Note 10. Financial Risk Management Activities

The operations of PSEG, Power and PSE&G are exposed to market risks from changes in commodity prices, interest rates and equity prices that could affect their results of operations and financial condition. Exposure to these risks is managed through normal operating and financing activities and, when appropriate, through hedging transactions. Hedging transactions use derivative instruments to create a relationship in which changes to the value of the assets, liabilities or anticipated transactions exposed to market risks are expected to be offset by changes in the value of these derivative instruments.

Commodity Prices

The availability and price of energy commodities are subject to fluctuations due to weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market conditions, transmission availability and other events. Power uses physical and financial transactions in the wholesale energy markets to mitigate the effects of adverse movements in fuel and electricity prices. Derivative contracts that do not qualify for hedge accounting or normal purchases/normal sales treatment are marked to market (MTM) with changes in fair value recorded in the income statement. The fair value for the majority of these contracts is obtained from quoted market sources. Modeling techniques using assumptions reflective of current market rates, yield curves and forward prices are used to interpolate certain prices when no quoted market exists.

Cash Flow Hedges

Power uses forward sale and purchase contracts, swaps and futures contracts to hedge

•

forecasted energy sales from its generation stations and the related load obligations,

•

the price of fuel to meet its fuel purchase requirements, and

•

certain forecasted natural gas sales and purchases made to support the BGSS contract with PSE&G.

These derivative transactions are designated and effective as cash flow hedges. As of March 31, 2012 and December 31, 2011, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with these hedges was as follows:


	As of March 31, 2012		As of December 31, 2011
	Millions
Fair Value of Cash Flow Hedges	$	54	$	57
Impact on Accumulated Other Comprehensive Income (Loss) (after tax)	$	33	$	33

The expiration date of the longest-dated cash flow hedge at Power is in 2013. Power's after-tax unrealized gains on these derivatives that are expected to be reclassified to earnings during the next 12 months are $28 million. There was ineffectiveness of $1 million associated with these hedges as of March 31, 2012.

Trading Derivatives

The primary purpose of Power's wholesale marketing operation is to optimize the value of the output of the generating facilities via various products and services available in the markets we serve. Historically, Power engaged in trading of electricity and energy-related products where such transactions were not associated with the output or fuel purchase requirements of its facilities. This trading consisted mostly of energy supply contracts where Power secured sales commitments with the intent to supply the energy services from purchases in the market rather than from its owned generation. Such trading activities were marked to market through the income statement and represented less than one percent of gross margin (revenues less energy costs) on an annual basis. Effective July 2011, Power anticipates that it will not enter into any more trading derivative contracts.

Other Derivatives

Power enters into additional contracts that are derivatives, but do not qualify for or are not designated as cash flow hedges. These transactions are intended to mitigate exposure to fluctuations in commodity prices and optimize the value of our expected generation. Trade types include financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. Changes in fair market value of these contracts are recorded in earnings.

Interest Rates

PSEG, Power and PSE&G are subject to the risk of fluctuating interest rates in the normal course of business. Exposure to this risk is managed by targeting a balanced debt maturity profile which limits refinancing in any given period or interest rate environment. In addition, we have used a mix of fixed and floating rate debt, interest rate swaps and interest rate lock agreements.

Fair Value Hedges

PSEG enters into fair value hedges to convert fixed-rate debt into variable-rate debt. As of March 31, 2012, PSEG had eight interest rate swaps outstanding totaling $1.1 billion. These swaps convert Power's $250 million of 5% Senior Notes due April 2014, Power's $300 million of 5.5% Senior Notes due December 2015, $300 million of Power's $303 million of 5.32% Senior Notes due September 2016 and Power's $250 million of 2.75% Senior Notes due September 2016 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the changes in the fair value of the underlying debt. As of March 31, 2012 and December 31, 2011, the fair value of all the underlying hedges was $60 million and $62 million, respectively.

Cash Flow Hedges

PSEG uses interest rate swaps and other derivatives, which are designated and effective as cash flow hedges, to manage their exposure to the variability of cash flows, primarily related to variable-rate debt instruments. The Accumulated Other Comprehensive Income (Loss) (after tax) related to interest rate derivatives designated as cash flow hedges was $(2) million as of March 31, 2012 and December 31, 2011.

Fair Values of Derivative Instruments

The following are the fair values of derivative instruments on the Condensed Consolidated Balance Sheets:


	As of March 31, 2012
	Power												PSE&G			PSEG			Consolidated
	Cash Flow Hedges			Non Hedges									Non Hedges			Fair Value Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps			Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	52		$	644		$	(510	)	$	186		$	0		$	16		$	202
Noncurrent Assets		8			147			(104	)		51			34			46			131

Total Mark-to-Market Derivative Assets	$	60		$	791		$	(614	)	$	237		$	34		$	62		$	333

Derivative Contracts
Current Liabilities	$	(5	)	$	(602	)	$	455		$	(152	)	$	(2	)	$	0		$	(154	)
Noncurrent Liabilities		(1	)		(128	)		111			(18	)		0			(2	)		(20	)

Total Mark-to-Market Derivative (Liabilities)	$	(6	)	$	(730	)	$	566		$	(170	)	$	(2	)	$	(2	)	$	(174	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	54		$	61		$	(48	)	$	67		$	32		$	60		$	159


	As of December 31, 2011
	Power												PSE&G			PSEG			Consolidated
	Cash Flow Hedges			Non Hedges									Non Hedges			Fair Value Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps			Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	55		$	532		$	(448	)	$	139		$	0		$	17		$	156
Noncurrent Assets		8			121			(74	)		55			4			47			106

Total Mark-to-Market Derivative Assets	$	63		$	653		$	(522	)	$	194		$	4		$	64		$	262

Derivative Contracts
Current Liabilities	$	(5	)	$	(506	)	$	387		$	(124	)	$	(7	)	$	0		$	(131	)
Noncurrent Liabilities		(1	)		(76	)		53			(24	)		0			(2	)		(26	)

Total Mark-to-Market Derivative (Liabilities)	$	(6	)	$	(582	)	$	440		$	(148	)	$	(7	)	$	(2	)	$	(157	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	57		$	71		$	(82	)	$	46		$	(3	)	$	62		$	105

(A)

Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. As of March 31, 2012 and December 31, 2011, net cash collateral received of $48 million and $82 million, respectively, was netted against the corresponding net derivative contract positions. Of the $48 million as of March 31, 2012, cash collateral of $(79) million and $(9) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $24 million and $16 million were netted against current liabilities and noncurrent liabilities, respectively. Of the $82 million as of December 31, 2011, cash collateral of $(77) million and $(23) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $16 million and $2 million were netted against current liabilities and noncurrent liabilities, respectively.

Certain of PSEG's derivative instruments contain provisions that require PSEG to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon PSEG's credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. These credit risk-related contingent features stipulate that if PSEG were to be downgraded or lose its investment grade credit rating, it would be required to provide additional collateral. This incremental collateral requirement can offset collateral requirements related to other derivative instruments that are assets with the same counterparty, where the contractual right of offset exists under applicable master agreements. PSEG also enters into commodity transactions on the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE). The NYMEX and ICE clearing houses act as counterparties to each trade. Transactions on NYMEX and ICE must adhere to comprehensive collateral and margining requirements.

The aggregate fair value of all derivative instruments with credit risk-related contingent features in a liability position that are not fully collateralized (excluding transactions on NYMEX and ICE that are fully collateralized) was $350 million and $285 million as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, PSEG had the contractual right of offset of $189 million and $149 million, respectively, related to derivative instruments that are assets with the same counterparty under master agreements and net of margin posted. If PSEG had been downgraded or lost its investment grade rating, it would have had additional collateral obligations of $161 million and $136 million as of March 31, 2012 and December 31, 2011, respectively, related to its derivatives, net of the contractual right of offset under master agreements and the application of collateral. This potential additional collateral is included in the $876 million and $812 million as of March 31, 2012 and December 31, 2011, respectively, discussed in Note 8. Commitments and Contingent Liabilities.

The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended March 31, 2012 and 2011:


Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)					Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income	Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)					Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)	Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	Three Months Ended March 31,						Three Months Ended March 31,						Three Months Ended March 31,
	2012			2011			2012			2011			2012			2011
	Millions
PSEG and Power
Energy-Related Contracts	$	38		$	13	Operating Revenues	$	39		$	66	Operating Revenues	$	(1	)	$	(2	)
Energy-Related Contracts		(4	)		2	Energy Costs		(4	)		3			0			0

Total PSEG	$	34		$	15		$	35		$	69		$	(1	)	$	(2	)

The following reconciles the Accumulated Other Comprehensive Income for derivative activity included in the Accumulated Other Comprehensive Loss of PSEG on a pre-tax and after-tax basis:


Accumulated Other Comprehensive Income	Pre-Tax			After-Tax
	Millions
Balance as of December 31, 2010	$	188		$	111
Gain Recognized in AOCI		80			47
Less: Gain Reclassified into Income		(214	)		(127	)

Balance as of December 31, 2011	$	54		$	31

Gain Recognized in AOCI		34			20
Less: Gain Reclassified into Income		(35	)		(20	)

Balance as of March 31, 2012	$	53		$	31

The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months ended March 31, 2012 and 2011:


Derivatives Not Designated as Hedges	Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives	Pre-Tax Gain (Loss) Recognized in Income on Derivatives
Derivatives Not Designated as Hedges		Pre-Tax Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended March 31,
		2012			2011
		Millions
PSEG and Power
Energy-Related Contracts	Operating Revenues	$	195		$	(42	)
Energy-Related Contracts	Energy Costs		(26	)		3

Total PSEG and Power		$	169		$	(39	)

Power's derivative contracts reflected in the preceding tables include contracts to hedge the purchase and sale of electricity and natural gas and the purchase of fuel. Not all of these contracts qualify for hedge accounting. Most of these contracts are marked to market. The tables above do not include contracts for which Power has elected the normal purchase/normal sales exemption, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load. In addition, PSEG has interest rate swaps designated as fair value hedges. The effect of these hedges was to reduce interest expense by $6 million for each of the three month periods ended March 31, 2012 and 2011.

The following reflects the gross volume, on an absolute value basis, of derivatives as of March 31, 2012 and December 31, 2011:


Type	Notional	Total		PSEG		Power		PSE&G
	Millions
As of March 31, 2012
Natural Gas	Dth		590		0		366		224
Electricity	MWh		138		0		138		0
FTRs	MWh		6		0		6		0
Interest Rate Swaps	US Dollars		1,100		1,100		0		0
Coal	Tons		1		0		1		0
As of December 31, 2011
Natural Gas	Dth		612		0		377		235
Electricity	MWh		137		0		137		0
FTRs	MWh		12		0		12		0
Interest Rate Swaps	US Dollars		1,100		1,100		0		0
Coal	Tons		1		0		1		0

Credit Risk

Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. We have established credit policies that we believe significantly minimize 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 allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power's and PSEG's financial condition, results of operations or net cash flows.

As of March 31, 2012, 96% of the credit for Power's operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives and non-derivatives and normal purchases/normal sales).

The following table provides information on Power's credit risk from others, net of cash collateral, as of March 31, 2012. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of Power's credit risk by credit rating of the counterparties.


Rating	Current Exposure		Securities held as Collateral		Net Exposure		Number of Counterparties >10%		Net Exposure of Counterparties >10%
	Millions								Millions
Investment Grade—External Rating	$	674	$	104	$	669		2	$	400	(A)
Non-Investment Grade—External Rating		26		0		26		0		0
Investment Grade—No External Rating		7		0		7		0		0
Non-Investment Grade—No External Rating		0		0		0		0		0

Total	$	707	$	104	$	702		2	$	400

(A)	Includes net exposure of $302 million with PSE&G. The remaining net exposure of $98 million is with two nonaffiliated power purchasers which are regulated investment grade counterparties.

The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more cash collateral than the outstanding exposure, in which case there would be no exposure. When letters of credit have been posted as collateral, the exposure amount is not reduced, but the exposure amount is transferred to the rating of the issuing bank. As of March 31, 2012, Power had 191 active counterparties.

Financial Risk Management Activities

Note 10. Financial Risk Management Activities

The operations of PSEG, Power and PSE&G are exposed to market risks from changes in commodity prices, interest rates and equity prices that could affect their results of operations and financial condition. Exposure to these risks is managed through normal operating and financing activities and, when appropriate, through hedging transactions. Hedging transactions use derivative instruments to create a relationship in which changes to the value of the assets, liabilities or anticipated transactions exposed to market risks are expected to be offset by changes in the value of these derivative instruments.

Commodity Prices

The availability and price of energy commodities are subject to fluctuations due to weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market conditions, transmission availability and other events. Power uses physical and financial transactions in the wholesale energy markets to mitigate the effects of adverse movements in fuel and electricity prices. Derivative contracts that do not qualify for hedge accounting or normal purchases/normal sales treatment are marked to market (MTM) with changes in fair value recorded in the income statement. The fair value for the majority of these contracts is obtained from quoted market sources. Modeling techniques using assumptions reflective of current market rates, yield curves and forward prices are used to interpolate certain prices when no quoted market exists.

Cash Flow Hedges

Power uses forward sale and purchase contracts, swaps and futures contracts to hedge

•

forecasted energy sales from its generation stations and the related load obligations,

•

the price of fuel to meet its fuel purchase requirements, and

•

certain forecasted natural gas sales and purchases made to support the BGSS contract with PSE&G.

These derivative transactions are designated and effective as cash flow hedges. As of March 31, 2012 and December 31, 2011, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with these hedges was as follows:


	As of March 31, 2012		As of December 31, 2011
	Millions
Fair Value of Cash Flow Hedges	$	54	$	57
Impact on Accumulated Other Comprehensive Income (Loss) (after tax)	$	33	$	33

The expiration date of the longest-dated cash flow hedge at Power is in 2013. Power's after-tax unrealized gains on these derivatives that are expected to be reclassified to earnings during the next 12 months are $28 million. There was ineffectiveness of $1 million associated with these hedges as of March 31, 2012.

Trading Derivatives

The primary purpose of Power's wholesale marketing operation is to optimize the value of the output of the generating facilities via various products and services available in the markets we serve. Historically, Power engaged in trading of electricity and energy-related products where such transactions were not associated with the output or fuel purchase requirements of its facilities. This trading consisted mostly of energy supply contracts where Power secured sales commitments with the intent to supply the energy services from purchases in the market rather than from its owned generation. Such trading activities were marked to market through the income statement and represented less than one percent of gross margin (revenues less energy costs) on an annual basis. Effective July 2011, Power anticipates that it will not enter into any more trading derivative contracts.

Other Derivatives

Power enters into additional contracts that are derivatives, but do not qualify for or are not designated as cash flow hedges. These transactions are intended to mitigate exposure to fluctuations in commodity prices and optimize the value of our expected generation. Trade types include financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. Changes in fair market value of these contracts are recorded in earnings.

Interest Rates

PSEG, Power and PSE&G are subject to the risk of fluctuating interest rates in the normal course of business. Exposure to this risk is managed by targeting a balanced debt maturity profile which limits refinancing in any given period or interest rate environment. In addition, we have used a mix of fixed and floating rate debt, interest rate swaps and interest rate lock agreements.

Fair Value Hedges

PSEG enters into fair value hedges to convert fixed-rate debt into variable-rate debt. As of March 31, 2012, PSEG had eight interest rate swaps outstanding totaling $1.1 billion. These swaps convert Power's $250 million of 5% Senior Notes due April 2014, Power's $300 million of 5.5% Senior Notes due December 2015, $300 million of Power's $303 million of 5.32% Senior Notes due September 2016 and Power's $250 million of 2.75% Senior Notes due September 2016 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the changes in the fair value of the underlying debt. As of March 31, 2012 and December 31, 2011, the fair value of all the underlying hedges was $60 million and $62 million, respectively.

Cash Flow Hedges

PSEG uses interest rate swaps and other derivatives, which are designated and effective as cash flow hedges, to manage their exposure to the variability of cash flows, primarily related to variable-rate debt instruments. The Accumulated Other Comprehensive Income (Loss) (after tax) related to interest rate derivatives designated as cash flow hedges was $(2) million as of March 31, 2012 and December 31, 2011.

Fair Values of Derivative Instruments

The following are the fair values of derivative instruments on the Condensed Consolidated Balance Sheets:


	As of March 31, 2012
	Power												PSE&G			PSEG			Consolidated
	Cash Flow Hedges			Non Hedges									Non Hedges			Fair Value Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps			Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	52		$	644		$	(510	)	$	186		$	0		$	16		$	202
Noncurrent Assets		8			147			(104	)		51			34			46			131

Total Mark-to-Market Derivative Assets	$	60		$	791		$	(614	)	$	237		$	34		$	62		$	333

Derivative Contracts
Current Liabilities	$	(5	)	$	(602	)	$	455		$	(152	)	$	(2	)	$	0		$	(154	)
Noncurrent Liabilities		(1	)		(128	)		111			(18	)		0			(2	)		(20	)

Total Mark-to-Market Derivative (Liabilities)	$	(6	)	$	(730	)	$	566		$	(170	)	$	(2	)	$	(2	)	$	(174	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	54		$	61		$	(48	)	$	67		$	32		$	60		$	159


	As of December 31, 2011
	Power												PSE&G			PSEG			Consolidated
	Cash Flow Hedges			Non Hedges									Non Hedges			Fair Value Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps			Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	55		$	532		$	(448	)	$	139		$	0		$	17		$	156
Noncurrent Assets		8			121			(74	)		55			4			47			106

Total Mark-to-Market Derivative Assets	$	63		$	653		$	(522	)	$	194		$	4		$	64		$	262

Derivative Contracts
Current Liabilities	$	(5	)	$	(506	)	$	387		$	(124	)	$	(7	)	$	0		$	(131	)
Noncurrent Liabilities		(1	)		(76	)		53			(24	)		0			(2	)		(26	)

Total Mark-to-Market Derivative (Liabilities)	$	(6	)	$	(582	)	$	440		$	(148	)	$	(7	)	$	(2	)	$	(157	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	57		$	71		$	(82	)	$	46		$	(3	)	$	62		$	105

(A)

Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. As of March 31, 2012 and December 31, 2011, net cash collateral received of $48 million and $82 million, respectively, was netted against the corresponding net derivative contract positions. Of the $48 million as of March 31, 2012, cash collateral of $(79) million and $(9) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $24 million and $16 million were netted against current liabilities and noncurrent liabilities, respectively. Of the $82 million as of December 31, 2011, cash collateral of $(77) million and $(23) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $16 million and $2 million were netted against current liabilities and noncurrent liabilities, respectively.

Certain of PSEG's derivative instruments contain provisions that require PSEG to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon PSEG's credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. These credit risk-related contingent features stipulate that if PSEG were to be downgraded or lose its investment grade credit rating, it would be required to provide additional collateral. This incremental collateral requirement can offset collateral requirements related to other derivative instruments that are assets with the same counterparty, where the contractual right of offset exists under applicable master agreements. PSEG also enters into commodity transactions on the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE). The NYMEX and ICE clearing houses act as counterparties to each trade. Transactions on NYMEX and ICE must adhere to comprehensive collateral and margining requirements.

The aggregate fair value of all derivative instruments with credit risk-related contingent features in a liability position that are not fully collateralized (excluding transactions on NYMEX and ICE that are fully collateralized) was $350 million and $285 million as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, PSEG had the contractual right of offset of $189 million and $149 million, respectively, related to derivative instruments that are assets with the same counterparty under master agreements and net of margin posted. If PSEG had been downgraded or lost its investment grade rating, it would have had additional collateral obligations of $161 million and $136 million as of March 31, 2012 and December 31, 2011, respectively, related to its derivatives, net of the contractual right of offset under master agreements and the application of collateral. This potential additional collateral is included in the $876 million and $812 million as of March 31, 2012 and December 31, 2011, respectively, discussed in Note 8. Commitments and Contingent Liabilities.

The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended March 31, 2012 and 2011:


Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)					Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income	Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)					Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)	Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	Three Months Ended March 31,						Three Months Ended March 31,						Three Months Ended March 31,
	2012			2011			2012			2011			2012			2011
	Millions
PSEG and Power
Energy-Related Contracts	$	38		$	13	Operating Revenues	$	39		$	66	Operating Revenues	$	(1	)	$	(2	)
Energy-Related Contracts		(4	)		2	Energy Costs		(4	)		3			0			0

Total PSEG	$	34		$	15		$	35		$	69		$	(1	)	$	(2	)

The following reconciles the Accumulated Other Comprehensive Income for derivative activity included in the Accumulated Other Comprehensive Loss of PSEG on a pre-tax and after-tax basis:


Accumulated Other Comprehensive Income	Pre-Tax			After-Tax
	Millions
Balance as of December 31, 2010	$	188		$	111
Gain Recognized in AOCI		80			47
Less: Gain Reclassified into Income		(214	)		(127	)

Balance as of December 31, 2011	$	54		$	31

Gain Recognized in AOCI		34			20
Less: Gain Reclassified into Income		(35	)		(20	)

Balance as of March 31, 2012	$	53		$	31

The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months ended March 31, 2012 and 2011:


Derivatives Not Designated as Hedges	Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives	Pre-Tax Gain (Loss) Recognized in Income on Derivatives
Derivatives Not Designated as Hedges		Pre-Tax Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended March 31,
		2012			2011
		Millions
PSEG and Power
Energy-Related Contracts	Operating Revenues	$	195		$	(42	)
Energy-Related Contracts	Energy Costs		(26	)		3

Total PSEG and Power		$	169		$	(39	)

Power's derivative contracts reflected in the preceding tables include contracts to hedge the purchase and sale of electricity and natural gas and the purchase of fuel. Not all of these contracts qualify for hedge accounting. Most of these contracts are marked to market. The tables above do not include contracts for which Power has elected the normal purchase/normal sales exemption, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load. In addition, PSEG has interest rate swaps designated as fair value hedges. The effect of these hedges was to reduce interest expense by $6 million for each of the three month periods ended March 31, 2012 and 2011.

The following reflects the gross volume, on an absolute value basis, of derivatives as of March 31, 2012 and December 31, 2011:


Type	Notional	Total		PSEG		Power		PSE&G
	Millions
As of March 31, 2012
Natural Gas	Dth		590		0		366		224
Electricity	MWh		138		0		138		0
FTRs	MWh		6		0		6		0
Interest Rate Swaps	US Dollars		1,100		1,100		0		0
Coal	Tons		1		0		1		0
As of December 31, 2011
Natural Gas	Dth		612		0		377		235
Electricity	MWh		137		0		137		0
FTRs	MWh		12		0		12		0
Interest Rate Swaps	US Dollars		1,100		1,100		0		0
Coal	Tons		1		0		1		0

Credit Risk

Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. We have established credit policies that we believe significantly minimize 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 allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power's and PSEG's financial condition, results of operations or net cash flows.

As of March 31, 2012, 96% of the credit for Power's operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives and non-derivatives and normal purchases/normal sales).

The following table provides information on Power's credit risk from others, net of cash collateral, as of March 31, 2012. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of Power's credit risk by credit rating of the counterparties.


Rating	Current Exposure		Securities held as Collateral		Net Exposure		Number of Counterparties >10%		Net Exposure of Counterparties >10%
	Millions								Millions
Investment Grade—External Rating	$	674	$	104	$	669		2	$	400	(A)
Non-Investment Grade—External Rating		26		0		26		0		0
Investment Grade—No External Rating		7		0		7		0		0
Non-Investment Grade—No External Rating		0		0		0		0		0

Total	$	707	$	104	$	702		2	$	400

(A)	Includes net exposure of $302 million with PSE&G. The remaining net exposure of $98 million is with two nonaffiliated power purchasers which are regulated investment grade counterparties.

The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more cash collateral than the outstanding exposure, in which case there would be no exposure. When letters of credit have been posted as collateral, the exposure amount is not reduced, but the exposure amount is transferred to the rating of the issuing bank. As of March 31, 2012, Power had 191 active counterparties.

Financial Risk Management Activities

Note 10. Financial Risk Management Activities

The operations of PSEG, Power and PSE&G are exposed to market risks from changes in commodity prices, interest rates and equity prices that could affect their results of operations and financial condition. Exposure to these risks is managed through normal operating and financing activities and, when appropriate, through hedging transactions. Hedging transactions use derivative instruments to create a relationship in which changes to the value of the assets, liabilities or anticipated transactions exposed to market risks are expected to be offset by changes in the value of these derivative instruments.

Commodity Prices

The availability and price of energy commodities are subject to fluctuations due to weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market conditions, transmission availability and other events. Power uses physical and financial transactions in the wholesale energy markets to mitigate the effects of adverse movements in fuel and electricity prices. Derivative contracts that do not qualify for hedge accounting or normal purchases/normal sales treatment are marked to market (MTM) with changes in fair value recorded in the income statement. The fair value for the majority of these contracts is obtained from quoted market sources. Modeling techniques using assumptions reflective of current market rates, yield curves and forward prices are used to interpolate certain prices when no quoted market exists.

Cash Flow Hedges

Power uses forward sale and purchase contracts, swaps and futures contracts to hedge

•

forecasted energy sales from its generation stations and the related load obligations,

•

the price of fuel to meet its fuel purchase requirements, and

•

certain forecasted natural gas sales and purchases made to support the BGSS contract with PSE&G.

These derivative transactions are designated and effective as cash flow hedges. As of March 31, 2012 and December 31, 2011, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with these hedges was as follows:


	As of March 31, 2012		As of December 31, 2011
	Millions
Fair Value of Cash Flow Hedges	$	54	$	57
Impact on Accumulated Other Comprehensive Income (Loss) (after tax)	$	33	$	33

The expiration date of the longest-dated cash flow hedge at Power is in 2013. Power's after-tax unrealized gains on these derivatives that are expected to be reclassified to earnings during the next 12 months are $28 million. There was ineffectiveness of $1 million associated with these hedges as of March 31, 2012.

Trading Derivatives

The primary purpose of Power's wholesale marketing operation is to optimize the value of the output of the generating facilities via various products and services available in the markets we serve. Historically, Power engaged in trading of electricity and energy-related products where such transactions were not associated with the output or fuel purchase requirements of its facilities. This trading consisted mostly of energy supply contracts where Power secured sales commitments with the intent to supply the energy services from purchases in the market rather than from its owned generation. Such trading activities were marked to market through the income statement and represented less than one percent of gross margin (revenues less energy costs) on an annual basis. Effective July 2011, Power anticipates that it will not enter into any more trading derivative contracts.

Other Derivatives

Power enters into additional contracts that are derivatives, but do not qualify for or are not designated as cash flow hedges. These transactions are intended to mitigate exposure to fluctuations in commodity prices and optimize the value of our expected generation. Trade types include financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. Changes in fair market value of these contracts are recorded in earnings.

Interest Rates

PSEG, Power and PSE&G are subject to the risk of fluctuating interest rates in the normal course of business. Exposure to this risk is managed by targeting a balanced debt maturity profile which limits refinancing in any given period or interest rate environment. In addition, we have used a mix of fixed and floating rate debt, interest rate swaps and interest rate lock agreements.

Fair Value Hedges

PSEG enters into fair value hedges to convert fixed-rate debt into variable-rate debt. As of March 31, 2012, PSEG had eight interest rate swaps outstanding totaling $1.1 billion. These swaps convert Power's $250 million of 5% Senior Notes due April 2014, Power's $300 million of 5.5% Senior Notes due December 2015, $300 million of Power's $303 million of 5.32% Senior Notes due September 2016 and Power's $250 million of 2.75% Senior Notes due September 2016 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the changes in the fair value of the underlying debt. As of March 31, 2012 and December 31, 2011, the fair value of all the underlying hedges was $60 million and $62 million, respectively.

Cash Flow Hedges

PSEG uses interest rate swaps and other derivatives, which are designated and effective as cash flow hedges, to manage their exposure to the variability of cash flows, primarily related to variable-rate debt instruments. The Accumulated Other Comprehensive Income (Loss) (after tax) related to interest rate derivatives designated as cash flow hedges was $(2) million as of March 31, 2012 and December 31, 2011.

Fair Values of Derivative Instruments

The following are the fair values of derivative instruments on the Condensed Consolidated Balance Sheets:


	As of March 31, 2012
	Power												PSE&G			PSEG			Consolidated
	Cash Flow Hedges			Non Hedges									Non Hedges			Fair Value Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps			Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	52		$	644		$	(510	)	$	186		$	0		$	16		$	202
Noncurrent Assets		8			147			(104	)		51			34			46			131

Total Mark-to-Market Derivative Assets	$	60		$	791		$	(614	)	$	237		$	34		$	62		$	333

Derivative Contracts
Current Liabilities	$	(5	)	$	(602	)	$	455		$	(152	)	$	(2	)	$	0		$	(154	)
Noncurrent Liabilities		(1	)		(128	)		111			(18	)		0			(2	)		(20	)

Total Mark-to-Market Derivative (Liabilities)	$	(6	)	$	(730	)	$	566		$	(170	)	$	(2	)	$	(2	)	$	(174	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	54		$	61		$	(48	)	$	67		$	32		$	60		$	159


	As of December 31, 2011
	Power												PSE&G			PSEG			Consolidated
	Cash Flow Hedges			Non Hedges									Non Hedges			Fair Value Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps			Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	55		$	532		$	(448	)	$	139		$	0		$	17		$	156
Noncurrent Assets		8			121			(74	)		55			4			47			106

Total Mark-to-Market Derivative Assets	$	63		$	653		$	(522	)	$	194		$	4		$	64		$	262

Derivative Contracts
Current Liabilities	$	(5	)	$	(506	)	$	387		$	(124	)	$	(7	)	$	0		$	(131	)
Noncurrent Liabilities		(1	)		(76	)		53			(24	)		0			(2	)		(26	)

Total Mark-to-Market Derivative (Liabilities)	$	(6	)	$	(582	)	$	440		$	(148	)	$	(7	)	$	(2	)	$	(157	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	57		$	71		$	(82	)	$	46		$	(3	)	$	62		$	105

(A)

Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. As of March 31, 2012 and December 31, 2011, net cash collateral received of $48 million and $82 million, respectively, was netted against the corresponding net derivative contract positions. Of the $48 million as of March 31, 2012, cash collateral of $(79) million and $(9) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $24 million and $16 million were netted against current liabilities and noncurrent liabilities, respectively. Of the $82 million as of December 31, 2011, cash collateral of $(77) million and $(23) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $16 million and $2 million were netted against current liabilities and noncurrent liabilities, respectively.

Certain of PSEG's derivative instruments contain provisions that require PSEG to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon PSEG's credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. These credit risk-related contingent features stipulate that if PSEG were to be downgraded or lose its investment grade credit rating, it would be required to provide additional collateral. This incremental collateral requirement can offset collateral requirements related to other derivative instruments that are assets with the same counterparty, where the contractual right of offset exists under applicable master agreements. PSEG also enters into commodity transactions on the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE). The NYMEX and ICE clearing houses act as counterparties to each trade. Transactions on NYMEX and ICE must adhere to comprehensive collateral and margining requirements.

The aggregate fair value of all derivative instruments with credit risk-related contingent features in a liability position that are not fully collateralized (excluding transactions on NYMEX and ICE that are fully collateralized) was $350 million and $285 million as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, PSEG had the contractual right of offset of $189 million and $149 million, respectively, related to derivative instruments that are assets with the same counterparty under master agreements and net of margin posted. If PSEG had been downgraded or lost its investment grade rating, it would have had additional collateral obligations of $161 million and $136 million as of March 31, 2012 and December 31, 2011, respectively, related to its derivatives, net of the contractual right of offset under master agreements and the application of collateral. This potential additional collateral is included in the $876 million and $812 million as of March 31, 2012 and December 31, 2011, respectively, discussed in Note 8. Commitments and Contingent Liabilities.

The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended March 31, 2012 and 2011:


Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)					Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income	Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)					Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)	Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	Three Months Ended March 31,						Three Months Ended March 31,						Three Months Ended March 31,
	2012			2011			2012			2011			2012			2011
	Millions
PSEG and Power
Energy-Related Contracts	$	38		$	13	Operating Revenues	$	39		$	66	Operating Revenues	$	(1	)	$	(2	)
Energy-Related Contracts		(4	)		2	Energy Costs		(4	)		3			0			0

Total PSEG	$	34		$	15		$	35		$	69		$	(1	)	$	(2	)

The following reconciles the Accumulated Other Comprehensive Income for derivative activity included in the Accumulated Other Comprehensive Loss of PSEG on a pre-tax and after-tax basis:


Accumulated Other Comprehensive Income	Pre-Tax			After-Tax
	Millions
Balance as of December 31, 2010	$	188		$	111
Gain Recognized in AOCI		80			47
Less: Gain Reclassified into Income		(214	)		(127	)

Balance as of December 31, 2011	$	54		$	31

Gain Recognized in AOCI		34			20
Less: Gain Reclassified into Income		(35	)		(20	)

Balance as of March 31, 2012	$	53		$	31

The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months ended March 31, 2012 and 2011:


Derivatives Not Designated as Hedges	Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives	Pre-Tax Gain (Loss) Recognized in Income on Derivatives
Derivatives Not Designated as Hedges		Pre-Tax Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended March 31,
		2012			2011
		Millions
PSEG and Power
Energy-Related Contracts	Operating Revenues	$	195		$	(42	)
Energy-Related Contracts	Energy Costs		(26	)		3

Total PSEG and Power		$	169		$	(39	)

Power's derivative contracts reflected in the preceding tables include contracts to hedge the purchase and sale of electricity and natural gas and the purchase of fuel. Not all of these contracts qualify for hedge accounting. Most of these contracts are marked to market. The tables above do not include contracts for which Power has elected the normal purchase/normal sales exemption, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load. In addition, PSEG has interest rate swaps designated as fair value hedges. The effect of these hedges was to reduce interest expense by $6 million for each of the three month periods ended March 31, 2012 and 2011.

The following reflects the gross volume, on an absolute value basis, of derivatives as of March 31, 2012 and December 31, 2011:


Type	Notional	Total		PSEG		Power		PSE&G
	Millions
As of March 31, 2012
Natural Gas	Dth		590		0		366		224
Electricity	MWh		138		0		138		0
FTRs	MWh		6		0		6		0
Interest Rate Swaps	US Dollars		1,100		1,100		0		0
Coal	Tons		1		0		1		0
As of December 31, 2011
Natural Gas	Dth		612		0		377		235
Electricity	MWh		137		0		137		0
FTRs	MWh		12		0		12		0
Interest Rate Swaps	US Dollars		1,100		1,100		0		0
Coal	Tons		1		0		1		0

Credit Risk

Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. We have established credit policies that we believe significantly minimize 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 allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power's and PSEG's financial condition, results of operations or net cash flows.

As of March 31, 2012, 96% of the credit for Power's operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives and non-derivatives and normal purchases/normal sales).

The following table provides information on Power's credit risk from others, net of cash collateral, as of March 31, 2012. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of Power's credit risk by credit rating of the counterparties.


Rating	Current Exposure		Securities held as Collateral		Net Exposure		Number of Counterparties >10%		Net Exposure of Counterparties >10%
	Millions								Millions
Investment Grade—External Rating	$	674	$	104	$	669		2	$	400	(A)
Non-Investment Grade—External Rating		26		0		26		0		0
Investment Grade—No External Rating		7		0		7		0		0
Non-Investment Grade—No External Rating		0		0		0		0		0

Total	$	707	$	104	$	702		2	$	400

(A)	Includes net exposure of $302 million with PSE&G. The remaining net exposure of $98 million is with two nonaffiliated power purchasers which are regulated investment grade counterparties.

The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more cash collateral than the outstanding exposure, in which case there would be no exposure. When letters of credit have been posted as collateral, the exposure amount is not reduced, but the exposure amount is transferred to the rating of the issuing bank. As of March 31, 2012, Power had 191 active counterparties.