Incentive Amount, Performance Objectives and Final Incentive Award, or (iv) entertaining appeals of alleged adverse determinations. -5- (b) All decisions and determinations by the Committee shall be final and binding upon all parties, including shareholders, Participants, beneficiaries and other Employees. 5. DETERMINATION OF TARGET INCENTIVE AMOUNT Prior to each Plan Year, or, in the case of the First Plan Year, within 30 days of the initial adoption of the Plan and, in the case of new hires, within 30 days of the date of hire, the Committee shall approve a Target Incentive Amount for each Participant based upon the Participant's position and potential to contribute to the attainment of the Company's financial and operating objectives. The Target Incentive Amount shall be expressed as a percentage of the Participant's Base Salary. Target Incentive Amounts for individual Participants may vary from Plan Year to Plan Year in the discretion of the Committee. 6. DETERMINATION OF INDIVIDUAL PERFORMANCE OBJECTIVES Prior to each Plan Year, or, in the case of the First Plan Year, within 30 days of the initial adoption of the Plan and, in the case of new hires, within 30 days of hire, the Committee shall approve each Participant's Performance Objectives. Performance Objectives shall be measurable goals which (i) are related to the Company's business objectives and (ii) reflect outcomes or results that the Participant can directly influence. Performance Objectives are to be developed by Participants in conjunction with their immediate supervisors, except that the President's Performance Objectives shall be established in conjunction with the Committee. Each objective -6- shall be weighted to reflect its overall impact on the Participant's Target Incentive Award. 7. DETERMINATION OF PLANNED CORPORATE PERFORMANCE GOAL AND INCENTIVE AWARD POOL (a) Prior to the beginning of each Plan Year, or, in the case of the First Plan Year, within 30 days of the initial adoption of the Plan, the Committee shall establish an Planned Corporate Performance Goal for the Company for such Plan Year. Such goal shall be any measurable criteria of corporate performance as the committee may deem appropriate. The Committee may change such criteria or measurement from Plan Year to Plan Year as it deems appropriate. (b) At the time that the Committee establishes the Company's Planned Corporate Performance Goal for a Plan Year, it shall also establish a schedule to be used in computing the Incentive Award Pool. Such schedule shall define the levels of achievement of the Planned Corporate Performance Goal for the Plan Year will result in adjustments to the Incentive Award Pool, upwards for superior performance and downward for failure to achieve goals. (c) Not later than 90 days after the completion of each Plan Year, the Committee shall certify the Company's Corporate Performance for such Plan Year based upon the Company's audited financial statements for that year. (d) Thereafter, an Incentive Award Pool shall be established based upon the Company's success in achieving its -7- Planned Corporate Performance Goal for that Plan Year. 8. DETERMINATION OF PRELIMINARY INCENTIVE AMOUNT Participant's Preliminary Incentive Amount shall then be determined by multiplying the amount of the Incentive Award Pool by a factor which equals the proportion that such Participant's Target Incentive Award is to the total Target Incentive Awards of all Participants. ================================================================================ For Example: Assumptions: (a) Participant A's Target Incentive Amount = $ 15,000 (b) Sum of all Participants' Target Incentive Awards = $600,000 (c) Total Incentive Award Pool = $720,000 15,000 ------- 600,000 X $720,000 = $18,000 ================================================================================ 9. DETERMINATION OF FINAL INCENTIVE AWARD (a) Within 90 days of the end of each Plan Year, each Participant's supervisor, or in the case of the President or any Vice President of the Company, the Committee, shall certify the extent to which such Participant has achieved his/her Performance Objectives. Such certification shall be in writing and shall be expressed in terms of percentage of achievement of each of the several objectives. (b) Each Participant's Preliminary Incentive Award shall then be multiplied by the weighted percentage of -8- achievement of his/her individual Performance Objectives to determine the Participant's Final Incentive Award. - -------------------------------------------------------------------------------- For Example: Participant A - -------------------------------------------------------------------------------- Weighting Percentage of Final Award Objective # Factor(1) Achievement(2) Factor - -------------------------------------------------------------------------------- 1 .10 100 .10 - -------------------------------------------------------------------------------- 2 .25 90 .225 - -------------------------------------------------------------------------------- 3 .35 90 .315 - -------------------------------------------------------------------------------- 4 .30 110 .33 - -------------------------------------------------------------------------------- .97 - -------------------------------------------------------------------------------- (1) Established prior to the beginning of the Plan Year. (2) Determined within 90 days of the close of the Plan Year. Thus, in this example, Participant A's Final Incentive Award would be equal to 97% of his/her Preliminary Incentive Amount or, following the example in Paragraph 8 $18,000 X .97 = $17,460. - -------------------------------------------------------------------------------- (c) Notwithstanding anything contained in this Plan to the contrary, a Participant's Final Incentive Award shall not exceed 100% of such Participant's Base Salary for the Award Year to which it relates. (d) Notwithstanding anything contained in this Plan to the contrary, the total of all Participants' Final Incentive Awards for any Plan Year shall not exceed the amount of the Incentive Award Pool established for such Plan Year. -9- 10. DISTRIBUTION (a) All distributions of a Participant's Final Incentive Award shall be made as of a distribution date established by the Committee which shall be no later than 120 days after the close of the Plan Year to which such award relates. (b) All distributions shall be in one lump sum in money by check. 11. TERMINATION (a) If the employment of a Participant is terminated on account of the Participant's death, disability or retirement, the Committee shall, if it determines that an award under this Plan may be earned for the Plan Year of termination, prorate such award 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, unless otherwise determined by the Committee. (b) If the employment of a Participant is terminated for any reason other than death, Disability or Retirement, the Participant shall not receive any award under this Plan for the Plan Year of termination. (c) If a Participant becomes a Participant during a Plan Year, any award under this Plan to the Participant shall be appropriately prorated from the time the Participant entered the Plan to the end of the Plan Year. -10- (d) In the case of a Participant's death, any payment under the Plan shall be made to the Participant's estate. Such payment shall be made as a lump sum as soon as practicable after determination of the Final Incentive Award in accordance with Paragraph 9. 12. ASSIGNMENT No benefit or award under the Plan shall in any manner or to any extent be assigned, alienated or transferred by any Participant under the Plan or subject to attachment, garnishment or other legal process. 13. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT This Plan shall not constitute a contract for the continued employment of any Participant by the Company. The Company reserves the right to modify a Participant's compensation at any time and from time to time as it considers appropriate and to terminate any Participant's employment for any reason at any time notwithstanding this Plan. 14. AMENDMENT OR TERMINATION OF THE PLAN BY THE COMPANY The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of a Participant in respect of a previously earned Final Incentive Award which has not been paid, unless such Participant or his or her legal representative shall consent to such change. If this -11- Plan is terminated during any Plan Year in which Participants have been selected to participate, the Board of Directors may authorize the Committee to prorate and make provision for payment of Final Incentive Awards for such a period. 15. WHAT CONSTITUTES NOTICE Any notice to a Participant or legal representative hereunder shall be given either by delivering it, or by depositing it in the United States mail, postage prepaid, addressed to his last-known address. Any notice to the Company or the Committee hereunder shall be given either by delivering it, or depositing it in the United States Mail, postage prepaid, to the Secretary, PSEG Resources Inc., 80 Park Plaza, T4B, P. O. Box 1171, Newark, New Jersey 07101. 16. ADVANCE DISCLAIMER OF ANY WAIVER Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 17. EFFECT ON INVALIDITY OF ANY PART OF THE PLAN The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. -12- 18. PLAN BINDING ON ANY SUCCESSOR OWNER Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 19. LAWS GOVERNING THIS PLAN Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 20. MISCELLANEOUS The masculine pronoun shall also mean the feminine and vice versa wherever appropriate. 21. WITHHOLDING The Company shall have the right to deduct from any payment any sums 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. 22. EFFECTIVE DATE This Plan shall be effective as of January 1, 1995. EX-12 17 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31, -------- -------- -------- -------- -------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Earnings as Defined in Regulation S-K (A): Income from Continuing Operations (B) $667 $627 $588 $560 $644 Income Taxes (C) 320 348 297 313 428 Fixed Charges 535 549 527 543 577 -------- -------- -------- -------- -------- Earnings $1,522 $1,524 $1,412 $1,416 $1,649 ======== ======== ======== ======== ======== Fixed Charges as Defined in Regulation S-K (D) Total Interest Expense (E) $462 $464 $453 $470 $481 Interest Factor in Rentals 12 12 12 11 11 Subsidiaries' Preferred Securities Dividend Requirements 2 16 28 44 71 Preferred Stock Dividends 41 34 22 12 9 Adjustment to Preferred Stock Dividends to state on a pre-income tax basis 18 23 12 6 5 -------- -------- -------- -------- -------- $535 $549 $527 $543 $577 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 2.84 2.78 2.68 2.61 2.86 ======== ======== ======== ======== ========
Notes: (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 and (b) the actual amount of any preferred stock dividend requirements of majority-owned subsidiaries which were included in such fixed charges amount but not deducted in the determination of pretax income. (B) Excludes income from discontinued operations. (C) Includes State income taxes and Federal income taxes for other incomes. (D) Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense, (c) an estimate of interest implicit in rentals, and (d) preferred securities dividend requirements of subsidiaries and preferred stock dividends, increased to reflect the pre-tax earnings requirement for Public Service Enterprise Group Incorporated. (E) Excludes interest expense from discontinued operations. EX-12.A 18 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 (A) PUBLIC SERVICE ELECTRIC AND GAS COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31, -------- -------- -------- -------- -------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Earnings as Defined in Regulation S-K (A): Net Income $659 $617 $535 $528 $604 Income Taxes (B) 302 326 268 286 406 Fixed Charges 408 419 438 450 446 -------- -------- -------- -------- -------- Earnings $1,369 $1,362 $1,241 $1,264 $1,456 ======== ======== ======== ======== ======== Fixed Charges as Defined in Regulation S-K (C): Total Interest Expense $396 $407 $399 $395 $390 Interest Factor in Rentals 12 12 11 11 11 Subsidiaries' Preferred Securities Dividend Requirements -- -- 28 44 45 -------- -------- -------- -------- -------- Total Fixed Charges $408 $419 $438 $450 $446 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 3.35 3.25 2.83 2.81 3.27 ======== ======== ======== ======== ========
Notes: (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 and (b) the actual amount of any preferred stock dividend requirements of majority-owned subsidiaries which were included in such fixed charges amount but not deducted in the determination of pretax income. (B) Includes State income taxes and Federal income taxes for other income. (C) Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense, (c) an estimate of interest implicit in rentals, and (d) Preferred Securities Dividend Requirements of subsidiaries. EX-12.B 19 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 (B) PUBLIC SERVICE ELECTRIC AND GAS COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS
YEARS ENDED DECEMBER 31, -------- -------- -------- -------- -------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Earnings as Defined in Regulation S-K (A): Net Income $659 $617 $535 $528 $604 Income Taxes (B) 302 326 268 286 406 Fixed Charges 408 419 438 450 446 -------- -------- -------- -------- -------- Earnings $1,369 $1,362 $1,241 $1,264 $1,456 ======== ======== ======== ======== ======== Fixed Charges as Defined in Regulation S-K (C): Total Interest Expense $396 $407 $399 $395 $390 Interest Factor in Rentals 12 12 11 11 11 Subsidiaries' Preferred Securities Dividend Requirements -- -- 28 44 45 Preferred Stock Dividends 42 49 23 12 9 Adjustment to Preferred Stock Dividends to state on a pre-income tax basis 19 24 12 6 6 -------- -------- -------- -------- -------- Total Fixed Charges $469 $492 $473 $468 $461 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 2.92 2.77 2.62 2.70 3.15 ======== ======== ======== ======== ========
Notes: (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 and (b) the actual amount of any preferred stock dividend requirements of majority-owned subsidiaries which were included in such fixed charges amount but not deducted in the determination of pretax income. (B) Includes State income taxes and Federal income taxes for other income. (C) Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense, (c) an estimate of interest implicit in rentals, and (d) preferred securities dividend requirements of subsidiaries and preferred stock dividends, increased to reflect the pre-tax earnings requirement for Public Service Electric and Gas Company. EX-21 20 SIGNIFICANT SUBSIDIARIES EXHIBIT 21 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED SIGNIFICANT SUBSIDIARIES STATE OF NAME OWNERSHIP % INCORPORATION - ---- ----------- ------------- Public Service Electric and Gas Company ..... 100 New Jersey Energy Holdings Inc. ........................ 100 New Jersey PSEG Resources Inc. ......................... 100 New Jersey The remaining subsidiaries of Public Service Enterprise Group Incorporated are not significant subsidiaries as defined in Regulation S-X. EX-23 21 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-44581, 33-44582 and 33-45491 of Public Service Enterprise Group Incorporated on Form S-8 and Registration Statements No. 33-49123 and 333-65261 of Public Service Enterprise Group Incorporated on Form S-3 of our report dated February 12, 1999, appearing in this Annual Report on Form 10-K of Public Service Enterprise Group Incorporated for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 22, 1999 EX-23.A 22 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23(A) PUBLIC SERVICE ELECTRIC AND GAS COMPANY INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-49367, 33-50199, 33-51309, 333-02763 and 333-44991 of Public Service Electric and Gas Company on Form S-3 of our report dated February 12, 1999 appearing in this Annual Report on Form 10-K of Public Service Electric and Gas Company for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 22, 1999 EX-27.A 23 FDS PSEG
UT This schedule contains summary information extracted from SEC Form 10-K and is qualified in its entirety by reference to such financial statements. 0000788784 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 1000000 YEAR DEC-31-1998 DEC-31-1998 PER-BOOK 10,876 3,833 1,654 1,634 0 17,997 3,396 0 1,748 5,098 1,113 95 4,763 0 0 1,056 418 0 50 0 5,404 17,997 5,931 428 4,325 4,745 1,186 6 1,192 548 644 80 644 499 393 1,422 2.79 2.79 Includes Treasury Stock of ($207). Includes Foreign Currency Translation Adjustment of ($43). Federal and State Income Taxes for Other Income of $8 were incorporated into this line for FDS purposes. In the referenced financial statements, Total Other Income and Deductions are net of the above applicable Federal and State income taxes. Total interest expense includes Preferred Securities Dividends Requirements.
EX-27.B 24 FDS PSE&G
UT This schedule contains summary financial information extracted from Form 10-K and is qualified in its entirety by reference to such financial statements. 0000081033 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 1000000 YEAR DEC-31-1998 DEC-31-1998 PER-BOOK 10,876 833 1,459 1,580 0 14,748 2,563 594 1,443 4,597 588 95 4,045 0 0 850 100 0 50 0 4,423 14,748 5,590 407 4,173 4,571 1,019 8 1,027 423 604 10 595 503 309 1,565 0 0 State Income Taxes of $2 and Federal and State Income Taxes for Other Income of $7 were incorporated into this line item for FDS purposes. In the referenced financial statements, Total Other Income and Deductions are net of the above applicable Federal and State income taxes. Total interest expense includes Preferred Securities Dividend Requirements.
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