UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
100 F ST. N.E.
WASHINGTON, D.C. 20549
F ORM 10-K
(Mark One)
S
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007,
OR
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
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Commission
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Registrants, State of Incorporation,
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I.R.S. Employer
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001-09120 |
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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22-2625848 |
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000-49614 |
PSEG POWER LLC
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22-3663480 |
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001-00973 |
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
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22-1212800 |
Securities registered pursuant to Section 12(b) of the Act:
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Registrant |
Title of Each Class |
Name of Each Exchange
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Public Service Enterprise
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Common Stock without
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New York Stock Exchange |
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Registrant
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Title of Each Class |
Title of Each Class |
Name of Each Exchange
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Public Service Electric
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Cumulative Preferred Stock
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First and Refunding
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Series |
Due |
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4.08% |
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9 1 / 4 |
% |
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CC |
2021 |
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4.18% |
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6 3 / 4 |
% |
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VV |
2016 |
New York Stock Exchange |
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4.30% |
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6 3 / 8 |
% |
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YY |
2023 |
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5.05% |
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8 |
% |
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2037 |
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5.28% |
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5 |
% |
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2037 |
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(Cover continued on next page) |
(Cover continued from previous page)
Securities registered pursuant to Section 12(g) of the Act:
Registrant
Title of Class
PSEG Power LLC
Limited Liability Company Membership Interest
Public Service Electric and
Gas Company
6.92% Cumulative Preferred Stock $100 par value
Indicate by check mark whether each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Public Service Enterprise Group Incorporated
Yes
S
No
£
PSEG Power LLC
Yes
£
No
S
Public Service Electric and Gas Company
Yes
£
No
S
Indicate by check mark if each of the registrants is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes
£
No
S
Indicate by check mark whether each of the registrants (1) has 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) has been subject to such filing requirements for the past 90 days. Yes
S
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 registrants 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.
S
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one):
Public Service Enterprise Group Incorporated
Large accelerated filer
S
Accelerated filer
£
Non-accelerated filer
£
PSEG Power LLC
Large accelerated filer
£
Accelerated filer
£
Non-accelerated filer
S
Public Service Electric and Gas Company
Large accelerated filer
£
Accelerated filer
£
Non-accelerated filer
S
Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
£
No
S
The aggregate market value of the Common Stock of Public Service Enterprise Group Incorporated held by non-affiliates as of June 30, 2007 was $22,248,331,515 based upon the New York Stock Exchange Composite
Transaction closing price.
The number of
shares outstanding of Public Service Enterprise Group Incorporateds sole
class of Common Stock as of February 4, 2008 was 508,456,850, after giving
effect for the two-for-one stock split.
PSEG Power LLC is a wholly owned subsidiary of Public Service Enterprise Group Incorporated and meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is filing its Annual Report on
Form 10-K with the reduced disclosure format authorized by General Instruction I.
As of February 4, 2008, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record by
Public Service Enterprise Group Incorporated.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K of
Documents Incorporated by Reference
III
Portions of the definitive Proxy Statement for the 2008 Annual Meeting
of Stockholders of Public Service Enterprise Group Incorporated,
which definitive Proxy Statement is expected to be filed with the
Securities and Exchange Commission on or about March 5, 2008, as specified
herein.
Medium-Term Notes, Series A
Medium-Term Notes, Series B
Medium-Term Notes, Series C
Medium-Term Notes, Series D
Medium-Term Notes, Series E
Public Service
Enterprise
Group Incorporated
TABLE OF CONTENTS
Page
iii
iv
1
1
Business
1
14
24
24
Risk Factors
30
Unresolved Staff Comments
38
Properties
39
Legal Proceedings
42
Submission of Matters to a Vote of Security Holders
44
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
45
Selected Financial Data
47
Managements Discussion and Analysis of Financial Condition and Results of Operations
47
47
53
64
72
75
75
Qualitative and Quantitative Disclosures About Market Risk
78
Financial Statements and Supplementary Data
85
86
89
Note 1. Organization and Summary of Significant Accounting Policies
104
109
112
Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments
113
118
120
122
122
Note 9. Schedule of Consolidated Capital Stock and Other Securities
125
126
131
133
144
146
148
Note 16. Pension, Other Postretirement Benefits (OPEB) and Savings Plans
155
161
165
Note 19. Property, Plant and Equipment and Jointly-Owned Facilities
169
i
Page
171
171
174
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
176
Controls and Procedures
176
Other Information
176
Directors, Executive Officers and Corporate Governance
181
Executive Compensation
184
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
211
Certain Relationships and Related Transactions, and Director Independence
212
Principal Accounting Fees and Services
213
Exhibits and Financial Statement Schedules
214
221
223
226
ii
Certain of the matters discussed in this report constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are
subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such statements are based on managements beliefs as well as assumptions made by and
information currently available to management. When used herein, the words anticipate, intend, estimate, believe, expect, plan, hypothetical, potential, forecast, project, variations of
such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves.
Other factors that could cause actual results to differ materially from those contemplated in any forward-looking statements made by us herein are discussed in Item 1A. Risk Factors, Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operation, Item 8. Financial Statements and Supplementary DataNote 12. Commitments and Contingent Liabilities and other factors
discussed in filings we make with the United States Securities and Exchange Commission (SEC). These factors include, but are not limited to:
Adverse Changes in energy industry, policies and regulation, including market rules that may adversely affect our operating results.
Any inability of our energy transmission and distribution businesses to obtain adequate and timely rate relief and/or regulatory approvals from federal and/or state regulators.
Changes in federal and/or state environmental regulations that could increase our costs or limit operations of our generating units.
Changes in nuclear regulation and/or developments in the nuclear power industry generally, that could limit operations of our nuclear generating units.
Actions or activities at one of our nuclear units that might adversely affect our ability to continue to operate that unit or other units at the same site.
Any inability to balance our energy obligations, available supply and trading risks.
Any deterioration in our credit quality.
Any inability to realize anticipated tax benefits or retain tax credits.
Increases in the cost of or interruption in the supply of fuel and other commodities necessary to the operation of our generating units.
Delays or cost escalations in our construction and development activities.
Adverse capital market performance of our decommissioning and defined benefit plan trust funds.
Changes in technology and/or increased customer conservation.
Additional information concerning these factors are set forth under Item 1A. Risk Factors.
All of the forward-looking statements made in this report are qualified by these cautionary statements and we cannot assure you that the results or developments anticipated by management will be
realized, or even if realized, will have the expected consequences to, or effects on, us or our business prospects, financial condition or results of operations. Readers are cautioned not to place undue reliance
on these forward-looking statements in making any investment decision. Forward-looking statements made in this report only apply as of the date of this report. Except as may be required by the federal
securities laws, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to these forward-looking statements to reflect events or circumstances that occur or arise or
are anticipated to occur or arise after the date hereof. The forward-looking statements contained in this report are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
iii
GLOSSARY OF TERMS
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:
APB
Accounting Principles Board
ARO
Asset Retirement Obligation
BEC
Bethlehem Energy Center
BGS
Basic
Generation Service
BGSS
Basic Gas Supply Service
BPU
New Jersey Board of Public Utilities
CERCLA
Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980
CIEP
Commercial and Industrial Energy Price
CO
2
carbon dioxide
Competition Act
New Jersey Electric Discount and Energy Competition Act
DOE
U.S. Department of Energy
EDC
New Jersey Electric Distribution Company
EGDC
Enterprise Group Development Corporation
EITF
Emerging Issues Task Force
EMP
New Jersey Energy Master Plan
Energy Holdings
PSEG Energy Holdings L.L.C.
EPA
U.S. Environmental Protection Agency
ER&T
PSEG Energy Resources & Trade LLC
ERCOT
Electric Reliability Council of Texas
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
FIN
FASB Interpretation Number
Fossil
PSEG Fossil LLC
FSP
FASB Staff Position
FWPCA
Federal Water Pollution Control Act
GAAP
generally accepted accounting principles in the U.S.
Global
PSEG Global L.L.C.
GWhr
gigawatt hour
Hope Creek
Hope Creek Nuclear Generating Station
kWh
Kilowatt-hour
LTIP
Long-Term Incentive Plan
MBR
market-based rates
MD&A
Managements Discussion and Analysis of Financial Condition and Results of Operations
MGP
Manufactured Gas Plant
MICP
Management Incentive Compensation Plan
MOU
memorandum of understanding
MTC
Market Transition Charge
MTM
mark-to-market
MW
megawatts
NDT
Nuclear Decommissioning Trust
NEO
Named Executive Officer
NERC
North American Electric Reliability Corporation
NGC
Non-Utility Generation Clause
NJDEP
New Jersey Department of Environmental Protection
Notes
Notes to Consolidated Financial Statements
NRC
Nuclear Regulatory Commission
Nuclear
PSEG Nuclear LLC
NUG
Non-Utility Generation
NYISO
New York Independent System Operator
OPEB
Other Postretirement Benefits
Peach Bottom
Peach Bottom Atomic Power Station
PJM
PJM Interconnection, L.L.C.
Power
PSEG Power LLC
PPA
power purchase agreement
PSE&G
Public Service Electric and Gas Company
PSEG
Public Service Enterprise Group Incorporated
RAC
Remediation Adjustment Clause
Resources
PSEG Resources L.L.C.
RGGI
Regional Greenhouse Gas Initiative
RPS
BPUs Renewal Portfolio Standard
Salem
Salem Nuclear Generating Station
SBC
Societal Benefits Clause
Services
PSEG Services Corporation
SFAS
Statement of Financial Accounting Standard
Spill Act
New Jersey Spill Compensation and Control Act
TPS
third party supplier
Transition Funding
PSE&G Transition Funding LLC
Transition Funding II
PSE&G Transition Funding II LLC
iv
This combined Annual Report on Form 10-K is separately filed by Public Service Enterprise Group Incorporated (PSEG), PSEG Power LLC (Power) and Public Service Electric and Gas Company
(PSE&G). Information contained herein relating to any individual company is filed by such company on its own behalf. Power and PSE&G each makes representations only as to itself and its subsidiaries and
makes no other representations whatsoever as to any other company.
WHERE TO FIND MORE INFORMATION
PSEG, Power and PSE&G file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (SEC). You may read and copy any document
that PSEG, Power and PSE&G file at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. You may also obtain PSEGs, Powers and PSE&Gs filed documents from commercial document retrieval services, the SECs internet website at www.sec.gov or PSEGs
website at www.pseg.com. Information contained on PSEGs website should not be deemed incorporated into or as a part of this report. PSEGs Common Stock is listed on the New York Stock Exchange
under the ticker symbol PEG. You can obtain information about PSEG at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
PSEG was incorporated under the laws of the State of New Jersey in 1985 and has its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. PSEG has four principal direct wholly
owned subsidiaries: Power, PSE&G, PSEG Energy Holdings L.L.C. (Energy Holdings) and PSEG Services Corporation (Services). The following organization chart shows PSEG and its principal subsidiaries,
as well as the principal operating subsidiaries of Power: PSEG Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy Resources & Trade LLC (ER&T); and of Energy Holdings: PSEG Global
L.L.C. (Global) and PSEG Resources L.L.C. (Resources):
PSEG is an energy company with a diversified business mix. PSEGs operations are primarily in the Northeastern and Mid Atlantic United States (U.S.) and in other select markets. As the competitive
portion of PSEGs business has grown, the resulting financial risks and rewards have become greater, causing financial requirements to change and increasing the volatility of earnings and cash flows.
For additional information, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)Overview of 2007 and Future Outlook.
Power
Power is a Delaware limited liability company, formed in 1999, and has its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. Power is a multi-regional, wholesale energy supply
company that
1
integrates its generating asset operations with its wholesale energy, fuel supply, energy trading and marketing and risk management functions through three principal direct wholly owned subsidiaries:
Nuclear, Fossil and ER&T.
As of December 31, 2007, Powers generation portfolio consisted of 13,314 MW of summer installed capacity, which is primarily located in the Northeast and Mid Atlantic regions of the U.S. in some of
the nations largest and most developed energy markets. For additional information, see Item 2. Properties.
As a merchant generator, Powers profit is derived from selling under contract or on the spot market a range of diverse products such as energy, capacity, emissions credits, congestion credits and a
series of energy-related products used to optimize the operation of the energy grid. Powers revenues also include gas supply sales to PSE&G under the Basic Gas Supply Service (BGSS) contract with PSE&G
(see Gas Supply below) and other customers.
Nuclear
Nuclear has ownership interests in five nuclear generating units: the Salem Nuclear Generating Station, Units 1 and 2 (Salem 1 and 2), each owned 57.41% by Nuclear and 42.59% by Exelon
Generation LLC (Exelon Generation), each of which is operated by Nuclear; the Hope Creek Nuclear Generating Station (Hope Creek), which is owned 100% by Nuclear and operated by Nuclear; and the
Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom 2 and 3), each of which is operated by Exelon Generation and owned 50% by Nuclear and 50% by Exelon Generation. Salem 1 and 2 and
Hope Creek are located at the same site. For additional information, see Item 2. PropertiesPower.
Nuclear Operations
From January 2005 through December 31, 2007, an Operating Services Contract (OSC) with Exelon Generation was in effect under which Exelon Generation provided key personnel to oversee daily
plant operations at the Hope Creek and Salem nuclear generating stations and implemented a management model that Exelon Generation has used to manage its own nuclear facilities. In December 2006,
Power announced its plans to resume direct management of the Salem and Hope Creek nuclear generating stations. As part of this plan, on January 1, 2007, the senior management team at Salem and Hope
Creek, which consisted of three senior executives from Exelon, became employees of Power. Power continued to recruit additional employees to build its organizational structure and execute its plan in
anticipation of direct management. As of January 1, 2008, the OSC was terminated and Power has resumed independent operation at Salem and Hope Creek.
During 2007, over half of Powers generating output was from its nuclear generating stations. Nuclear unit capacity factors for 2007 were as follows:
Unit
Capacity
Salem Unit 1
89.0
%
Salem Unit 2
97.1
%
Hope Creek.
85.4
%
Peach Bottom Unit 2.
99.4
%
Peach Bottom Unit 3.
90.7
%
Total Power Ownership.
91.4
%
(A)
Maximum Dependable Capacity, net.
No assurances can be given that such capacity factors will be achieved in the future. For additional information on recent operational issues, see Regulatory IssuesNuclear Regulatory Commission
(NRC).
Nuclear Fuel
Nuclear has several long-term purchase contracts for the supply of nuclear fuel for the Salem and Hope Creek Nuclear Generating Stations which include:
purchase of uranium (concentrates and uranium hexafluoride);
2
Factor(A)
conversion of uranium concentrates to uranium hexafluoride;
enrichment of uranium hexafluoride; and
fabrication of nuclear fuel assemblies.
While the prices for uranium, conversion and enrichment are increasing, Nuclear does not anticipate any significant problems in meeting its future requirements; however, no assurances can be given.
Nuclear has been advised by Exelon Generation that it has similar purchase contracts to satisfy the fuel requirements for Peach Bottom. For additional information, see Item 7. MD&AOverview of 2007
and Future OutlookPower and Note 12. Commitments and Contingent Liabilities.
Fossil
Fossil has ownership interests in 17 generating stations in the Northeast and Mid Atlantic U.S. Fossil uses coal, natural gas and oil for electric generation. These fuels are purchased on behalf of Fossil
by ER&T through various contracts and in the spot market and represent a significant portion of Powers working capital requirements. See Item 2. Properties for a list of these stations.
ER&T
ER&T purchases the capacity and energy produced by each of the generation subsidiaries of Power. In conjunction with these purchases, ER&T uses commodity and financial instruments designed to cover
estimated commitments for Basic Generation Service (BGS) and other bilateral contract agreements. ER&T also markets electricity, capacity, ancillary services and natural gas products on a wholesale basis.
ER&T is a fully integrated wholesale energy marketing and trading organization that is active in the long-term and spot wholesale energy and energy-related markets.
Electric Supply
Powers generation capacity is comprised of a diverse mix of fuels; 46% gas, 26% nuclear, 18% coal, 8% oil and 2% pumped storage. Powers fuel diversity serves to mitigate risks associated with fuel
price volatility and market demand cycles.
The following table indicates proportionate gigawatt hour (GWhr) output of Powers generating stations by fuel type, based on actual 2007 output of approximately 53,200 GWhrs, and 2008 estimated
output of approximately 54,000 GWhrs.
Generation by Fuel Type
Actual
Estimated
Nuclear:
New Jersey facilities
36
%
37
%
Pennsylvania facilities
18
%
17
%
Fossil:
Coal:
New Jersey facilities
9
%
11
%
Pennsylvania facilities.
11
%
12
%
Connecticut facilities.
4
%
5
%
Oil and Natural Gas:
New Jersey facilities.
15
%
13
%
New York facilities
6
%
4
%
Connecticut facilities.
1
%
1
%
Total
100
%
100
%
(A)
No assurances can be given that actual 2008 output by source will match estimates.
For a discussion of Powers management and hedging strategy relating to its energy sales supply and fuel needs, see Market Price Environment and Item 7. MD&AOverview of 2007 and Future
OutlookPower.
3
2007
2008(A)
Coal Supply
Power purchases coal for certain of its fossil generation stations through various long-term commitments. In order to minimize emissions levels, Powers Bridgeport generating facility uses a specific
type of coal obtained from Indonesia through a Fixed-Price (FP) supply contract that runs through 2011. Under a consent decree with the New Jersey Department of Environmental Protection (NJDEP)
and the U.S. Environmental Protection Agency (EPA), the Hudson facility also utilizes this type of coal and has a FP supply contract that runs through 2010. If the supply of coal from Indonesia or
equivalent coal from other sources was not available for these facilities, in the near term operations could be curtailed or suspended and in the long term, additional material capital expenditures could be
required to modify the existing plants to enable their continued operation.
As
of the end of 2007, one of Powers coal suppliers declared a force majeure,
resulting in the interruption of coal shipments due to a mine fire. This
supplier provides approximately 50% of the type of coal used at Powers
648 MW Mercer generation facility. In addition, approximately 35% of Mercers
coal supply is purchased through another contract in Venezuela, which was
renegotiated in February 2008 and now provides for coal shipments through
the end of 2008.
As described in Note 12. Commitments and Contingent Liabilities, Power is currently constructing pollution control equipment at its coal fired plants. When construction of those projects is complete,
Power anticipates having more flexibility in the type of coal used at those facilities, thereby reducing its reliance on certain suppliers and reducing its risk of sourcing fuel for those facilities.
Power believes it has access to adequate fuel supplies, including transportation, for its facilities over the next several years; however, events such as those experienced at
Mercer could result in higher than anticipated fuel costs as Power seeks alternate supply arrangements or purchases in the spot market. For additional information, see Item 7. MD&AOverview of 2007 and Future
OutlookPower and Note 12. Commitments and Contingent Liabilities.
Gas Supply
Power sells gas to PSE&G under the BGSS contract. Power has a full requirements contract with PSE&G to meet the gas supply requirements of PSE&Gs gas customers. The contract term runs through
March 31, 2012, and year-to-year thereafter. Power charges PSE&G for gas commodity costs which PSE&G recovers from its customers.
Additionally, based upon availability, Power sells gas to others. Powers firm transportation, which is available every day of the year, can provide about 41% of PSE&Gs peak daily gas requirements. The
remainder comes from field storage, liquefied natural gas, seasonal purchases, contract peaking supply, propane and refinery and landfill gas. Power purchases gas for its gas operations directly from natural
gas producers and marketers. These supplies are transported to New Jersey by four interstate pipeline suppliers.
Power has approximately 1 billion cubic feet-per-day of firm transportation capacity under contract to meet the primary needs of PSE&Gs gas consumers and the needs of its own generation fleet. Power
supplements that supply with a total storage capacity of 78 billion cubic feet. This provides a maximum of approximately 1 billion cubic feet-per-day of gas during the winter season.
Power expects to be able to meet the energy-related demands of its firm natural gas customers and its own operations. However, the ability to maintain an adequate supply could be affected by several
factors not within Powers control, including curtailments of natural gas by its suppliers, severe weather and the availability of feedstocks for the production of supplements to its natural gas supply.
Market Price Environment
System operators in the electric markets in which Power participates will generally dispatch the lowest variable cost units in the system first, with higher variable cost units dispatched as demand
increases. As such, nuclear units, with their low variable cost of operation, will generally be dispatched whenever they are available. Coal units generally follow next in the merit order of dispatch and gas
and oil units generally follow to meet the total amount of demand. With limited exceptions, the price that all dispatched units receive is set by the last, or marginal unit that is dispatched.
This method of determining supply and pricing creates an environment where natural gas prices often have a major impact on the price that generators will receive for their output, especially in periods
of
4
relatively strong demand. As such, significant changes in the price of natural gas will often translate into significant changes in the price of electricity.
Commodity prices, such as electricity, gas, coal and emissions, as well as the availability of Powers diverse fleet of generation units to produce these products, have a considerable effect on Powers
profitability. There is significant volatility in commodity markets, including electricity, fuel and emission allowances. For example, the spot price of electricity at the quoted PJM Interconnection, L.L.C.
(PJM) West market increased from an average of about $25 per megawatt hour (MWh) for 2002 to an average of about $60 per MWh in 2005 and in 2007 was about $55 per MWh. Similarly, the price of
natural gas at the Henry Hub terminal increased from an average of about $3 per one million British Thermal Units (MMBtu) in 2002 to about $9 per MMBtu in 2005 and to about $7 per MMBtu on
average in 2007. The prices at which transactions are entered into for future delivery of these products, as evidenced through the market for forward contracts at points such as PJM West are volatile as well.
When averaged over a year, the historical annual spot prices and forward calendar prices as of year-end 2007 are reflected in the graphs below.
In the electricity markets where Power participates, the pricing of electricity varies by location. For example, prices may be higher in congested areas due to transmission constraints during peak
demand periods, reflecting the bid prices of the higher cost units that are dispatched to meet demand. This typically occurs in the eastern portion of PJM, where many of Powers plants are located. At
various times, depending
5
upon its production and its obligations, these price differentials can serve to increase or decrease Powers profitability.
While the prices reflected in the tables above do not necessarily represent prices at which Power has contracted, they are representative of market prices at relatively liquid hubs, with nearer term
forward pricing generally resulting from more liquid markets than pricing for later years. While they provide some perspective on past and future prices, the forward prices are highly volatile and there is no
assurance that such prices will remain in effect nor that Power will be able to contract its output at these forward prices.
One type of contract that is material to Powers
hedging strategy is the BGS contract in New Jersey that is awarded for 3-year
periods through an auction process managed by the New Jersey Board of Public
Utilities (BPU). The BGS contract is a full requirements contract that includes
energy and capacity, ancillary and other services. Pricing for the BGS contracts
for recent and future periods by the purchasing utility is as follows:
Load Zone
20052008
20062009
20072010
20082011
($/MWh)
PSE&G
$
65.41
$
102.51
$
98.88
$
111.15
Jersey Central Power and Light
$
65.70
$
100.44
$
99.64
$
114.09
Atlantic City Electric
$
66.48
$
103.99
$
99.59
$
116.50
Rockland Electric Company
$
71.79
$
111.14
$
109.99
$
120.49
Power is also provided with payments from the various markets for the capability to provide electricity, known as capacity payments, which are reflective of the value to the grid of having the assurance
of sufficient generating capacity to meet system reliability and energy requirements, and to encourage the future investment in adequate sources of new generation to meet system demand. While there is
generally sufficient capacity in the markets in which Power operates, there are certain areas in these markets where there are constraints in the transmission system, causing concerns for reliability and a
more acute need for capacity. Some generators, including Power, announced the retirement of certain older generating facilities in these constrained areas due to insufficient revenues to support their
continued operation. In separate instances, both PJM and the New England Power Pool (NEPOOL), in order to enable their continued availability, responded with Reliability-Must-Run (RMR) contracts
that provide Power with payments which are not necessarily reflective of the full value of those units contribution to reliability. Such payment structure by its nature acknowledges that these units provide a
reliability service that is not compensated for in the existing markets.
The Federal Energy Regulatory Commission (FERC) issued certain orders in 2006 related to market design that have changed the nature of capacity payments in PJM and in NEPOOL. In PJM, a new
capacity-pricing regime known as the Reliability Pricing Model (RPM) provides generators with differentiated capacity payments based within a Load Deliverability Area. Similarly, the Forward Capacity
Market (FCM) settlement in NEPOOL provides for locational capacity payments. Both market designs are based in part on the premise that a more structured, forward-looking, transparent pricing
mechanism gives prospective investors in new generating facilities more clarity on the value of capacity, sending a pricing signal to encourage expansion of capacity to meet future market demands. The
FERC has approved the market changes in each of these markets. RPM started June 1, 2007 and the FCM transition period began December 1, 2006. The majority of Powers generating capacity has
experienced increases in value from aspects of these market designs, resulting in considerable additional revenue. Power cannot determine the long-term impacts of these market design changes.
PJM sets the prices that will be received by generating assets located within the Eastern Mid Atlantic Area Council (MAAC) zone, the MAAC zone, the MAAC + APS zone and PJM, other than
within the Eastern MAAC and MAAC + APS zones (Rest of Pool) through RPM base residual auctions. Most of Powers generating assets are in the Eastern MAAC and MAAC zones. The clearing prices
resulting from the first four base residual auctions are listed in the following table.
6
Zones
Delivery Year
June 1, 2007 to
June 1, 2008 to
June 1, 2009 to
June 1, 2010 to
MW-day
kW-yr
MW-day
kW-yr
MW-day
kW-yr
MW-day
kW-yr
Eastern MAAC
$
197.67
$
72.15
$
148.80
$
54.31
$
191.32
$
69.83
$
$
MAAC
$
$
$
$
$
$
$
174.29
$
63.62
MAAC + APS
$
$
$
$
$
191.32
$
69.83
$
$
Rest of Pool
$
40.80
$
14.89
$
111.92
$
40.85
$
97.82
$
35.70
$
174.29
$
63.62
May 31, 2008
May 31, 2009
May 31, 2010
May 31, 2011
As a normal part of its contracting strategy, Power enters into contracts to sell capacity for future delivery. One such contract, as discussed above, is the BGS contract, which includes several energy- related components, one of which is capacity. A significant portion of Powers capacity is contracted as part of the three-year BGS-FP auctions in which Power had won 11 tranches in 2005, 20 tranches in 2006, 19 tranches in 2007 and 17 tranches in 2008. On average, each of these BGS-FP tranches requires approximately 120 MW of capacity on a daily basis. In addition, prior to the capacity auctions, Power hedged a portion of its generation capacity with forward capacity sales contracts at prices lower than auction prices above. As a result, Power expects to see an increasing amount of its capacity realizing RPM auction pricing as these existing contracts expire.
The capacity auctions also determine the price that must be paid by an entity serving load in the various auction delivery areas such as Powers obligation to serve BGS in New Jersey. These prices differ from physical capacity resources due to import and export capability to and from lower priced areas. Auction clearing prices for the purchase of capacity in the zones where Powers obligations are located are listed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
Zones |
Delivery Year |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 1, 2007 to
|
June 1, 2008 to
|
June 1, 2009 to
|
June 1, 2010 to
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
MW-day |
kW-yr |
MW-day |
kW-yr |
MW-day |
kW-yr |
MW-day |
kW-yr |
|||||||||||||||||||||||||||||||||||||||||||||||||
Eastern MAAC |
|
$ |
|
177.51 |
|
$ |
|
64.79 |
|
$ |
|
143.51 |
|
$ |
|
52.38 |
|
$ |
|
188.55 |
|
$ |
|
68.82 |
|
$ |
|
|
|
$ |
|
|
||||||||||||||||||||||||
MAAC |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
174.29 |
|
$ |
|
63.62 |
The balance of Powers PJM capacity has obtained price certainty through May 31, 2011 as a result of the first four RPM auctions. Power has obtained price certainty for all of its capacity in New England through May 31, 2010 as a result of the FP nature of the transitional FCM auction.
On a prospective basis, many factors will affect the pricing for capacity in PJM, including but not limited to:
|
||||||||||||||||||||
|
|
changes in demand; |
||||||||||||||||||
|
||||||||||||||||||||
|
|
demand response resources; |
||||||||||||||||||
|
||||||||||||||||||||
|
|
changes in available generating capacity (including retirements, additions, derates, forced outage rates, etc.); |
||||||||||||||||||
|
||||||||||||||||||||
|
|
increases in transmission capability between zones; and |
||||||||||||||||||
|
||||||||||||||||||||
|
|
changes to the pricing mechanism created by PJM, including increasing the potential number of zones to as many as 24 zones in future years, which could create more pricing sensitivity to changes in supply and demand, as well as other potential changes that PJM may propose over time.
|
For additional information on Powers collection of RMR payments in PJM and NEPOOL and the RPM and FCM proposals, see Regulatory IssuesFederal Regulation.
Competitive Environment
Powers competitors include merchant generators with or without trading capabilities, including banks, funds and other financial entities, utilities that have generating capability, utility companies that have formed generation and/or trading businesses, aggregators and wholesale power marketers. These participants compete with Power and one another in buying and selling in wholesale power pools, entering into bilateral contracts and selling to aggregated retail customers.
Powers businesses are also under competitive pressure due to Demand Side Management (DSM) and other efficiency efforts aimed at changing the quantity and patterns of usage by end-use consumers which would result in reduction in Powers load requirements. It is also possible that advances in technology, such
7
as distributed generation, will reduce the cost of alternative methods of producing electricity to a level that is competitive with that of most central station electric production.
There is also a risk to Power if states should decide to turn away from competition and allow regulated utilities to continue to own or reacquire and operate generating stations in a regulated and
potentially uneconomical manner, or to encourage rate-based generation for the construction of new base-load units. This has already occurred in certain states. The lack of consistent rules in energy
markets can negatively impact the competitiveness of Powers plants. Also, regional inconsistencies in environmental regulations, particularly those related to emissions, have put some of Powers plants
which are located in the Northeast, where rules are more stringent, at an economic disadvantage compared to its competitors in certain Midwest states.
Also, environmental issues such as restrictions on carbon dioxide (CO
2
) emissions and other pollution may have a competitive impact on Power to the extent it is more expensive for its plants to remain
compliant, thus affecting its ability to be a lower cost provider compared to competitors without such restrictions.
Customers
As Exempt Wholesale Generators, Powers subsidiaries do not directly serve retail customers. Power uses its generation facilities for the production of electricity for sale at the wholesale level. Powers
customers consist mainly of wholesale buyers, primarily within PJM, but also in New York and NEPOOL. Power is at times a direct or indirect supplier of New Jerseys Electric Distribution Companies
(EDCs), including PSE&G, depending on the positions it takes in the New Jersey BGS auctions. These contracts are full requirements contracts, where Power is responsible to serve a percentage of the full
supply needs of the customer class being served, including energy, capacity, congestion and ancillary services. In addition, Power has four-year contracts with two Pennsylvania utilities expiring in 2008.
As mentioned in Gas Supply, Power has a full requirements contract, BGSS, with PSE&G to meet the gas supply requirements of PSE&Gs gas customers.
For the year ended December 31, 2007, approximately 50% of Powers revenue was comprised of billings to PSE&G for BGS and BGSS. See Note 21. Related-Party Transactions for additional
information.
Employee Relations
As of December 31, 2007, Power had 2,538 employees, of whom 1,412 employees (710 employees at Fossil and 702 employees at Nuclear) are represented by three union groups under six-year
collective bargaining agreements, which were ratified in February, July and August 2005, respectively. Power believes that it maintains satisfactory relationships with its employees.
PSE&G
PSE&G is a New Jersey corporation, incorporated in 1924, and has its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. PSE&G is an operating public utility company engaged
principally in the transmission and distribution of electric energy and gas in New Jersey. In addition, PSE&G owns PSE&G Transition Funding LLC (Transition Funding) and PSE&G Transition Funding II LLC
(Transition Funding II), which are bankruptcy-remote entities that respectively purchased, pursuant to New Jerseys Electric Discount and Energy Competition Act, as amended (Competition Act), the
irrevocable property rights to receive certain non-bypassable transition charges per kilowatt-hour (kWh) of electricity delivered to PSE&G customers and issued transition bonds secured by such property in
payment for such property.
PSE&G provides electric and gas service in areas of New Jersey in which approximately 5.5 million people, about 70% of the states population, reside. PSE&Gs 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 Jerseys largest municipalities, including its six largest citiesNewark, Jersey City, Paterson, Elizabeth, Trenton and Camdenin addition to approximately 300 suburban and rural communities. This
service territory contains a diversified mix of commerce and industry, including major facilities of many nationally prominent
8
corporations. PSE&Gs load requirements are split among residential, commercial and industrial customers, described below under customers. PSE&G believes that it has all the non-exclusive franchise rights
(including consents) necessary for its electric and gas distribution operations in the territory it serves. PSE&G primarily earns margins through the transmission and distribution of electricity and the
distribution of gas. PSE&Gs revenues for these services are based upon tariffs approved by the BPU and the FERC. PSE&G also earns margins through non-tariff competitive services.
Energy Supply
PSE&G distributes electric energy and gas to end-use customers within its designated service territory. All electric and gas customers in New Jersey have the ability to choose an electric energy and/or
gas supplier. Pursuant to the BPU requirements, PSE&G serves as the supplier of last resort for electric and gas customers within its service territory. PSE&G earns no margin on the commodity portion of its
electric and gas sales.
As shown in the table below, PSE&G continues to provide the electric energy and gas supply for the majority of the customers in its service territory for the year ended December 31, 2007.
GWh
%
Million Therms
%
PSE&G
35,152
79
%
2,201
63
%
Third Party Suppliers
9,543
21
%
1,302
37
%
Total Delivered
44,695
100
%
3,503
100
%
New Jerseys EDCs, including PSE&G, provide two types of BGS, BGS-FP and BGS-Commercial and Industrial Energy Price (CIEP). BGS is the default electric supply service for customers who do not
choose a third party supplier (TPS) for electric supply requirements. BGS-FP provides default supply service for smaller industrial and commercial customers and residential customers at seasonally-adjusted
fixed prices for a three-year term. BGS-FP rates change annually on June 1, and are based on the average BGS price obtained at auctions in the current year and two prior years.
PSE&G is required to provide BGS for all customers who are not supplied by a TPS. All of New Jerseys EDCs jointly procure the supply to meet their BGS obligations through two concurrent auctions
authorized by the BPU for New Jerseys total BGS requirement. These auctions take place annually in February. Results of these auctions determine which energy suppliers are authorized to supply BGS to
New Jerseys EDCs.
BGSS is the mechanism approved by the BPU designed to recover all gas costs related to the supply for residential customers. BGSS filings are made annually by June 1 of each year, with an effective
date of October 1. PSE&G has a full requirements contract through 2012 with Power to meet the supply requirements of PSE&Gs default service gas customers. Power charges PSE&G for gas commodity costs
which PSE&G recovers from its customers. Any difference between rates charged by Power under the BGSS contract and rates charged to PSE&Gs residential customers is deferred and collected or refunded
through adjustments in future rates
Market Price Environment
There continues to be significant volatility in commodity prices, including fuel, emission allowances and electricity. Such volatility can have a considerable impact on PSE&G since a rising commodity
price environment results in higher delivered electric and gas rates for end-use customers, and may result in decreased demand by end users of both electricity and gas, increased regulatory pressures and
greater working capital requirements as the collection of higher commodity costs may be deferred under PSEGs regulated rate structure. For additional information see Item 7. MD&A.
Competitive Environment
The electric and gas transmission and distribution business has minimal risks from competitors. PSE&Gs transmission and distribution business is minimally impacted when customers choose alternate
electric or gas suppliers since PSE&G earns its return by providing transmission and distribution service, not by supplying the commodity. The demand for electric energy and gas by PSE&Gs customers is
affected by customer conservation, economic conditions, weather and other factors not within PSE&Gs control.
9
Customers
As of December 31, 2007, PSE&G provided service to 2.1 million electric customers and 1.7 million gas customers. In addition to its transmission and distribution business, PSE&G also offers appliance
services and repairs to customers throughout its service territory. The following details the distribution of electric and gas sales among customer classes:
Customer Type
% of Sales
Electric
Gas
Commercial
56
%
36
%
Residential.
31
%
60
%
Industrial
13
%
4
%
Total
100
%
100
%
Employee Relations
As of December 31, 2007, PSE&G had 6,069 employees. PSE&G has six-year collective bargaining agreements, which were ratified in 2005, with four unions representing 4,838 employees. PSE&G believes
that it maintains satisfactory relationships with its employees.
Energy Holdings
Global
Global has investments in power producers that own and operate electric generation in Texas, California and Hawaii, with smaller investments in New Hampshire and Pennsylvania. Globals assets
include consolidated projects and those accounted for under the equity method and cost method. As of December 31, 2007, Globals domestic generation portfolio consisted of 2,395 MW of owned capacity,
as discussed below. For additional information see Item 2. Properties.
Texas
Global owns 100% of PSEG Texas, LP (PSEG Texas) (Formerly Texas Independent Energy) which owns and operates two gas-fired, combined cycle generation facilities with a total generating
capacity of 2,000 MW, one in Guadalupe County in south central Texas (Guadalupe) and one in Odessa in western Texas (Odessa). Guadalupe and Odessa each have a generation capacity of 1,000 MW.
Effective January 1, 2008, Global contracted with Fossil to assume management responsibilities for Odessa and Guadalupe. Approximately 40% to 50% of the expected output of PSEG Texas for 2008 has
been sold via bilateral agreements and additional bilateral sales for peak and off-peak services are expected to be signed as the year progresses. Any remaining uncommitted output will be sold in the Texas
spot market. Included in Odessas 1,000 MW of generation capacity is a 350 MW daily capacity call option at Odessa that expires on December 31, 2010. For additional information, see Market Price
Environment, below.
California
Global owns 50% of GWF Power System L.P. (GWF) and GWF Hanford, Inc.(Hanford). Global has PPAs for the five GWF San Francisco Bay Area plants net output with Pacific Gas and Electric
Company (PG&E) ending in 2020 and 2021 and a PPA for Hanford for its net output with PG&E ending in 2011. GWF and Hanford primarily acquire the petroleum coke used to fuel the plants through
contracts with prices negotiated between the parties either semi-annually or annually. Three of the five GWF plants have been modified to burn a wider variety of petroleum coke products to mitigate fuel
supply and pricing risk.
GWF Energy LLC (GWF Energy), which is 60% owned by Global and 40% owned by a power fund managed by Harbert, owns and operates three peaker plants in California. The output of these
plants is sold under a PPA with the California Department of Water Resources (DWR) ending in 2011 and 2012. The DWR has the right to schedule energy and/or reserve capacity from each unit of the
three plants for a maximum of 2,000 hours each year. Energy and capacity not scheduled by the DWR is available for sale by GWF Energy. The DWR supplies the natural gas when the units are scheduled
for dispatch by the DWR. GWF Energy obtains the natural gas used to fuel its plants for non-DWR sales from the spot market on a non-firm basis.
10
Hawaii
Global owns 50% of Kalaeloa, a base load generating station on Oahu, Hawaii. All of the electricity generated by the Kalaeloa power plant is sold to the Hawaiian Electric Company, Inc. (HECO)
under a PPA expiring in May 2016. Under a steam purchase and sale agreement expiring in May 2016, the Kalaeloa power plant supplies steam to the adjacent Tesoro refinery. The primary fuel, low sulfur
fuel oil, is provided from the adjacent Tesoro refinery under a long-term all requirements contract. The refinery is interconnected to the power plant by a pipeline and preconditions the fuel oil prior to
delivery. Back-up fuel supply is provided by HECO.
New Hampshire
Global owns 40% of Bridgewater, a 16 MW biomass-fired power plant located in New Hampshire. Prior to August 2007, Bridgewater sold power to Public Service of New Hampshire under a long term
PPA. Bridgewater has entered into a three year contract with a third party to supply electricity and renewable energy credits (RECs) on an a unit contingent basis. The RECs will be qualified according to
the Connecticut Renewable Portfolio Standard. Bridgewaters fuel supply comes from a well-developed system of local sources.
Other
Global has reduced its international risk by opportunistically monetizing the majority of its international investments. On December 18, 2007, Global announced that it intends to sell its investment in
the SAESA Group. The SAESA Group consists of four distribution companies, one transmission company and a generation facility located in Chile.
Global is also continuing to explore options for its remaining international investments in Italy, Venezuela and India. These businesses had a total book asset value of approximately $120 million as of
December 31, 2007.
Market Price Environment
Globals projects in California, Hawaii and New Hampshire are fully contracted under long-term PPAs with the public utilities or power procurers in those areas. Therefore, Global does not have price
risk with respect to the output of such assets, and generally, with respect to such assets, has limited risk with respect to fuel prices. Globals risks related to these projects are primarily operational in nature
and have historically been minimal.
Globals generation business in Texas (PSEG Texas) is a merchant generation business with higher risks. PSEG Texas competes in the Texas wholesale energy market administered by ERCOT.
Wholesale electricity prices in the ERCOT market generally move with the price of natural gas because marginal demand is generally supplied by natural gas-fueled generation plants. Natural gas prices
have increased significantly in recent years, but historically the price has fluctuated due to the effects of weather, changes in industrial demand and supply availability, and other economic and market
factors. ERCOT is a bilateral market in which generation plants run as their contractual commitments dictate with ERCOT further dispatching units up or down to maintain system stability via the
balancing energy market and through the deployment of ancillary service capacity, which are bid price markets. In the balancing energy and ancillary service markets, ERCOT will generally dispatch the
lowest bids first unless local transmission congestion requires units to be dispatched out of order. The price that all dispatched units receive is set by the last, or marginal bidder that is dispatched. PSEG
Texas generation assets are combined cycle gas-fired generation units, and generally have lower variable costs than less efficient gas and oil-fired generation units. As a result, during on-peak periods, the
price of power in ERCOT is frequently set by generation units with higher variable costs than PSEG Texas generation assets. Unlike the markets in which Power competes, ERCOT does not have a
capacity market, and as a result, all generators are compensated solely through energy revenues and revenues for ancillary services, which are subject to substantial volatility as power prices fluctuate. While
Globals business in Texas performed well during 2006 and 2007 as higher natural gas prices resulted in higher energy prices, there can be no assurances that such pricing in the market will continue at these
levels.
11
Competitive Environment
Although PSEG Texas generating stations operate very efficiently relative to other gas-fired generating plants, new additions of generation capacity could make PSEG Texas plants less economical in
the future. A number of competitors have announced plans to build additional coal-fired and gas-fired generation capacity in ERCOT. Although it is not clear if this capacity will be built or, if so, what the
economic impact will be, such additions could impact market prices and PSEG Texas competitiveness.
Over the past several years, substantial amounts of additional wind generation capacity has been constructed in ERCOT, particularly in western Texas, where PSEG Texas Odessa generation facility is
located. At the end of 2007, ERCOT had approximately 4,000 MW of installed wind capacity. Given the favorable wind conditions in western Texas, these wind generation facilities are able to produce
power during a substantial period of the year, resulting in an additional source of base load power in western Texas, especially during off-peak seasons.
While numerous competitors have announced plans to build substantial amounts of new wind generation capacity, an issue impacting the likelihood of these projects being built is the constrained
amount of transmission capacity between western Texas, where wind generation units are typically sited but where power demand is relatively low, and the rest of Texas. In an effort to address these
transmission constraints, the Public Utilities Commission of Texas (PUCT) has designated five Competitive Renewable Energy Zones (CREZs) in western Texas and the Texas Panhandle. The PUCT has
requested that ERCOT develop transmission construction options within these CREZs that would allow for much greater levels of delivery of wind power from western Texas to customers throughout the
ERCOT grid. Although it is not clear if these efforts at transmission expansion will be successful or, if so, what the economic impact will be, it is possible that substantial additional amounts of wind
generation will be built in ERCOT as a result of such potential transmission expansion, which could impact market prices and PSEG Texas competitiveness.
ERCOTs upcoming transitions to nodal pricing from zonal pricing, currently targeted for December 2008, may impact the competitiveness of PSEG Texas generating plants. A nodal electricity
market, such as the PJM market, is a centrally organized, day-ahead and real-time market for wholesale power in which generators are compensated based on their location in the system (i.e. node). The
implementation of the nodal market design is expected to deliver improved price signals, improved dispatch efficiencies and direct assignment of local congestion costs. PSEG is currently evaluating this
change in market design and cannot predict the potential impact this change will have on its Texas generation facilities.
Customers
As discussed above, Global has ownership interests in electric generation facilities which sell energy, capacity and ancillary services to numerous customers through PPAs, as well as into the wholesale
market.
Resources
Resources has investments in energy-related financial transactions and manages a diversified portfolio of assets, including leveraged leases, operating leases, leveraged buyout funds, limited partnerships
and marketable securities. Established in 1985, Resources has a portfolio of 47 separate investments. PSEG does not anticipate that Resources will be making significant additional investments in the near
term (See Leveraged Lease Investments below).
12
The major components of Resources investment portfolio as a percent of its total assets as of December 31, 2007 were:
As of December 31, 2007
Amount
% of
(Millions)
Leveraged Leases
Energy-Related
Foreign
$
1,490
50
%
Domestic
1,060
35
%
Real EstateDomestic.
188
6
%
Commuter Rail CarsForeign.
88
3
%
Total Leveraged Leases
2,826
94
%
Owned Property (real estate and aircraft)
114
4
%
Limited Partnerships, Other Investments & Current and Other Assets
52
2
%
Total Resources Assets
$
2,992
100
%
As of December 31, 2007, no single investment represented more than 10% of Resources total assets.
Leveraged Lease Investments
Resources maintains a portfolio that is designed to provide a fixed rate of return. Income on leveraged leases is recognized by a method which produces a constant rate of return on the outstanding
investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Any gains or losses incurred as a result of a lease termination are recorded as Operating
Revenues as these events occur in the ordinary course of business of managing the investment portfolio.
In a leveraged lease, the lessor acquires an asset by investing equity representing 15% to 20% of the cost of the asset and incurring non-recourse lease debt for the balance. The lessor acquires economic
and tax ownership of the asset and then leases it to the lessee for a period of time no greater than 80% of its remaining useful life. As the owner, the lessor is entitled to depreciate the asset under applicable
federal and state tax guidelines. The lessor receives income from lease payments made by the lessee during the term of the lease and from tax benefits associated with interest and depreciation deductions
with respect to the leased property. The ability of Resources to realize these tax benefits is dependent on operating gains generated by its affiliates and allocated pursuant to PSEGs consolidated tax sharing
agreement. The Internal Revenue Service (IRS) has recently disallowed certain tax deductions claimed by Resources for certain of these leases. See Note 12. Commitments and Contingent Liabilities for
further discussion. Lease rental payments are unconditional obligations of the lessee and are set at levels at least sufficient to service the non-recourse lease debt. The lessor is also entitled to any residual
value associated with the leased asset at the end of the lease term. An evaluation of the after-tax cash flows to the lessor determines the return on the investment. Under generally accepted accounting
principles in the U.S. (GAAP), the lease investment is recorded on a net basis and income is recognized as a constant return on the net unrecovered investment.
Resources has evaluated the lease investments it has made against specific risk factors. The assumed residual value risk, if any, is analyzed and verified by third parties at the time an investment is
made. Credit risk is assessed and, in some cases, mitigated or eliminated through various structuring techniques, such as defeasance mechanisms and letters of credit. As of December 31, 2007, the weighted
average credit rating of the lessees in the portfolio was A/A3 by S&P and Moodys, respectively. Resources has not taken currency risk in its cross-border lease investments. Transactions have been structured
with rental payments denominated and payable in U.S. dollars. Resources, as a passive lessor or investor, has not taken operating risk with respect to the assets it owns, so leveraged leases have been
structured with the lessee having an absolute obligation to make rental payments whether or not the related assets operate. The assets subject to lease are an integral element in Resources overall security
and collateral position. If the value of such assets were to be impaired, the rate of return on a particular transaction could be affected. The operating characteristics and the business environment in which
the assets operate are, therefore, important and must be understood and periodically evaluated. For this reason, Resources will retain, as necessary, experts to conduct appraisals on the assets it owns and
leases.
13
Resources
Total Assets
For additional information on leases, including credit, tax and accounting risks related to certain lessees, see Item 1A Risk Factors, Item 7. MD&AResults of OperationsEnergy Holdings, Item 7A.
Qualitative and Quantitative Disclosures About Market RiskCredit RiskEnergy Holdings and Note 12. Commitments and Contingent Liabilities.
Employee Relations
As of December 31, 2007, Energy Holdings had 112 direct employees. In addition, Energy Holdings subsidiaries, other than the SAESA Group, had a total of 48 employees, 19 of which are
represented by unions under collective bargaining agreements that expire in June 2009. Energy Holdings believes that it maintains satisfactory relationships with its employees.
Services
Services is a New Jersey corporation with its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. Services provides management and administrative and general services to PSEG
and its subsidiaries. These include accounting, treasury, financial risk management, law, tax, communications, planning, development, human resources, corporate secretarial, information technology,
investor relations, stockholder services, real estate, insurance, library, records and information services, security and certain other services. Services charges PSEG and its subsidiaries for the cost of work
performed and services provided pursuant to the terms and conditions of intercompany service agreements. As of December 31, 2007, Services had 1,138 employees, including 106 employees represented by
two union groups under six-year collective bargaining agreements that were ratified in February 2005. Services believes that it maintains satisfactory relationships with its employees.
Federal Regulation
FERC
PSEG, Power and PSE&G
The FERC is an independent federal agency that regulates the transmission of electric energy and gas in interstate commerce and the sale of electric energy and gas at wholesale pursuant to the Federal
Power Act (FPA) and the Natural Gas Act, respectively. By virtue of its regulation of (a) interstate transmission and (b) wholesale sales of electricity and gas, the FERC has extensive oversight over public
utilities as defined by the FPA. For example, FERC approval is usually required when a public utility company seeks to: sell or acquire an asset that is regulated by the FERC (such as a transmission line
or a generating station); issue a corporate guarantee or issue debt; charge a rate for a wholesale sale under a contract or tariff; or engage in certain mergers and internal corporate reorganizations. Several
PSEG subsidiaries, including PSE&G, Fossil, Nuclear and ER&T, as well as certain subsidiaries of Fossil and certain domestic subsidiaries of Energy Holdings, are public utilities as defined by the FPA.
The FERC also regulates generating facilities known as Qualifying Facilities (QFs) under the Public Utility Regulatory Policy Act (PURPA). PSEG, through Global, owns several QF plants. QFs are
subject to many, but not all, of the same FERC requirements as public utilities such as PSE&G, Fossil, Nuclear and ER&T.
To ensure that public utilities and QFs are complying with its rules and regulations with respect to interstate transmission and wholesale energy sales, the FERC may impose civil penalties of up to $1
million per day per violation. Penalties may be imposed on FERC-regulated companies for any violation of a FERC order, rule, regulation or FERC-approved Tariff. As such, all FERC-regulated
companies, including PSEG subsidiaries which are either public utilities or QFs, are affected by FERC activity in the area of compliance and all developments in this area may be material to the business of
these regulated companies.
14
Regulation of Wholesale SalesGeneration/Market Issues
Market Power
Under FERC regulations, public utilities must receive FERC authorization to sell power in interstate commerce. Public utilities may sell power at cost-based rates or may apply to the FERC for
authority to sell power at market-based rates (MBR). In order to obtain approval to sell power at MBR, the FERC must first make a determination that the requesting company lacks market power in the
relevant markets. Once this determination is made, and MBR authority is granted, the public utilitys individual sales made under the MBR authority are not reviewed or approved by the FERC but are
reported to the FERC in quarterly reports.
PSE&G, ER&T and certain subsidiaries of Fossil and Energy Holdings have applied for and received MBR authority from the FERC. The FERC requires that holders of MBR tariffs file an update, on a
triennial basis, demonstrating that they continue to lack market power. Retention of MBR authority is critical to the maintenance of Powers revenues.
In 2007, the FERC issued new MBR rules that changed the way in which the FERC analyzes whether a company possesses market power and that narrowed the relevant market(s) to be analyzed. For
example, the FERC will no longer look at all of PJM to examine whether a public utility operating in PJM possesses market power but may instead look at sub-markets within PJM.
In January 2008, PSE&G and ER&T filed with the FERC their respective updated market power reports as required by the FERCs new MBR rules. In addition, in this filing, Fossil and Nuclear, which
currently sell all of their power to ER&T under FERC-approved cost-based rates, have asked for the authority to sell power at MBR. PSE&G, ER&T, Fossil and Nuclear have asserted in their MBR filing that
they either lack any generation market power or, if they do posess any market power, that market power is being effectively mitigated. PSE&G, ER&T, Fossil and Nuclear have further asserted that, to the
extent that the FERC analyzes market power held in the small sub-market of Northern PSEG, PJM mitigation rules (including price capping for bids) eliminate the potential for the exercise of market
power in this sub-market. This MBR filing is currently pending, and the outcome cannot be predicted.
PJMs wholesale markets depend upon PJMs Market Monitoring Unit (MMU) being viewed as a well-functioning and independent entity capable of effectively analyzing and addressing market power
issues within PJM and stepping in to impose mitigation measures when required. In 2007, various state commissions and consumer groups filed a complaint at the FERC challenging the MMUs
independence by alleging that PJM was interfering with the MMUs operations. The FERC placed this matter on a fast track and ordered settlement discussions between all interested parties, which resulted
in a settlement that was filed with the FERC in December 2007. Under the settlement, the MMU will be a stand-alone company, engaged by contract (initial 6-year term) by PJM, with separate employees.
This approach differs from the pre-existing internal MMU model. This settlement is currently pending before FERC.
Cost-Based RMR Agreements
The FERC has permitted public utility generation owners (such as Fossil and Power Connecticut) to enter into RMR Agreements. These agreements provide cost-based compensation to a generation
owner when a unit proposed for retirement is asked to continue operating for reliability purposes. Fossils Sewaren 1, 2, 3 and 4 and Hudson 1 generating stations are currently operating under an RMR
Tariff in PJM. The current term of the RMR agreement for Sewaren is through September 2008 and for Hudson Unit 1 is through September 2010. For additional information, see Note 12. Commitments
and Contingent Liabilities.
In the NEPOOL, many owners of generation facilities have also filed with the FERC for RMR treatment. Power Connecticut currently collects FERC-approved monthly payments for the Bridgeport
Harbor Station, Unit 2 and the New Haven Harbor Station, respectively. Both RMR agreements are scheduled to end in June 2010.
Receipt of RMR treatment for both the Fossil units and the Power Connecticut units has enabled these units to continue to operate and has had a positive effect on revenues for Power. Various parties,
however, have challenged in court the continuation of RMR payments in New England, and thus, there is risk that such payments may be terminated by court or FERC order prior to the end of the terms of
the RMR contracts.
15
Organized Wholesale Energy Markets Notice of Proposed Rulemaking (NOPR)
On
February 21, 2008, FERC issued a NOPR with respect to competition in the
organized wholesale energy markets. This NOPR seeks to address issues with
respect to demand response, long-term energy contracts, MMUs and the responsiveness
of RTOs and ISOs to customers and other stakeholders. PSEG is unable to predict
the outcome of the NOPR process.
The Cross Hudson Project
Power is currently contemplating whether or not to disconnect its existing Bergen 2 generation station from the PJM grid and connect the station to the NYISO transmission grid via a direct generator
lead which will be constructed by a third party. On January 17, 2008, Power and the third party filed a request for a declaratory order at FERC seeking clarification from FERC on the status and use of the
proposed generator lead. Power and the third party requested that FERC make a determination that it will not order the generator lead to be reconnected to the PJM system, that Powers use of the
generator lead will not be displaced by another party and the negotiated economic terms for the use of the generator lead are appropriate under the Federal Power Act. A number of parties, including the BPU and the New Jersey Division of Ratepayer Advocate, have filed protests in the FERC declaratory order proceeding opposing the proposed disconnection of
Bergen 2 from the PJM grid.
On December 20, 2007, Power submitted a bid to the New York Power Authoritys (NYPA) to supply power directly to New York City. In the event Power is successful in its bid, Power would
disconnect its existing Bergen 2 generation station from the PJM grid in summer 2011 and connect the station to the NYISO transmission grid via the direct generator lead to be constructed.
Power has been working with PJM to ensure that the disconnection of Bergen 2 would not adversely impact reliability of the PJM system. Based on discussions to date with PJM, it appears that
reliability could be maintained through a combination of new generation, continued operation of generation that was scheduled to retire and the construction of transmission upgrades. In the event that
reliability cannot be adequately addressed, Power will not proceed with the disconnection of Bergen 2 from the PJM system.
Capacity Market Issues
In early 2006, certain interested market participants in New England agreed to a settlement that establishes the design of the regions market for installed capacity and which will be implemented
gradually over four years. Commencing in December 2006, all generators in New England began receiving fixed capacity payments that escalate gradually over the transition period. RMR contracts, such as
Powers, continue to be effective until the implementation of the new market design in 2010. The market design consists of a forward-looking auction for installed capacity that is intended to recognize the
locational value of generators on the system and contains incentive mechanisms to encourage generator availability during generation shortages. RPM is a locational installed capacity market design for the
PJM region, including a forward auction for installed capacity. Under RPM, generators located in constrained areas within PJM are paid more for their capacity so that they are incented to locate in those
areas where generation capacity is most needed. Both PJMs RPM and New Englands FCM have been challenged in court. Capacity market rules in both PJM and in New England may change in the
future.
FERC Transmission Regulation
PJM Transmission Rate Design
In 2007, the FERC addressed the issue of how transmission rates, paid by PJM transmission customers such as ER&T and ultimately paid by PSE&Gs retail customers, should be designed in PJM. Under
PJMs pre-existing rate design, transmission customers paid rates within the particular transmission zone in which they took service (zonal rate design). Many parties argued to the FERC, however, that
rates should be paid on a postage stamp basis
i.e.
all customers within PJM pay the same transmission rate, regardless of the distance of the transaction. The FERC ultimately decided to apply both rate
design methodologies. The cost of new high voltage (500 kV and above) transmission facilities in PJM will be socialized and paid for by all transmission customers. For all existing facilities, costs will be
allocated using the pre-existing zonal rate
16
design. For new lower voltage transmission facilities, costs will be allocated using the beneficiary pays approach, as discussed below. This FERC decision has recently been upheld on rehearing but has
been challenged by American Electric Power Company and the Illinois Commerce Commission. PSEG believes that FERCs decision is beneficial to PSE&Gs customers and to Power as representing a fair
allocation of costs for transmission expansions in PJM.
Transmission Rates and Cost Allocation
In 2007, PJM and its members reached a settlement regarding how to allocate costs for new lower voltage (below 500 kilovolts (kV)) transmission expansion. Specifically, PJM will use a beneficiary
pays methodology, identifying the beneficiaries of a particular expansion and allocating costs to those beneficiaries. Power and PSE&G supported this settlement as properly allocating costs for such facilities
and ensuring that only the correct amounts of costs are allocated to ratepayers. The settlement is currently pending approval by the FERC.
PJM Economic Transmission Construction Rules
PJM has proposed significant changes to the rules establishing how economic transmission gets built within PJM. Economic transmission is transmission that is being built not to address a reliability
problem, but instead to reduce economic congestion on the system, as congestion can result in higher electricity prices paid by consumers located within congested areas. PJM proposes to forecast
congestion levels well into the future and to use these forecasts as the basis for determining the benefits of an economic transmission project. Moreover, PJMs proposal permits economic transmission that
is rate-based (
i.e.
transmission that is funded by a companys ratepayers and for which the company itself is not at financial risk) to be constructed as a first resort, rather than permit market solutions
(transmission, generation and/or demand response) to first come forward to address congestion issues as is currently permitted in the New York Independent System Operator (NYISO).
Power and PSE&G have actively participated in the FERC proceeding that is still considering the specifics of PJMs economic transmission proposal. In this proceeding, Power and PSE&G have
recommended the implementation of a voting mechanism that will permit the identified beneficiaries of an economic transmission project to vote on the merits of a particular economic transmission project
and to decide whether it gets built.
Transmission Expansion
In June 2007, PSE&G endorsed the construction of three new 500 kV transmission lines intended to significantly improve the reliability of the electrical grid serving New Jersey customers. Also in June
2007, PJM approved construction of one of the proposed lines (Susquehanna-Roseland line) and construction responsibility was ultimately assigned to PSE&G and Pennsylvania Power and Light (PPL) for
their respective service territories. The estimated cost of PSE&Gs portion of this construction project is between $600 million and $650 million, and the line currently has an expected in-service date of 2012.
The two other lines which PSE&G has endorsed have not yet been submitted to PJM for approval.
At the end of 2007, PSE&G and PPL jointly filed with the FERC to obtain incentive rate treatment for the Susquehanna-Roseland line in the form of a 150 basis point adder to return on equity. In
addition, PSE&G has filed with the FERC to classify as transmission (rather than distribution) certain separate 69 kV facilities that PSE&G will construct.
Construction of the Susquehanna-Roseland line and the other transmission projects that have been endorsed by PSE&G is contingent upon obtaining all necessary landowner, municipal and state permits
and approvals.
DOE Congestion Study
In early 2007, the DOE issued a National Electric Transmission Congestion Study (Congestion Study), as directed by Congress. This Congestion Study identified two areas in the U.S. as critical
congestion areas; one of the areas is the region between New York and Washington, D.C and encompassing all of New Jersey. The DOE has the ability to designate transmission corridors in these critical
congestion areas, which then
17
gives the FERC the ability to site transmission projects within these corridors should the relevant state(s) fail to act in a timely manner.
In October 2007, the DOE acted to designate transmission corridors within these critical congestion areas. One of the corridors designated, for a twelve year period, is the Mid-Atlantic Area National
Corridor. This corridor designation covers most of the PJM territory. The DOE report is subject to rehearing and is being challenged in court; thus the final outcome of this proceeding cannot be predicted.
Should the Mid-Atlantic Area corridor designation remain intact, entities seeking to build transmission within its geographic scope, which includes New Jersey, most of Pennsylvania and New York, will be
able to use the FERCs back-stop eminent domain authority in the future, if necessary to site transmission.
Compliance
Reliability Standards
One of the FERCs major new tasks in the compliance area is to ensure compliance with reliability standards developed by the North American Electric Reliability
Corporation (NERC) and approved by
the FERC. Congress has required the FERC to put in place, through NERC, national and regional reliability standards to ensure the reliability of the U.S. electric transmission system and to prevent major
system black-outs. The NERC has developed, and the FERC has approved, many reliability standards, compliance with which is mandatory by all those entities (including transmission owners, generation
owners and generation operators) that have the ability to impact upon the reliability of the bulk of the electric transmission system. Since these standards are applicable to transmission owners and
generation owners and operators, PSEG, PSE&G, Power and Energy Holdings (or their subsidiaries) are obligated to comply with the standards and to ensure continuing compliance. In 2008, PSE&G will be
audited by ReliabilityFirst Corporation, a regional arm of NERC, for NERC Reliability Standards compliance. Also in 2008, Energy Holdings Texas generating plants will be audited for NERC Reliability
Standards compliance by the Texas Regional Entity. The FERC has the ability to impose penalties of up to $1 million per day per violation for any violations of NERC Reliability Standards.
FERC Standards of Conduct
The FERC is currently re-examining its Standards of Conduct rules. These rules govern the relationship between a transmission provider (a public utility that owns, operates or controls transmission
facilities) and its energy affiliates (affiliated public utilities that engage in wholesale sales of electricity or gas). The rules are intended to ensure that there is a level playing field in the competitive wholesale
market by preventing a transmission provider from, among other things, providing non-public information about the transmission system that would benefit the energy affiliates at the expense of unaffiliated
wholesale market participants. PSE&G is currently subject to the FERCs Standards of Conduct as a transmission provider and subsidiaries of Power and Energy Holdings are subject to the Standards of
Conduct as energy affiliates. Thus, any changes by the FERC to the existing Standards of Conduct may impact the interactions between these companies.
NRC
PSEG and Power
Nuclears operation of nuclear generating facilities is subject to comprehensive regulation by the NRC, a federal agency established to regulate nuclear activities to ensure protection of public health
and safety, as well as the security and protection of the environment. Such regulation involves testing, evaluation and modification of all aspects of plant operation in light of NRC safety and environmental
requirements. Continuous demonstration to the NRC that plant operations meet requirements is also necessary. The NRC has the ultimate authority to determine whether any nuclear generating unit may
operate. Power anticipates filing for extensions of operating licenses for the Salem and Hope Creek facilities in 2009. The current operating licenses of Powers nuclear facilities expire in the years shown
below:
18
Facility
Year
Salem 1
2016
Salem 2
2020
Hope Creek
2026
Peach Bottom 2
2033
Peach Bottom 3
2034
Power is expected to add approximately 125 MW of additional generating capacity at Hope Creek with Phase II of its turbine replacement expected to be completed along with the Extended Power Uprate in the second quarter of 2008 upon receipt of NRC approval.
Additional NRC Oversight
Power has been advised by the NRC that Salem Unit 1 will be subject to additional oversight. The additional NRC oversight is due to a negative change in the performance indicator related to the plants diesel back-up power system. In December 2007, one of Salem 1s emergency diesel generators failed to start during NRC testing. This test failure, combined with another instance earlier in the year in which another of the units diesel generators failed to start and a third failure in 2005 in which an emergency diesel generator failed to run led to the NRCs action to downgrade the indicator. The change will result in a corresponding increase in the NRCs inspection and assessment oversight at Salem Unit 1. This increased oversight will include a supplemental inspection to provide assurance that the problem has been adequately addressed. Although no assurances can be given, Power believes it has satisfactorily corrected the condition and expects to be returned to a normal oversight level by the end of the first quarter of 2008.
PSE&G
Investment Tax Credits (ITC)
As of June 1999, the IRS had issued several private letter rulings (PLRs) that concluded that the refunding of excess deferred tax and ITC balances to utility customers was permitted only over the related assets regulatory lives, which for PSE&G, were terminated upon New Jerseys electric industry deregulation. Based on this fact, in 1999, PSEG and PSE&G reversed the deferred tax and ITC liability relating to PSE&Gs generation assets that were transferred to Power, and recorded a $235 million reduction of the extraordinary charge due to the restructuring of the utility industry in New Jersey. Subsequently, PSE&G was directed by the BPU to seek a PLR from the IRS to determine if the ITC included in the impairment write-down of generation assets could be credited to customers without violating the tax normalization rules of the Internal Revenue Code. PSE&G filed a PLR request with the IRS in 2002.
On May 11, 2006, the IRS issued a PLR to PSE&G, which concluded that none of the generation ITC could be passed to utility customers without violating the normalization rules. While the holding in the PLR is favorable for PSE&G, an outstanding Treasury regulation project could overturn the holding in the PLR if the Treasury were to alter a position set out in certain proposed regulations issued on December 21, 2005. PSEG and PSE&G cannot predict the final outcome of this matter.
State Regulation
New Jersey
PSEG, Power and PSE&G
The BPU is the regulatory authority that oversees electric and natural gas distribution companies in New Jersey. PSE&G is subject to comprehensive regulation by the BPU including, among other matters, regulation of retail electric and gas distribution rates and service and the issuance and sale of securities. PSE&Gs ownership of certain transmission facilities in Pennsylvania is subject to regulation by the Pennsylvania Public Utility Commission (PAPUC), which oversees retail electric and natural gas service in Pennsylvania. Power and PSE&G are also subject to rules and regulations of the NJDEP and the New Jersey Department of Transportation.
As discussed below, various Power subsidiaries and Energy Holdings subsidiaries are subject to some state regulation in other individual states where they operate facilities, including New York, Pennsylvania, Connecticut, Texas, California, Hawaii and New Hampshire.
19
Rates
Electric and Gas Base Rates
PSE&G must file electric and gas base rate cases with the BPU in order to change base rates. The BPU also has authority to seek to adjust rates downward if it believes the rates are no longer just and
reasonable. A settlement agreement was approved in November 2006 authorizing the partial elimination of a rate credit established in the Electric Base Rate Case approved in July 2003. This settlement
resulted in an increase in electric distribution revenues of $47 million at then current sales volumes. PSE&G also settled its pending gas base rate case at that same time, resulting in an increase in gas
distribution revenues of $40 million annually at then current sales volumes. In addition, gas book depreciation expense was reduced by $26 million annually, and gas accumulated cost of removal
amortization was reduced by $13 million annually for five years. The November 2006 settlements, for both electric and gas, provided that PSE&G not seek new base rates to be effective prior to November
15, 2009. PSE&G also must file a joint electric and gas petition for any future base rate increases.
Rate Adjustment Clauses
In addition to base rate determinations, PSE&G may recover certain costs from customers pursuant to mechanisms, known as clauses. These permit, at set intervals, the flow through of costs to customers
related to specific programs, outside the context of base rate case proceedings. Recovery of these costs are subject to BPU approval. Costs associated with these programs are deferred when incurred and
amortized to expense when recovered in revenues. Delays in the pass-through of costs under these clauses can result in significant changes in cash flow. Two of PSE&Gs primary clauses are detailed in the
following table:
Rate Clause
2007 Revenue
(Over) Under
(Millions)
Energy Efficiency and Renewable Energy
$
183
$
(3
)
Remediation Adjustment Clause (RAC)
33
102
Universal Service Fund (USF)
137
33
Social Programs
29
19
Total Societal Benefits Clause (SBC)
382
151
Non-Utility Generation Clause (NGC)
54
9
Total Clauses
$
436
$
160
SBC
The SBC is a mechanism designed to insure recovery of costs associated with activities required to be accomplished to achieve specific government mandated public policy determinations. The
programs that are covered by the SBC (gas and electric) are energy efficiency and renewable energy programs, Manufactured Gas Plant RAC and the USF. In addition, the electric SBC includes a
Social Programs component. All components include interest on both over and under recoveries.
NGC
The NGC recovers the above market costs associated with the long-term contracts with non-utility generators approved by the BPU. The BPU transferred the remaining balance from the former
Market Transition Charge (MTC) to the NGC in March 2007. The MTC was formerly part of the Electric SBC. The 2007 Revenue above includes the MTC collections through March.
Pending Rate Adjustments
PSE&G filed for revisions to the energy efficiency and renewable energy programs, the NGC and Social Program recoveries in May 2007. The current request, as updated, proposes annual revenues of
$141 million, $112 million and $58 million, respectively. A decision is expected by July 2008.
On
December 14, 2007, PSE&G submitted its RAC-15 filing to the BPU seeking
recovery of $36 million of RAC program costs incurred during the period August
1, 2006 through July 31, 2007. The expenditures in each RAC period are recovered
over seven years. If approved as requested, the annual RAC revenues will
decrease to approximately $14 million annually.
20
Recovered
Balance as of
December 31,
2007
Recent Rate Adjustments
The current USF rates were approved by the BPU in October 2007 at an annual level of $103 million.
Energy Supply
BGS
New Jerseys EDCs, including PSE&G, provide two types of BGS, BGS-FP and BGS-CIEP. BGS is the default electric supply service for customers who do not choose a TPS for electric supply
requirements. BGS-FP provides default supply service for smaller industrial and commercial customers and residential customers at seasonally-adjusted fixed prices for a three-year term. BGS-FP rates
change annually on June 1, and are based on the average BGS price obtained at auctions in the current year and two prior years. BGS-CIEP provides supply for larger customers at hourly PJM real-time
market prices for a term of 12 months. BGS-FP and BGS-CIEP represent approximately 82% and 18%, respectively, of PSE&Gs BGS-eligible load.
All of New Jerseys EDCs jointly procure the supply to meet their BGS obligations through two concurrent auctions authorized by the BPU for New Jerseys total BGS requirement. These auctions
take place annually in February. Results of these auctions determine which energy suppliers are authorized to supply BGS to New Jerseys EDCs. Certain conditions are required to participate in these
auctions. Energy suppliers must agree to execute the BGS Master Service Agreement, provide required security within three days of BPU certification of auction results and satisfy certain creditworthiness
requirements. PSE&G earns no margin on the provision of BGS.
Through the BGS auctions, PSE&G has contracted for its anticipated BGS-Fixed Price load, as follows:
Auction Year
2005
2006
2007
2008
36 Month Terms Ending
May 2008
May 2009
May 2010
May 2011
(a)
Load (MW)
2,840
2,882
2,758
2,840
$ per kWh
$0.06541
$0.10251
$0.09888
$0.1115
(a)
Prices set in the February 2008 BGS Auction are effective on June 1, 2008 when the agreements for the 36-month (May 2008) supply agreements expire.
For additional information, see Note 5. Regulatory Matters and Note 12. Commitments and Contingent Liabilities.
BGSS
BGSS is the mechanism approved by the BPU designed to recover all gas costs related to the supply for residential customers. BGSS filings are made annually by June 1 of each year, with an effective
date of October 1. Revenues are matched with costs using deferred accounting, with the goal of achieving a zero cumulative balance by September 30 of each year. In addition PSE&G has the ability to put in
place two self-implementing BGSS increases on December 1 and February 1 of up to 5% and also may reduce the BGSS rate at any time.
PSE&G has a full requirements contract through 2012 with Power to meet the supply requirements of PSE&Gs default service gas customers. Power charges PSE&G for gas commodity costs which PSE&G
recovers from its customers. Any difference between rates charged by Power under the BGSS contract and rates charged to PSE&Gs residential customers are deferred and collected or refunded through
adjustments in future rates. PSE&G earns no margin on the provision of BGSS.
There were no changes to the BGSS rate in 2007. In June 2007, PSE&G requested an increase in annual BGSS revenues of $39 million, excluding Sales and Use Tax, to be effective October 1, 2007.
However, as a result of lower forward gas prices after the filing, the parties to the proceeding agreed that the requested increase was not necessary. The current BGSS rate will remain in effect and is
considered final. A Stipulation including final terms has been executed and BPU approval is expected shortly.
21
Energy Policy
New Jersey Energy Master Plan (EMP)
The Governor of New Jersey has directed the BPU, in partnership with other New Jersey agencies, to develop an EMP. State law in New Jersey requires that an EMP be developed every three years,
the purpose of which is to ensure safe, secure and reasonably-priced energy supply, foster economic growth and development and protect the environment. In the Governors directive regarding the EMP,
the Governor established three specific goals:
reduce the states projected energy use by 20% by the year 2020;
supply 20% of the states electricity needs with certain renewable energy sources by 2020; and
emphasize energy efficiency, conservation and renewable energy resources to meet future increases in New Jersey electric demand without increasing New Jerseys reliance on non-renewable
resources.
In November 2006, PSE&G submitted a number of strategies designed to improve efficiencies in customer use and increase the level of renewable generation and has been actively involved in the broad-
based constituent working groups created to develop these strategies. In September 2007, the BPU held a stakeholder meeting on energy efficiency issues, and PSE&G submitted comments advocating a
strong role for gas and electric utilities in meeting the states energy efficiency goals. We expect the state to release a draft EMP in the second quarter of 2008, and a final plan is expected to be completed
later in 2008. Generally, implementation of new or revised energy policy put forth in the EMP will require further regulatory or legislative actions. PSE&G has stated its desire to be a partner to the state in
achieving the above-stated goals of the EMP. During 2007, to this end, PSE&G has proposed several programs in filings with the BPU, described below. Each of these pilot programs addresses a different
component of the EMP goals, but all are aimed at demonstrating PSE&Gs capabilities as a partner to the State of New Jersey. PSEG, Power and PSE&G cannot predict the contents of the EMP and its
impacts.
Solar Initiative
On April 19, 2007, PSE&G filed a plan with the BPU designed to spur investment in solar power in New Jersey and meet energy goals under the EMP. Under the plan, PSE&G would invest approximately
$100 million over two years following BPU approval of the plan in a pilot program to help finance the installation of solar systems throughout its service area. PSE&G would loan money to customers in its
electric service territory for the installation of solar photovoltaic systems on the customers premises. The borrowers would repay the loans over a period of either 10 years (for residential customer loans) or
15 years (for all other loans) by providing PSE&G with solar renewable energy certificates (SRECs). Borrowers would also have the option to repay the loans with cash. PSE&Gs proposal is conditioned on it
being allowed to earn a fair return on and of its investment, and recover its administrative costs to implement the program, through its regulated rates.
If approved by the BPU, the program could begin in early 2008 and support 30 MW of solar power in the following two years, fulfilling approximately 50% of the BPUs Renewal Portfolio Standard
requirements in PSE&Gs service area for energy years 2009 and 2010. On July 12, 2007, the BPU established a schedule for consideration of this proposal. PSE&G has held a series of stakeholder meetings to
discuss program details with interested parties. Settlement discussions are ongoing, with a BPU decision expected in early 2008. No assurances can be given that PSE&Gs initiatives will be approved.
Advanced Metering Infrastructure Technologies
On December 11, 2007, PSE&G filed a petition with the BPU requesting expedited approval to deploy and test Advanced Metering Infrastructure technologies, to enable customers to monitor energy
use, conserve energy, reduce costs during peak periods and reduce CO
2
emissions that contribute to global climate change. If approved, PSE&G will install 32,500 advanced meters in customers homes and
businesses and begin transmitting customer data in the summer of 2008.
Carbon Abatement Program
On December 6, 2007, PSE&G filed a petition with the BPU seeking expedited approval of a carbon abatement pilot program designed to curb energy consumption, resulting in lower customer bills and
a
22
meaningful reduction in CO
2
emissions. The proposal, if approved, would enable PSE&G to determine the best way to implement broader initiatives to reach the States aggressive carbon reduction goals. If
the program is approved, PSE&G will commit up to $5 million to fund the carbon abatement programs. For additional information on CO
2
emissions, see Environmental Matters.
Governance
Public Utility Holding Company Act of 1935 (PUHCA) Repeal
In 2005, the BPU initiated a proceeding to consider whether additional ratepayer protections were necessary in light of Congress repeal of PUHCA that year. The proceeding considered the BPUs
current authority to protect utility ratepayers from risks associated with a utility being part of a holding company structure. The BPU determined that additional protections were necessary and imposed a
requirement that (i) each New Jersey public utility and its holding company ensure that the aggregate assets of all nonutility activities in the holding company system do not exceed 25% of the aggregate
assets of the utility and utility-related assets in the holding company system without first obtaining BPU consent, and (ii) the utility and its parent holding company certify on an annual basis that this
requirement is being satisfied. PSE&G and PSEG currently satisfy these requirements and expect to continue to satisfy them based on the companies current business plans. However, constant monitoring
will be required to ensure that the regulation is satisfied and to meet the annual certification requirement.
The BPU is currently developing new regulations that would increase the BPUs access to books and records, impose restrictions on service agreements between utilities and their affiliated service
companies and impose additional requirements on utility board of director composition, utility participation in money pools and additional reporting obligations. It is expected that new regulations will be
proposed as part of a public rulemaking process during 2008. PSEG and PSE&G are not able to predict the outcome of such rulemaking process.
Compliance
The
BPU has statutory authority to conduct periodic audits of PSE&Gs
operations and its compliance with applicable affiliate rules and competition
standards. The BPU has retained consultants to conduct periodic combined
management/competitive service audits of New Jersey utilities which PSE&G expects
to occur later in 2008. While PSE&G believes that its operations are
in compliance with the BPUs
affiliate standards and competitive service rules, it cannot predict the outcome
of this process.
Gas Purchasing Strategies Audit
In 2007, the BPU engaged a contractor to perform an analysis of the gas purchasing practices and hedging strategies of the four New Jersey gas distribution companies, including PSE&G. The primary
focus was to examine and compare the financial and physical hedging policies and practices of each company and to provide recommendations for improvements to these policies and practices. Over the
past few months, the audit has proceeded with discovery and the conducting of interviews. The goal of the consultants is to issue a report of major recommendations during the first quarter of 2008. PSE&G
cannot predict the outcome of this process.
Deferral Audit
The BPU Energy and Audit Division conducts audits of deferred balances. A draft Deferral AuditPhase II report relating to the 12-month period ended July 31, 2003 was released by the consultant to
the BPU in April 2005. The draft report addressed the SBC, MTC and Non-Utility Generation (NUG) deferred balances and took no issue with respect to the reconciliation method PSE&G employed in
calculating the overrecovery of its MTC and other charges during the Phase I and Phase II four-year transition period. The draft report did include the comments of BPU staff as to the reconciliation
method. For additional information regarding PSE&Gs Deferral Audit, see Note 12. Commitments and Contingent Liabilities.
23
RAC Audit
On
February 4, 2008, the BPUs Division of Audits commenced a review of
the RAC program for the RAC 12, 13 and 14 periods encompassing August 1,
2003 through July 31, 2006. Total RAC costs associated with this period were
$83 million.
Texas
PSEG Texas is a merchant generation business that participates, through its subsidiaries, Odessa-Ector Power Partners, L.P. (Odessa) and Guadalupe Power Partners, LP (Guadalupe), in the Texas
wholesale energy market administered by ERCOT. Under the regulation of the Public Utility Commission of Texas, ERCOT performs three main roles in managing the electric power grid and marketplace:
ensuring that the grid can accommodate scheduled energy transfers, ensuring grid reliability, and overseeing retail transactions. While neither PSEG Texas, Odessa nor Guadalupe are public utilities subject
to the jurisdiction of the FERC, they are subject to FERC jurisdiction for purposes of complying with NERCs Reliability Standards (see discussion in Federal RegulationComplianceReliability Standards).
Financial information with respect to the business segments of PSEG, Power and PSE&G is set forth in Note 18. Financial Information by Business Segment.
PSEG, Power and PSE&G
PSEGs operations are subject to environmental regulation by federal, regional, state and local authorities. For both domestic and foreign operations, areas of regulation may include air quality, water
quality, site remediation, land use, waste disposal, aesthetics, impact on global climate and other matters. These environmental laws and regulations impact the manner in which PSEGs operations currently
are conducted as well as to impose costs on PSEG to address the environmental impacts of its historic operations that may have been in full compliance with the laws at the time those operations were
conducted.
To the extent that environmental requirements are more stringent and compliance more costly in certain domestic states where PSEG operates compared to other states that are part of the same
market, such rules may impact its ability to compete within that market. Due to evolving environmental regulations, it is difficult to project expected costs of compliance and its impact on competition. For
additional information related to environmental matters, see Item 1A. Risk Factors and Item 3. Legal Proceedings.
Global Climate Change
Recent scientific studies have found that human activities are responsible for increases in global warming trends. Fossil fuel-fired electric generating stations have been identified in such studies as a
major source of air emissions that contribute to global warming. PSEG continues to strive to reduce its carbon footprint by developing renewables, promoting conservation and increasing carbon-free
nuclear power. A federal program that would impose uniform requirements on all sources of greenhouse gas emissions has not been implemented, thereby allowing for state and regional programs that may
establish requirements that impose different costs in different markets in which PSEG competes.
Multiple states, primarily in the Northeastern U.S., are developing state-specific or regional legislative initiatives to stimulate CO
2
emission reductions in the electric power industry. New York initiated
the Regional Greenhouse Gas Initiative (RGGI) in April 2003. In RGGI, ten Northeastern states, including New Jersey, have signed a memorandum of understanding (MOU) intended to cap and reduce
CO
2
emissions from the electric power sector in the RGGI region. A model rule contemplates the creation of a CO
2
allowance allocation and/or auction whereby CO
2
generators in the electric power
industry would be expected to receive through allocation, or purchase through an auction, CO
2
allowances in an amount corresponding to each facilitys emissions. A final model rule was issued on August
15, 2006 that includes MOU commitments and makes recommendations for states to move forward.
In July 2007, New Jersey adopted the Global Warming Response Act (GWRA), which sets goals for the reduction of greenhouse gas emissions in New Jersey. The GWRA specifically calls for
stabilizing greenhouse
24
gas emissions to 1990 levels by 2020, followed by a further reduction of greenhouse emissions to 80% below 2006 levels by 2050. These provisions codify an Executive Order that the Governor signed in
February. To reach this goal, the NJDEP, the BPU, other state agencies and stakeholders are required to evaluate methods to meet and exceed the emission reduction targets, taking into account their
economic benefits and costs.
In January 2008, additional legislation was enacted in New Jersey related to the reduction of greenhouse gas emissions. The legislation authorized the NJDEP to sell, exchange, retire, assign, allocate or
auction allowances from greenhouse gas emission reductions and set forth the procedural requirements to be followed by the NJDEP if allowances are to be conveyed using an auction. Proceeds raised from
the auction will be deposited in the Global Warming Solutions Fund and will be used to provide grants and other forms of assistance for the purpose of energy efficiency, renewable energy, new high
efficiency generation, to stimulate or reward investment in the development of innovative CO
2
reduction or avoidance technologies and stewardship of New Jerseys forests and tidal marshes. The law also
authorizes the participation of regulated public utilities in renewable energy, conservation and energy efficiency activities. The law specifically enables the BPU to allow an electric or gas public utility to
offer programs for energy efficiency, conservation and Class I Renewables and to recover associated costs, as well as a return on and of investment, in rates. The law requires the BPU to issue an order
within 120 days following enactment that allows public utilities to offer energy efficiency and conservation programs, to invest in Class I renewable energy resources, and to offer Class I renewable energy
programs in their respective service territories on a regulated basis. This order will be reflected in rules and regulations to be adopted subsequently by the BPU.
The law further provides that the BPU shall adopt an emissions portfolio standard or other regulatory mechanism, to mitigate leakage by July 1, 2009, unless the states Attorney General determines
that this will unconstitutionally burden interstate commerce or would be preempted by federal law. This would benefit Powers generating facilities as it would reduce or eliminate the competitive advantage
that facilities outside the RGGI region would otherwise have by operating without the added costs for reducing CO
2
emissions. Leakage occurs when CO
2
emissions or other air pollutants from power plants
outside of the RGGI region increase as a result of reduced operation of plants within the RGGI region, thereby undermining the emissions cap and worsening air quality. Absent the implementation of any
mitigation mechanisms, the operations of plants within the RGGI region would be reduced since the added costs to reduce CO
2
emissions would increase operating costs making the less expensive facilities
outside the RGGI region more likely to be dispatched.
PSEG supported the legislation to reduce CO
2
emissions and intends to work with the New Jersey agencies and other stakeholders in developing the methods to achieve the greenhouse gas reduction
goals. The new legislation also authorizes the BPU to require the disclosure on customer bills of the environmental characteristics of the delivered energy, to develop an interim renewable energy portfolio
standard, a requirement for net metering, and electric and gas energy efficiency portfolio standards.
The outcome of global climate change initiatives cannot be determined at this time; however, adoption of stringent CO
2
emissions reduction requirements in the Northeast, including the potential
allocation of allowances to PSEGs facilities and the prices of allowances available through auction, could materially impact the operation of Powers fossil fuel-fired electric generating units. The financial
impact of a requirement to purchase allowances for emissions of CO
2
would be greatest on coal-fired generating units because they typically have the highest CO
2
emission rate and thereby the need to
purchase the most allowances. Gas-fired units would require fewer CO
2
allowances and nuclear units would not need CO
2
allowances, consistent with their emissions profiles.
Air Pollution Control
The Federal Clean Air Act (CAA) and its implementing regulations require controls of emissions from sources of air pollution and also impose record keeping, reporting and permit requirements.
Facilities in the U.S. that Power and Energy Holdings operate or in which they have an ownership interest are subject to these federal requirements, as well as requirements established under state and local
air pollution laws applicable where those facilities are located. Capital costs of complying with air pollution control requirements through 2010 are included in Powers estimate of construction expenditures
in Item 7. MD&ACapital Requirements.
25
Sulfur Dioxide (SO
2
), Nitrogen Oxide (NO
x
) and Particulate Matter Emissions
To reduce emissions of SO
2
for acid rain prevention, the CAA sets a cap on total SO
2
emissions from affected units and allocates SO
2
allowances (each allowance authorizes the emission of one ton of
SO
2
) to those units. Generation units with emissions greater than their allocations can obtain allowances from sources that have excess allowances. At this time, Power does not expect to incur material
expenditures to continue complying with the acid rain SO
2
emissions program. The EPA has issued regulations (commonly known as the NO
x
State Implementation Plan Call) requiring 19 states in the
eastern half of the U.S. and the District of Colombia to reduce and cap NO
x
emissions from power plant and industrial sources. The NO
x
reduction requirements are consistent with requirements already in
place in New Jersey, New York, Connecticut and Pennsylvania, and therefore have not had an additional impact on the capacity available from Powers facilities in those states. Power has been
implementing measures to reduce NO
x
emissions at several of its units in an effort to reduce the impact of any further increases to the costs of allowances.
In 1997, the EPA adopted a new air quality standard for fine particulate matter and a revised air quality standard for ozone. In 2004, the EPA identified and designated areas of the U.S. that fail to
meet the revised federal health standard for ozone or the new federal health standard for fine particulates. States are expected to develop regulatory measures necessary to achieve and maintain the health
standards, which may require reductions in NO
x
and SO
2
emissions. Additional NO
x
and SO
2
reductions also may be required to satisfy requirements of an EPA rule protecting visibility in many of the
nations Class 1 (pristine) environmental areas. Most of Powers fossil facilities would be affected by these initiatives.
In May 2005, the EPA published the final Clean Air Interstate Rule (CAIR) that identifies 28 states and the District of Columbia as contributing significantly to the levels of fine particulates and/or
eight-hour ozone air quality in downwind states. New Jersey, New York, Pennsylvania, Texas and Connecticut are among the states the EPA lists in the CAIR. Based on state obligations to address
interstate transport of pollutants under the CAA, the EPA has proposed a two-phased emission reduction program for NO
x
and SO
2
, with Phase 1 beginning in 2009 (NO
x
) and 2010 (SO
2
) and Phase 2
beginning in 2015. The EPA is recommending that the program be implemented through a cap-and-trade program, although states are not required to proceed in this manner.
Power is unable to determine whether any costs it may incur to comply with the above standards would be material.
In 2007 the Ozone Transport Commission (OTC) signed an MOU to reduce NO
x
emissions from High Electric Demand Day electric generation peaking units. The OTC is made up of 13 states in the
Northeast and the District of Columbia and was created to address a continuing Ozone non-attainment challenge in the region. The states are in the process of developing regulations to meet emissions
reductions identified in the MOU. Although the costs expected to be incurred as a result of these regulations will likely be material, compliance costs cannot be determined until the regulations are issued.
Regulations are expected in the first half of 2008.
Other Air Pollutants
In March 2005, the EPA established a New Source Performance Standard limit for nickel emissions from oil-fired electric generating units, and a cap-and-trade program for mercury emissions from
coal-fired electric generating units, with a first phase cap of 38 tons per year (tpy) in 2010 and a second phase cap of 15 tpy in 2018 (the Clean Air Mercury Rule). The United States Court of Appeals for
the District of Columbia Circuit issued a decision on February 8, 2008 rejecting EPAs Clean Air Mercury Rule. As a result of this decision, the EPA is required to develop emissions standards for mercury
and nickel emissions that do not rely on a cap-and-trade program. The full impact, if any, of this development is uncertain until the EPA issues the new emissions standards. Compliance with the new
mercury standards, however, is not expected to have a material impact on Powers operations in New Jersey and Connecticut given the stringent mercury control requirements applicable in those states, as
described below.
New Jersey and Connecticut have adopted standards for the reduction of emissions of mercury from coal-fired electric generating units. The regulations in New Jersey require the units to meet certain
emissions limits or reduce emissions by 90% by December 15, 2007, unless a one-year extension is granted by NJDEP.
Under the New Jersey regulations, companies that are parties to multi-pollutant reduction agreements are permitted to postpone such reductions on half of their coal-fired electric generating capacity
until December 15, 2012. With respect to Powers New Jersey facilities, half of the reductions that were required
26
by December 15, 2007 are expected to be achieved through the installation of carbon injection technology at both Mercer Units, which was completed in January 2007. Because there is some uncertainty as
to whether the system can consistently achieve the required reductions, Power has applied for, and received from NJDEP approval of a one-year extension through a facility-specific control plan that
includes the installation of baghouses at the Mercer Units in 2008. Installation is scheduled to be completed by the end of 2008. At its Hudson plant, Power anticipates compliance consisting of the
installation of a baghouse by the end of 2010.
The mercury control technologies are also part of Powers multi-pollutant reduction agreement, which resulted from the amended 2002 agreement that resolved issues arising out of the Prevention of
Significant Deterioration (PSD) and the New Source Review (NSR) air pollution control programs.
Mercury emissions control standards effective in July 2008 in Connecticut require coal-fired power plants in Connecticut to achieve either an emissions limit or a 90% mercury removal efficiency
through technology installed to control mercury emissions. Power anticipates compliance at its Bridgeport Harbor Station resulting from the installation of new technology prior to July 2008.
In February 2007, Pennsylvania finalized its state-specific requirements to reduce mercury emissions from coal-fired electric generating units. The Keystone and Conemaugh generating stations are
positioned by 2010 to meet Phase I of the Pennsylvania mercury rule by benefiting from mercury reductions realized from the installation of controls for compliance with the CAIR. Phase 2 of the mercury
rule will be addressed after a full evaluation of Phase 1 co-benefit reductions.
Some
uncertainty exists regarding the feasibility of achieving the reductions
in mercury emissions required by the New Jersey regulations and Connecticut
statute; however, the estimated costs of technology believed to be capable
of meeting these emissions limits at Powers coal-fired units in Connecticut,
New Jersey and Pennsylvania have been incurred or are included in Powers
capital expenditure forecast.
Mercers mercury control technology was installed prior to December 15, 2007, but is currently operating under an NJDEP-approved Facility-Specific Mercury Control Plan that extends the deadline
for compliance to December 15, 2008. The United States Court of Appeals for the District of Columbia Circuit issued a decision on February 8, 2008 rejecting the EPAs regulations that removed coal and
oil-fired electric generating units from the list of facilities whose emissions of mercury and nickel would be regulated under the more stringent requirements for hazardous air pollutants and rejecting the
EPAs regulations that allowed for an emissions trading program for mercury emissions. As a result of this decision, the EPA is required to develop emissions standards for mercury and nickel emissions.
The full impact, if any, of this development is uncertain until the EPA issues the new emissions standards. Compliance with the new mercury standards, however, is not expected to have a material impact
on Powers operations in New Jersey and Connecticut given the stringent mercury control requirements applicable in those states.
Water Pollution Control
The Federal Water Pollution Control Act (FWPCA) prohibits the discharge of pollutants to waters of the U.S. from point sources, except pursuant to a National Pollutant Discharge Elimination
System (NPDES) permit issued by the EPA or by a state under a federally authorized state program. The FWPCA authorizes the imposition of technology-based and water quality-based effluent limits to
regulate the discharge of pollutants into surface waters and ground waters. The EPA has delegated authority to a number of state agencies, including the NJDEP, to administer the NPDES program through
state acts. Power and Energy Holdings also have ownership interests in domestic facilities in other jurisdictions that have their own laws and implement regulations to control discharges to their surface
waters and ground waters that directly govern Powers or Energy Holdings facilities in these jurisdictions.
The EPA promulgated regulations under FWPCA Section 316(b), which requires that cooling water intake structures reflect the best technology available (BTA) for minimizing adverse environmental
impact. The Phase II rule covering large existing power plants became effective in 2004. The Phase II regulations provided five alternative methods by which a facility can demonstrate that it complies with
the requirement for BTA for minimizing adverse environmental impacts associated with cooling water intake structures.
On January 25, 2007, the U.S. Court of Appeals for the Second Circuit issued its decision in litigation of the Phase II regulations brought by several environmental groups, the Attorneys General of six
Northeastern states, including New Jersey, the Utility Water Act Group and several of its members, including Power. The court remanded major portions of the regulations and determined that Section
316(b) of the Clean Water Act does not support the use of restoration and the site-specific cost-benefit test. The court instructed the
27
EPA to reconsider the definition
of BTA without comparing the costs of the best performing technology to its
benefits. Prior to this decision, Power had used restoration and/or a site-specific
cost-benefit test in applications it had filed to renew the permits at its
once-through cooled plants, including Salem, Hudson and Mercer. Although
the rule applies to all of Powers electric generating units that use
surface waters for once-through cooling purposes, the impact of the rule and
the decision of the court cannot be determined at this time for all of Powers
facilities.
Nuclear,
Fossil, another generating company and a trade association have filed petitions
requesting that the US Supreme Court review the decision of the Second Circuit
Court of Appeals. The Northeast states and the Solicitor General have received
an extension to file their oppositions to those petitions, up through and
including February 28, 2008. Industry petitioners, including Fossil and Nuclear,
have until March 12, 2008 to file a reply brief. The briefs will then be
distributed to the Supreme Court for consideration. If the Supreme Court
accepts the case, then the matter would be set for oral argument most likely
in the Courts 20082009 term, which begins in October. If the
Court does not accept the case, then the Second Circuits opinion stands
and the regulations are remanded to the EPA for further consideration.
Depending on the outcome of any appeals, or actions by the EPA to repromulgate the regulations, this decision could have a material impact on Powers ability to renew its NPDES permits at its larger
once-through cooled plants, including Salem, Hudson, Mercer, Sewaren, Bridgeport and possibly Sewaren and New Haven, without making significant upgrades to their existing intake structures and cooling
systems. The costs of those upgrades to one or more of Powers once-through cooled plants could be material and would require economic review to determine whether to continue operations.
Hazardous Substance Liability
Because of the nature of Powers and PSE&Gs respective businesses, including the production and delivery of electricity, the distribution of gas and, formerly, the manufacture of gas, various by-
products and substances are or were produced or handled that contain constituents classified by federal and state authorities as hazardous. Federal and state laws impose liability for damages to the
environment from hazardous substances. This liability can include obligations to conduct an environmental remediation of discharged hazardous substances as well as monetary payments, regardless of the
absence of fault and the absence of any prohibitions against the activity when it occurred, as compensation for injuries to natural resources.
Site Remediation
The
Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980 (CERCLA) and the New Jersey Spill Compensation and Control Act
(Spill Act) require the remediation of discharged hazardous substances and
authorize the EPA, the NJDEP and private parties to commence lawsuits to
compel clean-ups or reimbursement for clean-ups of discharged hazardous substances.
The clean-ups of hazardous substances can be more complicated and the costs
higher when the hazardous substances are in a water body. For discussions
of these hazardous substance issues and a discussion of potential liability
for remedial action regarding the Passaic River, see Note 12. Commitments
and Contingent Liabilities. For a discussion of remediation/clean-up actions
involving Power and PSE&G, see
Item 3. Legal Proceedings. For information regarding PSE&Gs MGP Remediation
Program, see Note 12. Commitments and Contingent Liabilities.
Natural Resource Damages (NRD)
CERCLA and the Spill Act authorize federal and state trustees for natural resources to assess damages against persons who have discharged a hazardous substance, causing an injury to natural
resources. Pursuant to the Spill Act, the NJDEP requires persons conducting remediation to characterize injuries to natural resources and to address those injuries through restoration or damages. The
NJDEP adopted regulations concerning site investigation and remediation that require an ecological evaluation of potential damages to natural resources in connection with an environmental investigation
of contaminated sites. The NJDEP also issued guidance to assist parties in calculating their natural resource damage liability for settlement purposes, but has stated that those calculations are applicable
only for those parties that volunteer to settle a claim for natural resource damages before a claim is asserted by the NJDEP. Power and PSE&G cannot assess the magnitude of the potential financial impact
of this regulatory change.
28
On June 29, 2007, the State of New Jersey filed multiple lawsuits against parties, including PSE&G, who were alleged to be responsible for injuries to natural resources in New Jersey. Included in these
lawsuits was a claim against PSE&G and others arising out of PSE&Gs former Camden Coke facility, and a claim against PSE&G and others arising out of the Global Landfill matter. PSE&G has responded to
the complaint in the NRD case arising out of the former Camden Coke site and is in the process of remediating that site under its MGP program. The time for PSE&G to answer the complaint in the NRD
case arising out of the Global Landfill matter has been delayed until March 2008 to allow the parties to negotiate an order that would resolve the NRD claim.
PSEG, PSE&G and Power cannot predict what
further actions, if any, or the costs or the timing thereof, that may be required with respect to the Passaic River, Newark Bay or other natural resource damages claims; however, such costs could be
material.
See Note 12. Commitments and Contingent Liabilities for additional information.
New Jersey Operating Permits
The New Jersey Air Pollution Control Act requires that certain sources of air emissions obtain operating permits issued by the NJDEP. All of Powers generating facilities in New Jersey are required to
have such operating permits. The costs of compliance associated with any new requirements that may be imposed by these permits in the future are not known at this time and are not included in capital
expenditures, but may be material.
Power
Nuclear Fuel Disposal
Under the Nuclear Waste Policy Act of 1982, as amended (NWPA), the federal government has entered into contracts with the operators of nuclear power plants for transportation and ultimate
disposal of spent nuclear fuel. To pay for this service, nuclear plant owners are required to contribute to a Nuclear Waste Fund at a rate of one mil ($0.001) per kWh of nuclear generation, subject to such
escalation as may be required to assure full cost recovery by the federal government. Under the NWPA, the DOE was required to begin taking possession of the spent nuclear fuel by no later than 1998.
The DOE has announced that it does not expect a facility for such purpose to be available earlier than 2017.
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 reactors 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). Adequate spent fuel storage capacity is estimated to be available
through 2011 for Salem 1 and 2015 for Salem 2. Power also has an on-site storage facility that is expected to satisfy the spent fuel storage needs of Hope Creek through the end of its current license in 2026.
Exelon Generation has advised Power that it has a licensed and operational on-site storage facility at Peach Bottom that will satisfy Peach Bottoms spent fuel storage requirements until at least 2014.
Exelon Generation had previously advised Power that it had signed an agreement with the DOE, applicable to Peach Bottom, under which Exelon Generation would be reimbursed for costs incurred
resulting from the DOEs delay in accepting spent nuclear fuel for permanent storage. Future costs incurred resulting from the DOE delays in accepting spent fuel will be reimbursed annually until the
DOE fulfills its obligation to accept spent nuclear fuel. In addition, Exelon Generation and Nuclear are required to reimburse the DOE for the previously received credits from the Nuclear Waste Fund,
plus lost earnings. Under this settlement, Power received $27 million for its share of previously incurred storage costs for Peach Bottom, $22 million of which was used for the required reimbursement to the
Nuclear Waste Fund. Exelon Generation paid Power $5.4 million for its portion of the spent fuel storage costs reimbursed by the DOE in 2005 for costs incurred between October 1, 2003 and June 30, 2005.
In September 2001, Power filed a complaint in the U.S. Court of Federal Claims seeking damages for Salem and Hope Creek caused by the DOE not taking possession of spent nuclear fuel in 1998. On
October 14, 2004, an order to show cause was issued regarding whether the U.S. Court of Federal Claims has jurisdiction over the matter. Power responded to this order in November 2004. On January 31,
2005, the Court dismissed the breach-of-contract claims of Power and three other utilities. Power moved for reconsideration in the U.S. Court of Federal Claims and jointly petitioned for permission to
appeal the January 31, 2005 order to the U.S. Court of Appeals for the Federal Circuit. On September 29, 2006, the U.S. Court of Appeals for the Federal Circuit reversed the adverse U.S. Court of Federal
Claims jurisdictional
29
ruling and reinstated Powers claims in the U.S. Court of Federal Claims. No assurances can be given as to any damage recovery or the ultimate availability of a disposal facility.
In 2004, Delmarva Power & Light (DP&L) and Atlantic City Electric Company (ACE) commenced litigation against the DOE based on claims that they were injured by DOEs failure to timely
commence removal of spent nuclear fuel as required at Salem and Hope Creek. Power believes that DP&Ls and ACEs actions violate the terms of the purchase and sale agreements and invoked the binding
arbitration provisions in the purchase and sale agreements to seek a determination that ACE and DP&L transferred to Power any and all of their potential claims with respect to DOEs failure to collect the
spent nuclear fuel. The arbitration panel issued its decision in June 2007 in agreement with Power. ACE and DP&L requested that the U.S. Court of Appeal determine that the matter should not have been
subject to arbitration, but the court instead dismissed ACE and DP&Ls claims against DOE based on a finding that ACE and DP&L had transferred their claims to Power and DOE had accepted that transfer.
In December 2007, the New Jersey Superior Court confirmed the award of the arbitration panel. ACE and DP&L have filed appeals of both decisions. These pending appeals could delay Powers ability to
resolve its claims against DOE for failure to remove spent nuclear fuel from Salem and Hope Creek.
Spent Fuel Pool
The spent fuel pool at each Salem unit has an installed leakage collection system. This system was found to be obstructed at Salem Unit 1. Power developed a solution to maintain the design function of
the leakage collection system at Salem Unit 1 and investigated the existence of any structural degradation that might have been caused by the obstruction. The concrete and reinforcing steel laboratory test
results were completed in March 2006. Test results that have been collected as part of the ongoing testing indicate that no repairs are anticipated. The NRC issued Information Notice 200405 in March 2004
concerning this emerging industry issue and Power cannot predict what further actions the NRC may take on this matter.
Elevated concentrations of tritium in the shallow groundwater at Salem Unit 1 were detected in early 2003. This information was reported to the NJDEP and the NRC, as required. Power conducted a
comprehensive investigation in accordance with NJDEP site remediation regulations to determine the source and extent of the tritium in the groundwater. Power is conducting remedial actions to address
the contamination in accordance with a remedial action work plan approved by the NJDEP in November 2004. The remedial actions are expected to be ongoing for several years. The costs necessary to
address this on-site groundwater contamination issue are not expected to be material.
Low Level Radioactive Waste (LLRW)
As a by-product of their operations, nuclear generation units produce LLRW. Such waste includes paper, plastics, protective clothing, water purification materials and other materials. LLRW materials
are accumulated on-site and disposed of at licensed permanent disposal facilities. New Jersey, Connecticut and South Carolina have formed the Atlantic Compact, which gives New Jersey nuclear
generators, including Power, continued access to the Barnwell LLRW disposal facility which is owned by South Carolina. Power believes that the Atlantic Compact will provide for adequate LLRW disposal
for Salem and Hope Creek through the end of their current licenses, although no assurances can be given. Both Power and Exelon Generation have on-site LLRW storage facilities for Salem, Hope Creek
and Peach Bottom, which have the capacity for at least five years of temporary storage for each facility. For information regarding Nuclear Spent Fuel Pool, see Note 12. Commitments and Contingent
Liabilities.
The following factors should be considered when reviewing our businesses. These factors could have an adverse impact on our financial position, results of operations or net cash flows and could cause
results to differ materially from those expressed in any statements made by us, or on our behalf herein.
The factors discussed in Item 7. MD&A may also adversely affect our results of operations and cash flows and affect the market prices for our publicly traded securities. While we believe that we have
identified and discussed the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may
adversely affect our financial position, results of operations and cash flows.
30
We are subject to comprehensive regulation by federal, state and local regulatory agencies that affects, or may affect, our business.
We are subject to regulation by the FERC and the NRC, by federal, state and local authorities under environmental laws and by state public utility commissions under laws regulating our distribution
business, among others.
Changes in regulation can cause significant delays in or materially affect business planning and transactions and can materially increase our costs. Regulation will affect almost every aspect of our
businesses, such as our ability to:
Obtain fair and timely rate relief
Our utilitys base rates for electric and gas distribution are subject to regulation by the BPU and are effective until a new base rate case is filed and concluded. In
addition, limited categories of costs are recovered through adjustment clauses that are periodically reset to reflect current costs. Our transmission assets are regulated by the FERC and costs are
recovered through rates set by the FERC. At the end of 2007, PSE&G and PPL jointly filed with the FERC to obtain incentive rate treatment for the PJM-approved Susquehanna-Roseland line,
specifically a 150 basis point adder to return on equity. Inability to obtain a fair return on our investments or to recover material costs not included in rates would have an adverse effect on our
business.
Obtain
required regulatory approvals
Powers subsidiary,
ER&T, which markets all of Powers electric generation output,
has been granted MBR authority from FERC, as have PSE&G, Power
Connecticut and GWF Energy. FERC has recently issued new MBR rules which
have significantly changed the way in which FERC analyzes whether
a company possesses market power and have narrowed the relevant market(s)
to be analyzed. With the narrowing of the markets, some of Powers
generation assets could be considered to have market power due to
their location in constrained areas within PJM. In January 2008,
PSE&G and ER&T filed with the FERC their respective updated
market power reports as required by the FERCs
new MBR rules. PSE&G, ER&T, Fossil and Nuclear have asserted
in their MBR filing that they either lack any generation market power or,
if they do possess any market power, that market power is being effectively
mitigated. PSE&G, ER&T, Fossil and Nuclear have
further asserted that, to the extent that the FERC analyzes market power
held in the small sub-market of Northern PSEG, PJM mitigation rules (including
price capping for bids) eliminate the potential for the exercise of market
power in this sub-market. This filing remains pending with FERC and the
extent of any such mitigation measures, that may be required, cannot be
determined at this time. Failure to maintain MBR eligibility, or the effects
of any severe mitigation measures that may be required, could have a material
adverse effect on PSEG, Power and PSE&G.
Our businesses may also require various other regulatory approvals to, among other things, buy or sell assets, engage in transactions between our public utility and our other subsidiaries, issue
securities and pay dividends. Any failure to obtain any required regulatory approvals could materially adversely affect our results of operations and cash flows.
Comply with regulatory requirements
Congress has required FERC to put in place, through the NERC, national and regional Standards to ensure the reliability of the United States electric
transmission system and to prevent major system black-outs. Since these Standards are applicable to transmission owners and generation owners and operators, we are obligated to comply with the
Standards and to ensure continuing compliance. In 2008, both PSE&G and Energy Holdings Texas generating plants will be audited for compliance with such Standards. FERC has the ability to
impose penalties of up to $1 million per day per violation for any violations.
The BPU has also retained consultants to conduct periodic combined management/competitive service audits of New Jersey utilities which we expect to occur later in 2008. Such audits in the past
have resulted in the imposition of significant additional requirements on PSEG and PSE&G. While we believe that we are in compliance with all affiliate standard requirements, we cannot predict the
outcome of the audit.
31
Several issues at the BPU are pending stemming from the restructuring of the utility industry in New Jersey several years ago.
Treatment of previously approved stranded costs
We previously securitized $2.525 billion of PSE&Gs generation and generation-related costs, which were determined by the BPU in 1999 to be stranded
by industry restructuring, pursuant to an irrevocable, non-bypassable BPU financing order issued pursuant to the Competition Act. The Competition Act, and the authority of the BPU to issue its
order, was upheld by the New Jersey Supreme court in 2001. In 2007, a new legal action, challenging the presumed constitutionality of certain provisions of the Competition Act, was filed in the
Superior Court of New Jersey. This action sought injunctive relief from the continued collection of the transition bond charge (TBC) and related taxes by PSE&G, as well as recovery of amounts
previously charged and collected. This action has been summarily dismissed by the Court. However, an appeal of this summary judgment is currently pending. Although the Court in dismissing the
matter found no merit to the claims asserted, if such appeal ultimately was to be successful, ongoing recovery of funds to service our previous securitization could be affected. An administrative
complaint by the same ratepayer was filed with the BPU. We have filed a motion to dismiss that complaint, which is pending.
Treatment
of ITC included in previous write-down of generation assets
The
IRS has issued several PLRs that concluded that the refunding of
excess deferred tax and ITC balances to utility customers was permitted
only over the related assets regulatory lives, which for PSE&G,
was terminated upon New Jerseys electric industry deregulation
in 1999. Based on this fact, in 1999, we reversed the deferred tax
and ITC liability relating to the generation assets that were transferred
to Power, and recorded a $235 million reduction of the extraordinary
charge due to such restructuring of the industry in New Jersey. Subsequently,
PSE&G was directed by the BPU to seek a PLR from the IRS to determine
if the ITC included in the impairment write-down of generation assets
could be credited to customers without violating the tax normalization
rules of the Internal Revenue Code. PSE&G filed a PLR request with
the IRS in 2002. In May 2006, the IRS issued a PLR to PSE&G,
which concluded that none of the generation ITC could be passed to
utility customers without violating its normalization rules. While
the holding in the PLR is favorable to the action we took, an outstanding
Treasury regulation project could overturn that holding in the PLR
if the Treasury were to alter a position set out in certain proposed
regulations.
MTC collected during the four year industry transition period
The BPU has raised certain questions with respect to the reconciliation method PSE&G had employed in calculating the overrecovery of
its MTC and other charges during the four-year transition period from 1999 to 2003. The amount in dispute was $114 million, which if required to be refunded to customers with interest through
December 2007, would be $127 million. While PSE&G believes the MTC methodology it used was fully litigated and resolved by the prior BPU Orders in its previous electric base rate case, deferral
audit and deferral proceedings, PSE&G cannot predict the outcome of this proceeding.
We are subject to numerous federal and state environmental laws and regulations that may significantly limit or affect our business, adversely impact our business plans or expose us to significant
environmental fines and liabilities.
We are subject to extensive environmental regulation by federal, state and local authorities regarding air quality, water quality, site remediation, land use, waste disposal, aesthetics, impact on global
climate, natural resources damages and other matters. These laws and regulations affect the manner in which we and our subsidiaries conduct our operations and make capital expenditures. Further, such
laws and regulations are subject to future changes that may result in increased compliance costs. We can give no assurance that we will be able to:
obtain all current or future required environmental approvals;
obtain any necessary modifications to existing environmental approvals;
maintain compliance with all applicable environmental laws, regulations and approvals; or
recover any resulting costs through future sales.
Delay in obtaining, or failure to obtain and maintain in full force and effect, any environmental permits or approvals, or delay or failure to satisfy any applicable environmental regulatory requirements,
could prevent construction of new facilities, continued operation of existing facilities or sale of energy from these facilities or could result in us incurring significant additional costs which would materially
affect our business, results of operations and cash flows.
32
In
obtaining required environmental approvals and maintaining compliance with
current environmental laws and regulations, we are focused on several key
environmental issues, including:
Concerns over global climate change could result in laws and regulations
to limit CO
2
emissions
or other greenhouse gases produced by our fossil generation
facilities
Federal and state legislation and
regulation designed to address global climate change through the reduction
of greenhouse gas emissions could significantly impact our fossil generation
facilities. Recent legislation enacted in New Jersey establishes aggressive
goals for the reduction of CO
2
emissions
over a 40-year period. There could be material required expenditures, including
the potential need to purchase CO
2
emission allowances, and modifications to operations that may be needed
to meet new regulatory requirements. Multiple states, primarily in the
Northeastern U.S., are developing state-specific or regional legislative
initiatives to stimulate CO
2
emissions
reductions in the electric power industry. The RGGI was initiated in April
2003 and is scheduled to begin in 2009. In RGGI, ten Northeastern states,
including New Jersey, have signed a memorandum of understanding intended
to cap and reduce CO
2
emissions
from the electric power sector in the RGGI region. Member states will control
emissions of greenhouse gases by issuance of allowances to emit CO
2
through
an auction, allocation or a combination of the two methods.
A significant portion of our fossil fuel-fired electricity generators are located in states within the RGGI region and compete with electricity generators within PJM not located within a RGGI state.
The costs or inability to purchase CO
2
allowances for our fleet operating within a RGGI state could place us at an economic disadvantage compared to our competitors not located in a RGGI state.
Legislation recently enacted in New Jersey authorizes the NJDEP to sell, exchange, retire, assign, allocate or auction allowances from greenhouse gas emissions and sets forth the requirements to be
followed by the NJDEP if allowances are to be conveyed using an auction. Proceeds raised from the auction will be deposited in the Global Warming Solutions Fund and will be used to provide
grants and other forms of assistance for the purpose of energy efficiency, renewable energy, new high efficiency generation, to stimulate or reward investment in the development of innovative CO
2
reduction or avoidance technologies and stewardship of New Jerseys forests and tidal marshes. The law further provides that the BPU shall adopt an emissions portfolio standard or other regulatory
mechanism, to mitigate leakage by July 1, 2009 unless the states Attorney General determines that this will unconstitutionally burden interstate commerce or would be preempted by federal law.
Potential closed-cycle cooling requirements
Our Salem nuclear generating facility has a permit from the NJDEP allowing for the continued operation of the Salem facility with its existing cooling
water system. That permit expired in July 2006. The NJDEP informed us that it strongly recommends that cooling water intake flow at the Salem facility be reduced commensurate with closed-cycle
cooling. The application of FWPCA Section 316(b) could, as one option, require the installation of structures at the Salem facility to reduce cooling water intake commensurate with closed-cycle
cooling, which would result in material costs of compliance. Our application to renew the permit, filed in February 2006 with the NJDEP, estimated the costs associated with cooling towers for Salem
to be approximately $1 billion, of which Powers share would be approximately $575 million.
If the NJDEP and the Connecticut Department of Environmental Protection were to require installation of closed-cycle cooling or its equivalent at our Mercer, Hudson, Bridgeport, Sewaren or New
Haven generating stations, the related increased costs and impacts would be material to our financial position, results of operations and net cash flows and would require economic review to
determine whether to continue operations.
Remediation of environmental contamination at current or formerly owned facilities
We are subject to liability under environmental laws for the costs of remediating environmental contamination of
property now or formerly owned by us and of property contaminated by hazardous substances that we generated. Remediation activities associated with our former MGP operations subsidiaries are
one source of such costs. Also, we are currently involved in a number of proceedings relating to sites where other hazardous substances have been deposited and may be subject to additional
proceedings in the future, the related costs of which could have a material adverse effect on our financial condition, results of operations and cash flows.
On June 29, 2007, the State of New Jersey filed multiple lawsuits against parties, including PSE&G, who were alleged to be responsible for injuries to natural resources in New Jersey, including a site
being remediated under PSE&Gs MGP program. We cannot predict what further actions, if any, or the costs or the timing thereof, that may be required with respect to these or other natural resource
damages claims.
More stringent environmental requirements in New Jersey
Most of our generating facilities are located in the State of New Jersey. In particular, New Jerseys environmental programs are generally
33
considered to be more stringent in comparison to similar programs in other states. Therefore, there may be instances where the facilities located in New Jersey are subject to more stringent and,
therefore, more costly pollution control requirements and liability for damage to natural resources, than competing facilities in other states. Most of New Jersey has been classified as nonattainment
with national ambient air quality standards for one or more air contaminants. This requires the state to develop programs to reduce air emissions. Such programs can impose additional costs on us by
requiring that we offset any emissions increases from new electric generators we may want to build and by setting more stringent emission limits on our facilities that run during the hottest days of the
year.
Our ownership and operation of nuclear power plants involves regulatory, financial, environmental, health and safety risks.
Over half of our total generation output each year is provided by our nuclear fleet, which comprises approximately 25% of our total owned generation capacity. For this reason, we are exposed to risks
related to the successful operation of our nuclear facilities and issues that may adversely affect the nuclear generation industry. Significant risk factors relating to our nuclear generation include:
Storage and Disposal of Spent Nuclear Fuel
We currently use on-site storage for spent nuclear fuel and incur costs to maintain this storage. Potential increased costs of storage, handling and disposal
of nuclear materials, including the availability or unavailability of a permanent repository for spent nuclear fuel, could impact future operations of these stations. In addition, the availability of a
repository for spent nuclear fuel may affect our ability to fully decommission our nuclear units in the future.
Regulatory and Legal Risk
The NRC may modify, suspend or revoke licenses, or shut down a nuclear facility and impose substantial civil penalties for failure to comply with the Atomic Energy Act,
related regulations or the terms of the licenses for nuclear generating facilities. As with all of our facilities, as discussed above, our nuclear facilities are also subject to environmental regulation as
rules continue to change.
Our New Jersey nuclear generating facilities are currently operating under NRC licenses that expire in 2016, 2020 and 2026. While we have applied for extensions to these licenses, the extension
process takes approximately four to five years from the commencement until completion of NRC review. We cannot be sure that we will receive the requested extensions or be able to operate the
facilities for all or any portion of any extended license.
Operational Risk
Operations at any of our nuclear generating units could degrade to the point where the affected unit needs to be shut down or operated at less than full capacity. If this were to
happen, identifying and correcting the causes may require significant time and expense. Since our nuclear fleet provides the majority of our generation output, any significant outage could result in
reduced earnings as we would need to purchase or generate higher priced energy to meet our contractual obligations. For additional information, see our discussion of operational performance for all
of our generation facilities below.
Nuclear Incident or Accident Risk
Accidents and other unforeseen problems have occurred both in the U.S. and elsewhere. The consequences of an accident can be severe and may include loss of life
and property damage. Any resulting financial impact from a nuclear accident may exceed our resources, including insurance coverages. In addition, it is possible that an accident or other incident at a
nuclear generating unit could adversely affect our ability to continue to operate unaffected units located at the same site, which would further affect our financial condition, operating results and cash
flows.
We may be adversely affected by changes in energy deregulation policies, including market design rules.
The energy industry continues to experience significant change. Various rules have recently been implemented to respond to commodity pricing, reliability and other industry concerns. Our business has
been impacted by rules established that create locational capacity markets in each of PJM, New England and New York. Under these rules, generators located in constrained areas are paid more for their
capacity so there is an incentive to locate in those areas where generation capacity is most needed. While the existence of these rules has had a positive impact on Powers revenues, as its generation in PJM
and New England is located in constrained areas, both PJMs and New Englands locational capacity market design rules are currently being
34
challenged in court. Any changes to these rules may have an adverse impact on our financial condition, results of operations and cash flows.
We could also be impacted by a number of other events, including regulatory or legislative actions favoring non-competitive markets, energy efficiency initiatives, and regulatory policies favoring the
construction of rate-based transmission that may result in increased imports of generation, which may be subject to less stringent environmental regulation, into areas served by Powers generation assets.
Further, some of the market-based mechanisms in which Power participates, including Basic Generation Service (BGS) auctions, are at times the subject of review or discussion by some of the participants
in the New Jersey and federal regulatory and political arenas and the PJM market monitor. We can provide no assurance that these mechanisms will continue to exist in their current form for the
foreseeable future.
We expect New Jersey to issue a draft EMP in the second quarter of 2008 and a final plan is expected to be completed later in 2008. The EMP may incorporate features that could have some of the
effects described above.
On
February 21, 2008, FERC issued a NOPR with respect to competition in the
organized wholesale energy markets. This NOPR seeks to address issues with
respect to demand response, long-term energy contracts, MMUs and the responsiveness
of RTOs and ISOs to customers and other stakeholders. PSEG is unable to predict
the outcome of the NOPR process.
We may be unable to achieve, or continue to sustain, our expected levels of generating operating performance.
One of the key elements to achieving the results in our business plans is the ability to sustain generating operating performance and capacity factors at expected levels. This is especially important at our
low-cost nuclear and coal facilities. Operations at any of our plants could degrade to the point where the plant has to shut down or operate at less than full capacity. Some issues that could impact the
operation of our facilities are:
breakdown or failure of equipment, processes or management effectiveness;
disruptions in the transmission of electricity;
labor disputes;
fuel supply interruptions for certain types of coal used at several of our fossil stations;
transportation constraints;
limitations which may be imposed by environmental or other regulatory requirements;
permit limitations; and
operator error or catastrophic events such as fires, earthquakes, explosions, floods, acts of terrorism or other similar occurrences.
Identifying and correcting any of these issues may require significant time and expense. Depending on the materiality of the issue, we may choose to close a plant rather than incur the expense of
restarting it or returning it to full capacity. In either event, to the extent that our operational targets are not met, we could have to operate higher cost generation facilities or meet our obligations through
higher cost open market purchases.
Our inability to balance energy obligations with available supply could negatively impact results.
The revenues generated by the operation of the generating stations are subject to market risks that are beyond our control. Generation output will either be used to satisfy wholesale contract
requirements, other bilateral contracts or be sold into other competitive power markets. Participants in the competitive power markets are not guaranteed any specified rate of return on their capital
investments through recovery of mandated rates payable by purchasers of electricity.
Generation revenues and results of operations are dependent upon prevailing market prices for energy, capacity, ancillary services and fuel supply in the markets served.
Our business frequently involves the establishment of forward sale positions in the wholesale energy markets on long-term and short-term bases. To the extent that we have produced or purchased
energy in excess of our contracted obligations a reduction in market prices could reduce profitability. Conversely, to the extent that we have contracted obligations in excess of energy we have produced or
purchased, an increase in market prices could reduce profitability.
35
If the strategy we utilize to hedge our exposures to these various risks is not effective, we could incur significant losses. Our market positions can also be adversely affected by the level of volatility in
the energy markets that, in turn, depends on various factors, including weather in various geographical areas, short-term supply and demand imbalances and pricing differentials at various geographic
locations. These cannot be predicted with any certainty.
Increases in market prices also affect our ability to hedge generation output and fuel requirements as the obligation to post margin increases with increasing prices and could require the maintenance of
liquidity resources that would be prohibitively expensive.
Inability to successfully develop or construct generation, transmission and distribution projects could adversely impact our businesses.
Our business plan calls for extensive investment by us in capital improvements and additions, including the installation of required environmental upgrades and retrofits, construction and/or acquisition
of additional generation units and transmission facilities, and modernizing existing infrastructure as well as other initiatives. Our success will depend, in part, on our ability to complete these projects within
budgets, on commercially reasonable terms and conditions and, at PSE&G, our ability to recover the related costs. Any delays, cost escalations or otherwise unsuccessful construction and development could
materially affect our financial position, results of operations and cash flows. Currently, we have several significant projects underway or being contemplated, including:
the installation of pollution control equipment at our coal generating facilities;
the construction of the new Susquehanna-Roseland transmission line;
the construction or completion of potential growth initiatives;
the implementation of a new customer service system; and
the solar initiative proposed by PSE&G.
We face substantial competition in the merchant energy markets.
Our wholesale power and marketing businesses are subject to substantial competition from well-capitalized entities that may adversely affect our ability to make investments on favorable terms and
achieve growth objectives. Increased competition could contribute to a reduction in prices offered for power and could result in lower returns. Some of the competitors include:
merchant generators, including coal;
banks, funds and other financial entities;
domestic and multi-national utility generators;
energy marketers;
fuel supply companies; and
affiliates of other industrial companies.
The regulatory, environmental, industry and operational issues discussed previously will have a significant impact on our ability to compete in energy markets. Our ability to compete will also be
impacted by:
DSM and other efficiency efforts
DSM and other efficiency efforts aimed at changing the quantity and patterns of usage by end-use consumers could result in a reduction in Powers load requirements.
Changes in technology and/or customer conservation
It is possible that advances in technology will reduce the cost of alternative methods of producing electricity, such as fuel cells, microturbines,
windmills and photovoltaic (solar) cells, to a level that is competitive with that of most central station electric production. It is also possible that electric customers may significantly decrease their
electric consumption due to demand-side energy conservation programs. Changes in technology could also alter the channels through which retail electric customers buy electricity, which could affect
financial results.
If such issues were to occur, our market share could be eroded and the value of our power plants could be significantly impaired.
36
We are exposed to commodity price volatility as a result of our participation in the wholesale energy markets.
The material risks associated with the wholesale energy markets known or currently anticipated that could adversely affect our operations are:
Price fluctuations and collateral requirements
We expect to meet our supply obligations through a combination of generation and energy purchases managed by ER&T. We also enter into derivative
and other positions related to our generation assets and supply obligations. To the extent we hedge our costs, we will be subject to the risk of price fluctuations that could affect our future results.
These include:
variability in costs, such as changes in the expected price of energy and capacity that we sell into the market;
o
increases in the price of energy purchased to meet supply obligations or the amount of excess energy sold into the market;
o
the cost of fuel to generate electricity; and
o
the cost of emission credits and congestion credits that we use to transmit electricity.
As market prices for energy and fuel fluctuate, our forward energy sale and forward fuel purchase contracts could require us to post substantial additional collateral, thus requiring us to obtain
additional sources of liquidity during periods when our ability to do so may be limited. If we were to lose our investment grade credit rating, we would be required under certain agreements to
provide a significant amount of additional collateral in the form of letters of credit or cash, which would have a material adverse effect on our liquidity and cash flows. If we had lost our investment
grade credit rating as of December 31, 2007, we would have been required to provide approximately $777 million in additional cash or cash-equivalent collateral.
Certain of our leveraged lease transactions at Resources may be successfully challenged by the IRS, which would have a material adverse effect on our taxes, operating results and cash flows.
On November 16, 2006, the IRS issued its revenue agents audit report for tax years 1997 through 2000, which disallowed all deductions associated with certain of our leveraged lease transactions that
are similar to a type that the IRS publicly announced its intention to challenge. In addition, the IRS imposed a 20% penalty for substantial understatement of tax liability. In February 2007, PSEG filed a
protest to the Office of Appeals of the IRS. As of each of December 31, 2007 and December 31, 2006, Resources total gross investment in such transactions was $1.5 billion.
If the IRS disallowance of tax benefits associated with all of these lease transactions was sustained, $781 million of our deferred tax liabilities that have been recorded under leveraged lease accounting
through December 31, 2007 would become currently payable. In addition, as of December 31, 2007 interest of approximately $179 million, after-tax, and penalties of $169 million may become payable, with
potential additional interest and penalties of approximately $17 million accruing quarterly. We have assessed the probability of various outcomes to this matter and recorded the tax effect to be realized in
accordance with FIN 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109. In December 2007, PSEG deposited $100 million with the IRS to defray potential interest
costs associated with this disputed tax liability. In the event PSEG is successful in its defense of its position, the deposit is fully refundable with interest.
While we believe that our tax position related to these transactions is proper based on applicable statutes, regulations and case law and we believe that it is more likely than not that we will prevail with
respect to the IRS challenge, no assurances of such result can be given. If all deductions associated with these lease transactions, entered into by us between 1997 and 2002, are successfully challenged by
the IRS, it would have a material adverse impact on our financial position, results of operations and cash flows.
37
o
Third party credit risk
We sell generation output through the execution of bilateral contracts. These contracts are subject to credit risk, which relates to the ability of our counterparties to meet their
contractual obligations to us. Any failure to perform by these counterparties could have a material adverse impact on our results of operations, cash flows and financial position. In the spot markets,
we are exposed to the risks of whatever default mechanisms exist in those markets, some of which attempt to spread the risk across all participants, which may not be an effective way of lessening the
severity of the risk and the amounts at stake.
If we are unable to access sufficient capital at reasonable rates or have sufficient liquidity in the amounts and at the times needed, our ability to successfully implement our financial strategies may be
adversely affected.
Capital for projects and investments has been provided by internally-generated cash flow, equity issuances and borrowings. Continued access to debt capital from outside sources is required in order to
efficiently fund the cash flow needs of our businesses. The ability to arrange financing and the costs of capital depend on numerous factors including, among other things, general economic and market
conditions, the availability of credit from banks and other financial institutions, investor confidence, the success of current projects and the quality of new projects.
The ability to have continued access to the credit and capital markets at a reasonable economic cost is dependent upon our current and future capital structure, financial performance, our credit ratings
and the availability of capital. As a result, no assurance can be given that we will be successful in obtaining financing for projects and investments or in funding the equity commitments required for such
projects and investments in the future.
Capital
market performance directly affects the asset values of our decommissioning
and defined benefit plan trust funds. Sustained decreases in asset value
of trust assets could result in the need for significant additional funding.
The performance of the capital markets will affect the value of the assets that are held in trust to satisfy our future obligations under our pension and post-retirement benefit plans and to decommission
nuclear generating plants. A significant decline in the market value of those assets, as was experienced from 2000 to 2002, may significantly increase our funding requirements for these obligations.
In the event of an accident or acts of war or terrorism, our insurance coverage may be insufficient if we are unable to obtain adequate coverage at commercially reasonable rates.
We have insurance for all-risk property damage, general public liability, boiler and machinery coverage, nuclear liability for nuclear generating units, replacement power and business interruptions, in
amounts and with deductibles that management considers appropriate.
We can give no assurance that this insurance coverage will be available in the future on commercially reasonable terms or that the insurance proceeds received for any loss of or any damage to any of
our facilities will be sufficient to fund future payments on debt.
ITEM 1B. UNRESOLVED STAFF COMMENTS
PSEG
None.
Power and PSE&G
Not Applicable.
38
PSEG does not own any property. All property is owned by PSEG subsidiaries. PSEG believes that it and its subsidiaries maintain adequate insurance coverage against loss or damage to plants and
properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost.
Generation Facilities
Power
As of December 31, 2007, Powers share of summer installed generating capacity was 13,314 MW, as shown in the following table:
OPERATING POWER PLANTS
Name
Location
Total
%
Owned
Principal
Mission
Steam:
Hudson
NJ
913
100
%
913
Coal/Gas
Load Following
Mercer
NJ
648
100
%
648
Coal
Load Following
Sewaren
NJ
428
100
%
428
Gas
Load Following
Keystone(A)(B)
PA
1,687
23
%
388
Coal
Base Load
Conemaugh(A)(B)
PA
1,661
23
%
382
Coal
Base Load
Bridgeport Harbor
CT
503
100
%
503
Coal/Oil
Base Load/Load Following
New Haven Harbor
CT
448
100
%
448
Oil
Load Following
Total Steam
6,288
3,710
Nuclear:
Hope Creek.
NJ
1,061
100
%
1,061
Nuclear
Base Load
Salem 1 & 2(A).
NJ
2,304
57
%
1,323
Nuclear
Base Load
Peach Bottom 2 & 3(A)(C).
PA
2,224
50
%
1,112
Nuclear
Base Load
Total Nuclear
5,589
3,496
Combined Cycle:
Bergen
NJ
1,224
100
%
1,224
Gas
Load Following
Linden
NJ
1,186
100
%
1,186
Gas
Load Following
Bethlehem
NY
746
100
%
746
Gas
Load Following
Total Combined Cycle.
3,156
3,156
Combustion Turbine:
Essex
NJ
616
100
%
616
Gas
Peaking
Edison
NJ
504
100
%
504
Gas
Peaking
Kearny
NJ
441
100
%
441
Gas
Peaking
Burlington
NJ
557
100
%
557
Oil
Peaking
Linden
NJ
340
100
%
340
Gas
Peaking
Mercer
NJ
115
100
%
115
Gas
Peaking
Sewaren
NJ
105
100
%
105
Oil
Peaking
Bergen
NJ
21
100
%
21
Gas
Peaking
National Park
NJ
21
100
%
21
Gas
Peaking
Salem(A)
NJ
38
57
%
22
Oil
Peaking
Bridgeport Harbor
CT
10
100
%
10
Oil
Peaking
Total Combustion Turbine
2,768
2,752
Pumped Storage:
Yards Creek(A)(D)
NJ
400
50
%
200
Peaking
Total Operating Generation Plants
18,201
13,314
(A)
Powers share of jointly-owned facility.
(B)
Operated by Reliant Energy.
(C)
Operated by Exelon Generation.
(D)
Operated by JCP&L.
39
Capacity
(MW)
Owned
Capacity
(MW)
Fuels
Used
Global
Global has investments in the following generation facilities as of December 31, 2007:
OPERATING POWER PLANTS
Name
Location
Total
%
Owned
Principal
United States
PSEG Texas
Guadalupe
TX
1,000
100
%
1,000
Natural gas
Odessa
TX
1,000
100
%
1,000
Natural gas
Total PSEG Texas
2,000
2,000
Kalaeloa
HI
208
50
%
104
Oil
GWF
CA
105
50
%
53
Petroleum coke
Hanford L.P. (Hanford)
CA
27
50
%
13
Petroleum coke
GWF Energy
HanfordPeaker Plant
CA
95
60
%
57
Natural gas
HenriettaPeaker Plant
CA
97
60
%
58
Natural gas
TracyPeaker Plant
CA
171
60
%
103
Natural gas
Total GWF Energy
363
218
Bridgewater
NH
16
40
%
6
Biomass
Conemaugh
PA
15
4
%
1
Hydro
Total United States
2,734
2,395
International
(A)
PPN Power Generating Company Limited (PPN)
India
330
20
%
66
Naphtha/Natural gas
Bioenergie
Crotone
Italy
20
43
%
9
Biomass
Bando DArgenta I
Italy
20
85
%
17
Biomass
Strongoli
Italy
40
43
%
17
Biomass
Total Bioenergie
80
43
Turboven
Maracay
Venezuela
60
50
%
30
Natural gas
Cagua
Venezuela
60
50
%
30
Natural gas
Total Turboven
120
60
Turbogeneradores de Maracay (TGM)
Venezuela
40
9
%
4
Natural gas
Natural gas/
SAESA Group
Chile
118
100
%
118
Gas/Oil/Hydro/Wind
Total International
688
291
Total Operating Power Plants
3,422
2,686
(A)
In December 2007, Global announced its intention to sell the SAESA Group of companies. Global is also continuing to explore options for its equity investments in its other international generation
projects, PPN, Bioenergie, Turboven and TGM.
Transmission and Distribution Facilities
PSE&G
As of December 31, 2007, PSE&Gs electric transmission and distribution system included 21,764 circuit miles, of which 7,729 circuit miles were underground, and 804,936 poles, of which 538,811 poles
were jointly-owned. Approximately 99% of this property is located in New Jersey.
In addition, as of December 31, 2007, PSE&G owned four electric distribution headquarters and five subheadquarters in four operating divisions, all located in New Jersey.
40
Capacity
(MW)
Owned
Capacity
(MW)
Fuels
Used
As of December 31, 2007, the daily gas capacity of PSE&Gs 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:
Plant
Location
Daily Capacity
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, 2007, PSE&G owned and operated 17,618 miles of gas mains, owned 12 gas distribution headquarters and two subheadquarters, all in three operating regions located in New Jersey
and owned one meter shop in New Jersey serving all such areas. In addition, PSE&G operated 62 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 suppliers and were operated under lease, easement or other similar arrangement. In some instances, the pipeline companies owned portions of the metering and
regulating facilities.
PSE&Gs First and Refunding Mortgage, securing the bonds issued thereunder, constitutes a direct first mortgage lien on substantially all of PSE&Gs property.
PSE&Gs electric lines and gas mains 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 other rights are deemed by PSE&G to be adequate for the purposes for which they are being used.
Office Buildings and Other Facilities
Power
Power rents office space from Services as its headquarters in Newark, New Jersey. Other leased properties include office, warehouse, classroom and storage space, primarily located in New Jersey.
Power also owns the Central Maintenance Shop at Sewaren, New Jersey.
Power has a 57.41% ownership interest in approximately 13,000 acres in the Delaware River Estuary region to satisfy the condition of the New Jersey Pollutant Discharge Elimination System
(NJPDES) permit issued for Salem. Power also owns several other facilities, including the on-site Nuclear Administration and Processing Center buildings.
Power has a 13.91% ownership interest in the 650-acre Merrill Creek Reservoir in Warren County, New Jersey and approximately 2,158 acres of land surrounding the reservoir. The reservoir was
constructed to store water for release to the Delaware River during periods of low flow. Merrill Creek is jointly-owned by seven companies that have generation facilities along the Delaware River or its
tributaries and use the river water in their operations.
Power believes that it maintains adequate insurance coverage against loss or damage to its 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 12. Commitments and Contingent Liabilities.
PSE&G
PSE&G rents office space from Services as its headquarters in Newark, New Jersey. PSE&G also leases 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.
In addition to the facilities discussed above, as of December 31, 2007, PSE&G owned 42 switching stations in New Jersey with an aggregate installed capacity of 22,809 megavolt-amperes and 245
substations
41
(Therms)
with an aggregate installed capacity of 7,835 megavolt-amperes. In addition, four substations in New Jersey having an aggregate installed capacity of 109 megavolt-amperes were operated on leased property.
Services
Services leases a 25-story office tower for PSEGs corporate headquarters at 80 Park Plaza, Newark, New Jersey, together with an adjoining three-story building. In addition, Services owns the
Maplewood Test Services Facility in Maplewood, New Jersey.
ITEM 3. LEGAL PROCEEDINGS
PSE&G
Competition Act
On
April 23, 2007, PSE&G and Transition Funding were served with a copy
of a purported class action complaint (Complaint) challenging the constitutional
validity of certain provisions of New Jerseys
Competition Act, seeking injunctive relief against continued collection from
PSE&Gs electric customers of the TBC of PSE&G Transition Funding,
as well as recovery of TBC amounts previously collected. Notice of the filing
of the Complaint was also provided to New Jerseys Attorney General.
Under New Jersey law, the Competition Act, enacted in 1999, is presumed constitutional.
On July 9, 2007, the same plaintiff filed an amended Complaint to also seek
injunctive relief from continued collection of related taxes as well as recovery
of such taxes previously collected and also filed a petition with the BPU
requesting review and adjustment to PSE&Gs recovery of the same charges.
PSE&G and Transition Funding filed a motion to dismiss the amended Complaint
(or in the alternative for summary judgment) on July 30, 2007 and PSE&G
filed on September 30, 2007 a motion with the BPU to dismiss the petition.
On October 10, 2007, PSE&G and Transition Fundings motion to dismiss
the amended Complaint was granted. The plaintiff has appealed this dismissal.
PSE&Gs
motion to dismiss the BPU petition is pending (BPU Docket No. ER07070516).
Con Edison
In November 2001, Consolidated Edison Company of New York, Inc. (Con Edison) filed a complaint with the FERC against PSE&G, PJM and NYISO with the FERC asserting a failure to comply with
agreements between PSE&G and Con Edison covering 1,000 MW of transmission. PSE&G denied the allegations set forth in the complaint. The FERC subsequently held hearings and issued a number of
orders between 2002 and late 2007. Those decisions were largely favorable to PSE&G and generally held that PSE&G and the other respondents had complied with their obligations under the contracts. The
FERCs orders, however, did require greater specificity in defining the parties respective obligations and, in conformance with FERCs requirements, the parties have met on numerous occasions for the
purpose of developing detailed operational protocols.
On May 18, 2005, FERC accepted operational protocols jointly submitted by all parties that addressed FERCs basic findings. In subsequent filings to the FERC regarding the efficacy of these
protocols, however, Con Edison continued to claim that the obligations under the agreements as interpreted by the FERCs orders are not being met. In December 30, 2005 and January 19, 2007 filings with
the FERC, Con Edison claimed to have incurred $111 million in damages, and requested the FERC to require refunds of this amount. This claim was subsequently rejected by FERC on procedural grounds.
PJM, NYISO, Con Edison and PSE&G continue to meet under a work plan intended to address the remaining operational issues associated with the protocols and to address Con Edisons refund claim.
As part of these discussions and in separate discussions, PSE&G and Con Edison have discussed the possibility of a comprehensive settlement of all matters raised in the November 2001 complaint. At the
present time, however, these comprehensive settlement discussions have reached an impasse. Both PSE&G and Con Edison have sought judicial review of the FERC orders addressing these contracts before
the D.C. Circuit Court of Appeals. As this matter is currently pending before the appeals court, PSEG and PSE&G are unable to predict the outcome of this proceeding.
42
PSEG, Power and PSE&G
In addition to the matters discussed above, see information on the following proceedings at the pages indicated for PSEG, Power and PSE&G as noted:
(1)
Page 15. (Power) PSEG Power Connecticuts filing with FERC on November 17, 2004, Docket No. ER05-231-000, to request RMR compensation.
(2)
Page 15. (PSEG and Power) FERC proceeding for issuance of a declaratory order relating to the proposed Cross Hudson project, Docket No. EL08-35-000.
(3)
Page 16. (PSEG, Power and PSE&G) PJM Reliability Pricing Model filed with FERC on August 31, 2005, Docket Nos. ERO5-1410-000 and EL05-148-000.
(4)
Page 16. (PSEG, Power and PSE&G) FERC proceeding relating to PJM Long-Term Transmission Rate Design, Docket No. EL05-121-000.
(5)
Page 20. (PSE&G) SBC/NGC Rate filing with the BPU on May 7, 2007, Docket Nos. ER07050303 & GR07050304.
(6)
Page 20. (PSE&G) Remediation Adjustment Clause filing with the BPU on April 25, 2005, Docket No. GR05040383.
(7)
Page 20. (Power and PSEG) Universal Service Fund mandated by the BPU under the Competition Act to recover costs under the Permanent Universal Service Fund and the Lifeline program.
(8)
Page 21. (PSE&G) PSE&Gs BGSS Commodity filing with the BPU on May 28, 2004, Docket No. GR04050390.
(9)
Page
23. (PSEG, Power and PSE&G) BPU proceedings relating
to ratepayer protections due to repeal of PUHCA under the Energy Policy
Act of 2005, Docket No. AX05070641.
(10)
Pages 23 and 142. (PSE&G) Deferral Proceeding filed with the BPU on August 28, 2002, Docket No. EX02060363, and Deferral Audit beginning on October 2, 2002 at the BPU, Docket No.
EA02060366.
(11)
Pages 27 and 138. (Power) Powers Petition for Review filed in the United States Court of Appeals for the District of Columbia Circuit on July 30, 2004 challenging the final rule of the EPA entitled
National Pollutant Discharge Elimination SystemFinal Regulations to Establish Requirements for Cooling Water Intake Structures at Phase II Existing Facilities, now transferred to and venued in
the United States Court of Appeals for the Second Circuit with Docket No. 04-6696-ag.
(12)
Page 29. (Power) Filing of Complaint by Nuclear against the DOE on September 26, 2001 in the U.S. Court of Federal Claims, Docket No. 01-0551C seeking damages caused by DOEs failure to
take possession of spent nuclear fuel. The complaint was amended to include PSE&G as a prior owner in interest.
(13)
Page 135. (PSE&G) Investigation Directive of NJDEP dated September 19, 2003 and additional investigation Notice dated September 15, 2003 by the EPA regarding the Passaic River site, Docket No.
EX93060255.
(14)
Page 136. (Power and PSE&G) New Jersey Department of Environmental Protection v. BFI Waste Systems of New Jersey, Inc. et al., filed with New Jersey Superior Court on June 29, 2007.
(15)
Page 136. (Power and PSE&G) New Jersey Department of Environmental Protection v. Public Service Electric and Gas Co., et al., filed with New Jersey Superior Court on June 29, 2007, Docket No.
L-3337-07.
(16)
Page 136. (Power) PSE&Gs MGP Remediation Program instituted by NJDEPs Coal Gasification Facility Sites letter dated March 25, 1988.
(17)
Page 142. (PSE&G) BPU Order dated December 23, 2003, Docket No. EO02120955 relating to the New Jersey Interim Clean Energy Program.
Power and PSE&G
In addition, see the following environmental related matters involving governmental authorities. Power and PSE&G do not expect expenditures for any such site relating to the items listed below,
individually or for all such current sites in the aggregate, to have a material effect on their respective financial condition, results of operations and net cash flows.
43
(1) Claim made in 1985 by the 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&Gs knowledge there has been no action on this matter since 1988.
(2) Duane Marine Salvage Corporation Superfund Site is in Perth Amboy, Middlesex County, New Jersey. The EPA had named PSE&G as one of several potentially responsible parties (PRPs) through
a series of administrative orders between December 1984 and March 1985. Following work performed by the PRPs, the EPA declared on May 20, 1987 that all of its administrative orders had been satisfied.
The NJDEP, however, named PSE&G as a PRP and issued its own directive dated October 21, 1987. Remediation is currently ongoing.
(3) Various Spill Act directives were issued by the 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 operation and maintenance, interim remedial measures and a Remedial Investigation and Feasibility Study (RI/FS) in excess of $25 million. The directives also sought reimbursement of the NJDEPs
past and future oversight costs and the costs of any future remedial action.
(4) Claim by the EPA, Region III, under CERCLA with respect to a Cottman Avenue Superfund Site, a former non-ferrous scrap reclamation facility located in Philadelphia, Pennsylvania, owned and
formerly operated by Metal Bank of America, Inc. PSE&G, other utilities and other companies are alleged to be liable for contamination at the site and PSE&G has been named as a PRP. A Final Remedial
Design Report was submitted to the EPA in September of 2002. This document presents the design details that will implement the EPAs selected remediation remedy. PSE&Gs share of the remedy
implementation costs is estimated at approximately $4 million.
(5) The Klockner Road site is located in Hamilton Township, Mercer County, New Jersey, and occupies approximately two acres on PSE&Gs Trenton Switching Station property. PSE&G entered into a
memorandum of agreement with the NJDEP for the Klockner Road site pursuant to which PSE&G conducted an RI/FS and remedial action at the site to address the presence of soil and groundwater
contamination at the site.
(6) 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. PSE&Gs 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 the 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.
(7) The EPA sent PSE&G, Power and approximately 157 other entities a notice that the EPA considered each of the entities to be a PRP with respect to contamination in Berrys Creek in Bergen
County, New Jersey and requesting that the PRPs perform a RI/FS on Berrys Creek and the connected tributaries and wetlands. Berrys Creek flows through approximately 6.5 miles of areas that have
been used for a variety of industrial purposes and landfills. The EPA estimates that the study could be completed in approximately five years at a total cost of approximately $18 million. Power and PSE&G
are unable to predict the outcome of this matter; however, the related costs of this study are not expected to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PSEG
None.
Power
None.
PSE&G
None.
44
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PSEG
PSEGs Common Stock is listed on the New York Stock Exchange, Inc. As of December 31, 2007, there were 88,887 holders of record.
The graph below shows a comparison of the five-year cumulative return assuming $100 invested on December 31, 2002 in PSEG common stock and the subsequent reinvestment of quarterly dividends,
the S&P Composite Stock Price Index, the Dow Jones Utilities Index and the S&P Electric Utilities Index.
2002
2003
2004
2005
2006
2007
PSEG
$
100.00
$
143.78
$
178.42
$
232.27
$
245.83
$
373.49
S&P 500
$
100.00
$
128.63
$
142.58
$
149.57
$
173.14
$
182.63
DJ Utilities
$
100.00
$
129.08
$
167.87
$
209.77
$
244.67
$
293.76
S&P Electrics
$
100.00
$
123.84
$
156.54
$
183.98
$
226.58
$
278.87
The following table indicates the high and low sale prices for PSEGs common stock and dividends paid for the periods indicated:
Common Stock
High
Low
Dividend
2007:
First Quarter
$
42.12
$
32.16
$
0.2925
Second Quarter
$
46.90
$
41.02
$
0.2925
Third Quarter
$
46.66
$
38.66
$
0.2925
Fourth Quarter
$
49.88
$
43.48
$
0.2925
2006:
First Quarter
$
36.23
$
31.99
$
0.285
Second Quarter
$
33.82
$
29.50
$
0.285
Third Quarter
$
36.31
$
30.24
$
0.285
Fourth Quarter
$
34.05
$
29.56
$
0.285
On January 15, 2008, PSEGs Board of Directors approved a two-for-one stock split of PSEGs outstanding shares of common stock. The stock split entitled each stockholder of record at the close of
business on January 25, 2008 to receive one additional share for every outstanding share of common stock held. The additional shares resulting from the stock split were distributed on February 4, 2008. All
share and per share amounts included in this Form 10-K retroactively reflect the effect of the stock split.
On January 15, 2008, PSEGs Board of Directors also approved a $0.03 increase in its quarterly common stock dividend, from $0.2925 to $0.3225 per share for the first quarter of 2008. This reflects an
indicated annual dividend rate of $1.29 per share. PSEG expects to continue to pay cash dividends on its common
45
Per Share
stock, however, the declaration and payment of future dividends to holders of PSEG common stock will be at the discretion of the Board of Directors and will depend upon many factors, including PSEGs
financial condition, earnings, capital requirements of its business, alternate investment opportunities, legal requirements, regulatory constraints, industry practice and other factors that the Board of
Directors deems relevant.
The following table indicates the securities authorized for issuance under equity compensation plans as of December 31, 2007:
Plan Category
Number of Securities
Weighted-Average
Number of Securities
Equity compensation plans approved by security holders
2,373,236
31.27
23,393,442
Equity compensation plans not approved by security holders
318,000
22.61
4,189,032
(A)
Total
2,691,236
30.25
27,582,474
(A)
Shares issuable under the PSEG Employee Stock Purchase Plan, Compensation Plan for Outside Directors and Stock Plan for Outside Directors.
For additional discussion of specific plans concerning equity-based compensation, see Note 17. Stock Based Compensation.
Power
All of Powers outstanding limited liability company membership interests are owned by PSEG. For additional information regarding Powers ability to pay dividends, see Item 7. MD&AOverview of
2007 and Future Outlook.
PSE&G
All of the common stock of PSE&G is owned by PSEG. For additional information regarding PSE&Gs ability to continue to pay dividends, see Item 7. MD&AOverview of 2007 and Future Outlook.
46
to be Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
(#)
Exercise Price of
Outstanding
Options, Warrants
and Rights
($)
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(#)
SELECTED FINANCIAL DATA
PSEG
The information presented below should be read in conjunction with the MD&A and the Consolidated Financial Statements and Notes to Consolidated Financial Statements (Notes).
For the Years Ended December 31,
2007
2006
2005
2004
2003
(Millions, where applicable)
Operating Revenues
$
12,853
$
11,762
$
11,849
$
10,362
$
10,626
Income from Continuing Operations(A)
$
1,319
$
679
$
837
$
747
$
800
Net Income
$
1,335
$
739
$
661
$
726
$
1,160
Earnings per Share:
Income from Continuing Operations:
Basic(A)
$
2.60
$
1.35
$
1.74
$
1.57
$
1.76
Diluted(A)
$
2.59
$
1.34
$
1.71
$
1.56
$
1.75
Net Income:
Basic
$
2.63
$
1.47
$
1.38
$
1.53
$
2.54
Diluted
$
2.62
$
1.46
$
1.35
$
1.52
$
2.54
Dividends Declared per Share
$
1.17
$
1.14
$
1.12
$
1.10
$
1.08
As of December 31:
Total Assets
$
28,392
$
28,552
$
29,821
$
29,260
$
28,132
Long-Term Obligations(B)
$
8,709
$
10,147
$
11,035
$
12,392
$
12,462
(A)
Income from Continuing Operations for 2006 includes an after-tax charge of $178 million, or $0.35 per share related to the sale of RGE.
(B)
Includes capital lease obligations.
Power
Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.
PSE&G
The information presented below should be read in conjunction with the MD&A, the Consolidated Financial Statements and the Notes.
For the Years Ended December 31,
2007
2006
2005
2004
2003
(Millions)
Operating Revenues
$
8,493
$
7,569
$
7,514
$
6,810
$
6,598
Income from Continuing Operations
$
380
$
265
$
348
$
346
$
247
Net Income
$
380
$
265
$
348
$
346
$
229
As of December 31:
Total Assets
$
14,637
$
14,553
$
14,297
$
13,586
$
13,177
Long-Term Obligations
$
4,632
$
4,711
$
4,745
$
4,877
$
5,129
|
|
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) |
This combined MD&A is separately filed by Public Service Enterprise Group Incorporated (PSEG), PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G). Information contained herein relating to any individual company is filed by such company on its own behalf. Power and PSE&G each make representations only as to itself and make no other representations whatsoever as to any other company.
OVERVIEW OF 2007 AND FUTURE OUTLOOK
PSEG, Power and PSE&G
PSEGs business consists of four reportable segments, which are Power, PSE&G and the two direct subsidiaries of Energy Holdings L.L.C. (Energy Holdings), PSEG Global L.L.C. (Global) and PSEG Resources L.L.C. (Resources). The following discussion relates to the regions and markets in which PSEGs
47
subsidiaries operate and compete, the corporate strategy for the conduct of PSEGs businesses within these markets and significant events that have occurred during 2007 and expectations for 2008 for
Power, PSE&G and Energy Holdings, as well as the key factors that will drive the future performance of these businesses.
Stock Split
On January 15, 2008, PSEGs Board of Directors approved a two-for-one stock split of PSEGs outstanding shares of common stock. The stock split entitled each stockholder of record at the close of
business on January 25, 2008 to receive one additional share for every outstanding share of common stock held. The additional shares resulting from the stock split were distributed on February 4, 2008. All
share and per share amounts included in this Form 10-K retroactively reflect the effect of the stock split.
Power
Power is an electric generation and wholesale energy marketing and trading company that is focused on a generation market in the Northeast and Mid Atlantic U.S. Through its subsidiaries, Power
seeks to produce low-cost energy through efficient operations of its nuclear, coal and gas-fired generation facilities, balance its generation production, fuel requirements and supply obligations through
energy portfolio management and pursue disciplined growth. In addition to the electric generation business, Powers revenues include gas supply sales under the Basic Gas Supply Service (BGSS) contract
with PSE&G.
Powers principal operating subsidiaries, PSEG Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy Resources & Trade LLC (ER&T) are regulated by the FERC. ER&T and Fossils
subsidiary, PSEG Power Connecticut LLC, sell power at wholesale under Federal Energy Regulatory Commission (FERC)-approved market-based rate tariffs. Certain subsidiaries of Fossil are subject to
state regulation and Nuclear is also subject to regulation by the Nuclear Regulatory Commission.
As a merchant generator, Powers profit is derived from selling under contract or on the spot market a range of diverse products such as energy, capacity, emissions credits, congestion credits and a
series of energy-related products that the system operator uses to optimize the operation of the energy grid, known as ancillary services. Accordingly, the availability of Powers diverse fleet of generation
units to produce these products as well as the prices of commodities, such as electricity, gas, nuclear fuel, coal and emissions, can have a material effect on Powers profitability. In recent years, the prices at
which transactions are entered into for future delivery of these products, as evidenced through the market for forward contracts at points such as PJM Interconnection L.L.C. (PJM) West, have escalated
considerably over historical prices. Broad market price increases such as these have had a positive effect on Powers results. Historically, Powers nuclear and coal-fired facilities have produced over 50%
and 25% of Powers production, respectively. With the vast majority of its power sourced from these lower-cost units, the rise in electric prices has yielded higher margins for Power. Over a longer-term
horizon, if these higher prices are sustained at levels reflective of what the current forward markets indicate, Power would have an attractive environment in which to contract for the sale of its anticipated
output, allowing for potentially sustained higher profitability than recognized in prior years. These prices also increase the cost of replacement power, thereby placing risk on Power to operate the generating
units to produce these products. Further, changes in the operation of Powers generating facilities, fuel and capacity prices, expected contract prices, capacity factors or other assumptions could materially
affect its ability to meet earnings targets and/or liquidity requirements.
Power seeks to mitigate volatility in its results by contracting in advance for a significant portion of its anticipated electric output, capacity and fuel needs. Power believes this contracting strategy
increases stability of earnings and cash flow.
Power seeks to sell a portion of its anticipated low-cost nuclear and coal-fired generation over a multi-year forward horizon, normally over a period of two to four years. As of February 15, 2008, Power
has contracted for all of its anticipated 2008 nuclear and coal-fired generation, with 85% to 95% contracted for 2009 and 40% to 50% contracted for 2010, with a modest amount contracted beyond 2010.
Power
has also entered into contracts for the future delivery of nuclear fuel and
coal to support its contracted sales discussed above. As of February 15,
2008, Power had contracted for 100% of its annual nuclear uranium fuel needs
through 2011 with decreasing percentages contracted through 2016. Power had
also contracted for 85% to 95% of its anticipated coal needs, including transportation,
for 2008, 75% to 85% for 2009, 55% to 65% for 2010 and modest amounts contracted
beyond 2010. These estimated fuel needs are subject to change based upon
the level of operation, and particular to coal, market demands
48
and pricing, which has increased recently. Power has recently negotiated through some disruptions in the delivery of certain contracted coal. Power believes it can continue to manage its fuel sourcing needs
in this dynamic market but cannot predict the impact that rising prices and potential increasing demand may have on its operations in the future.
By contrast, Power takes a more opportunistic approach in hedging its anticipated natural gas-fired generation. The generation from these units is less predictable, as these units are generally dispatched
only when aggregate market demand has exceeded the supply provided by lower-cost units. The natural gas-fired units generally provide a lower contribution to the margin of Power than either the nuclear
or coal units. Power will generally purchase natural gas as gas-fired generation is required to supply forward sale commitments.
In a changing market environment, this hedging strategy may cause Powers realized prices to be materially different than current market prices. At the present time, some of Powers existing
contractual obligations, entered into during lower-priced periods, are anticipated to result in lower margins than would have been the case if no or little hedging activity had been conducted. Alternatively,
in a falling price environment, this hedging strategy will tend to create margins in excess of those implied by the then current market.
Overview and Future Outlook
During 2007, Power continued to benefit from strong energy markets and sustained strong performance of its generating facilities. Going forward, Power expects continued strong margins as higher
prices for its nuclear and coal-fired generation output are realized due to the rolling nature of its forward hedge positions and the expiration of older lower-priced power contracts.
In the electricity markets where Power participates, the pricing of electricity can vary by location. For example, prices may be higher in congested areas due to transmission constraints during peak
demand periods, reflecting the bid prices of the higher cost units that are dispatched to meet demand. This typically occurs in the eastern portion of PJM, where many of Powers plants are located. At
various times, depending upon its production and its obligations, these price differentials can serve to increase or decrease Powers profitability.
In PJM, the Reliability Pricing Model (RPM) provides generators with capacity payments for the reliability provided by their respective facilities. The Forward Capacity Market (FCM) in the New
England Power Pool provides for similar reliability-based capacity payments. The FERC has approved the market changes in each of these markets, beginning on June 1, 2007 for the RPM transition period
and on December 1, 2006 for the FCM transition period.
In October 2007, Power initiated planning activities with respect to the construction of 300 MW to 400 MW of new gas-fired peaking capacity that could be available to bid into PJMs RPM base
residual auctions in 2008. Power estimates that the cost of this new construction could range from $250 million to $350 million. Power has requested that PJM perform feasibility studies to determine the
system impact of adding incremental gas-fired capacity at some of its existing generating stations located in the constrained Eastern MAAC reliability region. Powers final decision whether or not to
proceed with construction of any of these units would depend on estimated capital and interconnection costs, available siting and Powers ability to meet environmental permitting requirements. The costs
related to these units are included in Powers forecasted capital expenditures.
Power is also currently exploring a number of other initiatives for potential growth or development such as the possibility of supplying power directly to New York City from Powers Bergen 2
generating facility or the potential to build new nuclear generation. There is no guarantee that such initiatives will be achieved since many issues would need to be considered, such as system reliability
concerns, regulatory approvals and construction or development costs. Power does believe it has reasonable opportunities to grow its business.
A key factor in Powers ability to achieve its objectives is its ability to operate its nuclear and fossil stations at sufficient capacity factors to limit the need to purchase higher-priced electricity to satisfy
its obligations. Powers ability to achieve its objectives will also depend on the continuation of reasonable capacity markets. Power must also be able to effectively manage its construction projects and
continue to economically operate its generation facilities under increasingly stringent environmental requirements, including legislation, regulation and voluntary restrictions to address:
49
the control of carbon dioxide emissions to reduce the effects of global climate change and greenhouse gas;
other emissions such as nitrogen oxide, sulfur dioxide and mercury; and
the potential need for significant upgrades to existing intake structures and cooling systems at its larger once-through cooled plants, including Salem, Hudson, Mercer, Sewaren, New Haven and
Bridgeport.
Power has two large environmental back-end technology projects underway at its Mercer and Hudson coal plants aggregating approximately $1.1 billion in capital costs. These projects are scheduled to
be completed by the end of 2010. Power is focused on completing these projects on schedule and within the established budgets, but faces many risks typically involved in managing large construction
projects.
In addition, with an increase in competition and market complexity and constantly changing forward prices, there is no assurance that Power will be able to contract its output at attractive prices. While
these increases may have a potentially significant beneficial impact on margins, they could also raise any replacement power costs that Power may incur in the event of unanticipated outages, and could also
further increase liquidity requirements as a result of contract obligations. For additional information on liquidity requirements, see Liquidity and Capital Resources.
Power could also be impacted by a number of events, including regulatory or legislative actions favoring non-competitive markets, energy efficiency initiatives, and regulatory policies favoring the
construction of rate-based transmission that may result in increased imports of generation, which may be subject to less stringent environmental regulation, into areas served by Powers generation assets.
Further, some of the market-based mechanisms in which Power participates, including Basic Generation Service (BGS) auctions and RPM capacity payments, are at times the subject of review or discussion
by some of the participants in the New Jersey and federal regulatory and political arenas and the PJM market monitor. Power can provide no assurance that these mechanisms will continue to exist in their
current form for the foreseeable future.
PSE&G
PSE&G operates as an electric and gas public utility in New Jersey under cost-based regulation by the New Jersey Board of Public Utilities (BPU) for its distribution operations and by the FERC for its
electric transmission and wholesale sales operations.
Consequently, the earnings of PSE&G are largely determined by the regulation of its rates by those agencies. The BPU approved rate increases for gas delivery service in November 2006. Under the
terms of the settlement of its electric and gas base rate cases, PSE&G is required to file jointly for any gas and electric petition for future base rate increases and no base rate changes may become effective
before November 15, 2009.
Overview and Future Outlook
In February 2007, the BPU approved the results of New Jerseys annual BGS-Fixed Price (FP) and BGS-Commercial and Industrial Energy Price auctions and PSE&G successfully secured contracts to
provide the electricity requirements for the majority of its customers needs.
The Governor of New Jersey has directed the BPU, in partnership with other New Jersey agencies, to develop an Energy Master Plan (EMP) that reduces energy consumption while emphasizing
energy efficiency, conservation and renewable energy resources to meet New Jerseys future energy demands without increasing its reliance on non-renewable resources.
In conjunction with these efforts, on April 19, 2007, PSE&G filed a proposal with the BPU designed to spur investment in solar power in New Jersey and meet energy goals under the EMP. Under the
plan, PSE&G would invest approximately $100 million over two years following BPU approval of the plan to help finance the installation of solar systems throughout its service area. Under the Solar Energy
Program, PSE&G would loan money to customers in its electric service territory for the installation of solar photovoltaic systems on the customers premises. The borrowers would repay the loans over a
period of either 10 years (for residential customer loans) or 15 years (for all other loans) by providing PSE&G with solar renewable energy certificates (SRECs). Borrowers also have the option to repay the
loans with cash. PSE&G has proposed that it be allowed to earn a fair return on and of its investment, and fully recover its administrative costs to implement the Solar Energy Program, through its regulated
rates.
50
If approved by the BPU, the initiative could begin in the second quarter of 2008 and support 30 MW of solar power in the following two years, fulfilling approximately 50% of the BPUs Renewal
Portfolio Standard requirements in PSE&Gs service area for energy years 2009 and 2010. On July 12, 2007, the BPU established a schedule for consideration of this proposal. PSE&G has held a series of
stakeholder meetings to discuss program details with interested parties. Settlement discussions are ongoing, with a BPU decision expected in early 2008. The outcome of this proceeding cannot be predicted
at this time.
On June 8, 2007, PSE&G endorsed the construction of three new 500 kV transmission lines intended to significantly improve the reliability of the electrical grid serving New Jersey customers. On June
22, 2007, PJMs Board of Managers approved construction of one of the proposed lines and assigned construction responsibility to PSE&G, Pennsylvania Power and Light and FirstEnergy Corporation
(FirstEnergy) for their respective service territories. On October 9, 2007, PJM provided a formal letter notification to PSE&G identifying PSE&G as the responsible party for the construction of both its portion
of the new line and the portion originally assigned to FirstEnergy in New Jersey. The estimated cost of PSE&Gs portion of this construction project is between $600 million and $650 million. PSE&Gs costs
will go into transmission rate base, subject to regulatory approval, and can be expected to have a positive impact on revenues and earnings for PSE&G. In addition, the U.S. Department of Energy has now
designated the Mid-Atlantic Area Corridor, which encompasses all of New Jersey, as a National Interest Electric Transmission Corridor to which the FERC back-stop eminent domain authority will attach.
The two other lines which PSE&G has endorsed have not yet been submitted to PJM for approval, as required by PJM rules, but PSE&G believes that construction of these lines, which would follow
existing transmission rights-of-way, are needed to enhance the reliability of the transmission system.
PJM has proposed significant changes to the rules establishing how economic transmission gets built within PJM. Economic transmission is transmission that is being built to reduce economic congestion
on the system, as congestion can result in higher electricity prices paid by consumers located within congested areas. PJM proposes to forecast congestion levels well into the future and to use these forecasts
as the basis for determining the benefits of an economic transmission project. PJMs proposal is focused on rate-based rather than market conditions solutions. Power and PSE&G have actively participated in
the FERC proceeding that is still considering the specifics of PJMs proposal.
On June 1, 2007, new electric BGS-FP rates went into effect with an expected increase of approximately 12% to residential customers bills. There was no change to the BGSS residential rate during
2007.
As a result of the February 2008 auction new BGS-FP rates will increase the average residential customers bill by approximately 12% effective June 2008.
The risks to PSE&Gs business generally relate to the treatment of the various rate and other issues by the state and federal regulatory agencies, specifically the BPU and the FERC. PSE&Gs success will
depend, in part, on its ability to attain a reasonable rate of return, continue cost containment initiatives, maintain system reliability and safety levels, continue recovery of the regulatory assets it has deferred
and attain an adequate return on the investments it plans to make in its electric and gas transmission and distribution system and the level of recovery of distribution revenues in light of customer demand
and conservation efforts. Also, PSE&Gs recent incentive rate treatment request for the Susquehanna-Roseland line and classifying the new 69 kV facilities as transmission would result in improvements in
reliability and more expeditious rate treatment for these facilities.
The FERCs ruling regarding PJM long-term transmission rate design, which remains subject to rehearing, benefits PSE&G customers by preserving lower rates than would likely be in effect under
proposed rate design modifications. Since PSE&G earns no margin on the commodity portion of its electric and gas sales through tariff agreements, there is no anticipated commodity price volatility for
PSE&G; however, commodity costs continue to put upward pressure on customer charges.
Global
Overview and Future Outlook
Global has reduced its international risk by monetizing the majority of its international investments.
On October 17, 2007, Global closed on the sale of its interests in Electroandes S.A. (Electroandes), its 180 MW hydro-electric generation and transmission company in Peru to a wholly owned
subsidiary of
51
Statkraft Norfund Power Invest (SN Power) of Norway for a total purchase price of approximately $390 million (subject to working capital and other adjustments), including the assumption of
approximately $108 million of debt. After-tax net cash proceeds, including dividends paid prior to closing, were approximately $220 million.
On December 14, 2007, Global closed on the sale its 50% ownership interest in Chilquinta Energia S.A. (Chilquinta), an electric distribution company in Chile, and its 38% ownership of Luz del Sur
S.A.A. (LDS), an electric distribution company in Peru to a subsidiary of AEI (formerly Ashmore Energy International), for approximately $685 million. After-tax net cash proceeds were approximately
$480 million.
On December 18, 2007, PSEG announced its intention to sell its equity interest in the SAESA Group. The SAESA Group is Globals largest remaining international investment, consisting of four
distribution companies, one transmission company and a generation facility located in Chile.
For additional information on Electroandes, Chilquinta, LDS and SAESA, see Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments.
Domestically, Global has investments in power producers that own and operate electric generation in Texas, California and Hawaii, with smaller investments in New Hampshire and Pennsylvania.
Global expects these operations to continue to perform well and provide the opportunity for growth. As a merchant generation business with a load-following asset profile, Globals largest domestic
investment is in two generating facilities in Texas, and, as such, its success will be driven by the efficient operation of those plants and by changes in market conditions, particularly projected market heat
rates and weather. Global seeks to sell its output from its Texas facilities by entering into a mix of contracts consisting of standard on-peak calendar transactions and structured contracts normally selling
forward 30% to 50% of its available capacity with the balance sold during the year and in the daily balancing and ancillary service markets. Globals results from its investments in Texas are also impacted
by the recognition of unrealized mark-to-market (MTM) gains and losses on fixed-price contracts that expire in 2010.
Beginning in December 2008, the Electric Reliability Council of Texas (ERCOT) will transition from a zonal market to a nodal wholesale market. The redesigned grid will consist of more than 4,000
nodes replacing the current four congestion management zones. The implementation of the nodal market design is expected to deliver improved price signals, improved dispatch efficiencies and direct
assignment of local congestion. PSEG is currently evaluating the potential impact this change will have on its Texas generation facilities.
Global is also continuing to explore options for monetizing its other remaining international investments in Italy, Venezuela and India, which total approximately $123 million. In June 2007, Global
restarted Bioenergie S.p.A.s (Bioenergie) San Marco biomass generation facility after a seven-month outage due to a pending criminal investigation regarding allegations of violations of the facilitys air
permit. With respect to Globals investment in Turboven Company Inc. (Turboven), Global recently entered into preliminary valuation discussions with the government of Venezuela as part of the
nationalization efforts which are ongoing. Based upon a recent review of the circumstances, an impairment charge of $7 million, after-tax, was recorded in September 2007 to further write down Globals
Venezuelan investments. No assurances can be given as to whether Global can recover the current book value of the investments in Venezuela. Globals investment in India is currently more stable than in
prior years as evidenced by dividend payments of $6 million in 2007 and $2 million during 2006. The value of Globals investment in PPN Power Generating Company Limited (PPN), India was adjusted
down by $2 million, after-tax, to reflect the estimated current market value of PPN.
Global is pursuing the potential development of wind, biomass and solar projects, primarily in PSEGs core markets.
Resources
Overview and Future Outlook
Resources primarily has invested in energy-related leveraged leases. Resources is focused on maintaining its current investment portfolio and does not expect to make any new investments. Resources
future performance is subject to tax risks related to its lease transactions. See Note 12. Commitments and Contingent Liabilities for further discussion.
52
PSEG faces significant risk at Resources related to the tax treatment of uncertain tax positions which was impacted by new accounting guidance under FIN 48, Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement 109 (FIN 48) and FASB Staff Position No. FSP 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes
Generated by a Leveraged Lease Transaction (FSP 13-2), both of which were effective as of January 1, 2007. This new guidance also reduced PSEGs earnings by approximately $30 million in 2007 as
compared to 2006. Resources future earnings could also be impacted by changes to uncertain tax positions as determined by changes in substantive tax law and tax audit results, including resolution of tax
audit claims associated with its leveraged lease transactions. See Note 2. Recent Accounting Standards and Note 12. Commitments and Contingent Liabilities for further discussion.
Earnings (Losses)
Years Ended December 31,
2007
2006
2005
(Millions)
Power
$
949
$
515
$
434
PSE&G
380
265
348
Global (A)
31
(84
)
63
Resources
58
63
92
Other(B)
(99
)
(80
)
(100
)
PSEG Income from Continuing Operations
1,319
679
837
Income (Loss) from Discontinued Operations, including Gain (Loss) on Disposal(C)
16
60
(159
)
Cumulative Effect of a Change in Accounting Principle(D)
(17
)
PSEG Net Income
$
1,335
$
739
$
661
Earnings Per Share (Diluted)
Years Ended December 31,
2007
2006
2005
PSEG Income from Continuing Operations
$
2.59
$
1.34
$
1.71
Income (Loss) from Discontinued Operations, including Gain (Loss) on Disposal(C)
0.03
0.12
(0.33
)
Cumulative Effect of a Change in Accounting Principle(E)
(0.03
)
PSEG Net Income
$
2.62
$
1.46
$
1.35
(A)
Globals Income from Continuing Operations for 2007 includes the after-tax loss of $23 million resulting from the sale of Chilquinta and LDS and for 2006 includes the $178 million after-tax loss on the
sale of Rio Grande Energia S.A. (RGE).
(B)
Other activities include non-segment amounts of PSEG (as parent company) and its subsidiaries and intercompany eliminations. Specific amounts include interest on certain financing transactions and
certain administrative and general expenses at PSEG and Energy Holdings (as parent companies).
(C)
Includes Discontinued Operations of Lawrenceburg, the SAESA Group and Electroandes in 2007, 2006 and 2005 and Elektrocieplownia Chorzow Elcho Sp. Z o.o. (Elcho) and Elektrownia Skawina
SA (Skawina) in 2006 and 2005 as well as the gain on the sale of Electroandes in 2007, the gains on the sales of Elcho and Skawina in 2006 and the loss on the sale of Waterford in 2005. See Note 4.
Discontinued Operations, Dispositions, Acquisitions and Impairments.
(D)
Relates to the adoption in 2005 of FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations. (FIN 47). See Note 3. Asset Retirement Obligations.
53
PSEG
For the Years
2007 vs 2006
2006 vs 2005
2007
2006
2005
Increase
%
Increase
%
(Millions)
(Millions)
(Millions)
Operating Revenues
$
12,853
$
11,762
$
11,849
$
1,091
9
$
(87
)
(1
)
Energy Costs
$
6,523
$
6,553
$
6,882
$
(30
)
N/A
$
(329
)
(5
)
Operation and Maintenance
$
2,419
$
2,221
$
2,224
$
198
9
$
(3
)
N/A
Write-down of Assets
$
16
$
318
$
$
(302
)
(95
)
$
318
N/A
Depreciation and Amortization
$
783
$
811
$
714
$
(28
)
(3
)
$
97
14
Income from Equity Method Investments
$
116
$
120
$
124
$
(4
)
(3
)
$
(4
)
(3
)
Other Income and Deductions
$
23
$
88
$
144
$
(65
)
(74
)
$
(56
)
(39
)
Interest Expense
$
(729
)
$
(791
)
$
(766
)
$
(62
)
(8
)
$
25
3
Income Tax Expense
$
(1,060
)
$
(460
)
$
(549
)
$
600
N/A
$
(89
)
(16
)
Income (Loss) from Discontinued Operations, including Gain (Loss) on Disposal, net of tax
$
16
$
60
$
(159
)
$
(44
)
(73
)
$
219
N/A
Cumulative Effect of a Change in Accounting Principle, net of tax
$
$
$
(17
)
$
(17
)
N/A
$
17
N/A
PSEGs results of operations are primarily comprised of the results of operations of its operating subsidiaries, PSE&G, Power and Energy Holdings, excluding changes related to intercompany
transactions, which are eliminated in consolidation. It also includes certain financing costs at the parent company. For additional information on intercompany transactions, see Note 21. Related-Party
Transactions. For a discussion of the causes for the variances at PSEG in the table above, see the discussions for Power, PSE&G and Energy Holdings that follow.
Power
For the year ended December 31, 2007, Power had Net Income of $941 million, an increase of $665 million as compared to the year ended December 31, 2006. Excluding the Losses from Discontinued
Operations of Lawrenceburg of $8 million and $239 million in 2007 and 2006, respectively, Income from Continuing Operations for the year ended December 31, 2007 was $949 million, an increase of $434
million as compared to 2006. The primary reasons for the increase in Income from Continuing Operations were higher prices realized from new contracts, including BGS contracts, combined with higher
sales volumes and lower generation costs. Improved margins and higher sales volumes under the BGSS contract due to a colder winter heating season and more favorable fuel pricing in 2007 also
contributed to the increase. The increase in Income from Continuing Operations also included the recognition of non-trading MTM losses of $6 million, after-tax, in 2007 as compared to $1 million of after-
tax MTM losses in 2006.
For the year ended December 31, 2006, Power had Net Income of $276 million, an increase of $84 million as compared to the year ended December 31, 2005. Excluding Losses from Discontinued
Operations of Lawrenceburg and Waterford of $239 million and $226 million in 2006 and 2005, respectively, and a $16 million charge recorded for the cumulative effect adjustment of adopting FIN 47 in
2005, Income from Continuing Operations was $515 million for the year ended December 31, 2007, an increase of $81 million as compared to 2006. The increase primarily resulted from higher BGS contract
prices and higher sales volumes in the various power pools, supported by improved nuclear operations and the commencement of commercial operations at Linden in May 2006 and at the Bethlehem
Energy Center (BEC) in July 2005 and lower generation costs due to lower pool prices and lower demand under BGS contracts. Power also had lower non-trading losses, which were approximately $1
million in 2006 as compared to $8 million in 2005. Powers increased earnings were partially offset by reduced margins on BGSS, as market prices for natural gas declined from historically high price levels
experienced in the second half of 2005 while the cost of gas in inventory was reasonably stable, and lower demand in 2006 due to a warmer winter heating system and customer conservation. Powers 2006
earnings were also affected by a $44 million pre-tax write-down of four gas turbines, which were sold in April 2007, a $30 million after-tax decrease in Income from the Nuclear Decommissioning Trust
(NDT) Funds and higher Operation and Maintenance Costs, Depreciation and Amortization and Interest Expense related to operation of the Linden and BEC facilities.
54
Ended December 31,
(Decrease)
(Decrease)
The year-over-year detail for these variances for these periods are discussed in more detail below:
For the Years
2007 vs 2006
2006 vs 2005
2007
2006
2005
Increase
%
Increase
%
(Millions)
(Millions)
(Millions)
Operating Revenues
$
6,796
$
6,057
$
6,027
$
739
12
$
30
N/A
Energy Costs
$
3,975
$
3,955
$
4,266
$
20
1
$
(311
)
(7
)
Operation and Maintenance
$
1,001
$
958
$
939
$
43
4
$
19
2
Write-Down of Assets
$
$
44
$
$
(44
)
(100
)
$
44
N/A
Depreciation and Amortization
$
140
$
140
$
114
$
N/A
$
26
23
Other Income and Deductions
$
69
$
66
$
144
$
3
5
$
(78
)
(54
)
Interest Expense
$
(159
)
$
(148
)
$
(100
)
$
11
7
$
48
48
Income Tax Expense
$
(641
)
$
(363
)
$
(318
)
$
278
77
$
45
14
Loss from Discontinued Operations, including Loss on Disposal, net of tax
$
(8
)
$
(239
)
$
(226
)
$
(231
)
(97
)
$
13
6
Cumulative Effect of a Change in Accounting Principle, net of tax
$
$
$
(16
)
$
N/A
$
16
N/A
Operating Revenues
The $739 million increase for the year ended December 31, 2007 as compared to 2006 was due to increases of $416 million in generation revenues and $349 million in gas supply revenues, which were
partially offset by $26 million in lower trading revenues.
The $30 million increase for the year ended December 31, 2006 as compared to 2005 was due to increases of $238 million in generation revenues and $27 million in trading revenues, which were
partially offset by a decrease of $235 million in gas supply revenues.
Generation
The $416 million increase in generation revenues for the year ended December 31, 2007, as compared to 2006, was primarily due to higher revenues of $355 million from higher prices on BGS fixed-
price contracts. Also contributing to the increase was $149 million from higher capacity prices resulting from the changes in the capacity markets in PJM and Connecticut, which resulted in $47 million in
reduced RMR revenues in these markets. Power also had increased revenues resulting from more generation being sold into the various pools in which it operated following the expiration of certain of its
wholesale power contracts. The increased revenues from sales into the various pools offset the reduction in wholesale contract revenues.
The $238 million increase in generation revenues for the year ended December 31, 2006, as compared to 2005, was primarily due to an increase of $238 million from higher sales volumes in the various
power pools, supported by improved nuclear operations and the commencement of the commercial operations of Linden in May 2006 and BEC in July 2005, partially offset by lower pool prices. Also
contributing to the increase was $92 million of higher BGS contract revenues due to higher contract prices which were partly offset by a reduction in load being served under the fixed-price BGS contracts
and termination of BGS hourly contracts in May 2006. The increases were partially offset by a decrease of $58 million due to certain wholesale contracts ending in 2005 and early 2006 and $33 million of
unrealized losses on asset-backed electric forward contracts.
Gas Supply
The $349 increase in gas supply revenues for the year ended December 31, 2007, as compared to 2006, includes $248 million resulting from higher sales volumes under the BGSS contract, largely due to
colder average temperatures in the 2007 winter heating season. The increase was also attributable to the recognition of gains of $69 million on financial hedging transactions. The remaining increases were
primarily due to increased pricing and volumes sold to other gas distributors and increased revenues received for balancing and storage due to higher sales volumes and higher tariff rates that became
effective in January 2007.
The $235 million decrease in gas supply revenues for the year ended December 31, 2006, as compared to 2005, was primarily due to decreases of $334 million due to lower demand under the BGSS
contract in 2006 due to a warmer winter heating season and improved customer conservation in 2006 and $94 million in
55
Ended December 31,
(Decrease)
(Decrease)
decreased prices and gas volumes and pipeline capacity sold to other gas customers. The decreases were partially offset by an increase of $188 million due to higher prices under the BGSS contract.
Trading
The $26 million decrease in trading revenues for the year ended December 31, 2007, as compared to 2006, was due mainly to the absence of gains related to emissions credits that were realized in 2006.
The $27 million increase in trading revenues for the year ended December 31, 2006, as compared to 2005, was principally due to higher realized gains related to emissions credits.
Operating Expenses
Energy Costs
Energy Costs represent the cost of generation, which includes fuel purchases for generation as well as purchased energy in the market, and gas purchases to meet Powers obligation under its BGSS
contract with PSE&G.
The $20 million increase for the year ended December 31, 2007, as compared to 2006, was due to a $247 million increase in gas costs offset by a decrease of $227 million in generation costs. The
increase in gas costs reflected a $245 million increase due to a higher volume of gas sold to satisfy Powers BGSS obligations and an increase of $16 million due to the recognition of losses in 2007 coupled
with gains in 2006 related to financial hedging transactions. The decrease in generation costs reflected decreases of $275 million due to lower pool purchases, primarily resulting from reduced load
obligations in Connecticut following the expiration of a wholesale power contract in 2006, combined with $61 million in lower congestion and transmission costs. These decreases were partially offset by an
increase of $154 million due to higher volumes of fuel purchases, primarily natural gas, as these units ran more during 2007.
The $311 million decrease for the year ended December 31, 2006, as compared to 2005, was primarily due to decreases of $267 million from lower pool prices and lower demand under BGS contracts,
$144 million from a reduced volume of gas purchased to satisfy Powers BGSS obligations, partially offset by higher gas prices related to inventory for the 2005/2006 winter heating season, and $58 million
due to favorable pricing of fuel-related asset-backed transactions in 2006. These decreases were partially offset by $80 million of losses realized on gas hedges in 2006, an increase of $42 million in fuel costs
and an increase of $35 million in transmission fees. The increase in fuel costs was largely due to higher volumes of gas purchased to meet increased production by the gas-fired plants, including Linden and
BEC, and higher oil prices, partially offset by lower gas prices during 2006 and a lower volume of oil purchases due to reduced running times of certain of the oil-fired plants in 2006.
Operation and Maintenance
The $43 million increase for the year ended December 31, 2007, as compared to 2006, was principally due to costs incurred in 2007 related to various maintenance projects at certain fossil stations,
mainly Hudson and Mercer.
The $19 million increase for the year ended December 31, 2006, as compared to 2005, was principally due to higher maintenance costs of $60 million related to certain of the fossil plants and scheduled
outages at the nuclear units. These increases were partially offset by the absence of a $14 million restructuring charge recorded in 2005 related to Nuclears workforce realignment plan, a decrease of $10
million in payroll and benefits due to a reduction in employees and a decrease of $14 million in fees paid to Services for information technology and various administrative services.
Write-Down of Assets
The $44 million write-down of assets recorded in 2006 related to four turbines for which Power had no immediate use and which Power sold in April 2007. For additional information, see Note 4.
Discontinued Operations, Dispositions, Acquisitions and Impairments.
56
Depreciation and Amortization
There was no material change in Depreciation and Amortization for the year ended December 31, 2007 as compared to 2006. The $26 million increase for the year ended December 31, 2006, as
compared to 2005, was primarily due to the Linden and BEC plants being placed into service in May 2006 and July 2005, respectively.
Other Income and Deductions
The $3 million increase in Other Income and Deductions for the year ended December 31, 2007 as compared to 2006, was principally due to increased realized income of $76 million related to the NDT
Funds, the absence of $14 million of penalties referenced below that were recorded in 2006 and increased interest income of $13 million from short-term loans to PSEG (as parent company). These increases
were partially offset by increased realized losses of $34 million and increased charges of $58 million recorded in 2007 for other-than-temporary impairments related to the NDT Fund securities and the
absence of $6 million of expense reversals recorded in 2006 related to certain excess liability reserves.
The $78 million decrease for the year ended December 31, 2006, as compared to 2005, was primarily due to decreased net realized income of $29 million and increased realized losses of $19 million
related to the NDT Funds. Also contributing to the decrease were charges recorded in 2006 of $14 million for an other-than-temporary impairment of certain NDT Fund securities and $14 million for
penalties related to negotiations concerning environmental concerns and an alternate pollution reduction plan for Powers Hudson unit.
Interest Expense
Interest Expense increased $11 million for the year ended December 31, 2007, as compared to 2006, due primarily to an increase in interest expense of $20 million due to the reclassification of Interest
Expense to Discontinued Operations of the Lawrenceburg facility for year ended December 31, 2006 and through the sale of Lawrenceburg in May 2007 combined with an $8 million increase due to lower
capitalized interest in 2007 since the Linden construction was completed in May 2006. These increases were partially offset by the absence of $10 million of interest expense in 2007 due to the maturity of
the 6.87% Senior Notes in April 2006, as well as decreases in interest incurred on lower average short-term borrowings from Enterprise and lower commitment and letter of credit fees.
The $48 million increase for the year ended December 31, 2006, as compared to 2005, was due primarily to lower capitalized interest costs in 2006 related to commencement of operations of the Linden
and BEC facilities.
Income Tax Expense
Income Taxes increased in both 2007 and 2006, primarily due to higher pre-tax income.
Loss from Discontinued Operations, including Loss on Disposal, net of tax
On May 16, 2007, Power completed the sale of its Lawrenceburg generation facility. The sale price for the facility and inventory was $325 million. The transaction resulted in an after-tax charge to
Powers earnings of $208 million and was reflected as a charge to Discontinued Operations in the fourth quarter of 2006. Losses from Discontinued Operations of Lawrenceburg, not including the Loss of
Disposal, were $8 million, $31 million and $28 million for the years ended December 31, 2007, 2006 and 2005, respectively.
On May 27, 2005, Power reached an agreement to sell its Waterford generation facility for $220 million and recognized an estimated loss on disposal of $177 million, net of tax, for the initial write-down
of its carrying amount of Waterford to its fair value less cost to sell. On September 28, 2005, Power completed the sale of Waterford and recognized an additional loss of $1 million. Losses from
Discontinued Operations of Waterford, not including the Loss of Disposal, were $20 million for the year ended December 31, 2005.
See Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments for additional information.
57
Cumulative Effect of a Change in Accounting Principle, net of tax
For the year ended December 31, 2005, Power recorded an after-tax loss in the amount of $16 million due to the required recording of a liability for the fair value of asset-retirement costs primarily
related to its generation plants under FIN 47, which was adopted in December 2005.
PSE&G
For the year ended December 31, 2007, PSE&G had Net Income of $380 million, an increase of $115 million as compared to the year ended December 31, 2006. About $69 million of the increase was due
to the full year effect of the electric and gas base rate increases in November 2006. The return to a normal heating load (degree days were 16% higher in 2007 compared to 2006) for gas and a 2% growth in
electric sales added $60 million to net income. Offsetting these increases was a less than 2% increase in controllable Operation and Maintenance.
For the year ended December 31, 2006, PSE&G had Net Income of $265 million, a decrease of $83 million as compared to the year ended December 31, 2005. This decrease was primarily due to delayed
decisions in the electric and gas base rate cases combined with the decline in electric and gas delivery volumes. In 2006, delivery volumes for gas and electric decreased 10% and 3%, respectively. The
weather was the primary cause of these declines with a drop of 16% in the number of degree days impacting gas. Gas commodity prices were extremely high early in 2006, which also contributed to a further
decline in weather normalized sales. Thermal Heat Index hours were normal in 2006 but 18% less than 2005, negatively impacting electric sales.
The year-over-year detail for these variances for these periods are discussed in more detail below:
For the Years
2007 vs 2006
2006 vs 2005
2007
2006
2005
Increase
%
Increase
%
(Millions)
(Millions)
(Millions)
Operating Revenues
$
8,493
$
7,569
$
7,514
$
924
12
$
55
1
Energy Costs
$
5,498
$
4,884
$
4,756
$
614
13
$
128
3
Operation and Maintenance
$
1,308
$
1,160
$
1,151
$
148
13
$
9
1
Depreciation and Amortization
$
591
$
620
$
553
$
(29
)
(5
)
$
67
12
Other Income and Deductions
$
12
$
22
$
12
$
(10
)
(45
)
$
10
83
Interest Expense
$
(332
)
$
(346
)
$
(342
)
$
(14
)
(4
)
$
4
1
Income Tax Expense
$
(257
)
$
(183
)
$
(235
)
$
74
40
$
(52
)
(22
)
Operating Revenues
PSE&G has three sources of revenue: commodity revenues from the sales of energy to customers and in the PJM spot market; delivery revenues from the transmission and distribution of energy through
its system; and other operating revenues from the provision of various services.
PSE&G makes no margin on gas commodity sales as the costs are passed through to customers. The difference between the gas costs paid under the requirements contract for residential customers and
the revenues received from residential customers is deferred and collected from or returned to customers in future periods. Gas commodity prices fluctuate monthly for commercial and industrial customers
and annually through the BGSS tariff for residential customers. In addition, for residential gas customers, PSE&G has the ability to adjust rates upward two additional times and downward at any time, if
warranted, between annual BGSS proceedings.
PSE&G makes no margin on electric commodity sales as the costs are passed through to customers. PSE&G secures its electric commodity through the annual BGS auction. Electric commodity supply
prices are set based on the results of these auctions for residential and smaller industrial and commercial customers, and are translated into seasonally-adjusted fixed rates. Electric supply for larger
industrial and commercial customers is provided at a rate principally based on the hourly PJM real-time energy price. Customers may obtain their electric supply through either the BGS default electric
supply service or through competitive third-party electric suppliers, and the majority of the customers subject to hourly pricing are currently receiving electric supply from third-party suppliers. Any
differences between amounts paid by PSE&G to BGS suppliers for electric commodity, and the amounts of electric commodity revenue collected from customers is deferred and collected or returned to
customers in subsequent months.
58
Ended December 31,
(Decrease)
(Decrease)
PSE&G also purchases electric commodity from several Non-Utility Generation (NUG) facilities which is resold in the PJM market. Most of the NUG contracts are priced above market under long-term
contracts. PSE&G recoups the difference in price through the Non-Utility Generation Clause (NGC).
The $924 million increase for the year ended December 31, 2007, as compared to 2006, was due to increases of $613 million in commodity revenues and $301 million in delivery revenues, described
below and $10 million in other operating revenues, primarily related to appliance service contracts.
The $55 million increase for the year ended December 31, 2006, as compared to 2005 was due to increases of $78 million in commodity revenues and $3 million in other operating revenues, offset by a
decrease of $26 million in delivery revenues.
Commodity
The $613 million increase in commodity-related revenues for the year ended December 31, 2007, as compared to 2006, was due to increases of $510 million and $103 million in electric and gas revenues,
respectively. The electric increase was due to $541 million in higher BGS revenues (higher auction prices of $484 million plus increased sales of $57 million), $44 million in higher NUG prices, offset by a
$74 million decrease in the NGC revenues ($78 million in lower prices due to a March 2007 rate change offset by $4 million in higher volumes). The gas increase was primarily due to $240 million in
increased sales due to weather offset by $137 million in lower BGSS prices.
The $78 million increase in commodity revenues for the year ended December 31, 2006, as compared to 2005, was due to an increase in electric commodity revenues of $213 million, offset by a decrease
of $135 million in gas commodity revenues. The increase in electric revenues was due to $299 million in higher BGS revenues (higher auction prices of $346 million offset by reduced sales of $47 million)
offset by $85 million in lower NUG revenues (lower prices of $82 million and by $3 million for lower volumes). The gas decrease was due to $317 million in lower volumes due to weather and $58 million
due to the expiration of the Third Party Shopping Incentive Clause in July 2005. There was a corresponding $58 million increase in delivery revenues. These were offset by $240 million in higher BGSS
prices.
Delivery
The $301 million increase in delivery revenues for the year ended December 31, 2007, as compared to 2006, was due to increases of $169 million and $132 million in electric and gas revenues,
respectively. The electric increase was due primarily to $83 million for increased SBC rates, $42 million in rate relief effective November 9, 2006 and $44 million in increased sales and demands primarily
due to weather. PSE&G retains no margins from SBC collections as the revenues are offset in operating expenses below. The gas increase was due to $67 million in increased sales primarily due to weather,
$39 million due to the SBC rate increases on November 1, 2006 and March 9, 2007 and $31 million due to rate relief effective November 9, 2006.
The $26 million decrease in delivery revenues for the year ended December 31, 2006, as compared to 2005, was due to a $27 million decrease in gas offset by a $1 million increase in electric revenues.
The gas decrease was due to $101 million in lower volumes primarily due to weather offset by $74 million in increased prices, $58 million of which was due to the expiration of the Third Party Shopping
Incentive Clause in July 2005, described above in commodity revenues, $8 million due to rate relief effective November 9, 2006 and $8 million due to the SBC November 1, 2006 rate increase. The electric
increase was due primarily to $13 million in higher securitization tariff rates and $8 million from a rate increase effective November 9, 2006, offset by $20 million in lower volumes due to weather.
Operating Expenses
Energy Costs
The $614 million increase for the year ended December 31, 2007, as compared to the same period in 2006, was comprised of increases of $512 million and $102 million in electric and gas costs,
respectively. The electric increase was due to $453 million or 18% in higher prices for BGS and NUG purchases and $59 million or 2% in higher BGS volumes due to weather. The gas increase was caused
by a $239 million or 11% increase in sales volumes due primarily to weather offset by $137 million in lower prices.
The $128 million increase for the year ended December 31, 2006, as compared to 2005, was comprised of an increase of $211 million in electric costs offset by a decrease of $83 million in gas costs. The
electric
59
increase was caused by $255 million or 16% in higher prices for BGS and NUG purchases offset by $47 million in lower BGS volumes due to weather. The gas decrease was caused by a $362 million or 17%
decrease in sales volumes due to weather and $8 million due to the expiration of the Gas Cost Underrecovery Adjustment clause in January 2005, offset by $287 million or 11% in higher prices.
Operation and Maintenance
The $148 million increase for the year ended December 31, 2007, as compared to 2006, was due primarily to increased SBC expenses of $132 million, resulting from rate increases in November 2006 and
March 2007, increased payroll of $16 million, a higher reserve for injuries and damages of $10 million and $5 million for outside services. Offsetting the increases was $19 million in lower pension expense.
The increased SBC expenses were offset in delivery revenues with no impact on net income.
The $9 million increase for the year ended December 31, 2006, as compared to 2005, was due to $9 million in increased labor and fringe benefits due to increased wages and Other Postretirement
Benefits costs and $7 million in increased bad debt expense. These increases were offset by decreases of $3 million in injuries and damage claims and $2 million in write offs and $2 million in Net Operating
Loss purchases.
Depreciation and Amortization
The $29 million decrease for the year ended December 31, 2007, as compared to 2006, was due primarily to decreases of $30 million due to revised plant depreciation rates and $11 million due to lower
cost of removal rates, both resulting from the November 2006 rate case. Also contributing to the decrease was $8 million due to software previously amortized in 2006. This was offset by increases of $11
million due to amortization of regulatory assets and $9 million due to additional plant in service.
The $67 million increase for the year ended December 31, 2006, as compared to 2005, was comprised of increases of $70 million from the expiration of an excess depreciation credit, $6 million due to
amortization of regulatory assets and $3 million due to additional plant in service. These increases were offset by decreases of $5 million due to revised plant depreciation and cost of removal rates, $3
million due to software amortization and $3 million due to the amortization of the Remediation Adjustment Clause.
Other Income and Deductions
The
$10 million decrease for the year ended December 31, 2007, as compared to
2006, was due primarily to $7 million reduction in income tax gross-ups
on contributions in aid of construction (CIAC). CIAC is taxable and PSE&G
recognizes the gross-up as income when collected. Also contributing to the
decrease was $2 million in lower investment income and $1 million in increased
donations.
The $10 million increase for the year ended December 31, 2006, as compared to 2005, was due to an $8 million income tax gross-up on CIAC in 2006. CIAC are taxable and PSE&G recognizes the gross-
up as income when collected. Also included are increases of $1 million of short-term interest income and $1 million in gains on the sale of excess property.
Interest Expense
The $14 million decrease for the year ended December 31, 2007, as compared to 2006, was due primarily to lower interest expense of $12 million related to settlement of IRS Audits in 2006 and lower
interest on regulatory clauses of $7 million, offset by $5 million in increased long-term debt due to new debt issuances in December 2006 and May 2007.
Income Tax Expense
The $74 million increase for the year ended December 31, 2007, as compared to 2006, was primarily due to $77 million on higher pre-tax income offset by $3 million in various tax adjustments and tax
credits.
The $52 million decrease for the year ended December 31, 2006, as compared to 2005, was due to $55 million on lower pre-tax income offset by $3 million in various flow-through adjustments.
60
Energy Holdings
For the year ended December 31, 2007, Energy Holdings had Net Income of $81 million, a decrease of $194 million as compared to the year ended December 31, 2006. Excluding Income from
Discontinued Operations of $24 million and $299 million for the years ended December 31, 2007 and 2006, respectively, Income from Continuing Operations for the year ended December 31, 2007 was $57
million, an increase of $81 million as compared to 2006. The primary reason for the increase was the absence of the $178 million after-tax loss on the sale of RGE in 2006 which was partially offset by the
after-tax loss of $23 million resulting from the sale of Chilquinta and Luz Del Sur in December 2007. The increase was also offset by lower operational earnings at PSEG Texas driven by lower generation at
the plants and lower mark-to-market earnings which were $16 million, after-tax, in 2007 as compared to $29 million, after-tax, in 2006, due to increased future spark spreads caused by strengthening of
forward curves for 2008 and beyond; lower operational earnings at Bioenergie in Italy largely due to sequestration and shut-down in early 2007; losses recorded on the early retirement of debt in December
2007; and lower leveraged lease income at Resources.
For
the year ended December 31, 2006, Energy Holdings had Net Income of $275
million, an increase of $61 million as compared to the year ended December
31, 2005. Excluding Income from Discontinued Operations of $299 million and
$67 million for the years ended December 31, 2006 and 2005, respectively,
the Loss from Continuing Operations was $24 million for the year ended December
31, 2006, a decrease in earnings of $174 million as compared to 2005. The
primary reason for the decline was the $178 million after-tax loss on the
sale of RGE. The decreases were also due to the absence of an after-tax gain
of $43 million from the sale of Resources leveraged lease investment
in Generation Station Unit 2 (Seminole) in December 2005. The decreases were
partially offset by strong operations at PSEG Texas combined with $29 million
of after-tax mark-to-market gains on forward gas contracts in 2006 as compared
to $3 million of after-tax MTM losses in 2005 at PSEG Texas.
The year-over-year detail for these variances for these periods are discussed in more detail below:
For the Years
2007 vs 2006
2006 vs 2005
2007
2006
2005
Increase
%
Increase
%
(Millions)
(Millions)
(Millions)
Operating Revenues
$
968
$
955
$
987
$
13
1
$
(32
)
(3
)
Energy Costs
$
450
$
523
$
517
$
(73
)
(14
)
$
6
1
Operation and Maintenance
$
139
$
132
$
157
$
7
5
$
(25
)
(16
)
Write-Down of Assets
$
16
$
274
$
$
(258
)
(94
$
274
N/A
Depreciation and Amortization
$
38
$
32
$
29
$
6
19
$
3
10
Income from Equity Method Investments
$
116
$
120
$
124
$
(4
)
(3
)
$
(4
)
(3
)
Other (Deductions) and Income
$
(26
)
$
15
$
(4
)
$
(41
)
N/A
$
19
N/A
Interest Expense
$
(153
)
$
(185
)
$
(195
)
$
(32
)
(17
)
$
(10
)
(5
)
Income Tax (Expense) Benefit
$
(207
)
$
33
$
(58
)
$
240
N/A
$
(91
)
N/A
Income from Discontinued Operations, including Gain on Disposal
$
24
$
299
$
67
$
(275
)
(92
$
232
N/A
The classification of the results of Globals investments is dependent upon Globals ownership percentage in the underlying investment which determines whether the investment is consolidated or if it
is accounted for under the equity method of accounting. Global owns 100% of PSEG Texas and 85% of Bioenergie. As a result, the revenues, expenses, assets and liabilities of those investments are
consolidated. Globals investments in Chilquinta and Luz del Sur, which were sold in December 2007, as well as its investments GWF Energy LLC (GWF), Kalaeloa Partners L.P. (Kalaeloa) and several
other smaller investments are accounted for under the equity method of accounting. Therefore, Globals share of the net income from these projects is recorded as Income from Equity Method Investments
on the Consolidated Statements of Operations. The results for SAESA and Electroandes are included in Discontinued Operations for all periods presented.
Operating Revenues
The increase of $13 million for the year ended December 31, 2007, as compared to 2006, was due to higher revenue at Global of $30 million. The increase at Global was primarily due to a pretax gain
recorded on the sale of Chilquinta and Luz del Sur of $146 million that was largely offset by a reduction in generation revenues at PSEG Texas of $114 million. This decrease at PSEG Texas was largely due
to reduced electricity
61
Ended December 31,
(Decrease)
(Decrease)
)
)
sales of $80 million, coupled with lower MTM gains on electricity of $42 million, which were partially offset by a slight price increase in 2007 which generated an increase of $8 million. PSEG Texas had
lower generation primarily due to cooler spring and summer weather in 2007 and also due to forced outages at the Odessa and Guadalupe facilities. The lower MTM gains were largely driven by
strengthening of forward curves for 2008. The increases at Global were partially offset by lower revenues at Resources of $17 million primarily due to the effect on leverage leases from the adoption of FIN
48 and FSP13-2.
The decrease of $32 million for the year ended December 31, 2006, as compared to 2005, was due to lower revenues at Resources of $73 million primarily due to the absence of a $71 million pre-tax
gain from the sale of Resources interest in Seminole Generation in December 2005 coupled with the absence of $20 million of leveraged lease income in 2006 due to the Seminole sale, partially offset by a
$21 million write-off of a leveraged lease investment with United Airlines in 2005. The decrease at Resources was partially offset by higher revenues at Global of $41 million, which was primarily related to
a $79 million increase at PSEG Texas due to higher unrealized gains on forward contracts which were slightly offset by a reduction in gas sales and a $24 million increase due to the consolidation of
Bioenergie. These increases were partly offset by a $37 million decrease due to the absence of a gain from withdrawal from the Eagle Point Cogeneration Partnership in the prior year and the absence of
$20 million of revenue due to the deconsolidation of Dhofar Power Company S.A.O.C.
Energy Costs
The decrease of $73 million for the year ended December 31, 2007, as compared to 2006, was primarily due to lower consumption driven by lower generation at PSEG Texas, including $42 million for
lower fuel consumption, $22 million in reduced MTM costs on gas purchases driven by improvement of future spark spreads for 2008 and beyond and an $8 million reduction in purchased power costs.
The increase of $6 million for the year ended December 31, 2006, as compared to 2005, was primarily due to an $8 million increase due to the consolidation of Bioenergie in May 2006, partially offset
by a $5 million decrease related to the deconsolidation of Dhofar Power.
Operation and Maintenance
The
increase of $7 million for the year ended December 31, 2007, as compared
to 2006, was primarily due to an increase of $12 million at Global driven
largely by higher legal expenses of $4 million at Bioenergie (mainly in the
early part of 2007 for resolution of legal issues); selling expenses of $6
million for the sale of equity method investments; and $5 million higher
outage expenses at PSEG Texas. Globals increase was partially offset
by decreases in general and administrative expenses at Resources and Energy
Holdings (parent).
The decrease of $25 million for the year ended December 31, 2006, as compared to 2005, was primarily due to a reduction of $9 million at Resources, mainly due to a reduction of operating lease
expense and a $10 million reduction at Global, primarily due to a $9 million decrease at PSEG Texas. Also contributing to the decrease was a $4 million reduction in administrative expenses related to
lower corporate assessments, wages and benefits, and legal and consulting expense.
Write-Down of Assets
The $16 million write-down of assets in 2007 was primarily related to an additional $12 million pre-tax impairment recorded on Globals generation projects in Venezuela based on Globals estimated
market valuation of these investments. Global also recorded an impairment loss of $4 million pre-tax on its investment in PPN primarily related to Globals estimated market valuation of that project.
The $274 million write-down of assets in 2006 was primarily related to a $263 million pre-tax loss on Globals sale of its 32% indirect ownership interest in RGE, $4 million pre-tax loss related to the
sale of Globals interest in Magellan Capital Holdings Corporation, and a $7 million pre-tax loss on the impairment of Globals generation projects in Venezuela. See Note 4. Discontinued Operations,
Dispositions, Acquisitions and Impairments.
62
Depreciation and Amortization
The increase of $6 million for the year ended December 31, 2007, as compared to 2006, was primarily due to the consolidation of Bioenergie in May 2006.
The increase of $3 million for the year ended December 31, 2006, as compared to 2005, was primarily due to a $3 million increase at Resources and a $4 million increase related to the consolidation of
Bioenergie offset by a $4 million decrease resulting from the deconsolidation of Dhofar Power.
Income from Equity Method Investments
The decrease of $4 million for the year ended December 31, 2007, as compared to 2006, was primarily driven by the earnings of $11 million due to asset sales of RGE and Salalah in 2006; lower
earnings of $8 million caused by lower generation and partial shutdown in 2007 at Bioenergies equity investment and the consolidation of Bioenergie from mid-2006; reduction in the income from
Bridgewater for $3 million, mainly due to the expiration of the Purchase Power Agreement (PPA) in August 2007; these were partially offset by higher earnings at Chilquinta, LDS, GWF, Kalaeloa for a
total of $17 million.
The decrease of $4 million for the year ended December 31, 2006, as compared to 2005, was primarily driven by the absence of $12 million of earnings due to the sale of RGE in 2006 partially offset by
the absence of foreign currency losses in 2005 from Bioenergie of $8 million.
Other Income and Deductions
The decrease of $41 million for the year ended December 31, 2007, as compared to 2006, was primarily due to a $35 million loss on the early retirement of debt resulting from the call for early
redemption in December 2007 of Energy Holdings 10% Senior Notes due 2009; lower interest income from PSEG of $9 million due to lower average intercompany debt balances and increase of $5 million
in the fair value loss on the Chilquinta swap at Global. These were partially offset by the income recorded for the settlement of the Konya Ilgin litigation of $9 million.
The increase of $19 million for the year ended December 31, 2006, as compared to 2005, was primarily due to an increase in interest and dividend income of $10 million and lower losses in foreign
currency transactions due to favorable currency fluctuations mainly for Bioenergie operations in Italy.
Interest Expense
The decrease of $32 million for the year ended December 31, 2007, as compared to 2006, was mainly due to lower interest expense of $22 million on senior notes at Energy Holdings due to October
2006 and December 2007 redemptions, decrease in interest expense of $7 million due to Resources lower debt balance and the reversal of the accrued interest for the IRS audits for the years 1994 to 1996
and lower interest expense of $4 million at Global due to lower debt balance.
The decrease of $10 million for the year ended December 31, 2006, as compared to 2005, was mainly due to a decrease in Energy Holdings debt outstanding and a net decrease of $2 million resulting
from the consolidation of Bioenergie and the deconsolidation of Dhofar Power.
Income Tax Expense
The increase of $240 million for the year ended December 31, 2007, as compared to 2006, was primarily attributable to $163 million of taxes recorded as a result of Globals sale of Chilquinta and Luz
del Sur; $21 million of tax expense resulting from the implementation of FIN 48 at Global; higher taxation at Resources of $16 million due to higher pre-tax income and adjustment to FIN 48 tax reserves;
and the absence of the $93 million tax benefit obtained in 2006 on the impairment of RGE. These were partially offset by the tax credit of $18 million in Energy Holdings due to early redemption of debt
and $25 million lower taxes at Global due to lower pre-tax income in 2007 compared with 2006, excluding the amounts related to RGE, Chilquinta and Luz del Sur.
The decrease of $91 million for the year ended December 31, 2006, as compared to 2005, was primarily attributable to a tax benefit resulting from Globals sale of its 32% indirect ownership interest in
RGE.
63
Income from Discontinued Operations, including Gains on Disposal, net of tax
Electroandes
On October 17, 2007 Global completed the sale of Electroandes for a total purchase price of $390 million including the assumption of approximately $108 million of debt. Income from Discontinued
Operations, including Gain on Disposal, related to Electroandes for the years ended December 31, 2007, 2006 and 2005 was $58 million, $16 million and $14 million respectively. See Note 4. Discontinued
Operations, Dispositions, Acquisitions and Impairments for additional information.
SAESA Group
On December 18, 2007, Global announced that it plans to sell its investment in the SAESA group of companies. As a result, operating results for the SAESA Group have been presented as
Discontinued Operations. As a result of its intention to sell the SAESA Group, Global recorded an $82 million income tax expense in the fourth quarter of 2007 related to the discontinuation of applying
Accounting Principles Board (APB) Opinion No. 23, Accounting for Income TaxesSpecial Areas as the income generated by the SAESA Group is no longer expected to be indefinitely reinvested. (Loss)
Income from Discontinued Operations related to the SAESA Group for the years ended December 31, 2007, 2006 and 2005 was $(34) million, $57 million and $35 million, respectively. See Note 4.
Discontinued Operations, Dispositions, Acquisitions and Impairments for additional information.
Elcho and Skawina
In 2006, Global sold its
interest in Elcho and Skawina, two coal-fired plants in Poland. Proceeds, net of transaction costs, were $476 million. Income from Discontinued Operations, including the Gain
on Disposal, related to Elcho and Skawina for the years ended December 31, 2006 and 2005 was $226 million and $18 million, respectively. See Note 4. Discontinued Operations, Dispositions, Acquisitions
and Impairments for additional information.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources is on a consolidated basis for PSEG, noting the uses and contributions, where material, of PSEGs three direct operating subsidiaries, Power,
PSE&G and Energy Holdings.
Financing Methodology
PSEG, Power and PSE&G
Capital requirements for Power and PSE&G are met through liquidity provided by internally generated cash flow and external financings. PSEG and Power from time to time make equity contributions
or otherwise provide credit support to their respective direct and indirect subsidiaries to provide for part of their capital and cash requirements, generally relating to long-term investments.
At times, PSEG utilizes intercompany dividends and intercompany loans (except however, that Fossil, Nuclear and ER&T may not, without prior FERC approval, and PSE&G may not, without prior BPU
approval, make loans to their affiliates) to satisfy various subsidiary or parental needs and efficiently manage short-term cash. Any excess funds are invested in short-term liquid investments.
External funding to meet PSEGs, Powers and PSE&Gs needs consist of corporate finance transactions. The debt incurred is the direct obligation of those respective entities. Some of the proceeds of
these debt transactions may be used by the respective obligor to make equity investments in its subsidiaries.
As discussed below, depending on the particular company, external financing may consist of public and private capital market debt and equity transactions, bank revolving credit and term loans,
commercial paper and/or project financings. Some of these transactions involve special purpose entities (SPEs), formed in accordance with applicable tax and legal requirements in order to achieve specified
financial advantages, such as favorable legal liability treatment. PSEG consolidates SPEs, as applicable, in accordance with FIN No. 46, Consolidation of Variable Interest Entities (VIEs) (FIN 46).
64
The availability and cost of external capital is affected by each entitys performance, as well as by the performance of their respective subsidiaries and affiliates. This could include the degree of
structural separation between PSEG and its subsidiaries and the potential impact of affiliate ratings on consolidated and unconsolidated credit quality. Additionally, compliance with applicable financial
covenants will depend upon future financial position, earnings and net cash flows, as to which no assurances can be given.
Over the next several years, PSEG, Power and PSE&G may be required to extinguish or refinance maturing debt and, to the extent there is not sufficient internally generated funds, may incur additional
debt and/or provide equity to fund investment activities. Any inability to obtain required additional external capital or to extend or replace maturing debt and/or existing agreements at current levels and
reasonable interest rates may adversely affect PSEGs, Powers and PSE&Gs respective financial condition, results of operations and net cash flows.
From time to time, PSEG, Power and PSE&G may repurchase portions of their respective debt securities using funds from operations, asset sales, commercial paper, debt issuances, equity issuances and
other sources of funding and may make exchanges of new securities, including common stock, for outstanding securities. Such repurchases may be at variable prices below, at or above prevailing market
prices and may be conducted by way of privately negotiated transactions, open-market purchases, tender or exchange offers or other means. PSEG, Power and PSE&G may utilize brokers or dealers or effect
such repurchases directly. Any such repurchases may be commenced or discontinued at any time without notice.
Operating
Cash Flows
-
PSEG, Power and PSE&G
PSEG expects strong cash from operations primarily driven by earnings from Power due to improvements in energy margins and capacity markets. The strong operating cash flows combined with
proceeds from potential asset sales and financing activities are expected to be sufficient to fund capital expenditures and shareholder dividend payments, with excess cash available to invest in the business,
reduce debt and/or repurchase common stock.
PSEG
For the year ended December 31, 2007, PSEGs operating cash flow decreased by $13 million as compared to 2006. For the year ended December 31, 2006, PSEGs operating cash flow increased by
$982 million as compared to 2005. The net changes were due to net changes from its subsidiaries as discussed below.
Power
Powers operating cash flow increased $162 million for the year ended December 31, 2007 as compared to 2006, due principally to an increase in net income of $457 million, net of the Loss on Disposal
of Lawrenceburg, partially offset by an increase of $321 million in margin receivables related to higher collateral requirements.
Powers operating cash flow increased $907 million for the year ended December 31, 2006, as compared to 2005, due to a significant reduction in margin requirements and fuel inventories, largely
resulting from decreases in commodity prices.
PSE&G
PSE&Gs operating cash flow decreased $128 million for the year ended December 31, 2007 as compared to 2006 primarily due to a decline in cash from working capital. The operating cash flow for the
year 2006 was $806 million primarily due to very cold weather at the end of 2005 which resulted in increased cash flow during 2006. The return of more normal weather conditions in 2007 caused operating
cash flow to decline to the 2005 level.
PSE&Gs operating cash flow increased $122 million for the year ended December 31, 2006 as compared to 2005, primarily due to an increase in working capital. The colder than normal winter in 2005
caused an increase in cash flow in 2006.
65
Energy Holdings
Energy Holdings operating cash flow decreased $91 million for the year ended December 31, 2007, as compared to 2006. The decrease was mainly due to a $100 million tax deposit made with the IRS
in the fourth quarter of 2007 and the timing of tax payments related to Globals sales of Elcho, Skawina and RGE in 2006.
Energy
Holdings operating cash flow decreased $98 million for the year ended
December 31, 2006 as compared to 2005. The decrease was mainly due to taxes
paid related to the sale of Elcho, Skawina and RGE in 2006. The proceeds
from these sales are included in Cash Flows from Investing Activities
on PSEGs Consolidated Statements of Cash Flows.
Common Stock Dividends
On January 15, 2008, PSEGs Board of Directors approved a two-for-one stock split of the PSEGs outstanding shares of common stock. All share and per share amounts included in this Form 10-K
retroactively reflect the effect of the stock split. Dividend payments on common stock for the year ended December 31, 2007 were $1.17 per share and totaled $594 million. Dividend payments on common
stock for the year ended December 31, 2006 were $1.14 per share and totaled $574 million.
On January 15, 2008, PSEGs Board of Directors also approved a $0.03 increase in its quarterly common stock dividend, from $0.2925 to $0.3225 per share for the first quarter of 2008. This reflects an
indicated annual dividend rate of $1.29 per share. PSEG expects to continue to pay cash dividends on its common stock, however, the declaration and payment of future dividends to holders of PSEG
common stock will be at the discretion of the Board of Directors and will depend upon many factors, including PSEGs financial condition, earnings, capital requirements of its business, alternate investment
opportunities, legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors deems relevant.
Short-Term Liquidity
As of December 31, 2007, PSEG, Power and PSE&G had the following committed credit facilities Each of the facilities is restricted as to availability and use to the specific companies as listed below.
PSEG, Power and PSE&G believe sufficient liquidity exists to fund their respective short-term cash requirements.
Company
Expiration
Total
Primary
Usage
Available
(Millions)
PSEG:
5-year Credit Facility(A)
Dec 2012
$
1,000
CP Support/Funding/
$
1
(B)
$
999
Letters of Credit
Uncommitted Bilateral Agreement
N/A
N/A
Funding
$
$
N/A
Power:
5-year Credit Facility(A)
Dec 2012
$
1,600
Funding/Letters of
$
140
(B)
$
1,460
Credit
Bilateral Credit Facility
March 2010
$
100
Funding/Letters of
$
56
(B)
$
44
Credit
Bilateral Credit Facility
March 2008
$
200
Funding/Letters of
$
28
(B)
$
172
Credit
PSE&G:
5-year Credit Facility(A)
June 2012
$
600
CP Support/Funding/
$
55
$
545
Letters of Credit
Uncommitted Bilateral Agreement
N/A
N/A
Funding
$
10
N/A
(A)
In 2012, facilities reduce by $47 million, $75 million, and $28 million for PSEG, Power and PSE&G, respectively.
(B)
These amounts relate to letters of credit outstanding.
66
Date
Facility
Purpose
as of
December 31,
2007
Liquidity
as of
December 31,
2007
Power
As of December 31, 2007, Power had borrowed $238 million from PSEG in the form of an intercompany loan.
On June 25, 2007, Power refinanced the $200 million PSEG/Power joint and several co-borrower bilateral credit facility. The maturity was extended to March 2008 and terms were modified so that
Power is the sole borrower under this facility.
Powers required margin postings for sales contracts entered into in the normal course of business will fluctuate based on volatility in commodity prices. Should commodity prices rise, additional margin
calls may be necessary relative to existing power sales contracts. As Powers contract obligations are fulfilled, liquidity requirements are reduced.
In addition, ER&T maintains agreements that require Power, as its guarantor under performance guarantees, to satisfy certain creditworthiness standards. In the event of a deterioration of Powers credit
rating to below investment grade, which represents at least a two level downgrade from its current ratings, many of these agreements allow the counterparty to demand that ER&T provide performance
assurance, generally in the form of a letter of credit or cash. Providing this support would increase Powers costs of doing business and could restrict the ability of ER&T to manage and optimize Powers asset
portfolio. Power believes it has sufficient liquidity to meet any required posting of collateral likely to result from a credit rating downgrade. See Note 12. Commitments and Contingent Liabilities for further
information.
External Financings
PSEG
For the year ended December 31, 2007, PSEG issued 2,154,244 shares of its common stock in connection with settling stock options under its Long-Term Incentive Plan (LTIP) for $48 million.
For the year ended December 31, 2007, PSEG issued 811,780 shares of its common stock under its Dividend Reinvestment and Stock Purchase Plan (DRASPP) and Employee Stock Purchase Plan
(ESPP) for $35 million.
In
December 2007, PSEG called for redemption of $186 million of its Subordinated
Debentures underlying $180 million of PSEG Funding Trust II, Trust Preferred
Securities due 2032 at 100% of the principal amount. They were redeemed in
December 2007.
In November 2007, PSEG redeemed $474 million of its Subordinated Debentures underlying $460 million of PSEG Funding Trust I, Participating Equity Preferred Securities.
In October 2007, PSEG repaid $49 million of its 6.89% Senior Notes which are due in equal annual installment payments through 2009.
In
May 2007, PSEG called for redemption of the outstanding $375 million of its
Floating Rate Senior Notes Due 2008 at 100% of the principal amount.
Power
In December 2007, Power issued $44 million of 4.00% Pollution Control Bonds due 2042 in connection with a project being completed at one of its generation facilities in Pennsylvania.
In November 2007, Power issued $40 million of 5.75% Pollution Control Bonds due 2037 in connection with a project being completed at one of its generation facilities in Connecticut.
During 2007, Power paid cash dividends to PSEG totaling $1.075 billion.
PSE&G
PSE&G has $494 million of variable rate pollution control notes outstanding which service and secure a like amount of insured tax-exempt variable rate bonds of the Pollution Control Authority of Salem
County.
In February 2008, PSE&G purchased $105 million of the Salem County Authority bonds which were being held by the broker/dealer. PSE&G has elected to change the interest rate mode on the bonds to a
weekly rate. PSE&G intends to acquire all of these bonds by April 2008 upon the change of interest rate modes and to hold them until they can be remarketed or refinanced, possibly later in 2008.
67
In May 2007, PSE&G issued $350 million of 5.80% Secured Medium-Term Series E Notes due 2037. The proceeds were used to reduce short-term debt.
In January 2007, PSE&G repaid at maturity $113 million of its 6.25% Series WW First and Refunding Mortgage Bonds.
During 2007, PSE&G Transition Funding LLC (Transition Funding) repaid $161 million of its transition bonds and PSE&G Transition Funding II LLC (Transition Funding II) repaid $9 million of its
transition bonds.
PSE&G paid cash dividends to PSEG of $200 million in 2007.
Energy Holdings
In December 2007, Energy Holdings called for redemption all of the outstanding $400 million of 10% Senior Notes due 2009 which were redeemed in January 2008. In addition, in December 2007,
Energy Holdings repurchased $14 million of the remaining $544 million of the 8.50% Senior Notes due 2011.
In August 2007, SAESA, a wholly owned subsidiary of Global, issued 3.80% bonds (approximately 7%
, including current inflationary adjustment) for net proceeds of $163 million with a final
maturity of June 30, 2028. The proceeds were used principally to repay loans due to Energy Holdings which then loaned the funds to PSEG for short-term funding.
During 2007, Energy Holdings made cash distributions to PSEG of $355 million in the form of returns of capital.
During 2007, Energy Holdings subsidiaries repaid $57 million of non-recourse debt, including $51 million by Global, of which $45 million related to the PSEG Texas facilities and $6 million to the
SAESA Group, $4 million by Resources and $2 million by EGDC.
Debt Covenants
PSEG, Power and PSE&G
PSEGs, Powers and PSE&Gs respective credit agreements may contain maximum debt to equity ratios, minimum cash flow tests and other restrictive covenants and conditions to borrowing.
Compliance with applicable financial covenants will depend upon the respective future financial position, level of earnings and cash flows of PSEG, Power and PSE&G, as to which no assurances can be
given. The ratios presented below are for the benefit of the investors of the related securities to which the covenants apply. They are not intended as financial performance or liquidity measures. The debt
underlying the preferred securities of PSEG, which is presented in Long-Term Debt in accordance with FIN 46, is not included as debt when calculating these ratios, as provided for in the various credit
agreements.
PSEG
Financial covenants contained in PSEGs note purchase agreements related to the private placement of debt include a ratio of total debt (excluding non-recourse project financings, securitization debt
and debt underlying preferred securities and including commercial paper and loans and certain letters of credit) to total capitalization (including preferred securities outstanding) covenant. This covenant
requires that such ratio not be more than 70.0%. As of December 31, 2007, PSEGs ratio of debt to capitalization (as defined above) was 51.9%.
PSEGs credit facility contains a similar but less restrictive financial covenant where total debt excludes letters of credit related to collateral postings and total capitalization excludes any impacts for
Accumulated Other Comprehensive Income/Loss adjustments related to marking energy contracts to market and equity reductions from the funded status of pensions or benefit plans associated with
Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This covenant requires that such ratio not be more than
70.0%. As of December 31, 2007, PSEGs ratio of debt to capitalization (as defined above) was 49.9%.
68
Power
Financial covenants contained in Powers credit facility include a ratio of debt to total capitalization covenant. The Power ratio is the same debt to total capitalization calculation as set forth above for
PSEG except common equity is adjusted for the $986 million Basis Adjustment (see Consolidated Balance Sheets). This covenant requires that such ratio will not exceed 65.0%. As of December 31, 2007,
Powers ratio of debt to total capitalization (as defined above) was 41.3%.
PSE&G
Financial covenants contained in PSE&Gs credit facilities include a ratio of long-term debt (excluding securitization debt, long-term debt maturing within one year and short-term debt) to total
capitalization covenant. This covenant requires that such ratio will not be more than 65.0%. As of December 31, 2007, PSE&Gs ratio of long-term debt to total capitalization (as defined above) was 48.0%.
In addition, under its First and Refunding Mortgage (Mortgage), PSE&G may issue new First and Refunding Mortgage Bonds against previous additions and improvements, provided that its ratio of
earnings to fixed charges calculated in accordance with its Mortgage is at least 2 to 1, and/or against retired Mortgage Bonds. As of December 31, 2007, PSE&Gs Mortgage coverage ratio was 4.6 to 1 and the
Mortgage would permit up to approximately $2.1 billion aggregate principal amount of new Mortgage Bonds to be issued against previous bondable additions and improvements to its property.
Cross Default Provisions
PSEG, Power and PSE&G
The PSEG bank credit agreement contains default provisions under which a default by it in an aggregate amount of $50 million or greater would result in the potential acceleration of payment under
this agreement. Under certain conditions, a default by Power or PSE&G in an aggregate amount of $50 million or greater would also result in potential acceleration of payment under this agreement. PSEG,
Power and PSE&G have removed Energy Holdings from all cross default provisions.
PSEGs bank credit agreement and note purchase agreements related to private placement of debt (collectively, Credit Agreements) contain cross default provisions under which certain payment
defaults by Power or PSE&G, certain bankruptcy events relating to Power or PSE&G, the failure by Power or PSE&G to satisfy certain final judgments or the occurrence of certain events of default under the
financing agreements of Power or PSE&G, would each constitute an event of default under the PSEG Credit Agreements. Under the note purchase agreements, it is also an event of default if Power or PSE&G
ceases to be wholly-owned by PSEG. Under the bank credit agreement, both Power and PSE&G would have to cease to be wholly-owned by PSEG before an event of default would occur.
Power
The Power Senior Debt Indenture contains a default provision under which a default by Power, Nuclear, Fossil or ER&T in an aggregate amount of $50 million or greater would result in an event of
default and the potential acceleration of payment under the indenture. There are no cross defaults within Powers indenture from PSEG, Energy Holdings or PSE&G.
The Power credit agreement also has a provision under which a default by Power, Nuclear, Fossil or ER&T in an aggregate amount of $50 million or greater would result in an event of default and the
potential acceleration of payment under that agreement.
PSE&G
PSE&Gs Mortgage has no cross defaults. The PSE&G Medium-Term Note Indenture has a cross default to the PSE&G Mortgage. The PSE&G credit agreement has a provision under which a default by
PSE&G in the aggregate of $50 million or greater would result in an event of default and the potential acceleration of payment under that agreement.
69
Ratings Triggers
PSEG, Power and PSE&G
The debt indentures and credit agreements of PSEG, PSE&G, Power and Energy Holdings do not contain any material ratings triggers that would cause an acceleration of the required interest and
principal payments in the event of a ratings downgrade. However, in the event of a downgrade, any one or more of the affected companies may be subject to increased interest costs on certain bank debt
and certain collateral requirements.
Power
In connection with the management and optimization of Powers asset portfolio, ER&T maintains underlying agreements that require Power, as its guarantor under performance guarantees, to satisfy
certain creditworthiness standards. In the event of a deterioration of Powers credit rating to below an investment grade rating, many of these agreements allow the counterparty to demand that ER&T
provide performance assurance, generally in the form of a letter of credit or cash. As of December 31, 2007, if Power were to lose its investment grade rating and assuming all the counterparties to
agreements in which ER&T is out-of-the-money were contractually entitled to demand, and demanded, performance assurance, ER&T could be required to post collateral in an amount equal to
approximately $777 million. See Note 12. Commitments and Contingent Liabilities.
PSE&G
In accordance with the BPU approved requirements under the BGS contracts that PSE&G enters into with suppliers, PSE&G is required to maintain an investment grade credit rating. If PSE&G were to
lose its investment grade rating, PSE&G would be required to file with the BPU a plan to assure continued payment for the BGS requirements of its customers.
PSE&G is the servicer for the bonds issued by Transition Funding and Transition Funding II. If PSE&G were to lose its investment grade rating, PSE&G would be required to remit collected cash daily to
the bond trustee. Currently, cash is remitted monthly.
Credit Ratings
PSEG, Power and PSE&G
PSE&G has $494 million of variable-rate pollution control notes outstanding which service and secure a like amount of insured tax-exempt variable-rate bonds of the Pollution Control Authority of
Salem County. The credit ratings of these tax-exempt securities are linked to the credit ratings of the insurers. In December 2007, due to credit pressures experienced by the insurers, the credit ratings on
these tax-exempt securities were placed on review for possible downgrade by Moodys and negative (Neg) outlook by S&P. In January 2008, Fitch downgraded these securities from AAA to A. In early
February 2008, Moodys downgraded these securities from Aaa to A3. Currently, PSE&G is exposed to interest rate risk with resets every 35 days on the Salem Authority bonds and, in turn, PSE&Gs variable-
rate pollution control bonds.
On November 20, 2007, Fitch upgraded the senior unsecured debt rating of PSEG and Power to BBB+ from BBB and the rating outlook for each entity is now stable.
On June 22, 2007, S&P revised its outlook for the credit ratings of each of PSEG, Power and PSE&G from Neg to stable and upgraded its rating for the commercial paper of PSEG and PSE&G from A3 to
A2.
If the rating agencies lower or withdraw the credit ratings, such revisions may adversely affect the market price of PSEGs, Powers and PSE&Gs securities and serve to materially increase those
companies cost of capital and limit their access to capital. Outlooks assigned to ratings are as follows: stable, Neg or positive (Pos). There is no assurance that the ratings will continue for any given period
of time or that they will not be revised by the rating agencies, if, in their respective judgments, circumstances so warrant. Each rating given by an agency should be evaluated independently of the other
agencies ratings. The ratings should not be construed as an indication to buy, hold or sell any security.
70
Moodys(A)
S&P(B)
Fitch(C)
PSEG:
Outlook
Neg
Stable
Stable
Commercial Paper
P2
A2
F2
Power:
Outlook
Stable
Stable
Stable
Senior Notes
Baa1
BBB
BBB+
PSE&G:
Outlook
Neg
Stable
Stable
Mortgage Bonds
A3
A
A
Preferred Securities
Baa3
BB+
BBB+
Commercial Paper
P2
A2
F2
|
||||||||||||||||||||
(A) |
|
Moodys ratings range from Aaa (highest) to C (lowest) for long-term securities and P1 (highest) to NP (lowest) for short-term securities. |
||||||||||||||||||
|
||||||||||||||||||||
(B) |
|
S&P ratings range from AAA (highest) to D (lowest) for long-term securities and A1 (highest) to D (lowest) for short-term securities. |
||||||||||||||||||
|
||||||||||||||||||||
(C) |
|
Fitch ratings range from AAA (highest) to D (lowest) for long-term securities and F1 (highest) to D (lowest) for short-term securities.
|
Other Comprehensive Income
PSEG, Power and PSE&G
For the year ended December 31, 2007, PSEG, Power and PSE&G had Other Comprehensive (Losses) Income of $(32) million, $(115) million and $1 million, respectively, due to higher unrealized losses on derivative contracts accounted for as hedges at Power, partially offset by gains from foreign currency translation adjustments.
71
PSEG, Power and PSE&G
It is expected that the majority of each subsidiarys capital requirements over the next five years will come from internally generated funds. Projected construction and investment expenditures,
excluding nuclear fuel purchases, for PSEGs subsidiaries for the next five years are presented in the table below. These amounts are subject to change, based on various factors.
2008
2009
2010
2011
2012
(Millions)
Power:
Hudson Environmental
$
240
$
300
$
215
$
5
$
Mercer Environmental
215
100
10
Other Environmental
140
40
15
20
25
Exploration of New Nuclear Plant
5
20
15
15
55
Other Growth Opportunities
5
60
175
200
80
Other
285
155
190
190
190
Total Power
890
675
620
430
350
2008
2009
2010
2011
2012
(Millions)
PSE&G:
Transmission
System Reinforcement
140
160
265
420
465
Facility Replacement
15
30
30
30
30
Environmental/Regulatory
5
Distribution
Support Facilities
175
175
275
235
220
New Business
165
160
160
165
175
Reliability Enhancements
110
120
95
90
90
Facility Replacement
165
180
190
190
200
Environmental/Regulatory
70
80
80
85
85
Total PSE&G
840
905
1,100
1,215
1,265
Other
65
35
30
30
30
Total PSEG
$
1,795
$
1,615
$
1,750
$
1,675
$
1,645
Power
Powers projected expenditures above for the various items are primarily comprised of the following:
Hudson Environmentalconstruction of pollution control equipment, including a selective catalytic reduction system, a scrubber, a baghouse and a carbon injection system at our Hudson facility.
Mercer Environmentalconstruction of pollution control equipment, including scrubbers and baghouses, at our Mercer facility.
Other Environmentalconstruction of other pollution control equipment, including scrubbers at our Keystone facility.
Exploration of New Nuclear Plantcosts associated with exploring the feasibility of, and the technologies involved with, building a new nuclear plant.
Other Growth Opportunitiescosts associated with potential opportunities to build other new plants such as peaking facilities.
Othervarious capital projects at existing facilities to either extend plants useful lives or increase operating output.
In 2007, Power made approximately $562 million of capital expenditures (excluding $153 million for nuclear fuel), primarily related to various projects at Fossil and Nuclear.
PSE&G
PSE&Gs projections for future capital expenditures include additions and replacements to its transmission and distribution systems to meet expected
growth and to manage reliability. As project scope
72
and cost estimates develop, PSE&G will modify its current projections to include these required investments. PSE&Gs projected expenditures above for the various items are primarily comprised of the
following:
Support Facilitiesancillary equipment needed to support the business lines, such as computers, office furniture, and buildings and structures housing support personnel or equipment/inventory.
New Businessinvestments made in support of new business to PSE&G (e.g. add new customers).
Reliability Enhancementsinvestments made to improve the reliability and efficiency of the system or function.
Facility Replacementinvestments made to replace systems or equipment in kind.
Environmental/Regulatoryinvestments made in response to regulatory or legal mandates where financial loss is imminent if not pursued.
In 2007, PSE&G made approximately $570 million of capital expenditures, primarily for reliability of transmission and distribution systems. The $570 million does not include approximately $37 million
spent on cost of removal.
Disclosures about Long-Term Maturities, Contractual and Commercial Obligations and Certain Investments
The following table reflects PSEGs and its subsidiaries contractual cash obligations and other commercial commitments in the respective periods in which they are due. In addition, the table
summarizes anticipated recourse and non-recourse debt maturities for the years shown. The table also does not reflect debt maturities of Energy Holdings non-consolidated investments. If those obligations
were not able to be refinanced by the project, Energy Holdings may elect to make additional contributions in these investments. For additional information, see Note 10. Schedule of Consolidated Debt. In
addition, the table below does not reflect any anticipated cash payments for pension obligations due to uncertain timing of payments or liabilities under FIN 48 since PSEG is unable to reasonably estimate
the timing of FIN 48 liability payments in individual years beyond 12 months due to uncertainties in the timing of the effective settlement of tax positions. See Note 15. Income Taxes for additional
information.
73
Contractual Cash Obligations
Total
Less
23
45
Over
(Millions)
Short-Term Debt Maturities
PSEG
PSE&G
$
65
$
65
$
$
$
Long-Term Recourse Debt Maturities
PSEG
298
49
249
Power
2,902
250
1,466
1,186
PSE&G
3,352
250
60
300
2,742
Transition Funding (PSE&G)
1,623
169
364
399
691
Transition Funding II (PSE&G)
86
10
21
22
33
Energy Holdings
1,137
607
530
Long-Term Non-Recourse Project Financing
Energy Holdings
386
37
328
7
14
Interest on Recourse Debt
PSEG
34
21
13
Power
1,853
195
378
257
1,023
PSE&G
2,459
180
334
333
1,612
Transition Funding (PSE&G)
481
103
174
124
80
Transition Funding II (PSE&G)
16
4
6
4
2
Energy Holdings
180
67
90
23
Interest on Non-Recourse Project Financing
Energy Holdings
58
27
27
2
2
Capital Lease Obligations
PSEG
55
7
14
14
20
Power
15
2
4
9
Energy Holdings
47
13
23
5
6
Operating Leases
PSE&G
11
3
6
1
1
Energy Holdings
3
1
2
Energy-Related Purchase Commitments
Power
3,374
791
1,436
624
523
Energy Holdings
106
106
Total Contractual Cash Obligations
$
18,541
$
2,707
$
3,779
$
4,111
$
7,944
Commercial Commitments
Standby Letters of Credit
Power
$
225
$
225
$
$
$
Energy Holdings
18
3
15
Guarantees and Equity Commitments
Energy Holdings
16
4
12
Total Commercial Commitments
$
259
$
232
$
27
$
$
Liability Payments Under Fin 48
PSE&G
$
3
$
3
$
$
$
Energy Holdings
39
39
Amount
Committed
Than
1 year
years
years
5 years
See Note 12. Commitments and Contingent Liabilities for a discussion of contractual commitments for a variety of services for which annual amounts are not quantifiable.
74
OFF-BALANCE SHEET ARRANGEMENTS
Power
Power issues guarantees in conjunction with certain of its energy contracts. See Note 12. Commitments and Contingent Liabilities for further discussion.
Energy Holdings
Global has certain investments that are accounted for under the equity method in accordance with accounting principles generally accepted in the United States (GAAP). Accordingly, amounts
recorded on the Consolidated Balance Sheets for such investments represent Globals equity investment, which is increased for Globals pro-rata share of earnings less any dividend distribution from such
investments. The companies in which Global invests that are accounted for under the equity method have an aggregate $351 million of debt on their combined, consolidated financial statements. PSEGs
pro-rata share of such debt is $173 million. This debt is non-recourse to PSEG, Energy Holdings and Global. PSEG is generally not required to support the debt service obligations of these companies.
However, default with respect to this non-recourse debt could result in a loss of invested equity.
Resources has investments in leveraged leases that are accounted for in accordance with SFAS No. 13, Accounting for Leases. Leveraged lease investments generally involve three parties: an
owner/lessor, a creditor and a lessee. In a typical leveraged lease financing, the lessor purchases an asset to be leased. The purchase price is typically financed 80% with debt provided by the creditor and the
balance comes from equity funds provided by the lessor. The creditor provides long-term financing to the transaction secured by the property subject to the lease. Such long-term financing is non-recourse to
the lessor and is not presented on Energy Holdings Consolidated Balance Sheets. In the event of default, the leased asset, and in some cases the lessee, secure the loan. As a lessor, Resources has ownership
rights to the property and rents the property to the lessees for use in their business operation. As of December 31, 2007, Resources equity investment in leased assets was approximately $781 million, net of
deferred taxes of approximately $2 billion. For additional information, see Note 8. Long-Term Investments.
In the event that collectibility of the minimum lease payments to be received by Resources is no longer reasonably assured, the accounting treatment for some of the leases may change. In such cases,
Resources may deem that a lessee has a high probability of defaulting on the lease obligation, and would reclassify the lease from a leveraged lease to an operating lease and would consider the need to
record an impairment of its investment. Should Resources ever directly assume a debt obligation, the fair value of the underlying asset and the associated debt would be recorded on the Consolidated
Balance Sheets instead of the net equity investment in the lease.
Energy Holdings has guaranteed certain obligations of its subsidiaries or affiliates related to certain projects. See Note 12. Commitments and Contingent Liabilities for additional information.
PSEG, Power and PSE&G
Under GAAP, many accounting standards require the use of estimates, variable inputs and assumptions (collectively referred to as estimates) that are subjective in nature. Because of this, differences
between the actual measure realized versus the estimate can have a material impact on results of operations, financial position and cash flows. The managements of PSEG, Power and PSE&G have each
determined that the following estimates are considered critical to the application of rules that relate to their respective businesses.
Accounting for Pensions
PSEG, Power and PSE&G account for pensions under SFAS No. 87, Employers Accounting for Pensions (SFAS 87). Pension costs under SFAS 87 are calculated using various economic and
demographic assumptions. Economic assumptions include the discount rate and the long-term rate of return on trust assets. Demographic assumptions include projections of future mortality rates, pay
increases and retirement patterns. In 2007, PSEG and its subsidiaries recorded pension expense of $43 million, compared to $97 million in 2006 and $109 million in 2005. Additionally, in 2007, PSEG and its
respective subsidiaries
75
contributed cash of approximately $16 million, compared to cash contributions of $50 million in 2006 and $155 million in 2005.
PSEGs discount rate assumption, which is determined annually, is based on the rates of return on high-quality fixed-income investments currently available and expected to be available during the
period to maturity of the pension benefits. The discount rate used to calculate pension obligations is determined as of December 31 each year, PSEGs SFAS 87 measurement date. The discount rate used to
determine year-end obligations is also used to develop the following years net periodic pension cost. The discount rates used in PSEGs 2006 and 2007 net periodic pension costs were 5.75% and 6.00%,
respectively. PSEGs 2008 net periodic pension cost was developed using a discount rate of 6.50%.
PSEGs expected rate of return on plan assets reflects current asset allocations, historical long-term investment performance and an estimate of future long-term returns by asset class and long-term
inflation assumptions. For 2006 and 2007, PSEG assumed a rate of return of 8.75% on PSEGs pension plan assets. For 2008, PSEG will continue the rate of return assumption of 8.75%.
Based on the above assumptions, PSEG has estimated net period pension costs of approximately $37 million and contributions of up to approximately $50 million in 2008. As part of the business
planning process, PSEG has modeled its future costs assuming an 8.75% rate of return and a 6.50% discount rate for 2009 and beyond. Actual future pension expense and funding levels will depend on
future investment performance, changes in discount rates, market conditions, funding levels relative to PSEGs projected benefit obligation and accumulated benefit obligation and various other factors
related to the populations participating in PSEGs pension plans.
The following chart reflects the sensitivities associated with a change in certain assumptions. The effects of the assumption changes shown below solely reflect the impact of that specific assumption.
Accounting for Deferred Taxes
PSEG, Power and PSE&G provide for income taxes based on the liability method required by SFAS No. 109, Accounting for Income Taxes (SFAS 109). Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as
net operating loss and credit carryforwards.
PSEG, Power and PSE&G evaluate the need for a valuation allowance against their respective deferred tax assets based on the likelihood of expected future taxable income. PSEG, Power and PSE&G do
not believe a valuation allowance is necessary; however, if the expected level of future taxable income changes or certain tax planning strategies become unavailable, PSEG, Power and PSE&G would record
a valuation allowance through income tax expense in the period the valuation allowance is deemed necessary. Resources and Globals ability to realize their deferred tax assets are dependent on PSEGs
subsidiaries ability to generate ordinary income and capital gains.
Uncertain Tax Positions
PSEG, Power and PSE&G are required to make judgments regarding the potential tax effects of various financial transactions and results of operations in order to estimate their obligations to taxing
authorities. Beginning January 1, 2007, PSEG, Power and PSE&G began accounting for uncertain income tax positions using a benefit recognition model with a two-step approach, a more-likely-than-not
recognition criterion and a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon ultimate settlement in
accordance with FIN 48. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit will be recorded. Uncertain tax positions that relate only to timing of when an
item is included on a tax return are considered to have met the recognition threshold. Prior to January 1, 2007, PSEG, Power and PSE&G estimated their
76
uncertain income tax obligations in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS No. 109) and SFAS No. 5, Accounting for Contingencies (SFAS No. 5). The Registrants also
have non-income tax obligations related to real estate, sales and use and employment-related taxes and ongoing appeals related to these tax matters that are outside the scope of FIN 48 and accounted for
under SFAS No. 5.
Accounting for tax obligations requires judgments, including estimating reserves for potential adverse outcomes regarding tax positions that have been taken. PSEG, Power and PSE&G also assess their
ability to utilize tax attributes, including those in the form of carryforwards, for which the benefits have already been reflected in the financial statements. PSEG, Power and PSE&G do not record valuation
allowances for deferred tax assets related to capital losses that they believe will be realized in future periods. While PSEG, Power and PSE&G believe the resulting tax reserve balances as of December 31,
2007 are appropriately accounted for in accordance with FIN 48, SFAS No. 5 and SFAS No. 109, as applicable, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to
their consolidated financial statements and such adjustments could be material.
Hedge and MTM Accounting
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) requires an entity to recognize the fair value of derivative instruments held as assets or liabilities on the
balance sheet. SFAS 133 applies to all derivative instruments held by PSEG, Power and PSE&G. The fair value of most derivative instruments is determined by reference to quoted market prices, listed
contracts, or quotations from brokers. Some of these derivative contracts are long term and rely on forward price quotations over the entire duration of the derivative contracts.
In the absence of the pricing sources listed above, for a small number of contracts, PSEG and its subsidiary companies utilize mathematical models that rely on historical data to develop forward pricing
information in the determination of fair value. Because the determination of fair value using such models is subject to significant assumptions and estimates, PSEG and its subsidiary companies developed
reserve policies that are consistently applied to model-generated results to determine reasonable estimates of value to record in the financial statements.
PSEG and its subsidiaries have entered into various derivative instruments in order to hedge exposure to commodity price risk, interest rate risk and foreign currency risk. Many such instruments have
been designated as cash flow hedges. For a cash flow hedge, the change in the value of a derivative instrument is measured against the offsetting change in the value of the underlying contract or business
condition the derivative instrument is intended to hedge. This is known as the measure of derivative effectiveness. In accordance with SFAS 133, the effective portion of the change in the fair value of a
derivative instrument designated as a cash flow hedge is reported in Accumulated Other Comprehensive Loss, net of tax, or as a Regulatory Asset (Liability). Amounts in Accumulated Other
Comprehensive Loss are ultimately recognized in earnings when the related hedged forecasted transaction occurs. During periods of extreme price volatility, there will be significant changes in the value
recorded in Accumulated Other Comprehensive Loss. The changes in the fair value of the ineffective portions of derivative instrument designated as cash flow hedges are recorded in earnings.
For Powers wholesale energy business, many of the forward sale, forward purchase and other option contracts are derivative instruments that hedge commodity price risk, but for which the businesses
are not able to apply the hedge accounting guidance in SFAS 133. The changes in value of such derivative contracts are marked to market through earnings as commodity prices fluctuate. As a result, the
earnings of PSEG and Power may experience significant fluctuations depending on the volatility of commodity prices.
For Powers energy trading activities, all changes in the fair value of energy trading derivative contracts are recorded in earnings.
For additional information regarding Derivative Financial Instruments, see Note 11. Financial Risk Management Activities.
77
Power
Nuclear Decommissioning Trust (NDT) Funds
Power accounts for the assets in the NDT Funds under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). The assets in the NDT Funds are classified as
available-for-sale securities and are marked to market with unrealized gains and losses recorded in Accumulated Other Comprehensive Loss unless securities with such unrealized losses are deemed to be
other-than-temporarily-impaired. Realized gains, losses and dividend and interest income are recorded on Powers and PSEGs Statements of Operations under Other Income and Other Deductions.
Unrealized losses that are deemed to be other than temporarily impaired, as defined under SFAS 115, and related interpretive guidance, are charged against earnings rather than Accumulated Other
Comprehensive Loss.
PSE&G
Unbilled Revenues
Electric and gas revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues for 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. Unbilled usage is calculated in two steps. The initial step is to apply a base usage per day to the number
of unbilled days in the period. The second step estimates seasonal loads based upon the time of year and the variance of actual degree-days and temperature-humidity-index hours of the unbilled period
from expected norms. The resulting usage is priced at current rate levels and recorded as revenue. A calculation of the associated energy cost for the unbilled usage is recorded as well. Each month the prior
months unbilled amounts are reversed and the current months amounts are accrued. Using benchmarks other than those used in this calculation could have a material effect on the amounts accrued in a
reporting period. The resulting revenue and expense reflect the service rendered in the calendar month.
PSE&G
SFAS 71
PSE&G prepares its Consolidated Financial Statements in accordance with the provisions of SFAS 71, which differs in certain respects from the application of GAAP by non-regulated businesses. In
general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the economic effects of regulation. As a result, a regulated utility is required to defer the recognition of costs (a
Regulatory Asset) or recognize obligations (a Regulatory Liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future rates. Accordingly,
PSE&G has deferred certain costs, 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&Gs competitive position, the associated Regulatory Asset or Liability is charged or credited to income. See Note 5. Regulatory Matters for additional information related to these and
other regulatory issues.
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QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK |
PSEG, Power and PSE&G
The market risk inherent in PSEGs, Powers and PSE&Gs market-risk sensitive instruments and positions is the potential loss arising from adverse changes in foreign currency exchange rates, commodity prices, equity security prices and interest rates as discussed in the Notes to Consolidated Financial Statements (Notes). It is the policy of each entity to use derivatives to manage risk consistent with its respective business plans and prudent practices. PSEG, Power and PSE&G have a Risk Management Committee comprised of executive officers who utilize an independent risk oversight function to ensure compliance with corporate policies and prudent risk management practices.
Additionally, PSEG, Power and PSE&G are exposed to counterparty credit losses in the event of non-performance or non-payment. PSEG has a credit management process, which is used to assess, monitor and mitigate counterparty exposure for PSEG and its subsidiaries. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on PSEG and its subsidiaries financial condition, results of operations or net cash flows.
78
Commodity Contracts
PSEG and Power
The availability and price of energy-related commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory
policies, market rules and other events. To reduce price risk caused by market fluctuations, Power enters into supply contracts and derivative contracts, including forwards, futures, swaps and options with
approved counterparties. These contracts, in conjunction with demand obligations help reduce risk and optimize the value of owned electric generation capacity.
Normal Operations and Hedging Activities
Power enters into physical contracts, as well as financial contracts, including forwards, futures, swaps and options designed to reduce risk associated with volatile commodity prices. Commodity price
risk is associated with market price movements resulting from market generation demand, changes in fuel costs and various other factors.
Under SFAS 133, changes in the fair value of qualifying cash flow hedge transactions are recorded in Accumulated Other Comprehensive Loss, and gains and losses are recognized in earnings when the
underlying transaction occurs. Changes in the fair value of derivative contracts that do not meet hedge criteria under SFAS 133 and the ineffective portion of hedge contracts are recognized in earnings
currently. Additionally, changes in the fair value attributable to fair value hedges are similarly recognized in earnings.
Many non-trading contracts qualify for the normal purchases and normal sales exemption under SFAS 133 and are accounted for upon settlement.
Trading
Power maintains a strategy of entering into positions to optimize the value of its portfolio of generation assets, gas supply contracts and its electric and gas supply obligations. Power engages in physical
and financial transactions in the electricity wholesale markets and executes an overall risk management strategy to mitigate the effects of adverse movements in the fuel and electricity markets. In addition,
Power has non-asset based trading activities, which have significantly decreased. These contracts also involve financial transactions including swaps, options and futures. These activities are marked to
market in accordance with SFAS 133 with gains and losses recognized in earnings.
Value-at-Risk (VaR) Models
Power
Power uses VaR models to assess the market risk of its commodity businesses. The portfolio VaR model for Power includes its owned generation and physical contracts, as well as fixed price sales
requirements, load requirements and financial derivative instruments. VaR represents the potential gains or losses, under normal market conditions, for instruments or portfolios due to changes in market
factors, for a specified time period and confidence level. Power estimates VaR across its commodity businesses.
Power manages its exposure at the portfolio level. Its portfolio consists of owned generation, load-serving contracts (both gas and electric), fuel supply contracts and energy derivatives designed to
manage the risk around generation and load. While Power manages its risk at the portfolio level, it also monitors separately the risk of its trading activities and its hedges. Non-trading MTM VaR consists of
MTM derivatives that are economic hedges, some of which qualify for hedge accounting. The MTM derivatives that are not hedges are included in the trading VaR.
The VaR models used by Power are variance/covariance models adjusted for the delta of positions with a 95% one-tailed confidence level and a one-day holding period for the MTM trading and non-
trading activities and a 95% one-tailed confidence level with a one-week holding period for the portfolio VaR. The models assume no new positions throughout the holding periods, whereas Power actively
manages its portfolio.
79
Reduced trading activities by Power during 2007 have resulted in less trading risk. As of each of December 31, 2007 trading VaR was less than $1 million.
For the Year Ended December 31, 2007
Trading VaR
Non-Trading
(Millions)
95% Confidence Level, One-Day Holding Period, One-Tailed:
Period End
$
*
$
48
Average for the Period
$
*
$
45
High
$
1
$
61
Low
$
*
$
29
99% Confidence Level, One-Day Holding Period, Two-Tailed:
Period End
$
1
$
75
Average for the Period
$
*
$
71
High
$
1
$
95
Low
$
*
$
45
*
less than $1 million
Interest Rates
PSEG, Power and PSE&G
PSEG, Power and PSE&G are subject to the risk of fluctuating interest rates in the normal course of business. It is the policy of PSEG, Power and PSE&G to manage interest rate risk through the use of
fixed and floating rate debt, interest rate swaps and interest rate lock agreements. PSEG, Power and PSE&G manage their respective interest rate exposures by maintaining a targeted ratio of fixed and
floating rate debt. As of December 31, 2007, a hypothetical 10% increase in market interest rates would result in $2 million of additional annual interest costs related to debt at PSEG. In addition, as of
December 31, 2007, a hypothetical 10% decrease in market interest rates would result in a $227 million increase in the fair value of debt of PSEG and its subsidiaries, including $116 million at PSE&G and
$95 million at Power.
Debt and Equity Securities
PSEG, Power and PSE&G
PSEG has approximately $3.4 billion invested in its pension plans. Although fluctuations in market prices of securities within this portfolio do not directly affect PSEGs earnings in the current period,
changes in the value of these investments could affect PSEGs future contributions to these plans, its financial position if its accumulated benefit obligation under its pension plans exceeds the fair value of
its pension funds and future earnings as PSEG could be required to adjust pension expense and its assumed rate of return.
Power
Powers NDT Funds are comprised of both fixed income and equity securities totaling $1.3 billion as of December 31, 2007. The fair value of equity securities is determined independently each month
by the Trustee. As of December 31, 2007, the portfolio was comprised of approximately $759 million of equity securities and approximately $517 million in fixed income securities. The fair market value of
the assets in the NDT Funds will fluctuate primarily depending upon the performance of equity markets. As of December 31, 2007, a hypothetical 10% change in the equity market would impact the value
of the equity securities in the NDT Funds by approximately $76 million.
Power uses duration to measure the interest rate sensitivity of the fixed income portfolio. Duration is a summary statistic of the effective average maturity of the fixed income portfolio. The benchmark
for the fixed income component of the NDT Funds is the Lehman Brothers Aggregate Bond Index, which currently has duration of 4.41 years and a yield of 6.97%. The portfolios value will appreciate or
depreciate by the duration with a 1% change in interest rates. As of December 31, 2007, a hypothetical 1% increase in interest rates would result in a decline in the market value for the fixed income
portfolio of approximately $21 million.
80
MTM VaR
Credit Risk
PSEG, Power and PSE&G
Credit risk relates to the risk of loss that PSEG, Power and PSE&G would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. PSEG, Power and
PSE&G have established credit policies that they 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 may allow for the netting of positive and negative exposures associated with a single counterparty.
Power
Counterparties expose Powers operations to credit losses in the event of non-performance or non-payment. Power has a credit management process, which is used to assess, monitor and mitigate
counterparty exposure for Power and its subsidiaries. Powers counterparty credit limits are based on a scoring model that considers a variety of factors, including leverage, liquidity, profitability, credit
ratings and risk management capabilities. Power has entered into payment netting agreements or enabling agreements that allow for payment netting with the majority of its large counterparties, which
reduce Powers exposure to counterparty risk by providing the offset of amounts payable to the counterparty against amounts receivable from the counterparty. In the event of non-performance or non-
payment by a major counterparty, there may be a material adverse impact on Powers and its subsidiaries financial condition, results of operations or net cash flows. As of December 31, 2007,
approximately 80% of the credit exposure (MTM plus net receivables and payables, less cash collateral) for Powers operations was with investment grade counterparties. The majority of the credit exposure
with non-investment grade counterparties was with certain companies that supply fuel (primarily coal) to Power. Therefore, this exposure relates to the risk of a counterparty performing under its
obligations rather than payment risk. In the first quarter of 2008, exposure to coal counterparties increased, reducing credit exposure with investment grade counterparties to 64%. Coal prices have increased
materially since the beginning of 2008.
PSE&G
BGS suppliers expose PSE&G to credit losses in the event of non-performance or non-payment upon a default of the BGS supplier. Credit requirements are governed under BPU approved BGS
contracts.
Global
Global has credit risk with respect to its counterparties to PPAs and other parties.
Resources
Resources has credit risk related to its investments in leveraged leases, totaling $781 million, which is net of deferred taxes of $2 billion, as of December 31, 2007. These investments are largely
concentrated in the energy industry. As of December 31, 2007, 66% of counterparties in the lease portfolio were rated investment grade by both S&P and Moodys. As of December 31, 2007, the weighted
average credit rating of the lessees in Resources leasing portfolio was A/A3 by S&P and Moodys respectively. The credit exposure to the lessees is partially mitigated through various credit enhancement
mechanisms within the lease transactions. These credit enhancement features vary from lease to lease. Some of the leasing transactions include covenants that restrict the flow of dividends from the lessee to
its parent, over-collateralization of the lessee with non-leased assets, historical and forward cash flow coverage tests that prohibit discretionary capital expenditures and dividend payments to the
parent/lessee if stated minimum coverages are not met and similar cash flow restrictions if ratings are not maintained at stated levels. These covenants are designed to maintain cash reserves in the
transaction entity for the benefit of the non-recourse lenders and the lessor/equity participants in the event of a market downturn or degradation in operating performance of the leased assets.
In any lease transaction, in the event of a default, Resources would exercise its rights and attempt to seek recovery of its investment. The results of such efforts may not be known for a period of time.
A bankruptcy of a lessee and failure to recover adequate value could lead to a foreclosure of the lease. Under a worst-case scenario, if a foreclosure were to occur, Resources would record a pre-tax write-
off up to its gross
81
investment, including deferred taxes, in these facilities. Also, in the event of a potential foreclosure, the net tax benefits generated by Resources portfolio of investments could be materially reduced in the
period in which gains associated with the potential forgiveness of debt at these projects occurs. The amount and timing of any potential reduction in net tax benefits is dependent upon a number of factors
including, but not limited to, the time of a potential foreclosure, the amount of lease debt outstanding, any cash trapped at the projects and negotiations during such potential foreclosure process. The
potential loss of earnings, impairment and/or tax payments could have a material impact to PSEGs financial position, results of operations and net cash flows.
Other Supplemental Information Regarding Market Risk
Power
The following table describes the drivers of Powers energy trading and marketing activities and Operating Revenues included in its Condensed Consolidated Statement of Operations for the year
ended December 31, 2007. Normal operations and hedging activities represent the marketing of electricity available from Powers owned or contracted generation sold into the wholesale market. As the
information in this table highlights, MTM activities represent a small portion of the total Operating Revenues for Power. Activities accounted for under the accrual method, including normal purchases and
sales, account for the majority of the revenue. The MTM activities reported here are those relating to changes in fair value due to external movement in prices. For additional information, see Note 11.
Financial Risk Management Activities.
Operating Revenues
Normal
Trading
Total
(Millions)
MTM Activities:
Unrealized MTM Gains (Losses)
Changes in Fair Value of Open Position
$
(6
)
$
(3
)
$
(9
)
Realization at Settlement of Contracts
(15
)
10
(5
)
Total Change in Unrealized Fair Value
(21
)
7
(14
)
Realized Net Settlement of Transactions Subject to MTM
15
(10
)
5
Net MTM Losses
(6
)
(3
)
(9
)
Accrual Activities:
Accrual ActivitiesRevenue, Including Hedge Reclassifications
6,805
6,805
Total Operating Revenues
$
6,799
$
(3
)
$
6,796
(A)
Includes derivative contracts that Power enters into to hedge anticipated exposures related to its owned and contracted generation supply, all asset backed transactions and hedging activities, but
excludes owned and contracted generation assets.
82
For the Year Ended December 31, 2007
Operations and
Hedging(A)
The following table indicates Powers energy contracts, including Powers hedging activity related to asset backed transactions and derivative instruments that qualify for hedge accounting under SFAS
133. This table presents amounts segregated by portfolio which are then netted for those counterparties with whom Power has the right to offset and therefore, are not necessarily indicative of amounts
presented on the Condensed Consolidated Balance Sheets since balances with many counterparties are subject to offset and are shown net on the Condensed Consolidated Balance Sheets regardless of the
portfolio in which they are included.
Energy Contract Net Assets/Liabilities
Normal
Trading
Total
(Millions)
MTM Energy Assets
Current Assets
$
46
$
13
$
59
Noncurrent Assets
5
1
6
Total MTM Energy Assets
51
14
65
MTM Energy Liabilities
Current Liabilities
$
(365
)
$
(10
)
$
(375
)
Noncurrent Liabilities
(179
)
(1
)
(180
)
Total MTM Energy Liabilities
(544
)
(11
)
(555
)
Total MTM Energy Contract Net (Liabilities) Assets
$
(493
)
$
3
$
(490
)
The following table presents the maturity of net fair value of MTM energy contracts.
Maturity of Net Fair Value of MTM Energy Contracts
Maturities within
2008
2009
2010
Total
(Millions)
Trading
$
3
$
$
$
3
Normal Operations and Hedging
(319
)
(110
)
(64
)
(493
)
Total Net Unrealized Losses on MTM Contracts
$
(316
)
$
(110
)
$
(64
)
$
(490
)
Wherever possible, fair values for these contracts were obtained from quoted market sources. For contracts where no quoted market exists, modeling techniques were employed using assumptions
reflective of current market rates, yield curves and forward prices as applicable to interpolate certain prices. The effect of using such modeling techniques is not material to Powers financial results.
Global
The following table describes the drivers of Globals marketing activities and Operating Revenues included in PSEGs Condensed Consolidated Statement of Operations for the year ended December
31, 2007. Normal operations and hedging activities represent the marketing of electricity available from Globals owned generation sold into the market. Activities accounted for under the accrual method
account for the majority of the revenue. The MTM activities reported here are those relating to changes in fair value due to external movement in prices.
83
As of December 31, 2007
Operations and
Hedging
As of December 31, 2007
2011
Operating Revenues
Normal
(Millions)
MTM Activities:
Unrealized MTM Gains (Losses)
Changes in Fair Value of Open Position
$
26
Realization at Settlement of Contracts
Total Change in Unrealized Fair Value
26
Accrual Activities:
Accrual ActivitiesRevenue, Including Hedge Reclassifications
769
Total Operating Revenues
$
795
(A)
Includes derivative contracts that Global enters into to hedge anticipated exposures related to its owned and contracted generation supply.
The following table indicates Globals energy contract net assets.
Energy Contract Net Assets/Liabilities
Normal
(Millions)
MTM Energy Assets
Current Assets
$
18
Noncurrent Assets
45
Total MTM Energy Assets
63
MTM Energy Liabilities
Current Liabilities
$
Noncurrent Liabilities
Total MTM Energy Liabilities
Total MTM Energy Contract Net Assets
$
63
The following table presents the maturity of net fair value of MTM energy contracts.
Maturity of Net Fair Value of MTM Energy Contracts
Maturities within
2008
2009
2010
Total
(Millions)
Total Net Unrealized Losses on MTM Contracts (A)
$
18
$
24
$
21
$
63
(A)
The maturity of fair value of MTM Energy contracts as of December 31, 2007 includes $34 million of deferred inception losses which will be charged to Retained Earnings in January 2008 as a result of
the adoption of SFAS 157. See Note 2. Recent Accounting Standards for additional information.
Wherever possible, fair values for these contracts were obtained from quoted market sources. For contracts where no quoted market exists, modeling techniques were employed using assumptions
reflective of current market rates, yield curves and forward prices as applicable to interpolate.
84
For the Year Ended December 31, 2007
Operations and
Hedging(A)
As of December 31, 2007
Operations and
Hedging
As of December 31, 2007
2011
PSEG and Power
The following table identifies losses on cash flow hedges that are currently in Accumulated Other Comprehensive Loss, a separate component of equity. Power uses forward sale and purchase contracts,
swaps and firm transmission rights contracts to hedge forecasted energy sales from its generation stations and its contracted supply obligations. Power also enters into swaps, options and futures transactions
to hedge the price of fuel to meet its fuel purchase requirements for generation. PSEG and Power are subject to the risk of fluctuating interest rates in the normal course of business. PSEGs policy is to
manage interest rate risk through the use of fixed rate debt, floating rate debt and interest rate derivatives. The table also provides an estimate of the losses, net of taxes that are expected to be reclassified
out of Accumulated Other Comprehensive Loss and into earnings over the next twelve months.
Cash Flow Hedges Included in Accumulated Other Comprehensive Loss
Accumulated
Portion Expected
(Millions)
Commodities
$
(251
)
$
(147
)
Interest Rates
(8
)
(2
)
Net Cash Flow Hedge Loss Included in Accumulated Other Comprehensive Loss
$
(259
)
$
(149
)
Power
Credit Risk
The following table provides information on Powers credit exposure, net of collateral, as of December 31, 2007. Credit exposure is defined as any positive results of netting accounts receivable/accounts
payable and the forward value on open positions. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual
counterparties and an indication of the maturity of a companys credit risk by credit rating of the counterparties.
Schedule of Credit Risk Exposure on Energy Contracts Net Assets
Rating
Current
Securities
Net
Number of
Net Exposure of
(Millions)
(Millions)
Investment GradeExternal Rating
$
449
$
35
$
449
1
(A)
$
351
Non-Investment GradeExternal Rating
3
1
2
Investment GradeNo External Rating
2
2
Non-Investment GradeNo External Rating
112
1
112
1
92
Total
$
566
$
37
$
565
2
$
443
(A)
PSE&G is a counterparty with net exposure of $351 million.
The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. When letters of credit are posted, exposure is not reduced; it is shifted to a
more creditworthy entity. As of December 31, 2007, Power had 137 active counterparties.
As of December 31, 2007
Other
Comprehensive
Loss
to be Reclassified
in next 12 months
As of December 31, 2007
Exposure
Held
as Collateral
Exposure
Counterparties
>10%
Counterparties
>10%
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
This combined Form 10-K is separately filed by Public Service Enterprise Group Incorporated (PSEG), PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G). Information contained herein relating to any individual company is filed by such company on its own behalf. Power and PSE&G each make representations only as to itself and make no representations as to any other company.
85
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
We have audited the accompanying consolidated balance sheets of Public Service Enterprise Group Incorporated and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related
consolidated statements of operations, common stockholders equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the consolidated financial
statement schedule listed in the Index at Item 15. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in
Income Taxesan Interpretation of FASB Statement 109
.
As discussed in Note 2 to the consolidated financial statements, on December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans
.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of December 31,
2007, based on the criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2008
expressed an unqualified opinion on the Companys internal control over financial reporting.
D
ELOITTE
&
T
OUCHE
LLP
Parsippany, New Jersey
86
P
UBLIC
S
ERVICE
E
NTERPRISE
G
ROUP
I
NCORPORATED
:
February 27, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Sole Member and Board of Directors of
We have audited the accompanying consolidated balance sheets of PSEG Power LLC and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of
operations, members equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the consolidated financial statement schedule listed in the Index at
Item 15. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on the
consolidated financial statements and consolidated financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in
Income Taxesan Interpretation of FASB Statement 109
.
As discussed in Note 2 to the consolidated financial statements, on December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans
.
D
ELOITTE
&
T
OUCHE
LLP
Parsippany, New Jersey
87
PSEG P
OWER
LLC:
February 27, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Sole Stockholder and Board of Directors of
We have audited the accompanying consolidated balance sheets of Public Service Electric and Gas Company and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related
consolidated statements of operations, common stockholders equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the consolidated financial
statement schedule listed in the Index at Item 15. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2007 and 2006, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in
Income Taxesan Interpretation of FASB Statement 109
.
As discussed in Note 2 to the consolidated financial statements, on December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans
.
D
ELOITTE
&
T
OUCHE
LLP
Parsippany, New Jersey
88
P
UBLIC
S
ERVICE
E
LECTRIC
AND
G
AS
C
OMPANY
:
February 27, 2008
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
For The Years Ended December 31,
2007
2006
2005
OPERATING REVENUES
$
12,853
$
11,762
$
11,849
OPERATING EXPENSES
Energy Costs
6,523
6,553
6,882
Operation and Maintenance
2,419
2,221
2,224
Write-down of Assets
16
318
Depreciation and Amortization
783
811
714
Taxes Other Than Income Taxes
139
133
141
Total Operating Expenses
9,880
10,036
9,961
Income from Equity Method Investments
116
120
124
OPERATING INCOME
3,089
1,846
2,012
Other Income
282
201
229
Other Deductions
(259
)
(113
)
(85
)
Interest Expense
(729
)
(791
)
(766
)
Preferred Stock Dividends
(4
)
(4
)
(4
)
INCOME FROM CONTINUING OPERATIONS BEFORE
2,379
1,139
1,386
Income Tax Expense
(1,060
)
(460
)
(549
)
INCOME FROM CONTINUING OPERATIONS
1,319
679
837
Income (Loss) from Discontinued Operations, including Gain (Loss) on Disposal, net of tax (expense) benefit of ($161), ($115), and $36 for the years ended 2007,
2006 and 2005, respectively
16
60
(159
)
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
1,335
739
678
Cumulative Effect of a Change in Accounting Principle, net of tax benefit of $11
(17
)
NET INCOME
$
1,335
$
739
$
661
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS):
BASIC
507,560
503,356
480,594
DILUTED
508,813
504,628
488,812
EARNINGS PER SHARE:
BASIC
INCOME FROM CONTINUING OPERATIONS
$
2.60
$
1.35
$
1.74
NET INCOME
$
2.63
$
1.47
$
1.38
DILUTED
INCOME FROM CONTINUING OPERATIONS
$
2.59
$
1.34
$
1.71
NET INCOME
$
2.62
$
1.46
$
1.35
DIVIDENDS PAID PER SHARE OF COMMON STOCK
$
1.17
$
1.14
$
1.12
See Notes to Consolidated Financial Statements.
89
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions, except for share data)
INCOME TAXES
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
December 31,
2007
2006
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents
$
381
$
106
Accounts Receivable, net of allowances of $46 and $47 in 2007 and 2006, respectively
1,639
1,257
Unbilled Revenues
353
328
Fuel
793
848
Materials and Supplies
296
275
Prepayments
91
72
Restricted Funds
114
79
Derivative Contracts
70
109
Assets of Discontinued Operations
1,162
1,618
Assets Held for Sale
40
Other
29
45
Total Current Assets
4,928
4,777
PROPERTY, PLANT AND EQUIPMENT
19,310
18,094
Less: Accumulated Depreciation and Amortization
(6,035
)
(5,676
)
Net Property, Plant and Equipment
13,275
12,418
NONCURRENT ASSETS
Regulatory Assets
5,165
5,694
Long-Term Investments
3,246
3,868
Nuclear Decommissioning Trust (NDT) Funds
1,276
1,256
Other Special Funds
164
147
Goodwill and Other Intangibles
64
62
Derivative Contracts
53
55
Other
221
275
Total Noncurrent Assets
10,189
11,357
TOTAL ASSETS
$
28,392
$
28,552
See Notes to Consolidated Financial Statements.
90
CONSOLIDATED BALANCE SHEETS
(Millions)
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
See Notes to Consolidated Financial Statements.
91
CONSOLIDATED BALANCE SHEETS
(Millions)
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
For The Years Ended
2007
2006
2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
$
1,335
$
739
$
661
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
(Gain) Loss on Disposal of Discontinued Operations, net of tax
(48
)
(19
)
178
Cumulative Effect of a Change in Accounting Principle, net of tax
17
Gain on Disposition of Property, Plant and Equipment
(3
)
(5
)
(8
)
Write-Down of Property, Plant and Equipment
44
Write-Down of Project Investments
16
7
22
Depreciation and Amortization
802
850
767
Amortization of Nuclear Fuel
95
97
94
Provision for Deferred Income Taxes (Other than Leases) and ITC
119
(89
)
224
Non-Cash Employee Benefit Plan Costs
185
237
235
Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes
70
64
(27
)
(Gain) Loss on Sale of Investments
(173
)
253
(122
)
Cost of Removal
(37
)
(33
)
(30
)
Undistributed Earnings from Affiliates
(10
)
(44
)
(46
)
Foreign Currency Transaction Loss
5
Unrealized Losses (Gains) on Energy Contracts and Other Derivatives
22
(30
)
20
(Under) Over Recovery of Electric Energy Costs (BGS and NTC) and Gas Costs
(71
)
111
109
Under Recovery of Societal Benefits Charge (SBC)
(53
)
(175
)
(158
)
Net Realized Gains and Income from NDT Funds
(48
)
(64
)
(125
)
Other Non-Cash Charges
6
18
51
Net Change in Certain Current Assets and Liabilities
(169
)
146
(678
)
Employee Benefit Plan Funding and Related Payments
(96
)
(148
)
(240
)
Proceeds from the Withdrawal of Partnership Interests and Other Distributions
10
64
Other
(24
)
(43
)
(59
)
Net Cash Provided By Operating Activities
1,918
1,931
949
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment
(1,348
)
(1,015
)
(1,053
)
Proceeds from Collection of Notes Receivable
120
Proceeds from Sale of Discontinued Operations
600
494
218
Proceeds from Sale of Property, Plant and Equipment
43
5
11
Proceeds from the Sale of Investments and Return of Capital from Partnerships
703
251
315
Proceeds from NDT Funds Sales
1,672
1,405
3,223
Investment in NDT Funds
(1,703
)
(1,427
)
(3,232
)
Restricted Funds
(41
)
(6
)
(49
)
NDT Funds Interest and Dividends
48
40
35
Other
25
10
12
Net Cash Provided by (Used In) Investing Activities
(1
)
(243
)
(400
)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Commercial Paper and Loans
(317
)
281
(538
)
Issuance of Long-Term Debt
434
250
728
Issuance of Non-Recourse Debt
163
18
Issuance of Common Stock
83
83
533
Redemptions of Long-Term Debt
(551
)
(1,431
)
(125
)
Repayment of Non-Recourse Debt
(57
)
(51
)
(37
)
Redemption of Securitization Debt
(170
)
(163
)
(146
)
Redemption of Debt Underlying Trust Securities
(660
)
(203
)
(387
)
Cash Dividends Paid on Common Stock
(594
)
(574
)
(541
)
Other
27
(26
)
(47
)
Net Cash Used In Financing Activities
(1,642
)
(1,834
)
(542
)
Effect of Exchange Rate Change
(1
)
1
Net Increase (Decrease) in Cash and Cash Equivalents
275
(147
)
8
Cash and Cash Equivalents at Beginning of Period
106
253
245
Cash and Cash Equivalents at End of Period
$
381
$
106
$
253
Supplemental Disclosure of Cash Flow Information:
Income Taxes Paid
$
678
$
386
$
103
Interest Paid, Net of Amounts Capitalized
$
715
$
773
$
793
See Notes to Consolidated Financial Statements.
92
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
December 31,
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
Common
Treasury
Retained
Accumulated
Total
Shs.
Amount
Shs.
Amount
Balance as of January 1, 2005
528
$
4,569
(52
)
$
(978
)
$
2,425
$
(272
)
$
5,744
Net Income
661
661
Other Comprehensive Income (Loss), net of tax:
Currency Translation Adjustment, net of tax
84
84
Available for Sale Securities, net of tax
(30
)
(30
)
Change in Fair Value of Derivative Instruments, net of tax
(573
)
(573
)
Reclassification Adjustments for Net Amounts included in Net Income, net of tax
182
182
Settlement Adjustments Related to Projects Under Construction
(2
)
(2
)
Minimum Pension Liability Adjustment,
2
2
Other Comprehensive Loss
(337
)
Comprehensive Income
324
Cash Dividends on Common Stock
(541
)
(541
)
Issuance of Common Stock
2
104
24
429
533
Issuance Costs and Other
(55
)
17
(38
)
Balance as of December 31, 2005
530
$
4,618
(28
)
$
(532
)
$
2,545
$
(609
)
$
6,022
Net Income
739
739
Other Comprehensive Income (Loss), net of tax:
Currency Translation Adjustment,
154
154
Available for Sale Securities, net of tax
37
37
Change in Fair Value of Derivative Instruments, net of tax
343
343
Reclassification Adjustments for Net Amounts included in Net Income, net of tax
114
114
Sale of Investments
55
55
Minimum Pension Liability Adjustment,
3
3
Other Comprehensive Income
706
Comprehensive Income
1,445
Adjustment to initially apply FASB Statement 158, net of tax
(205
)
(205
)
Cash Dividends on Common Stock
(574
)
(574
)
Issuance of Common Stock
2
68
1
15
83
Issuance Costs and Other
(25
)
1
(24
)
Balance as of December 31, 2006
532
$
4,661
(27
)
$
(516
)
$
2,710
$
(108
)
$
6,747
Net Income
1,335
1,335
Other Comprehensive Income (Loss), net of tax:
Currency Translation Adjustment,
(3
)
(3
)
Available for Sale Securities, net of tax
(10
)
(10
)
Change in Fair Value of Derivative Instruments, net of tax
(290
)
(290
)
Reclassification Adjustments for Net Amounts included in Net Income, net of tax
144
144
Adjustment
for application of FASB Statement 158, net of tax
50
50
Sale of Investments
1
1
Other Comprehensive Loss
(108
)
Comprehensive Income
1,227
Adjustment to initially apply FSP13-2, net of tax
(67
)
(67
)
Adjustment to initially apply FIN 48, net of tax
(123
)
(123
)
Cash Dividends on Common Stock
(594
)
(594
)
Issuance of Common Stock
2
35
2
48
83
Issuance Costs and Other
36
(10
)
26
Balance as of December 31, 2007
534
$
4,732
(25
)
$
(478
)
$
3,261
$
(216
)
$
7,299
See Notes to Consolidated Financial Statements.
93
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY
(Millions)
Stock
Stock
Earnings
Other
Comprehensive
Loss
net of tax
net of tax
net of tax
net of tax
PSEG POWER LLC
For The Years Ended
December 31,
2007
2006
2005
OPERATING REVENUES
$
6,796
$
6,057
$
6,027
OPERATING EXPENSES
Energy Costs
3,975
3,955
4,266
Operation and Maintenance
1,001
958
939
Write-Down of Assets
44
Depreciation and Amortization
140
140
114
Total Operating Expenses
5,116
5,097
5,319
OPERATING INCOME
1,680
960
708
Other Income
239
157
187
Other Deductions
(170
)
(91
)
(43
)
Interest Expense
(159
)
(148
)
(100
)
INCOME FROM CONTINUING OPERATIONS BEFORE
1,590
878
752
Income Tax Expense
(641
)
(363
)
(318
)
INCOME FROM CONTINUING OPERATIONS
949
515
434
Loss from Discontinued Operations, net of tax benefit of $5, $22 and $33 for the years ended 2007, 2006 and 2005, respectively
(8
)
(31
)
(48
)
Loss on Disposal of Discontinued Operations, net of tax benefit of $144 for the year ended 2006
(208
)
(178
)
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
941
276
208
Cumulative Effect of a Change in Accounting Principle, net of tax benefit of $11 for the year ended 2005
(16
)
EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
$
941
$
276
$
192
See disclosures regarding PSEG Power LLC included in the
94
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions)
INCOME TAXES
GROUP INCORPORATED
Notes to Consolidated Financial Statements.
PSEG POWER LLC
See disclosures regarding PSEG Power LLC included in the
95
CONSOLIDATED BALANCE SHEETS
(Millions)
Notes to Consolidated Financial Statements.
PSEG POWER LLC
For The Years Ended
2007
2006
2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
$
941
$
276
$
192
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
Loss on Disposal of Discontinued operations, net of tax
208
178
Cumulative Effect of a Change in Accounting Principle
16
Write-down of Property, Plant and Equipment
44
Gain on Disposition of Property, Plant and Equipment
(1
)
(5
)
Depreciation and Amortization
140
157
136
Amortization of Nuclear Fuel
95
97
94
Interest Accretion on Asset Retirement Obligations
23
33
28
Provision for Deferred Income Taxes and ITC
222
34
276
Net Realized and Unrealized Losses on Energy Contracts and
33
5
17
Non-Cash Employee Benefit Plan Costs
28
46
46
Net Realized Gains and Income from NDT Funds
(48
)
(64
)
(125
)
Net Change in Working Capital:
Fuel, Materials and Supplies
37
(45
)
(214
)
Accounts Receivable
(189
)
432
(122
)
Accounts Payable
15
(181
)
(247
)
Accounts Receivable/PayableAffiliated Companies, net
(65
)
122
(91
)
Other Current Assets and Liabilities
(16
)
(5
)
(27
)
Employee Benefit Plan Funding and Related Payments
(15
)
(37
)
(58
)
Other
4
(78
)
42
Net Cash Provided By Operating Activities
1,205
1,043
136
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment
(715
)
(418
)
(476
)
Sales of Property, Plant and Equipment
40
1
8
Proceeds from NDT Funds Sales
1,672
1,405
3,223
NDT Funds Interest and Dividends
48
40
35
Investment in NDT Funds
(1,703
)
(1,427
)
(3,232
)
Restricted Funds
(50
)
Proceeds from Sale of Discontinued Operations
325
218
Other
(17
)
9
(18
)
Net Cash Used In Investing Activities
(400
)
(390
)
(242
)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Recourse Long-Term Debt
84
Redemption of Long-Term Debt
(500
)
Cash Dividend Paid
(1,075
)
Short-Term LoanAffiliated Company, net
184
(148
)
104
Net Cash (Used in) Provided by Financing Activities
(807
)
(648
)
104
Net (Decrease) Increase in Cash and Cash Equivalents
(2
)
5
(2
)
Cash and Cash Equivalents at Beginning of Period
13
8
10
Cash and Cash Equivalents at End of Period
$
11
$
13
$
8
Supplemental Disclosure of Cash Flow Information:
Income
Taxes Paid (Benefits Received)
$
345
$
(23
)
$
(23
)
Interest Paid, Net of Amounts Capitalized
$
169
$
139
$
139
See disclosures regarding PSEG Power LLC included in the
96
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
December 31,
Other Derivatives
Notes to Consolidated Financial Statements.
PSEG POWER LLC
Contributed
Basis
Retained
Accumulated
Total
Balance as of January 1, 2005
$
2,000
$
(986
)
$
2,118
$
(49
)
$
3,083
Net Income
192
192
Other Comprehensive Income (Loss),
Available for Sale Securities, net of tax
(30
)
(30
)
Minimum Pension Liability Adjustment, net of tax
1
1
Change in Fair Value of Derivative Instruments, net of tax
(589
)
(589
)
Reclassification Adjustments for Net Amount included in Net Income,
180
180
Other Comprehensive Loss
(438
)
Comprehensive Loss
(246
)
Balance as of December 31, 2005
$
2,000
$
(986
)
$
2,310
$
(487
)
$
2,837
Net Income
276
276
Other Comprehensive Income (Loss),
Available for Sale Securities, net of tax
37
37
Minimum Pension Liability Adjustment, net of tax
(4
)
(4
)
Change in Fair Value of Derivative Instruments, net of tax
343
343
Reclassification Adjustments for Net Amount included in Net Income,
107
107
Other Comprehensive Income
483
Comprehensive Income
759
Adjustment to initially apply FASB Statement 158, net of tax
(173
)
(173
)
Balance as of December 31, 2006
$
2,000
$
(986
)
$
2,586
$
(177
)
$
3,423
Net Income
941
941
Other Comprehensive Income (Loss),
Available for Sale Securities, net of tax
(10
)
(10
)
Adjustment
for FASB Statement 158,
38
38
Change in Fair Value of Derivative Instruments, net of tax
(287
)
(287
)
Reclassification Adjustments for Net Amount included in Net Income,
145
145
Other Comprehensive Loss
(114
)
Comprehensive Income
827
Adjustment to initially apply FIN 48,
(14
)
(14
)
Cash Dividends Paid
(1,075
)
(1,075
)
Balance as of December 31, 2007
$
2,000
$
(986
)
$
2,438
$
(291
)
$
3,161
See disclosures regarding PSEG Power LLC included in the
97
CONSOLIDATED STATEMENTS OF CAPITALIZATION AND MEMBERS EQUITY
(Millions)
Capital
Adjustment
Earnings
Other
Comprehensive
Income (Loss)
Members
Equity
net of tax:
net of tax
net of tax:
net of tax
net of tax:
net of tax
net of tax
net of tax
Notes to Consolidated Financial Statements.
[THIS PAGE INTENTIONALLY LEFT BLANK]
98
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
For The Years Ended December 31,
2007
2006
2005
OPERATING REVENUES
$
8,493
$
7,569
$
7,514
OPERATING EXPENSES
Energy Costs
5,498
4,884
4,756
Operation and Maintenance
1,308
1,160
1,151
Depreciation and Amortization
591
620
553
Taxes Other Than Income Taxes
139
133
141
Total Operating Expenses
7,536
6,797
6,601
OPERATING INCOME
957
772
913
Other Income
16
25
15
Other Deductions
(4
)
(3
)
(3
)
Interest Expense
(332
)
(346
)
(342
)
INCOME BEFORE INCOME TAXES
637
448
583
Income Tax Expense
(257
)
(183
)
(235
)
NET INCOME
380
265
348
Preferred Stock Dividends
(4
)
(4
)
(4
)
EARNINGS AVAILABLE TO PUBLIC SERVICE
$
376
$
261
$
344
See disclosures regarding Public Service Electric and Gas Company
99
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions)
ENTERPRISE GROUP INCORPORATED
included in the Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
December 31,
2007
2006
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents
$
32
$
28
Accounts Receivable, net of allowances of $45 in 2007 and $46 in 2006
995
805
Unbilled Revenues
353
328
Materials and Supplies
53
50
Prepayments
57
14
Restricted Funds
7
12
Derivative Contracts
1
2
Deferred Income Taxes
44
36
Total Current Assets
1,542
1,275
PROPERTY, PLANT AND EQUIPMENT
11,531
11,061
Less: Accumulated Depreciation and Amortization
(3,920
)
(3,794
)
Net Property, Plant and Equipment
7,611
7,267
NONCURRENT ASSETS
Regulatory Assets
5,165
5,694
Long-Term Investments
153
149
Other Special Funds
57
53
Other
109
115
Total Noncurrent Assets
5,484
6,011
TOTAL ASSETS
$
14,637
$
14,553
See disclosures regarding Public Service Electric and Gas Company
100
CONSOLIDATED BALANCE SHEETS
(Millions)
included in the Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
See disclosures regarding Public Service Electric and Gas Company
101
CONSOLIDATED BALANCE SHEETS
(Millions)
included in the Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
For the Years Ended
December 31,
2007
2006
2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
$
380
$
265
$
348
Adjustments to Reconcile Net Income to Net Cash Flows from
Depreciation and Amortization
591
620
553
Provision for Deferred Income Taxes and ITC
(118
)
(112
)
(52
)
Non-Cash Employee Benefit Plan Costs
140
169
166
Gain on Sale of Property, Plant and Equipment
(3
)
(4
)
(3
)
Non-Cash Interest Expense
12
18
16
Cost of Removal
(37
)
(33
)
(30
)
Employee Benefit Plan Funding and Related Payments
(69
)
(97
)
(154
)
Over Recovery of Electric Energy Costs (BGS and NTC)
(28
)
24
117
(Under) Over Recovery of Gas Costs
(43
)
87
(8
)
Over (Under) Recovery of SBC
(53
)
(175
)
(158
)
Other Non-Cash Charges
(4
)
(5
)
(6
)
Net Changes in Certain Current Assets and Liabilities:
Accounts Receivable and Unbilled Revenues
(218
)
220
(268
)
Materials and Supplies
(3
)
(1
)
(4
)
Prepayments
(48
)
29
6
Accrued Taxes
25
(23
)
Accrued Interest
1
(4
)
Accounts Payable
71
(32
)
36
Accounts Receivable/PayableAffiliated Companies, net
54
(72
)
79
Other Current Assets and Liabilities
1
(57
)
77
Other
27
(11
)
(31
)
Net Cash Provided By Operating Activities
678
806
684
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment
(570
)
(528
)
(498
)
Proceeds from the Sale of Property, Plant and Equipment
3
2
3
Restricted Funds
(1
)
(1
)
(6
)
Net Cash Used In Investing Activities
(568
)
(527
)
(501
)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt
34
31
(105
)
Issuance of Long-Term Debt
350
250
250
Redemption of Long-Term Debt
(113
)
(322
)
(125
)
Redemption of Securitization Debt
(170
)
(163
)
(146
)
Issuance of Securitization Debt
103
Deferred Issuance Costs
(3
)
(2
)
(3
)
Cash Dividends Paid on Common Stock
(200
)
(200
)
Preferred Stock Dividends
(4
)
(4
)
(4
)
Net Cash Used In Financing Activities
(106
)
(410
)
(30
)
Net Increase (Decrease) In Cash and Cash Equivalents
4
(131
)
153
Cash and Cash Equivalents at Beginning of Period
28
159
6
Cash and Cash Equivalents at End of Period
$
32
$
28
$
159
Supplemental Disclosure of Cash Flow Information:
Income Taxes Paid
$
336
$
237
$
313
Interest Paid, Net of Amounts Capitalized
$
314
$
312
$
316
See disclosures regarding Public Service Electric and Gas Company
102
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
Operating Activities:
included in the Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
Common
Contributed
Basis
Retained
Accumulated
Total
Balance as of January 1, 2005
$
892
$
170
$
986
$
656
$
(4
)
$
2,700
Net Income
348
348
Other Comprehensive Loss,
Minimum Pension Liability Adjustment, net of tax
(1
)
(1
)
Comprehensive Income
347
Cash Dividends on Preferred Stock
(4
)
(4
)
Balance as of December 31, 2005
$
892
$
170
$
986
$
1,000
$
(5
)
$
3,043
Net Income
265
265
Other Comprehensive Income, net of tax:
Minimum Pension Liability Adjustment, net of tax
5
5
Comprehensive Income
270
Adjustment to initially apply FASB Statement 158, net of tax
1
1
Cash Dividends on Common Stock
(200
)
(200
)
Cash Dividends on Preferred Stock
(4
)
(4
)
Balance as of December 31, 2006
$
892
$
170
$
986
$
1,061
$
1
$
3,110
Net Income
380
380
Other Comprehensive Income, net of tax:
Adjustment
for application of FASB Statement 158, net of tax
1
1
Comprehensive Income
381
Cash Dividends on Common Stock
(200
)
(200
)
Cash Dividends on Preferred Stock
(4
)
(4
)
Balance as of December 31, 2007
$
892
$
170
$
986
$
1,237
$
2
$
3,287
See disclosures regarding Public Service Electric and Gas Company
103
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY
(Millions)
Stock
Capital from
PSEG
Adjustment
Earnings
Other
Comprehensive
Loss
net of tax:
included in the Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Organization
Public Service Enterprise Group Incorporated (PSEG)
PSEG has four principal direct wholly owned subsidiaries: PSEG Power LLC (Power), Public Service Electric and Gas Company (PSE&G), PSEG Energy Holdings L.L.C. (Energy Holdings) and PSEG
Services Corporation (Services).
Power
Power is a multi-regional, wholesale energy supply company that integrates its generating asset operations and gas supply commitments with its wholesale energy, fuel supply, energy trading and
marketing and risk management function through three principal direct wholly owned subsidiaries: PSEG Nuclear LLC (Nuclear), PSEG Fossil LLC (Fossil) and PSEG Energy Resources & Trade LLC
(ER&T). Nuclear and Fossil own and operate generation and generation-related facilities. ER&T is responsible for the day-to-day management of Powers portfolio. Fossil, Nuclear and ER&T are subject to
regulation by the Federal Energy Regulatory Commission (FERC) and Nuclear is also subject to regulation by the Nuclear Regulatory Commission (NRC).
PSE&G
PSE&G is an operating public utility engaged principally in the transmission of electric energy and distribution of electric energy and natural gas in certain areas of New Jersey. PSE&G is subject to
regulation by the New Jersey Board of Public Utilities (BPU) and the FERC.
PSE&G Transition Funding LLC (Transition Funding) and PSE&G Transition Funding II LLC (Transition Funding II) are wholly owned, bankruptcy-remote subsidiaries of PSE&G that purchased certain
transition property from PSE&G and issued transition bonds secured by such property. The transition property consists principally of the rights to receive electricity consumption-based per kilowatt-hour
(kWh) charges from PSE&G electric distribution customers, which represent irrevocable rights to receive amounts sufficient to recover certain of PSE&Gs transition costs related to deregulation, as approved
by the BPU.
Energy Holdings
Energy Holdings has two principal direct wholly owned subsidiaries: PSEG Global L.L.C. (Global), which owns and operates international and domestic projects engaged in the generation and
distribution of energy and PSEG Resources L.L.C. (Resources), which has invested primarily in energy-related leveraged leases. Energy Holdings also owns Enterprise Group Development Corporation
(EGDC), a commercial real estate property management business.
Services
Services provides management and administrative and general services to PSEG and its subsidiaries. These include accounting, treasury, financial risk management, law, tax communications, planning,
development, human resources, corporate secretarial, information technology, investor relations, stockholder services, real estate, insurance, library, records and information services, security and certain
other services. Services charges PSEG and its subsidiaries for the cost of work performed and services provided pursuant to the terms and conditions of an intercompany service agreement.
Principles of Consolidation
PSEG, Power and PSE&G
PSEGs, Powers and PSE&Gs consolidated financial statements include their respective accounts and consolidate those entities in which they have a controlling interest or are the primary beneficiary,
except for certain of PSEGs capital trusts which were deconsolidated in accordance with Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46 (revised December 2003),
Consolidation of Variable
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Entities (VIE) (FIN 46). Entities over which PSEG, Power and PSE&G exhibit significant influence, but do not have a controlling interest and/or are not the primary beneficiary are accounted for
under the equity method of accounting. For investments in which significant influence does not exist and the investor is not the primary beneficiary, the cost method of accounting is applied. All
intercompany accounts and transactions are eliminated in consolidation.
Power and PSE&G
Power and PSE&G each have undivided interests in certain jointly-owned facilities and each is responsible for paying their respective ownership share of additional construction costs, fuel inventory
purchases and operating expenses. All revenues and expenses related to these facilities are consolidated at their respective pro-rata ownership share in the appropriate revenue and expense categories on the
Consolidated Statements of Operations. For additional information regarding these jointly-owned facilities, see Note 19. Property, Plant and Equipment and Jointly-Owned Facilities.
Accounting for the Effects of Regulation
PSE&G
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 economic effects of regulation. As a result, a regulated utility is required to defer the recognition
of costs (a regulatory asset) or record the recognition of obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future
rates. Accordingly, PSE&G has deferred certain costs and recoveries, which are being amortized over various future periods. To the extent that collection of any such costs or payment of liabilities is no
longer probable as a result of changes in regulation and/or PSE&Gs competitive position, the associated regulatory asset or liability is charged or credited to income. Management believes that PSE&Gs
transmission and distribution businesses continue to meet the requirements for application of SFAS 71. For additional information, see Note 5. Regulatory Matters.
Derivative Financial Instruments
PSEG, Power and PSE&G
PSEG, Power and PSE&G use derivative financial instruments to manage risk from changes in interest rates, congestion credits, emission credit prices, commodity prices and foreign currency exchange
rates, pursuant to their business plans and prudent practices.
PSEG, Power and PSE&G recognize derivative instruments, not designated as normal purchases or sales, on the balance sheet at their fair value. Changes in the fair value of a derivative that is highly
effective as, and that is designated and qualifies as, a fair value hedge (including foreign currency fair value hedges), along with changes of the fair value of the hedged asset or liability that are attributable
to the hedged risk, are recorded in current-period earnings. Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a cash flow hedge (including foreign
currency cash flow hedges) are recorded in Accumulated Other Comprehensive Income / Loss until earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness
is included in current-period earnings. In certain circumstances, PSEG, Power and/or PSE&G enter into derivative contracts that do not qualify as hedges or are not designated as normal purchases or sales or
as cash flow hedges; in such cases, changes in fair value are recorded in current-period earnings.
Many non-trading contracts qualify for the normal purchases and normal sales exemption under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and
interpreted (SFAS 133) and are accounted for upon settlement.
For additional information regarding derivative financial instruments, see Note 11. Financial Risk Management Activities.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Power
The majority of Powers revenues relate to bilateral contracts, which are accounted for on the accrual basis as the energy is delivered. Powers revenue also includes changes in value of non trading
energy derivative contracts that are not designated as normal purchases or sales or as hedges of other positions. Power records margins from energy trading on a net basis pursuant to accounting principles
generally accepted in the U.S. (GAAP). See Note 11. Financial Risk Management Activities for further discussion.
PSE&G
PSE&Gs Operating Revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues for 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. The unbilled revenue is estimated each month based on usage per day, the number of unbilled days
in the period, estimated seasonal loads based upon the time of year and the variance of actual degree-days and temperature-humidity-index hours of the unbilled period from expected norms.
Depreciation and Amortization
Power
Power calculates depreciation on generation-related assets under the straight-line method based on the assets estimated useful lives which are determined based on planned operations. The estimated
useful lives are from three years to 20 years for general plant assets. The estimated useful lives are 30 years to 67 years for fossil production assets, 53 years to 58 years for nuclear generation assets and 76
years for pumped storage facilities.
PSE&G
PSE&G calculates depreciation under the straight-line method 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. The depreciation rate stated as a percentage of original cost of depreciable property was 2.46% 2007, 2.84% for 2006 and 3.00% for 2005.
Taxes Other Than Income Taxes
PSE&G
Excise taxes, transitional energy facilities assessment (TEFA) and gross receipts tax (GRT) collected from PSE&Gs customers are presented on the financial statements on a gross basis. As a result of
New Jersey energy tax reform, effective January 1, 1998, TEFA and GRT are the residual of the prior excise tax, the New Jersey gross receipts and franchise taxes. For the years ended December 31, 2007,
2006 and 2005, combined TEFA and GRT of approximately $154 million, $146 million and $155 million, respectively, are reflected in Operating Revenues and $140 million, $132 million and $141 million,
respectively, are included in Taxes Other Than Income Taxes on the Consolidated Statements of Operations.
Interest Capitalized During Construction (IDC) and Allowance for Funds Used During Construction (AFUDC)
Power
IDC represents the cost of debt used to finance construction. The amount of IDC capitalized is reported in the Consolidated Statements of Operations as a reduction of interest charges and is included
in Property, Plant and Equipment on the Consolidated Balance Sheets. Powers average rate used for calculating IDC in 2007, 2006 and 2005 was 6.81%, 6.81% and 6.74%, respectively. For the years ended
December 31, 2007, 2006 and 2005, Powers IDC amounted to $33 million, $41 million and $95 million, respectively.
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PSE&G
AFUDC represents the cost of debt and equity funds used to finance the construction of new utility assets under the guidance of SFAS 71. The amount of AFUDC capitalized is reported in the
Consolidated Statements of Operations as a reduction of interest charges. PSE&Gs average rate used for calculating AFUDC in 2007, 2006 and 2005 was 5.44%, 4.99% and 3.17%, respectively. For the years
ended December 31, 2007, 2006 and 2005, PSE&Gs AFUDC amounted to $2.9 million, $2.0 million and $1.2 million, respectively.
Income Taxes
PSEG, Power and PSE&G
PSEG and its subsidiaries file a consolidated federal income tax return and income taxes are allocated to PSEGs 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.
Cash and Cash Equivalents
PSEG, Power and PSE&G
Cash and cash equivalents consist primarily of working funds and highly liquid marketable securities (commercial paper and money market funds) with an original maturity of three months or less.
Materials and Supplies and Fuel
Power
Materials and supplies and fuel for Power are valued at the lower of average cost or market.
PSE&G
PSE&Gs materials and supplies are carried at average cost consistent with the rate-making process.
Restricted Funds
Power, PSE&G and Energy Holdings
Powers restricted funds represent restricted cash for qualifying expenditures for solid waste disposal technology related to pollution control notes issued by Power for two of its coal-fired generation
stations. PSE&Gs restricted funds represent revenues collected from its retail electric customers that must be used to pay the principal, interest and other expenses associated with the securitization bonds of
Transition Funding and Transition Funding II. Energy Holdings restricted funds represent cash accounts designated for maintenance costs, debt service reserves and other specific purposes as set forth in
certain of PSEG Texas loan agreements.
Property, Plant and Equipment
Power
Power only capitalizes costs which increase the capacity or extend the life of an existing asset, represent a newly acquired or constructed asset or represent the replacement of a retired asset. The cost of
maintenance, repair and replacement of minor items of property is charged to appropriate expense accounts as incurred. Environmental costs are capitalized if the costs mitigate or prevent future
environmental contamination or if the costs improve existing assets environmental safety or efficiency. All other environmental expenditures are expensed as incurred.
PSE&G
PSE&Gs additions and replacements to property, plant and equipment that are either retirement units or property record units are capitalized at original cost. The cost of maintenance, repair and
replacement of
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
minor items of property is charged to appropriate expense accounts as incurred. At the time units of depreciable property are retired or otherwise disposed of, the original cost, adjusted for net salvage
value, is charged to accumulated depreciation.
Other Special Funds
PSEG, Power and PSE&G
Other Special Funds represents amounts deposited to fund the qualified pension plans and to fund a Rabbi Trust which was established to meet the obligations related to three non-qualified pension
plans and a deferred compensation plan.
Nuclear Decommissioning Trust (NDT) Funds
Power
As required under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), realized gains and losses on securities in the NDT Funds are recorded in earnings
and unrealized gains and losses on such securities are recorded as a component of Accumulated Other Comprehensive Loss unless securities with such unrealized losses are deemed to be other-than-
temporarily-impaired.
Investments in Corporate Joint Ventures and Partnerships
Generally, PSEGs interests in active joint ventures and partnerships are accounted for under the equity method of accounting where its respective ownership interests are 50% or less, it is not the
primary beneficiary, as defined under FIN 46, and significant influence over joint venture or partnership operating and management decisions exists. For investments in which significant influence does not
exist and PSEG is not the primary beneficiary, the cost method of accounting is applied.
Deferred Project Costs and Development Costs
Power
Power capitalizes all direct external and incremental direct internal costs related to project development once a project reaches certain milestones. On Powers Consolidated Balance Sheets, deferred
project costs are recorded in Construction Work in Progress. These costs are amortized on a straight-line basis over the lives of the related project assets. Such amortization commences upon the date of
commercial operation. Development costs related to unsuccessful projects are charged to expense.
Basis Adjustment
Power and PSE&G
Power and PSE&G have recorded a Basis Adjustment on their Consolidated Balance Sheets related to the generation assets that were transferred from PSE&G to Power in August 2000 at the price
specified by the BPU. Because the transfer was between affiliates, Power and PSE&G, the transaction was recorded at the net book value of the assets and liabilities rather than the transfer price. The
difference between the total transfer price and the net book value of the generation-related assets and liabilities, approximately $986 million, net of tax, was recorded as a Basis Adjustment on Powers and
PSE&Gs Consolidated Balance Sheets. The $986 million is a reduction of Powers Members Equity and an addition to PSE&Gs Common Stockholders Equity. These amounts are eliminated on PSEGs
consolidated financial statements.
Stock Split
PSEG
On January 15, 2008, PSEGs Board of Directors approved a two-for-one stock split of PSEGs outstanding shares of common stock. The stock split entitled each stockholder of record at the close of
business on January 25, 2008 to receive one additional share for every outstanding share of common stock
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
held. The additional shares resulting from the stock split were distributed on February 4, 2008. All share and per share amounts in the consolidated results of operations and financial position as well as in
the notes to the financial statements retroactively reflect the effect of the stock split.
Use of Estimates
PSEG, Power and PSE&G
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 materially differ from estimated amounts.
Reclassifications
PSEG, Power and PSE&G
Certain reclassifications have been made to the prior years financial statements to conform to the current year presentation. The reclassifications relate primarily to recording revenue and related
expenses on certain transactions on a net basis versus gross.
Note 2. Recent Accounting Standards
The following accounting standards were issued by the Financial Accounting Standards Board (FASB) but have not yet been adopted by PSEG, Power and PSE&G.
SFAS No. 157, Fair Value Measurements (SFAS 157)
PSEG, Power and PSE&G
In September 2006, the FASB issued SFAS 157 which provides a single definition of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Prior to SFAS 157, guidance for applying fair value was incorporated into several accounting pronouncements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific
measurement, and sets out a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources (observable inputs) and those based on an entitys own
assumptions (unobservable inputs). Under SFAS 157, fair value measurements are disclosed by level within that hierarchy, with the highest priority being quoted prices in active markets. While this
statement does not require any new fair value measurements, the application of this statement will change current practice for some fair value measurements.
This statement also nullifies the guidance in footnote 3 of Emerging Issues Task Force (EITF) Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management Activities (EITF 02-3). The guidance in footnote 3 applied for derivative (and other) instruments measured at fair value at initial recognition
under SFAS 133. That guidance precluded immediate recognition in earnings of an unrealized gain or loss, measured as the difference between the transaction price and the fair value of the instrument at
initial recognition, if the fair value of the instrument was determined using significant unobservable inputs. Under this guidance, an entity could not recognize an unrealized gain or loss at inception of a
derivative instrument unless the fair value of that instrument was obtained from a quoted market price in an active market or was otherwise evidenced by comparison to other observable current market
transaction or based on a valuation technique incorporating observable market data. SFAS 157 requires that the principles of fair value measurement should be applied for derivatives and other financial
instruments at initial recognition and in all subsequent periods. At December 31, 2007, PSEG has a deferred inception loss of $34 million, which is expected to be recognized through Retained Earnings in
the first quarter of 2008.
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. PSEG adopted this statement effective January 1, 2008. In February 2008, the FASB also issued
two FASB Staff Positions (FSPs):
FSP FAS 157-1 to exclude leasing transactions accounted for under SFAS No. 13, Accounting for Leases and its related interpretive pronouncements from SFAS 157s scope
FSP FAS 157-2 to partially defer the effective date of SFAS 157 for non financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
Both FSPs are expected to simplify PSEGs adoption of SFAS 157 on January 1, 2008.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159)
PSEG, Power and PSE&G
In February 2007, the FASB issued SFAS 159, which permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair
value. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting
provisions. The decision about whether to elect the fair value option is applied instrument by instrument, with a few exceptions; the decision is irrevocable; and it is required to be applied only to entire
instruments and not to portions of instruments.
The statement requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities and (b) between assets and liabilities in
the financial statements of an entity that selects different measurement attributes for similar assets and liabilities.
SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Upon implementation, an entity shall report the effect of the first remeasurement to fair value as
a cumulative-effect adjustment to the opening balance of Retained Earnings. Since the provisions of SFAS 159 are applied prospectively, any potential impact will depend on the instruments selected for fair
value measurement at the time of implementation. PSEG adopted this statement effective January 1, 2008. However, to date PSEG has not elected any of its assets or liabilities to fair value under this
standard.
FASB Staff Position (FSP) FIN 39-1, An amendment of FASB Interpretation No. 39
PSEG and Power
In April 2007, the FASB issued FSP FIN 39-1, An amendment of FASB Interpretation No. 39 (FSP FIN 39-1). This FSP amends FIN 39, Offsetting of Amounts Related to Certain Contracts to
permit an entity to offset cash collateral paid or received against fair value amounts recognized for derivative instruments held with the same counterparty under the same master netting arrangement.
Currently, PSEG and Power offset derivative contracts under master netting arrangements in accordance with FIN 39 but do not net these balances with cash collateral positions. Under this FSP, PSEG and
Power would be required to net cash collateral with the corresponding net derivative balance or elect to show all fair values gross.
FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007 and must be applied retroactively to all financial statements presented, unless it is impracticable to do so. PSEG and Power
adopted this FSP effective January 1, 2008. PSEG and Power have established a policy of netting fair value cash collateral receivables and payables with the corresponding net derivative balances and with
retroactive adjustments to reflect the adoption of this standard in 2008.
SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)),
PSEG, Power and PSE&G
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)), which replaces SFAS 141. SFAS 141(R) will significantly change financial accounting and
reporting of business combination transactions. Issuance of SFAS 141(R) marks the FASBs most significant
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
convergence effort with the International Accounting Standards Board (IASB) and move towards fair value accounting. SFAS 141(R) is based on the principle that all the assets acquired and the liabilities
assumed in a business combination should be measured at their acquisition date fair values, with limited exceptions. This standard applies to all transactions and events in which an entity obtains control of
one or more businesses of the acquiree. The standard also expands the definition of a business. Transactions formerly recorded as an asset acquisition, may qualify as a business combination under SFAS
141(R). It also requires that acquisition-related costs and certain restructuring costs be recognized separately from the business combination.
SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 141(R) is required to be adopted concurrently with SFAS 160. PSEG, Power
and PSE&G will adopt SFAS 141(R) effective January 1, 2009. Accordingly, all business combinations for which the acquisition date is on or after January 1, 2009, will be accounted for under this new
guidance.
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS No. 160)
PSEG, Power and PSE&G
In December 2007, the FASB issued SFAS 160. The new standard will significantly change the financial reporting relationship between a parent and non-controlling interest (i.e. minority interest).
SFAS 160 requires all entities to report minority interests in subsidiaries as equity in the consolidated financial statements. Accordingly, the amount of net income attributable to the noncontrolling interest
is required to be included in consolidated net income on the face of the income statement. Further, transactions between a parent and noncontrolling interests are treated as equity. However, if a subsidiary
is deconsolidated, a parent is required to recognize a gain or loss.
SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 will be applied prospectively, except for presentation and disclosure
requirements which are required to be applied retrospectively.
The following new accounting standards were adopted by PSEG, Power and PSE&G during 2007.
FIN 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109 (FIN 48)
PSEG, Power and PSE&G
In July 2006, the FASB issued FIN 48, which prescribes a model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. Under FIN 48, the financial statements reflect expected future tax consequences of such positions presuming the tax authorities full knowledge of the position
and all relevant facts. FIN 48 permits recognition of the benefit of tax positions only when it is more likely-than-not that the position is sustainable based on the merits of the position. It further limits the
amount of tax benefit to be recognized to the largest amount of benefit that is greater than 50% likely of being realized. FIN 48 also requires explicit disclosures about uncertainties in income tax positions,
including a detailed roll-forward of unrecognized tax benefits taken that do not qualify for financial statement recognition.
PSEG, Power and Energy Holdings adopted FIN 48 effective January 1, 2007. In general, companies recorded the change in net assets that resulted from the application of FIN 48 as an adjustment to
Retained Earnings. However, for PSE&G, because any charges to income arising from the adoption of FIN 48 should be recoverable in future rates, the offset to any incremental PSE&G liability was recorded
as a Regulatory Asset rather than Retained Earnings. The following table presents the impact at January 1, 2007 on the Condensed Consolidated Balance Sheets for PSEG and its subsidiaries as a result of
implementing FIN 48:
Power
PSE&G
Energy
PSEG
Balance Sheet
(Millions)
Increase to Long-Term Accrued Taxes
$
21
$
26
$
355
$
402
Decrease to Accumulated Deferred Income Tax Liability
$
7
$
15
$
246
$
268
Increase to Regulatory Assets
$
$
11
$
$
11
Decrease to Retained Earnings
$
14
$
$
109
$
123
111
Holdings
Consolidated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 2007, the after-tax expense resulting from the adoption of FIN 48 is summarized as follows:
Year Ended
PSEG
$
27
Power
$
1
PSE&G
$
(3
)
Energy Holdings
$
28
For additional information relating to the impacts of FIN 48, see Note 15. Income Taxes.
In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. The adoption of this FSP did not have a material impact on the financial statements of PSEG, PSE&G or Power.
FASB Staff Position (FSP) No. FAS 13-2, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction (FSP FAS
13-2)
PSEG
In July 2006, the FASB issued FSP FAS 13-2, which addresses how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects
the accounting by a lessor for that lease. The FSP amends SFAS No. 13, Accounting for Leases, stating that a change in the timing of the above referenced cash flows must be reviewed at least annually or
more frequently, if events or circumstances indicate a change in timing is probable. If a change in timing has occurred, or is projected to occur, the rate of return and the allocation of income to positive
investment years must be recalculated from the inception of the lease.
The guidance in this FSP was adopted effective January 1, 2007. The cumulative effect of applying the provisions of this FSP was reported as an adjustment to the beginning balance of Retained
Earnings as of the date of adoption. As a result of implementing FSP FAS 13-2, upon adoption PSEG recognized a reduction in Investment in Leveraged Leases of $69 million, a reduction in Deferred
Income Taxes of $2 million and a reduction in Retained Earnings of $67 million.
The impact to earnings for PSEG resulting from the adoption of FSP FAS 13-2 for year ended December 31, 2007 was an after-tax decrease of $12 million.
Note 3. Asset Retirement Obligations (AROs)
PSEG, Power and PSE&G
PSEG, Power and PSE&G have recorded various AROs under SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS 143) and FIN 47, Accounting for Conditional Asset Retirement
Obligations (FIN 47).
Power
Powers ARO liability primarily relates to the decommissioning of its nuclear power plants. Power maintains an independent external trust to fund decommissioning of its nuclear facilities upon
termination of operation. For additional information, see Note 13. Nuclear Decommissioning. Power also identified conditional AROs under FIN 47, primarily related to Powers fossil generation units,
including liabilities for the removal of asbestos, stored hazardous liquid material and underground storage tanks from industrial power sites, restoration of leased office space to rentable condition upon
lease termination, permits and authorizations, the restoration of an area occupied by a reservoir when the reservoir is no longer needed, the demolition of certain plants and the restoration of the sites at
which they reside when the plants are no longer in service.
During 2007, Power recorded less than $1 million related to new liabilities under FIN 47.
112
December 31, 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PSE&G
PSE&G has a conditional ARO for legal obligations identified under FIN 47 related to the removal of asbestos and underground storage tanks at certain industrial establishments, removal of wood poles,
leases and licenses, and the requirement to seal natural gas pipelines at all sources of gas when the pipelines are no longer in service. PSE&G did not record an ARO for PSE&Gs protected steel and poly
based natural gas transmission lines, as management believes that these categories of transmission lines have an indeterminable life.
During 2007, PSE&G recorded less than $1 million related to new liabilities under FIN 47.
PSEG, Power and PSE&G
The changes to the ARO liabilities for PSEG, Power and PSE&G during 2007 are presented in the following table:
(A)
Accretion expense is not reflected on PSE&Gs Consolidated Statements of Operations as it is deferred and recovered in rate base.
Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments
Discontinued Operations
Power
Lawrenceburg Energy Center (Lawrenceburg)
On May 16, 2007, Power completed the sale of Lawrenceburg, a 1,096-megawatt (MW), gas-fired combined cycle electric generating plant located in Lawrenceburg, Indiana, to AEP Generating
Company, a subsidiary of American Electric Power Company, Inc. (AEP).
The sale price for the facility and inventory was $325 million. The transaction resulted in an after-tax charge to Powers earnings of $208 million and was reflected as a charge to Discontinued
Operations in the fourth quarter of 2006.
Lawrenceburgs operating results for the years ended December 31, 2007, 2006 and 2005, which were reclassified to Discontinued Operations, are summarized below:
Years Ended
2007
2006
2005
(Millions)
Operating Revenues
$
$
41
$
32
Loss Before Income Taxes
$
(13
)
$
(53
)
$
(47
)
Net Loss
$
(8
)
$
(31
)
$
(28
)
113
December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts of the assets of Lawrenceburg as of December 31, 2006 are summarized in the following table:
As of
(Millions)
Current Assets
$
10
Noncurrent Assets
315
Total Assets of Discontinued Operations
$
325
Waterford Generation Facility (Waterford)
In September 2005, Power completed the sale of its electric generation facility located in Waterford, Ohio to a subsidiary of AEP. In 2005, Power recognized a loss on disposal of $178 million, net of tax
benefit of $123 million. The proceeds of the sale, together with the anticipated reduction in tax liability, were $320 million and were used to retire debt at Power.
Waterfords operating results for the year ended December 31, 2005, which were reclassified to Discontinued Operations, is summarized below:
Years Ended
(Millions)
Operating Revenues
$
18
Loss Before Income Taxes
$
(34
)
Net Loss
$
(20
)
Global
SAESA Group
On December 18, 2007, Global announced that it intends to sell its investment in the SAESA Group. The SAESA Group consists of four distribution companies, one transmission company and a
generation facility located in Chile. As a result, operating results for the SAESA Group have been reclassified to Discontinued Operations. In conjunction with managements decision to sell the SAESA
Group, Global recorded an $82 million income tax expense in the fourth quarter of 2007 related to the discontinuation of applying Accounting Principles Board No. 23, Accounting for Income Taxes-
Special Areas (APB 23).
SAESA Groups operating results for the years ended December 31, 2007, 2006 and 2005, which were reclassified to Discontinued Operations, are summarized below:
Years Ended
2007
2006
2005
(Millions)
Operating Revenues
$
442
$
341
$
263
Income Before Income Taxes
$
55
$
46
$
43
Net (Loss) Income
$
(34
)
$
57
$
35
114
December 31,
2006
December 31,
2005
December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts of SAESA Groups assets as of December 31, 2007 and 2006 are summarized in the following table:
As of
As of
(Millions)
Current Assets
$
191
$
136
Noncurrent Assets
971
859
Total Assets of Discontinued Operations
$
1,162
$
995
Current Liabilities.
$
130
$
84
Noncurrent Liabilities
390
203
Total Liabilities of Discontinued Operations
$
520
$
287
Electroandes S.A. (Electroandes)
On September 19, 2007, Global entered into an agreement for the sale of Electroandes, a hydro-electric generation and transmission company in Peru that owns and operates four hydro-generation
plants with total capacity of 180 MW and 437 miles of electric transmission lines. The purchaser is a wholly owned subsidiary of Statkraft Norfund Power Invest of Norway.
The sale was completed on October 17, 2007 for a total purchase price of $390 million, including the assumption of approximately $108 million of debt. Net cash proceeds, after taxes of $72 million and
including dividends received prior to closing were approximately $220 million, which resulted in an after-tax gain of $48 million recorded in the fourth quarter of 2007.
Operating results for Electroandes have been reclassified to Discontinued Operations. In conjunction with the plan to sell Electroandes, Global recorded a $19 million income tax expense in the second
quarter of 2007 related to the discontinuation of applying APB 23, as the income generated by Electroandes is no longer expected to be indefinitely reinvested.
Electroandes operating results for the years ended December 31, 2007, 2006 and 2005, which were reclassified to Discontinued Operations, are summarized below:
Years Ended
2007
2006
2005
(Millions)
Operating Revenues
$
41
$
61
$
52
Income Before Income Taxes
$
15
$
22
$
18
Net Income
$
10
$
16
$
14
The carrying amounts of the assets of Electroandes as of December 31, 2006 are summarized in the following table:
As of
(Millions)
Current Assets
$
25
Noncurrent Assets
272
Total Assets of Discontinued Operations
$
297
Current Liabilities
$
9
Noncurrent Liabilities
125
Total Liabilities of Discontinued Operations
$
134
Elektrocieplownia Chorzow Elcho Sp. Z o.o. (Elcho) and Elektrownia Skawina SA (Skawina)
On January 31, 2006, Global entered into an agreement with CEZ a.s. to sell its interest in two coal-fired plants in Poland, Elcho and Skawina. The sale was completed on May 29, 2006. Proceeds, net of
transaction costs, were $476 million, resulting in a gain of $227 million net of tax expense of $142 million. This gain is
115
December 31,
2007
December 31,
2006
December 31,
December 31,
2006
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
included in Discontinued Operations. The 2006 and 2005 operating results for Globals assets in Poland have been reclassified to Discontinued Operations.
Elchos and Skawinas operating results for the years ended December 31, 2006 and 2005 are summarized below:
Years Ended
Elcho
Skawina
2007
2006
2005
2007
2006
2005
(Millions)
Operating Revenues
$
$
39
$
106
$
$
44
$
125
(Loss) Income Before Income Taxes
$
$
(3
)
$
17
$
$
2
$
3
Net (Loss) Income
$
$
(2
)
$
16
$
$
1
$
2
Dispositions
Power
In December 2006, Power recorded a pre-tax impairment loss of $44 million to write down four turbines to their estimated realizable value and reclassified them to Assets Held for Sale on Powers
Condensed Consolidated Balance Sheet. In April 2007, Power sold the four turbines to a third party and received proceeds of $40 million, which approximated the recorded book value.
Global
Chilquinta Energia S.A. (Chilquinta) and Luz del Sur S.A.A. (LDS)
On December 14, 2007, Global closed on the sales of its 50% ownership interest in the Chilean electric distributor, Chilquinta and its affiliates and its 38% ownership interest in the Peruvian electric
distributor, LDS and its affiliates, for $685 million. Net cash proceeds after taxes were approximately $480 million, which resulted in an after-tax loss of $23 million.
Rio Grande Energia S. A. (RGE)
On May 10, 2006, Global entered into an agreement with Companhia Paulista de Force Luz to sell its 32% ownership interest in RGE, a Brazilian electric distribution company. The transaction closed
on June 23, 2006 and gross proceeds of $185 million were received. The transaction resulted in a pre-tax write-down of $263 million ($178 million after-tax), primarily related to the devaluation of the
Brazilian Real subsequent to Globals acquisition of its interests in RGE in 1997.
Dhofar Power Company S.A.O.C. (Dhofar Power)
In April 2005, Global sold a 35% interest in Dhofar Power through a public offering on the Omani stock exchange as required under its Concession Agreement for the project, reducing Globals
ownership in Dhofar Power from 81% to 46%. Net proceeds from the sale were $25 million, resulting in a pre-tax gain of $3 million ($1 million after-tax). As a result, Globals investment in Dhofar Power
was accounted for under the equity method following the sale.
On May 15, 2006, Global signed an agreement to sell its remaining 46% interest in Dhofar Power to Oman Technical Partners Ltd. Global closed the sale in November 2006 and received net proceeds
after-tax of $31 million, the approximate book value of the investment.
Resources
On December 28, 2005, Resources sold its interest in the Seminole Generation Station Unit 2 (Seminole), a 659 MW coal-fired facility in Palatka, Florida, to Seminole Electric Cooperative Inc. for $286
million, resulting in a pre-tax gain of $71 million ($43 million after-tax).
Resources was the equity investor in a Boeing B767 leased to United Airlines (UAL). In December 2002, UAL filed for Chapter 11 bankruptcy protection. In 2005, Resources received a notice from
the Trustee under the UAL lease that the lenders had terminated the lease and repossessed the aircraft. Upon receipt of
116
December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
this notice, Resources recorded a $21 million pre-tax ($15 million after-tax) charge to write off the carrying value of this investment.
Resources was also the equity investor in two operating leases with Northwest Airlines (Northwest) B 757-200 and Delta Airlines (Delta) B 737-200. On September 14, 2005 both Northwest and Delta
filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In 2004 and 2005, Resources successfully restructured the leases and converted the Delta and Northwest leases from leveraged leases to
operating leases. The Delta aircraft was sold in January 2006, generating a small gain for Resources.
Acquisitions
Global
Bioenergie S.p.A. (Bioenergie)
In May 2006, Global forgave the guarantees of its partner in the Bioenergie investment of certain loans Global had made to Bioenergie and converted such loans totaling $38 million into additional
equity in Bioenergie, thereby increasing its ownership interest from 50% to 85% and giving Global voting control of the project. As a result, PSEG began consolidating this investment in May 2006 and
reclassified the investment balance to Property, Plant and Equipment of approximately $62 million, Long-Term Investments of approximately $13 million, Capital Lease Obligations of approximately $40
million and certain other assets and liabilities on PSEGs Consolidated Balance Sheet. PSEG recorded certain purchase accounting adjustments to reflect the plant, contracts and investment in Biomasse
Italia S.p.A. at fair value.
Impairments
Global
Venezuela
PSEG has indirect ownership interests in two generating facilities in Maracay and Cagua, Venezuela that have a total capacity of 120 MW. The projects are owned and operated by Turboven Company
Inc. (Turboven), an entity which is jointly-owned by Global (50%) and Corporacion Industrial de Energia (CIE). Global also has a 9% indirect interest in Turbogeneradores de Maracay through a
partnership with CIE.
During Globals 2006 year-end review of its investments, management concluded that due to the current political situation in Venezuela, it was probable that Global would not be able to recover all of
its investment in its Venezuelan operations. Therefore, Global recorded an impairment loss of $4 million, after-tax, to write down these investments in the fourth quarter of 2006.
In January 2007, the Venezuelan government announced its intention to nationalize certain sectors of Venezuelan industry and commerce, including certain foreign-owned energy and communications
companies. In a subsequent press release, Turboven was named as one of the companies that Venezuela intended to nationalize. Since these announcements, Venezuela has proceeded to nationalize certain
companies. Global has entered into valuation discussions with the government of Venezuela as part of the nationalization efforts, which are ongoing. Based upon a review of the circumstances in the third
quarter 2007, an additional impairment charge of $7 million, after tax, was recorded in September 2007, based on Globals estimated market valuation of the project.
India
In December 2007, Global recorded an impairment loss of $2 million, after-tax, on Power Generating Company Limited (PPN) based on Globals estimated market valuation of the project.
117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Regulatory Assets and Liabilities
PSE&G
PSE&G prepares its financial statements in accordance with the provisions of SFAS 71. A regulated utility is required to defer the recognition of costs (a regulatory asset) or the recognition of obligations
(a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future rates. Accordingly, PSE&G has deferred certain costs, which will be
amortized over various future periods. These costs are deferred based on rate orders issued by the BPU or the FERC or PSE&Gs experience with prior rate cases. All of PSE&Gs regulatory assets and
liabilities at December 31, 2007 and 2006 are supported by written rate orders, either explicitly or implicitly through the BPUs treatment of various cost items. Regulatory assets are subject to prudence
reviews and can be disallowed in the future by regulatory authorities. PSE&G believes that all of its regulatory assets are probable of recovery. To the extent that collection of any regulatory assets or
payments of regulatory liabilities is no longer probable, the amounts would be charged or credited to income.
PSE&G had the following regulatory assets and liabilities on the Consolidated Balance Sheets:
As of
Recovery/Refund Period
2007
2006
(Millions)
Regulatory Assets
Stranded Costs To Be Recovered
$
2,772
$
3,059
Through December 2015(1)(2)
Manufactured Gas Plant (MGP) Remediation Costs
639
414
Various(2)
Pension and Other Postretirement
468
671
Various
Deferred Income Taxes
420
412
Various
Societal Benefits Charges (SBC)
151
279
Various(2)
New Jersey Clean Energy Program
149
253
To be determined (2)
Gas Contract Mark-to-Market
105
187
Various(1)
Other Postretirement Benefits (OPEB) Costs
96
116
Through December 2012(2)
Unamortized Loss on Reacquired Debt and Debt Expense
80
85
Over remaining debt life(1)
Conditional Asset Retirement Obligation
80
68
Various
Repair Allowance Taxes
54
62
Through August 2013(1)(2)
Uncertain Tax Positions
38
Various
Regulatory Restructuring Costs
27
31
Through August 2013(1)(2)
Gas Margin Adjustment Clause
25
14
To be determined(2)
Plant and Regulatory Study Costs
15
16
Through December 2021(2)
Incurred But Not Reported Claim Reserve
14
Various
Asbestos Abatement
9
10
Through 2020(2)
Non-Utility Generation Charge (NGC)
9
Through July 2008(2)
Other
14
17
Various
Total Regulatory Assets
$
5,165
$
5,694
118
December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of
Recovery/Refund Period
2007
2006
(Millions)
Regulatory Liabilities
Cost of Removal
$
274
$
279
Various
Overrecovered Gas Costs
54
96
Through October 2008 (1)(2)
Excess Cost of Removal
51
64
Through November 2011(1)(2)
Overrecovered Electric Costs
28
198
To be determined(1)(2)
Other
12
9
Various(1)
Total Regulatory Liabilities
$
419
$
646
(1)
Recovered/Refunded with interest.
(2)
Recoverable/Refundable per specific rate order.
All regulatory assets and liabilities are excluded from PSE&Gs rate base unless otherwise noted. The descriptions below define certain regulatory items.
Stranded Costs To Be Recovered:
This reflects deferred costs, which are being recovered through the securitization transition charges authorized by the BPU in irrevocable financing orders and being
collected by PSE&G, as servicer on behalf of Transition Funding and Transition Funding II, respectively. Funds collected are remitted to Transition Funding and Transition Funding II and are used for
interest and principal payments on the transition bonds and related costs and taxes.
MGP Remediation Costs:
Represents the low end of the range for the remaining environmental investigation and remediation program costs that are probable of recovery in future rates. Once these costs
are incurred they are recovered through the Remediation Adjustment Charge clause in the SBC.
Pension and Other Post Retirement:
Pursuant to the adoption of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158), PSE&G recorded the
unrecognized costs for defined benefit pension and OPEB plans on the balance sheet as a regulatory asset. These costs represent actuarial gains or losses, prior service costs and transition obligations as a
result of adoption, which have not been expensed. These costs will be amortized and recovered in future rates.
Deferred Income Taxes:
This amount represents the portion of deferred income taxes that will be recovered through future rates, based upon established regulatory practices, which permit the recovery of
current taxes. Accordingly, this regulatory asset is offset by a deferred tax liability and is expected to be recovered, without interest, over the period the underlying book-tax timing differences reverse and
become current taxes.
SBC:
The SBC, as authorized by the BPU and the New Jersey Electric Discount and Energy Competition Act (Competition Act), includes costs related to PSE&Gs electric and gas business as follows: 1) the
Universal Service Fund; 2) Energy Efficiency and Renewable Energy Programs. 3) Social Programs (electric only) which include electric bad debt expense; and 4) the Remediation Adjustment Clause for
incurred MGP remediation expenditures. All components accrue interest on both over and underrecoveries.
New Jersey Clean Energy Program:
The BPU approved future funding requirement for Energy Efficiency and Renewable Energy Programs programs through 2008.
Gas Contract Mark-to-Market:
The fair value of gas hedge contracts and gas cogeneration supply contracts. This asset is offset by a derivative liability and an intercompany payable on the Balance Sheet.
OPEB Costs:
Includes costs associated with the adoption of SFAS No. 106, Employers Accounting for Benefits Other Than Pensions which were deferred in accordance with EITF Issue No. 92-12,
Accounting for OPEB Costs by Rate Regulated Enterprises.
Unamortized Loss on Reacquired Debt and Debt Expense:
Represents losses on reacquired long-term debt, which are recovered through rates over the remaining life of the debt.
119
December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conditional Asset Retirement Obligation:
These costs represent the differences between rate regulated cost of removal accounting and asset retirement accounting under GAAP. These costs will be
recovered in future rates.
Uncertain Tax Positions:
The amount recorded for uncertain tax positions under FIN 48 which would have been expensed or charged to Retained Earnings upon adoption but will be recoverable in future
rates.
Repair AllowanceTaxes:
This represents tax, interest and carrying charges relating to disallowed tax deductions for repair allowance as authorized by the BPU with recovery over 10 years effective August
1, 2003.
Regulatory Restructuring Costs:
These are costs related to the restructuring of the energy industry in New Jersey through the Competition Act and include such items as the system design work necessary to
transition PSE&G to a transmission and distribution only company, as well as costs incurred to transfer and establish the generation function as a separate corporate entity with recovery over 10 years
beginning August 1, 2003.
Gas Margin Adjustment Clause:
PSE&G defers the margin differential received from Transportation Gas Service Non-Firm Customers versus bill credits provided to Basic Gas Supply Service (BGSS)-Firm
customers.
Plant and Regulatory Study Costs:
These are costs incurred by PSE&G and required by the BPU which are related to current and future operations, including safety, planning, management and construction.
Incurred But Not Reported Claim Reserve:
Represents reserves for workers compensation and injuries and damages that exceed the amounts recognized in rates on a settlement accounting basis.
NGC:
Represents the difference between the cost of non-utility
generation and the amounts realized from selling that energy at market rates through PJM. The BPU instructed PSE&G to transfer the
remaining $150 million debit balance for the Market Transition Charge (MTC) from the SBC to the NGC in March 2007.
Asbestos Abatement:
Represents costs incurred to remove and dispose of asbestos insulation at PSE&Gs fossil generating stations. Per a BPU order dated December 9, 1992, these costs are treated as Cost
of Removal for ratemaking purposes.
Other Regulatory Assets:
This includes the following: 1) Energy Information Control Network program costs; 2) Transition Fundings interest rate swap (offset by a derivative liability); and 3) deferred costs
for the new customer information system.
Cost of Removal:
PSE&G accrues and collects for Cost of Removal in rates. Pursuant to the adoption of SFAS 143, the liability for Cost of Removal was reclassified as a regulatory liability. This liability is
reduced as removal costs are incurred. Cost of removal is a reduction to the rate base.
Overrecovered Gas Costs:
These costs represent the over recovered amounts associated with BGSS, as approved by the BPU.
Excess Cost of Removal:
The BPU directed PSE&G to refund $66 million of excess gas cost of removal accruals over a 5 year period ending November 2011.
Overrecovered Electric Energy Costs:
These costs represent the over recovered amounts associated with Basic Generation Service (BGS), as approved by the BPU. The 2006 balance includes $180 million
from the NTC, now the NGC, as referred to above.
Other Regulatory Liabilities:
This includes the following: 1) a retail adder included in the BGS charges; 2) amounts collected from customers in order for Transition Funding to obtain a AAA rating on its
transition bonds; 3) third party billing discounts related to the Competition Act; and (4) the FAS 158 liability associated with the non-qualified pension plan.
Note 6. Earnings Per Share (EPS)
PSEG
Diluted EPS is calculated by dividing Net Income by the weighted average number of shares of common stock outstanding, including shares issuable upon exercise of stock options outstanding or
vesting of restricted stock awards granted under PSEGs stock compensation plans, upon payment of performance units or restricted stock units and upon conversion of Participating Units. The following
table shows the effect of
120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
these stock options, restricted stock awards, performance units, restricted stock units and Participating Units on the weighted average number of shares outstanding used in calculating diluted EPS:
Years Ended December 31,
2007
2006
2005
Basic
Diluted
Basic
Diluted
Basic
Diluted
EPS Numerator:
Earnings (Millions)
Continuing Operations
$
1,319
$
1,319
$
679
$
679
$
837
$
837
Discontinued Operations
16
16
60
60
(159
)
(159
)
Cumulative Effect of a Change in Accounting Principle
(17
)
(17
)
Net Income
$
1,335
$
1,335
$
739
$
739
$
661
$
661
EPS Denominator (Thousands):
Weighted Average Common Shares Outstanding
507,560
507,560
503,356
503,356
480,594
480,594
Effect of Stock Options
678
1,090
1,942
Effect of Stock Performance Units
560
182
174
Effect of Restricted Stock
12
Effect of Restricted Stock Units
3
Effect of Participating Units
6,102
Total Shares
507,560
508,813
503,356
504,628
480,594
488,812
EPS:
Continuing Operations
$
2.60
$
2.59
$
1.35
$
1.34
1.74
$
1.71
Discontinued Operations
0.03
0.03
0.12
0.12
(0.33
)
(0.33
)
Cumulative Effect of a Change in Accounting Principle
(0.03
)
(0.03
)
Net Income
$
2.63
$
2.62
$
1.47
$
1.46
$
1.38
$
1.35
No stock options or Participating Units had an antidilutive effect for the years ended December 31, 2007, 2006 or 2005.
Dividend payments on common stock for the year ended December 31, 2007 were $1.17 per share and totaled $594 million. Dividend payments on common stock for the year ended December 31, 2006
were $1.14 per share and totaled $574 million.
On January 15, 2008, PSEGs Board of Directors approved a two-for-one stock split of PSEGs outstanding shares of common stock to be effected in the form of a stock dividend. The stock split
entitled each stockholder of record at the close of business on January 25, 2008 to receive one additional share for every outstanding share of common stock held. The additional shares resulting from the
stock split were distributed on February 4, 2008. All share and per share amounts included in this Form 10-K retroactively reflect the effect of the stock split.
On January 15, 2008, PSEGs Board of Directors also approved a $0.03 increase in its quarterly common stock dividend, from $0.2925 to $0.3225 per share for the first quarter of 2008. This reflects an
indicated annual dividend rate of $1.29 per share. PSEG expects to continue to pay cash dividends on its common stock, however, the declaration and payment of future dividends to holders of PSEG
common stock will be at the discretion of the Board of Directors and will depend upon many factors, including PSEGs financial condition, earnings, capital requirements of its business, alternate investment
opportunities, legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors deems relevant.
121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Goodwill and Other Intangibles
PSEG and Power
As of December 31, 2007 and 2006, Power had goodwill of $16 million related to the Bethlehem Energy Center. Power conducted an annual review for goodwill impairment as of October 31, 2007 and
concluded that goodwill was not impaired. No events occurred subsequent to that date which would require a further review of goodwill for impairment. During 2007, goodwill related to SAESA which was
$418 million and $390 million as of December 31, 2007 and 2006, respectively was reclassified to assets of discontinued operations.
Also during 2007, Global sold its investments in Electroandes, Chilquinta and LDS. As of December 31, 2006, Globals goodwill in Electroandes and pro-rata share of goodwill in Chilquinta and LDS
was $133 million, $193 million and $55 million, respectively.
In addition to goodwill, as of December 31, 2007 and 2006, PSEG had recorded intangible assets of $48 million and $46 million, respectively. These included $35 million for both years of emissions
allowances at Power and $13 million and $11 million largely related to the fair value of a power purchase agreement resulting from a purchase price allocation at Bioenergie as of December 31, 2007 and
2006, respectively. Power emissions allowances are expensed as used or sold, which amounted to $2 million, $3 million and $5 million for the years ended December 31, 2007, 2006 and 2005, respectively.
PSEG, Power and PSE&G
PSEG, Power and PSE&G had the following Long-Term Investments as of December 31, 2007 and 2006:
As of December 31,
2007
2006
(Millions)
Leveraged Leases
$
2,826
$
2,810
Partnerships and Corporate Joint Ventures(A)
261
883
Life Insurance and Supplemental Benefits (PSE&G)
146
142
Investment in Capital Trusts
20
Other Investments
13
13
Total Long-Term Investments
$
3,246
$
3,868
(A)
Accounted for under the equity method of accounting. Includes $14 million and $16 million as of December 31, 2007 and 2006, respectively, related to Powers 23% ownership interest in Keystone
Fuels Corporation and Conemaugh Fuels Corporation.
Leveraged Leases
PSEGs net investment, through Resources, in leveraged leases was comprised of the following elements:
As of December 31,
2007
2006
(Millions)
Lease rents receivable (net of non-recourse debt)
$
2,890
$
2,918
Estimated residual value of leased assets
1,010
1,012
3,900
3,930
Unearned and deferred income
(1,074
(1,120
)
Total investments in leveraged leases
2,826
2,810
Deferred tax liabilities
(2,045
)
(1,886
)
Net investment in leveraged leases
$
781
$
924
122
)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pre-tax income and income tax effects related to investments in leveraged leases were as follows:
Years Ended
2007
2006
2005
(Millions)
Pre-tax income of leveraged leases
$
114
$
134
$
161
Income tax effect on pre-tax income of leveraged leases
$
36
$
41
$
64
Amortization of investment tax credits of leveraged leases
$
(1
)
$
(1
)
$
(1
)
The $23 million decrease in income tax effect on pre-tax income of leveraged leases in 2006 as compared to 2005, was primarily due to the absence of the tax expense resulting from the sale of
Resources interest in Seminole in 2005. For additional information regarding the sale of Seminole, see Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments.
Investments in and Advances to Affiliates
Investments in net assets of affiliated companies accounted for under the equity method of accounting by Global amounted to $208 million and $818 million as of December 31, 2007 and 2006,
respectively. During the three years ended December 31, 2007, 2006 and 2005, the amount of dividends from these investments was $108 million, $74 million and $70 million, respectively. Globals share of
income and cash flow distribution percentages ranged from 40% to 60% as of December 31, 2007.
As of December 31, 2007, Globals
recorded investment in equity method subsidiaries was $208 million as compared
to $240 million of underlying equity in net assets of such investments.
PSEG had the following equity method investments as of December 31, 2007:
Name
Location
%
Kalaeloa
HI
50
%
GWF
Bay Area I
CA
50
%
Bay Area II
CA
50
%
Bay Area III
CA
50
%
Bay Area IV
CA
50
%
Bay Area V
CA
50
%
Hanford L.P
CA
50
%
GWF Energy
Hanford-Peaker Plant
CA
60
%
Henrietta-Peaker Plant
CA
60
%
Bridgewater
NH
40
%
Turboven
Maracay
Venezuela
50
%
Cagua
Venezuela
50
%
Bioenergie
Italy
43
%
123
December 31,
Owned
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized results of operations and financial position of affiliates in which PSEG applied the equity method of accounting are presented below:
Foreign
Domestic
Total
(Millions)
December 31, 2007
Statement of Operations Information
Revenue
$
134
$
386
$
520
Gross Profit
$
73
$
147
$
220
Net Income
$
$
86
$
86
Balance Sheet Information
Assets:
Current Assets
$
69
$
108
$
177
Property, Plant and Equipment
190
537
727
Goodwill
50
50
Other Noncurrent Assets
19
25
44
Total Assets
$
278
$
720
$
998
Liabilities:
Current Liabilities
$
38
$
78
$
116
Debt*
134
217
351
Other Noncurrent Liabilities
66
66
Total Liabilities
172
361
533
Equity
106
359
465
Total Liabilities and Equity
$
278
$
720
$
998
December 31, 2006
Statement of Operations Information
Revenue
$
858
$
378
$
1,236
Gross Profit
$
345
$
154
$
499
Minority Interest
$
15
$
$
15
Net Income
$
107
$
86
$
193
Balance Sheet Information
Assets:
Current Assets
$
314
$
100
$
414
Property, Plant and Equipment
1,072
555
1,627
Goodwill
497
49
546
Other Noncurrent Assets
187
32
219
Total Assets
$
2,070
$
736
$
2,806
Liabilities:
Current Liabilities
$
186
$
63
$
249
Debt*
675
203
878
Other Noncurrent Liabilities
143
60
203
Minority Interest
70
70
Total Liabilities
1,074
326
1,400
Equity
996
410
1,406
Total Liabilities and Equity
$
2,070
$
736
$
2,806
December 31, 2005
Statement of Operations Information
Revenue
$
1,773
$
366
$
2,139
Gross Profit
$
513
$
133
$
646
Minority Interest
$
14
$
$
14
Net Income
$
170
$
78
$
248
*
Debt is non-recourse to PSEG, Energy Holdings and Global.
The differences in the results of operations and the financial position as of and for the year ended December 31, 2007, as compared to 2006, were due to PSEGs sale of its 50% interest in Chilquinta, its
38% stake in LDS and its 34.5% interest in Tracy Biomass as well as EGDCs sale of their Largo property. See
124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments for further details of these transactions.
PSEG also has investments in certain companies in which it does not have the ability to exercise significant influence. Such investments are accounted for under the cost method. As of December 31,
2007 and 2006, the carrying value of these investments aggregated $31 million and $37 million, respectively. PSEG periodically reviews these cost method investments for impairment and adjusts the values
of these investments accordingly.
Note 9. Schedule of Consolidated Capital Stock and Other Securities
Outstanding
Redemption
Book Value
2007
2006
(Millions)
PSEG Common Stock (no par value)(A)
Authorized 1,000,000,000 shares; (outstanding as of
508,523,004
$
4,254
$
4,145
PSE&G Cumulative Preferred Stock(B) without Mandatory Redemption(C) $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
$
102.43
16
16
Total Preferred Stock without Mandatory Redemption
795,234
$
80
$
80
(A)
For the years ended December 31, 2007, 2006 and 2005, PSEG issued approximately 0.8 million, 2.1 million, and 2.4 million shares, respectively, for $35 million, $67 million and $72 million, respectively,
under the Dividend Reinvestment and Stock Purchase Plan (DRASPP) and the Employee Stock Purchase Plan (ESPP). Total authorized and unissued shares of common stock available for issuance
through PSEGs DRASPP, ESPP and various employee benefit plans amounted to approximately 7.0 million shares as of December 31, 2007.
(B)
As of December 31, 2007, there was an aggregate of approximately 6.7 million shares of $100 par value and 10 million 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 for four consecutive quarters, holders
receive voting rights for the election of a majority of PSE&Gs Board of Directors and continue until all accumulated and unpaid dividends thereon have been paid, whereupon all such voting rights
cease. There are no arrearages in cumulative preferred stock and hence currently no voting rights for preferred shares. No preferred stock agreement contains any liquidation preferences in excess of
par values or any deemed liquidation events.
(C)
As of each December 31, 2007 and 2006, the annual dividend requirement and the embedded dividend rate for PSE&Gs Preferred Stock without Mandatory Redemption was approximately $4 million
and 5.03%, respectively.
Fair Value of Preferred Securities
The estimated fair value of PSE&Gs Cumulative Preferred Stock was $68 million and $72 million as of December 31, 2007 and 2006, respectively. The estimated fair value was determined using market
quotations.
125
Shares
As of
December 31,
2007
Price
Per Share
as of
December 31,
2007
As of
December 31,
December 31, 2006, 505,290,816 shares)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Schedule of Consolidated Debt
Long-Term Debt
Maturity
As of December 31,
2007
2006
(Millions)
PSEG
Senior Note6.89%(A)
20072009
$
98
$
147
Senior NoteLibor +.375%(B)
2008
375
Senior Note4.66%
2009
200
200
Debt Supporting Trust Preferred Securities(C)
20072032
660
Other(D)
(7
)
Principal Amount Outstanding
298
1,375
Amounts Due Within One Year(E)
(49
)
(522
)
Total Long-Term Debt of PSEG (Parent)
$
249
$
853
Power
Senior Notes:
3.75%
2009
$
250
$
250
7.75%
2011
800
800
6.95%
2012
600
600
5.00%
2014
250
250
5.50%
2015
300
300
8.625%
2031
500
500
Total Senior Notes
2,700
2,700
Pollution Control Notes:
5.00%
2012
66
66
5.50%
2020
14
14
5.85%
2027
19
19
5.75%
2031
25
25
5.75%(F)
2037
40
4.00%(G)
2042
44
Total Pollution Control Notes
208
124
Net Unamortized Discount
(6
)
(6
)
Total Long-Term Debt of Power
$
2,902
$
2,818
PSE&G
First and Refunding Mortgage Bonds:
6.25%(H)
2007
$
$
113
6.75%
2016
171
171
6.45%
2019
5
5
9.25%
2021
134
134
6.38%
2023
157
157
5.20%
2025
23
23
4.25%Auction Rate(I)
2028
64
64
4.25%Auction Rate(I)
2029
93
93
5.00%Auction Rate(I)
2030
88
88
4.25%Auction Rate(I)
2031
104
104
5.45%
2032
50
50
6.40%
2032
100
100
5.05%Auction Rate(I)
2033
50
50
4.25%Auction Rate(I)
2033
50
50
4.25%Auction Rate(I)
2033
45
45
8.00%
2037
7
7
5.00%
2037
8
8
126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturity
As of December 31,
2007
2006
(Millions)
Medium-Term Notes:
4.00%
2008
$
250
$
250
8.16%
2009
16
16
8.10%
2009
44
44
5.125%
2012
300
300
5.00%
2013
150
150
5.375%
2013
300
300
5.00%
2014
250
250
7.04%
2020
9
9
7.18%
2023
5
5
7.15%
2023
34
34
5.25%
2035
250
250
5.70%
2036
250
250
5.80%(J)
2037
350
Principal Amount Outstanding
3,357
3,120
Amounts Due Within One Year(E)
(250
)
(113
)
Net Unamortized Discount
(5
)
(4
)
Total Long-Term Debt of PSE&G (excluding Transition Funding and Transition Funding II)
$
3,102
$
3,003
Transition Funding (PSE&G)
Securitization Bonds(K):
6.29%
2009
$
251
$
412
6.45%
2011
328
328
6.61%
2013
454
454
6.75%
2014
220
220
6.89%
2015
370
370
Principal Amount Outstanding
1,623
1,784
Amounts Due Within One Year(E)
(169
)
(161
)
Total Securitization Debt of Transition Funding I
$
1,454
$
1,623
Transition Funding II (PSE&G)
Securitization Bonds(K):
4.18%
20072008
$
8
$
17
4.34%
20082012
35
35
4.49%
2013
20
20
4.57%
2015
23
23
Principal Amount Outstanding
86
95
Amounts Due Within One Year(E)
(10
)
(10
)
Total Securitization Debt of Transition Funding II
$
76
$
85
Total Long-Term Debt of PSE&G
$
4,632
$
4,711
Energy Holdings (Parent)
Senior Notes:
8.625%(L)
2008
$
207
$
207
10.00%(M)
2009
400
400
8.50%(N)
2011
530
544
Principal Amount Outstanding
1,137
1,151
Amounts Due Within One Year(E)
(607
)
Net Unamortized Discount
(2
)
Total Long-Term Debt of Energy Holdings (Parent)
$
530
$
1,149
127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturity
As of December 31,
2007
2006
(Millions)
Global (Energy Holdings)
(O)
Non-Recourse Debt:
PSEG Texas (Odessa)Libor +2.25%3.25%(P)
20072009
$
177
$
194
PSEG Texas (Guadalupe)Libor +1.875%2.00%(Q)
20072009
153
181
Chilquinta5.58%6.62%(R)
20082011
162
Bioenergie
2026
3
3
Principal Amount Outstanding
333
540
Amounts Due Within One Year(E)
(32
)
(25
)
Total Long-Term Debt of Global
$
301
$
515
Resources (Energy Holdings)
(O)
4.75%8.75%Non-Recourse Bank Loan
20072016
$
36
$
40
Amounts Due Within One Year(E)
(3
)
(3
)
Total Long-Term Debt of Resources
$
33
$
37
EGDC (Energy Holdings)
(O)
8.27%Non-Recourse Mortgage
20072013
$
17
$
19
Amounts Due Within One Year(E)
(2
)
(2
)
Total Long-Term Debt of EGDC
$
15
$
17
Total Long-Term Debt of Energy Holdings
$
879
$
1,718
Total PSEG Consolidated Long-Term Debt
$
8,662
$
10,100
(A)
In October 2007, PSEG repaid $49 million of 6.89% Senior Notes which are due in equal annual installment payments of $49 million through 2009.
(B)
In May 2007, PSEG called for redemption $375 million of its Floating Rate Senior Notes due 2008 at 100% of the principal amount.
(C)
In December 2007, PSEG called for redemption $186 million of Subordinated Debentures underlying $180 million of PSEG Funding Trust II, Trust Preferred Securities due 2032 at 100% of the
principal amount. These debentures were redeemed in December 2007. In November 2007, PSEG redeemed $474 million of Subordinated Debentures underlying $460 million of PSEG Funding Trust I,
Participating Equity Preferred Securities. PSEG recorded interest expense of $38 million, $43 million and $80 million for the years ended December 31, 2007, 2006 and 2005, respectively, related to this
debt.
(D)
Represents fair value of interest rate swaps. The balance as of December 31, 2007 was less than $1 million.
(E)
The aggregate principal amounts of maturities for each of the five years following December 31, 2007 are as follows:
Year
PSEG
Power
PSE&G
Energy Holdings
Total
PSE&G
Transition
Transition
Energy
Global
Resources
EGDC
(Millions)
2008
$
49
$
$
250
$
169
$
10
$
607
$
32
$
3
$
2
$
1,122
2009
249
250
60
178
10
298
4
3
1,052
2010
186
11
20
3
220
2011
800
195
11
530
1
3
1,540
2012
666
300
204
11
3
1,184
$
298
$
1,716
$
610
$
932
$
53
$
1,137
$
330
$
28
$
14
$
5,118
(F)
In November 2007, Power issued $40 million of 5.75% Pollution Control Bonds due 2037.
(G)
In December 2007, Power issued $44 million of 4.00% Pollution Control Bonds due 2042.
128
Funding
Funding II
Holdings
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(H)
In January 2007, PSE&G repaid at maturity $113 million of its 6.25% Series WW First and Refunding Mortgage Bonds.
(I)
Auction rates are variable. Reflects rates as of December 31, 2007. These pollution control notes ($494 total principal amount) service and secure a like amount of insured tax-exempt variable rate
bonds of the Pollution Control Authority of Salem County. In February 2008, PSE&G purchased $105 million of the Salem County Authority bonds which were held by the broker/dealer. PSE&G has
elected to change the interest rate mode on the bonds to a weekly rate. PSE&G intends to acquire all of these bonds by April 2008 upon the change in interest rate modes and to hold them until they can
be remarketed or refinanced, possibly later in 2008.
(J)
In May 2007, PSE&G issued $350 million of 5.80% Secured Medium-Term Series E Notes due 2037.
(K)
During 2007, Transition Funding and Transition Funding II repaid $161 million and $9 million, respectively, of their Transition Bonds.
(L)
In February 2008, Energy Holdings repaid at maturity $207 million of its 8.625% Senior Notes.
(M)
In December 2007, Energy Holdings called for redemption all of the outstanding $400 million of 10% Senior Notes due 2009. The Senior Notes were redeemed in January 2008.
(N)
In December 2007, Energy Holdings repurchased $14 million of the remaining $544 million of the outstanding 8.50% Senior Notes due 2011.
(O)
Non-recourse financing transactions consist of loans from banks and other lenders that are typically secured by project assets and cash flows and generally impose no material obligation on the parent-
level investor to repay any debt incurred by the project borrower. The consequences of permitting a project-level default include the potential for loss of any invested equity by the parent. However, in
some cases, certain obligations relating to the investment being financed, including additional equity commitments, may be guaranteed by Global and/or Energy Holdings for their respective
subsidiaries. PSEG does not provide guarantees or credit support to Energy Holdings or its subsidiaries.
During 2007, Energy Holdings subsidiaries repaid $51 million of non-recourse debt, including $45 million related to PSEG Texas, $4 million to Resources and $2 million to EGDC.
(P)
In February 2006, the maturity of the debt was extended to December 31, 2009. On September 29, 2006, 80% of the scheduled outstanding principal became subject to an interest rate swap that
converted floating rate Libor interest to a fixed rate of 5.4275% through December 31, 2009. On December 31, 2007, the Libor rate on the unswapped portion of the debt was 4.875% and the interest
spread was 2.75%.
(Q)
In April 2006, 80% of the scheduled outstanding principal became subject to interest rate swaps that converted floating rate Libor to a weighted average fixed rate of 4.518%. On December 31, 2007,
the Libor rate on the unswapped portion of the debt was 4.875% and the interest spread was 1.875%.
(R)
Chilquinta was sold in December 2007.
129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short-Term Liquidity
PSEG, Power and PSE&G
As of December 31, 2007, PSEG, Power and PSE&G had the following credit facilities. Each of the facilities is restricted as to availability and use to the specific companies as listed below. PSEG, Power
and PSE&G believe sufficient liquidity exists to fund their respective short-term cash requirements.
Company
Expiration
Total
Primary Purpose
Usage as of
Available
(Millions)
PSEG:
5-year Credit Facility(A)
Dec 2012
$
1,000
CP Support/
$
1
(B)
$
999
Uncommitted Bilateral Agreement
N/A
N/A
Funding
$
$
N/A
Power:
5-year Credit Facility(A)
Dec 2012
$
1,600
Funding/
$
140
(B)
$
1,460
Bilateral Credit Facility
March 2010
$
100
Funding/
$
56
(B)
$
44
Bilateral Credit Facility
March 2008
$
200
Funding/
$
28
(B)
$
172
PSE&G:
5-year Credit Facility(A)
June 2012
$
600
CP Support/
$
55
$
545
Uncommitted Bilateral Agreement
N/A
N/A
Funding
$
10
N/A
(A)
In 2012, facilities reduce by $47 million, $75 million, and $28 million for PSEG, Power and PSE&G, respectively.
(B)
These amounts relate to letters of credit outstanding.
Power
As of December 31, 2007, Power had borrowed $238 million from PSEG in the form of an intercompany loan.
On June 25, 2007, Power refinanced the $200 million PSEG/Power joint and several co-borrower bilateral credit facility. The maturity was extended to March 2008 and terms were modified so that
Power is the sole borrower under this facility.
130
Date
Facility
December 31,
2007
Liquidity as of
December 31,
2007
Funding/
Letters of Credit
Letters of Credit
Letters of Credit
Letters of Credit
Funding/
Letters of Credit
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Debt
The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions as of December 31, 2007 and
2006, respectively.
December 31, 2007
December 31, 2006
Carrying
Fair
Carrying
Fair
(Millions)
Long-Term Debt:
PSEG.
$
298
$
299
$
1,375
$
1,369
Power
2,902
3,106
2,818
3,045
PSE&G
3,353
3,370
3,116
3,145
Transition Funding (PSE&G)
1,623
1,792
1,784
1,907
Transition Funding II (PSE&G)
86
87
95
93
Energy Holdings:
Senior Notes
1,137
1,204
1,149
1,232
Project Level, Non-Recourse Debt
386
387
599
606
$
9,785
$
10,245
$
10,936
$
11,397
Because their maturities are less than one year, fair values approximate carrying amounts for cash and cash equivalents, short-term debt and accounts payable. For additional information related to
interest rate derivatives, see Note 11. Financial Risk Management Activities.
Note 11. Financial Risk Management Activities
The operations of PSEG, Power and PSE&G are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices that could affect their results
of operations and financial conditions. PSEG, Power and PSE&G manage exposure to these market risks through their regular operating and financing activities and, when deemed appropriate, hedge these
risks through the use of derivative financial instruments. PSEG, Power and PSE&G use the term hedge to mean a strategy designed to manage risks of volatility in prices or rate movements on certain assets,
liabilities or anticipated transactions and by creating a relationship in which gains or losses on derivative instruments are expected to counterbalance the gains or losses on the assets, liabilities or anticipated
transactions exposed to such market risks. Each of PSEG, Power and PSE&G uses derivative instruments as risk management tools consistent with its respective business plan and prudent business practices.
Derivative Instruments and Hedging Activities
Energy Contracts
Power
Power actively trades energy and energy-related products, including electricity, natural gas, electric capacity, firm transmission rights (FTRs), coal, oil and emission allowances in the spot, forward and
futures markets, primarily in PJM, but also in the surrounding region, which extends from Maine to the Carolinas and the Atlantic Coast to Indiana, and natural gas in the producing region.
Power maintains a strategy of entering into positions to optimize the value of its portfolio and reduce earnings volatility of generation assets, gas supply contracts and its electric and gas supply
obligations. Power engages in physical and financial transactions in the electricity wholesale markets and executes an overall risk management strategy seeking to mitigate the effects of adverse movements
in the fuel and electricity markets. These contracts also involve financial transactions including swaps, options and futures. There have been significant increases in commodity prices over the last year. The
resultant changes in market values for energy and related contracts that qualify for hedge accounting have resulted in significant increases to Accumulated Other Comprehensive Loss. For additional
information, see Note 12. Commitments and Contingent Liabilities. Power marks its derivative energy contracts to market in accordance with SFAS 133, with changes in fair value charged to the
Consolidated Statements of Operations. Wherever possible, fair
131
Amount
Value
Amount
Value
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
values for these contracts are obtained from quoted market sources. For contracts where no quoted market exists, modeling techniques are employed using assumptions reflective of current market rates,
yield curves and forward prices, as applicable, to interpolate certain prices. The effect of using such modeling techniques is not material to Powers financial results.
Commodity Contracts
Power
The availability and price of energy commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies,
market conditions, transmission availability and other events. Power manages its risk of fluctuations of energy price and availability through derivative instruments, such as forward purchase or sale
contracts, swaps, options, futures and FTRs.
Cash Flow Hedges
Power uses forward sale and purchase contracts, swaps and FTR contracts to hedge forecasted energy sales from its generation stations and to hedge related load obligations. Power also enters into
swaps and futures transactions to hedge the price of fuel to meet its fuel purchase requirements. These derivative transactions are designated and effective as cash flow hedges under SFAS 133. As of
December 31, 2007, the fair value of these hedges was $(427) million. These hedges, along with realized losses on hedges of $(4) million retained in Accumulated Other Comprehensive Loss, resulted in a
$(250) million after-tax impact on Accumulated Other Comprehensive Loss. As of December 31, 2006, the fair value of these hedges was $(166) million. These hedges, along with realized losses on hedges
of $(19) million retained in Accumulated Other Comprehensive Loss, resulted in a $(108) million after-tax impact on Accumulated Other Comprehensive Loss. During 2008, $147 million (after-tax) of net
unrealized and realized losses on these commodity derivatives is expected to be reclassified to earnings. $66 million of after-tax unrealized losses on these commodity derivatives in Accumulated Other
Comprehensive Loss is expected to be reclassified to earnings for the year ending December 31, 2009. Ineffectiveness associated with these hedges, as defined in SFAS 133, was $(8) million at December 31,
2007. The expiration date of the longest dated cash flow hedge is in 2011.
Other Derivatives
Power
also enters into certain other contracts that are derivatives, but do not
qualify for cash flow hedge accounting under SFAS 133. Most of these contracts
are used for fuel purchases for generation requirements and for electricity
purchases for contractual sales obligations. Therefore, the changes in fair
market value of these derivative contracts are recorded in Energy Costs or
Operating Revenues, as appropriate, on the Consolidated Statements of Operations.
The net fair value of these instruments was $(10) million and $1 million
as of December 31, 2007 and 2006, respectively.
PSEG Texas
Other Derivatives
PSEG Texas enters into electricity forward and capacity sale contracts to sell its 2,000 MW capacity for portions of the current calendar year, with the balance sold into the daily spot market. PSEG
Texas also enters into gas purchase contracts to specifically match the generation requirements to support the electricity forward sales contracts. Although these contracts fix the amount of revenue, fuel
costs and cash flows, and thereby provide financial stability to PSEG Texas, these contracts are, based on their terms, derivatives that do not meet the specific accounting criteria in SFAS 133 to qualify for
the normal purchases and normal sales exception, or to be designated as a hedge for accounting purposes. As a result, these contracts must be recorded at fair value. The net fair value of the open positions
was $63 million and $38 million as of December 31, 2007 and December 31, 2006, respectively.
132
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Rates
PSEG, Power and PSE&G
PSEG, Power and PSE&G are subject to the risk of fluctuating interest rates in the normal course of business. PSEGs policy is to manage interest rate risk through the use of fixed and floating rate debt
and interest rate derivatives.
Fair Value Hedges
PSEG and Power
In March 2004, Power issued $250 million of 3.75% Senior Notes due April 2009. PSEG used an interest rate swap to convert Powers fixed-rate debt into variable-rate debt. The interest rate swap is
designated and effective as a fair value hedge. The fair value changes of the interest rate swap are fully offset by the fair value changes in the underlying debt. As of December 31, 2007 and December 31,
2006, the fair value of the hedge was $(2) million and $(9) million, respectively.
Cash Flow Hedges
PSEG and PSE&G
PSEG and PSE&G use interest rate swaps and other interest rate derivatives to manage their exposures to the variability of cash flows, primarily related to variable-rate debt instruments. The interest
rate derivatives used are designated and effective as cash flow hedges. Except for PSE&Gs cash flow hedges, the fair value changes of these derivatives are initially recorded in Accumulated Other
Comprehensive Loss. As of December 31, 2007, the fair value of these cash flow hedges was $(4) million and $(7) million at PSE&G and Energy Holdings, respectively. As of December 31, 2006, the fair
value of these cash flow hedges was $(4) million, primarily at PSE&G. The $(4) million at PSE&G as of December 31, 2007 and December 31, 2006, is not included in Accumulated Other Comprehensive Loss,
as it is deferred as a Regulatory Asset and is expected to be recovered from PSE&Gs customers. During the next 12 months, $2 million of unrealized losses (net of taxes) on interest rate derivatives in
Accumulated Other Comprehensive Loss is expected to be reclassified at PSEG. As of December 31, 2007, there was no hedge ineffectiveness associated with these hedges.
Note 12. Commitments and Contingent Liabilities
Nuclear Insurance Coverages and Assessments
Power
Power is a member of an industry mutual insurance company, Nuclear Electric Insurance Limited (NEIL), which provides the primary property and decontamination liability insurance at Salem
Nuclear Generating Station (Salem), Hope Creek Nuclear Generating Station (Hope Creek) and Peach Bottom Atomic Power Station (Peach Bottom). NEIL also provides excess property insurance
through its decontamination liability, decommissioning liability and excess property policy and replacement power coverage through its accidental outage policy. NEIL policies may make retrospective
premium assessments in case of adverse loss experience. Powers maximum potential liabilities under these assessments are included in the table and notes below. 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 that site, issues a shutdown order
with respect to such unit or issues a confirmatory order keeping such unit down.
The American Nuclear Insurers (ANI) and NEIL policies both include coverage for claims arising out of acts of terrorism. NEIL makes a distinction between certified and non-certified acts of
terrorism, as defined under the Terrorism Risk Insurance Act (TRIA), and thus its policies respond accordingly. For non-certified acts of terrorism, NEIL policies are subject to an industry aggregate limit
of $3.2 billion plus any amounts available through reinsurance or indemnity for non-certified acts of terrorism. For any act of terrorism,
133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Powers nuclear liability policies will respond similarly to other covered events. For certified acts, Powers nuclear property NEIL policies will respond similarly to other covered events.
The Price-Anderson Act sets the limit of liability for claims that could arise from an incident involving any licensed nuclear facility in the U.S. 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 $10.8 billion. All utilities owning a nuclear reactor, including Power,
have provided for this exposure through a combination of private insurance and mandatory participation in a financial protection pool as established by the Price-Anderson Act. Under the Price-Anderson
Act, each party with an ownership interest in a nuclear reactor can be assessed its share of $101 million per reactor per incident, payable at $15 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. Powers maximum aggregate assessment per incident is $317 million (based on Powers ownership interests in Hope Creek, Peach Bottom and Salem) and its maximum
aggregate annual assessment per incident is $48 million. This does not include the $11 million that could be assessed under the nuclear worker policies. Further, a decision by the U.S. Supreme Court, not
involving Power, has held that the Price-Anderson Act did not preclude awards based on state law claims for punitive damages.
Powers insurance coverages and maximum retrospective assessments for its nuclear operations are as follows:
Total Site
Retrospective
(Millions)
Type and Source of Coverages
Public and Nuclear Worker Liability (Primary Layer):
ANI
$
300
(A)
$
10
Nuclear Liability (Excess Layer):
Price-Anderson Act
10,461
(B)
317
Nuclear Liability Total.
$
10,761
(C)
$
327
Property Damage (Primary Layer)
:
NEIL
Primary (Salem/Hope Creek/Peach Bottom).
$
500
$
17
Property Damage (Excess Layers):
NEIL II (Salem/Hope Creek/Peach Bottom)
750
9
NEIL Blanket Excess (Salem/Hope Creek/Peach Bottom)
850
(D)
6
Property Damage Total (Per Site)
$
2,100
$
32
Accidental Outage:
NEIL I (Peach Bottom)
$
245
(E)
$
6
NEIL I (Salem)
281
(E)
7
NEIL I (Hope Creek)
490
(E)
6
Replacement Power Total
$
1,016
$
19
(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 that is subject to reinstatement at ANI discretion and has an assessment potential under former canceled policies.
(B)
Retrospective premium program under the Price-Anderson Act liability provisions of the Atomic Energy Act of 1954, as amended. Power is subject to retrospective assessment with respect to loss from
an incident at any licensed nuclear reactor in the U.S. that produces greater than 100 MW of electrical power. This retrospective assessment can be adjusted for inflation every five years. The last
adjustment was effective as of August 20, 2003. The next adjustment is due on or before August 20, 2008. This retrospective program is in excess of the Public and Nuclear Worker Liability primary
layers.
134
Coverage
Assessments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(C)
Limit of liability under the Price-Anderson Act for each nuclear incident.
(D)
For property limits in excess of $1.25 billion, Power participates in a Blanket Limit policy where the $850 million limit is shared by Power with Amergen Energy Company, LLC (Amergen) and Exelon
Generation LLC (Exelon Generation) among the Braidwood, Byron, Clinton, Dresden, La Salle, Limerick, Oyster Creek, Quad Cities, TMI-1 facilities owned by Amergen and Exelon and the Peach
Bottom, Salem and Hope Creek facilities. This limit is not subject to reinstatement in the event of a loss. Participation in this program materially reduces Powers premium and the associated potential
assessment.
(E)
Peach Bottom has an aggregate indemnity limit based on a weekly indemnity of $2.3 million for 52 weeks followed by 80% of the weekly indemnity for 68 weeks. Salem has an aggregate indemnity
limit based on a weekly indemnity of $2.5 million for 52 weeks followed by 80% of the weekly indemnity for 75 weeks. Hope Creek has an aggregate indemnity limit based on a weekly indemnity of
$4.5 million for 52 weeks followed by 80% of the weekly indemnity for 71 weeks.
Guaranteed Obligations
Power
Power contracts for electricity, natural gas, oil, coal, pipeline capacity, transportation and emission allowances and engages in risk management activities through ER&T. These activities primarily involve
the purchase and sale of energy and related products under transportation, physical, financial and forward contracts at fixed and variable prices. These transactions are executed with numerous
counterparties and brokers. Counterparties and brokers may require guarantees, cash or cash-related instruments to be deposited on these transactions as described below.
Power has unconditionally guaranteed payments by its subsidiaries, ER&T and PSEG Power New York Inc. (Power New York) in commodity-related transactions to support current exposure, interest
and other costs on sums due and payable in the ordinary course of business. These payment guarantees are provided to counterparties in order to obtain credit. Under these agreements, guarantees cover
lines of credit between entities and are often reciprocal in nature. The exposure between counterparties can move in either direction. The face value of the guarantees outstanding as of December 31, 2007
and December 31, 2006 was $1.5 billion and $1.6 billion, respectively.
In order for Power to incur a liability for the face value of the outstanding guarantees, ER&T and Power New York would have to fully utilize the credit granted to them by every counterparty to whom
Power has provided a guarantee and all of ER&Ts and Power New Yorks contracts would have to be out-of-the-money (if the contracts are terminated, Power would owe money to the counterparties).
The probability of all contracts at ER&T and Power New York being simultaneously out-of-the-money is highly unlikely due to offsetting positions within the portfolio. For this reason, the current exposure
at any point in time is a more meaningful representation of the potential liability to Power under these guarantees if ER&T and/or Power New York were to default. This current exposure consists of the net
of accounts receivable and accounts payable and the forward value on open positions, less any margins posted. The current exposure from such liabilities was $521 million and $518 million as of December
31, 2007 and December 31, 2006, respectively.
Power is subject to counterparty collateral calls related to commodity contracts and is subject to certain creditworthiness standards as guarantor under performance guarantees for ER&Ts agreements.
Changes in commodity prices, including fuel, emissions allowances and electricity, can have a material impact on margin requirements under such contracts. As of December 31, 2007 and December 31,
2006, Power had the following margin posted and received to satisfy collateral obligations, which were primarily in the form of letters of credit:
As of
As of
(Millions)
Margin Posted
$
188
$
40
Margin Received
$
44
$
86
135
December 31,
2007
December 31,
2006
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Power also routinely enters into exchange-traded futures and options transactions for electricity and natural gas as part of its operations. Generally, such futures contracts require a deposit of cash
margin, the amount of which is subject to change based on market movement and in accordance with exchange rules. As of December 31, 2007 and December 31, 2006, Power had deposited margin of $168
million and $89 million, respectively.
In the event of a deterioration of Powers credit rating to below investment grade, which would represent a two level downgrade from its current ratings, many of these agreements allow the
counterparty to demand that ER&T provide further performance assurance. Exchange-traded transactions that are margined and monitored separately from physical trading activity may not be subject to
change in the event of a downgrade to Powers rating. As of December 31, 2007, if Power were to lose its investment grade rating and, assuming all counterparties to which ER&T is out-of-the-money were
contractually entitled to demand, and demanded, performance assurance, ER&T could be required to post additional collateral in an amount equal to $777 million. Power believes that it has sufficient
liquidity to post such collateral, if necessary.
In addition to amounts discussed above, Power had posted $37 million in letters of credit as of December 31, 2007 and 2006 to support various other contractual and environmental obligations.
Environmental Matters
PSEG, Power and PSE&G
Passaic River
The U.S. Environmental Protection Agency (EPA) has determined that a six-mile stretch of the Passaic River in the area of Newark, New Jersey is a facility within the meaning of that term under
the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA).
PSE&G and certain of its predecessors conducted industrial operations at properties adjacent to the Passaic River facility. The operations included one operating electric generating station (Essex Site),
one former generating station and four former MGPs. PSE&Gs costs to clean up former MGPs are recoverable from utility customers through the SBC. PSE&G has sold the site of the former generating
station. The Essex Site was transferred to Power in August 2000. Power assumed any environmental liabilities of PSE&G associated with the electric generating stations that PSE&G transferred to it, including
the Essex Site.
In 2003, the EPA notified 41 potentially responsible parties (PRPs), including Power and PSE&G, that it was expanding its assessment of the Passaic River Study Area to the entire 17-mile tidal reach of
the lower Passaic River. The EPA further indicated, with respect to PSE&G, that it believed that hazardous substances had been released from the Essex Site and a former MGP located in Harrison, New
Jersey (Harrison Site), which also includes facilities for PSE&Gs ongoing gas operations. The EPA estimated that its study would require five to eight years to complete and would cost $20 million, of which
it would seek to recover $10 million from the PRPs, including Power and PSE&G. In 2006, the EPA notified the PRPs that the cost of its study will greatly exceed the $20 million initially estimated and after
discussion, approximately 70 PRPs, including Power and PSE&G, have agreed to assume responsibility for the study pursuant to an Administrative Order on Consent and to divide the associated costs among
themselves according to a mutually agreed-upon formula. The percentage allocable to Power and PSE&G varies depending on the number of PRPs who have agreed to divide the costs but it currently
approximates 5%, approximately 80% of which is attributable to PSE&Gs former MGPs and approximately 20% to Powers generating station. Power has provided notice to insurers concerning this
potential claim.
In June 2007, the EPA announced a draft Focused Feasibility Study (FFS) that proposes six options with estimated costs ranging from $900 million to $2.3 billion to address contamination cleanup in
the lower eight miles of the Passaic River in addition to a No Action alternative. The work contemplated by the FFS is not subject to the Administrative Order on Consent or the cost sharing agreement.
The EPA is reviewing comments received on the draft FFS.
CERCLA and the New Jersey Spill Compensation and Control Act (Spill Act) authorize federal and state trustees for natural resources to assess damages against persons who have discharged a
hazardous substance, causing an injury to natural resources. Pursuant to the Spill Act, the New Jersey Department of
136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Environmental Protection (NJDEP) requires persons conducting remediation to characterize injuries to natural resources and to address those injuries through restoration or damages. The NJDEP has
regulations in effect concerning site investigation and remediation that require an ecological evaluation of potential damages to natural resources in connection with an environmental investigation of
contaminated sites. In 2003, PSEG, PSE&G and 56 other PRPs received a Directive and Notice to Insurers from the NJDEP that directed the PRPs to arrange for a natural resource damage assessment and
interim compensatory restoration of natural resource injuries along the lower Passaic River and its tributaries pursuant to the Spill Act. The NJDEP alleged in the Directive that it had determined that
hazardous substances had been discharged from the Essex Site and the Harrison Site. The NJDEP announced that it had estimated the cost of interim natural resource injury restoration activities along the
lower Passaic River to approximate $950 million. On August 2, 2007, the National Oceanic and Atmospheric Administration of the United States Department of Commerce sent a letter to PSE&G and other
companies identified as PRPs notifying them that it intended to perform an assessment of injuries to natural resources and inviting the PRPs to participate. The PRPs have not agreed to participate in either
of these natural resource damage initiatives.
Newark Bay Study Area
The EPA sent PSE&G and eleven other entities notices that the EPA considered each of the entities to be a PRP with respect to contamination in the Newark Bay Study Area, which it defined as
Newark Bay and portions of the Hackensack River, the Arthur Kill and the Kill Van Kull. The notice letter requested that the PRPs participate and fund the EPA-approved study in the Newark Bay Study
Area and encouraged the PRPs to contact Occidental Chemical Corporation (OCC) to discuss participating in the Remedial Investigation/Feasibility Study (RI/FS) that OCC is conducting in the Newark
Bay Study Area. EPA considers the Newark Bay Study Area, along with the Passaic River Study Area, to be part of the Diamond Alkali Superfund Site. The notice states the EPAs belief that hazardous
substances were released from sites owned by PSE&G and located on the Hackensack River. The sites included two operating electric generating stations (Hudson and Kearny Sites), and one former MGP.
PSE&Gs costs to clean up former MGPs are recoverable from utility customers through the SBC. The Hudson and Kearny Sites were transferred to Power in August 2000. Power assumed any environmental
liabilities of PSE&G associated with the electric generating stations that PSE&G transferred to it, including the Hudson and Kearny Sites. Power has provided notice to insurers concerning this potential claim.
Power and PSE&G are unable to estimate the cost of the investigation at this time.
Other
On June 29, 2007, the State of New Jersey filed multiple lawsuits against parties, including PSE&G, who were alleged to be responsible for injuries to natural resources in New Jersey. Included in these
lawsuits was a claim against PSE&G and others arising out of PSE&Gs former Camden Coke facility, and a claim against PSE&G and other arising out of the Global Landfill matter. PSE&G has responded to the
complaint in the NRD case arising out of the former Camden Coke site and is in the process of remediating that site under its MGP program, discussed below. The time for PSE&G to answer the complaint
in the NRD case arising out of the Global Landfill matter has been delayed until March 2008 to allow the parties to negotiate an order that would resolve the NRD claim.
PSEG, Power and PSE&G cannot
predict what further actions, if any, or the costs or the timing thereof, that may be required with respect to the Passaic River, Newark Bay or other natural resource damages claims; however, such costs
could be material.
PSE&G
MGP Remediation Program
PSE&G is currently working with the NJDEP under a program to assess, investigate and remediate environmental conditions at PSE&Gs former MGP sites (Remediation Program). To date, 38 sites have
been identified as sites requiring some level of remedial action. In addition, the NJDEP has announced initiatives to accelerate the investigation and subsequent remediation of the riverbeds underlying
surface water bodies that have been impacted by hazardous substances from adjoining sites. Specifically, in 2005, the NJDEP initiated a program on the Delaware River aimed at identifying the 10 most
significant sites for
137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cleanup. One of the sites identified is PSE&Gs former Camden Coke facility located in Camden. The Remediation Program is periodically reviewed, and the estimated costs are revised by PSE&G based on
regulatory requirements, experience with the program and available remediation technologies.
During the fourth quarter of 2007, PSE&G refined the detailed site estimates. Based on that review, the remaining cost of remediating all sites to completion, as well as the anticipated costs to address
MGP-related material discovered in three rivers adjacent to two former MGP sites, could range between $639 million and $812 million through 2021. Since no amount within the range was considered to be
most likely, the low end of the range, $639 million, was accrued as of December 31, 2007. Of this amount, $45 million was recorded in Other Current Liabilities and $594 million was reflected in Other
Noncurrent Liabilities. The costs associated with the MGP Remediation Program have historically been recovered through the SBC charges to PSE&G ratepayers. As such, a $639 million Regulatory Asset
was recorded. PSE&Gs costs for the Remediation Program were $44 million for 2007.
Power
Prevention of Significant Deterioration (PSD)/New Source Review (NSR)
The PSD/NSR regulations, promulgated under the Clean Air Act, require major sources of certain air pollutants to obtain permits, install pollution control technology and obtain offsets, in some
circumstances, when those sources undergo a major modification, as defined in the regulations. The federal government may order companies that are not in compliance with the PSD/NSR regulations to
install the best available control technology at the affected plants and to pay monetary penalties of up to $27,500 for each day of continued violation.
On November 30, 2006, Power reached an agreement with the EPA and the New Jersey Department of Environmental Protection (NJDEP) to achieve emissions reductions targets consistent with an
earlier consent decree that resolved allegations of non-compliance with NSR/PSD programs at the companys Mercer, Hudson and Bergen generating stations. Under this agreement and the consent decree
Power is required to undertake a number of technology projects, plant modifications and operating procedure changes at Hudson and Mercer designed to meet targeted reductions in emissions of Sulfur
Dioxide (SO
2
), Nitrogen Oxide (NO
x
), particulate matter and mercury.
Pursuant to this program, Power has installed selective catalytic reductions at Mercer at a cost of $129 million. The cost of implementing the balance of the agreement is estimated at $475 million to $525
million for Mercer to be completed by May 2010 and $700 million to $750 million for Hudson to be completed by the end of 2010. Fossil also purchased and retired emissions allowances by July 31, 2007,
paid a $6 million civil penalty and have agreed to contribute $3 million for programs to reduce particulate emissions from diesel engines in New Jersey. In March 2007, Fossil entered into an engineering,
procurement and construction contract with a third party contractor to complete all back-end technology requirements for the Mercer station, as referenced above. Fossil signed a contract for construction
management related to the Hudson back-end technology construction in July 2007.
As a result of the agreement, Powers environmental reserves include $3 million to account for the particulate matter reduction program. PSEG and Power recorded the charge in Other Deductions on
their respective Condensed Consolidated Statements of Operations in the fourth quarter of 2006.
Mercury Regulation
In March 2005, the EPA established a New Source Performance Standard limit for nickel emissions from oil-fired electric generating units, and a cap-and-trade program for mercury emissions from
coal-fired electric generating units, with a first phase cap of 38 tons per year (tpy) in 2010 and a second phase cap of 15 tpy in 2018 (the Clean Air Mercury Rule). The United States Court of Appeals for
the District of Columbia Circuit issued a decision on February 8, 2008 rejecting EPAs Clean Air Mercury Rule. As a result of this decision, the EPA is required to develop emissions standards for mercury
and nickel emissions that do not rely on a cap-and-trade program. The full impact, if any, of this development is uncertain until the EPA issues the new emissions standards. Compliance with the new
mercury standards, however, is not expected to have a material impact on Powers operations in New Jersey and Connecticut given the stringent mercury control requirements applicable in those states, as
described below.
138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Jersey and Connecticut have adopted standards for the reduction of emissions of mercury from coal-fired electric generating units. The regulations in New Jersey require the units to meet certain
emissions limits or reduce emissions by 90% by December 15, 2007, unless a one-year extension is granted by NJDEP.
Under the New Jersey regulations, companies that are parties to multi-pollutant reduction agreements are permitted to postpone such reductions on half of their coal-fired electric generating capacity
until December 15, 2012. With respect to Powers New Jersey facilities, half of the reductions that were required by December 15, 2007 are expected to be achieved through the installation of carbon
injection technology at both Mercer Units, which was completed in January 2007. Because there is some uncertainty as to whether the system can consistently achieve the required reductions, Power has
applied for, and received from NJDEP approval of a one-year extension through a facility-specific control plan that includes the installation of baghouses at the Mercer Units in 2008. Installation is
scheduled to be completed by the end of 2008. At its Hudson plant, Power anticipates compliance consisting of the installation of a baghouse by the end of 2010.
The mercury control technologies are also part of Powers multi-pollutant reduction agreement, which resulted from the amended 2002 agreement that resolved issues arising out of the PSD and NSR
air pollution control programs discussed above.
Mercury emissions control standards effective in July 2008 in Connecticut require coal-fired power plants in Connecticut to achieve either an emissions limit or a 90% mercury removal efficiency
through technology installed to control mercury emissions. Power anticipates compliance at its Bridgeport Harbor Station resulting from the installation of new technology prior to July 2008.
In February 2007, Pennsylvania finalized its state-specific requirements to reduce mercury emissions from coal-fired electric generating units. The Keystone and Conemaugh generating stations are
positioned by 2010 to meet Phase I of the Pennsylvania mercury rule by benefiting from mercury reductions realized from the installation of controls for compliance with the Clean Air Interstate Rule.
Phase 2 of the mercury rule will be addressed after a full evaluation of Phase 1 co-benefit reductions.
Some
uncertainty exists regarding the feasibility of achieving the reductions
in mercury emissions required by the New Jersey regulations and Connecticut
statute; however, the estimated costs of technology believed to be capable
of meeting these emissions limits at Powers coal-fired units in Connecticut,
New Jersey and Pennsylvania have been incurred or are included in Powers
capital expenditure forecast. Total estimated costs for each project are
between $150 million and $200 million. The costs for Mercer and Hudson are
included in the cost estimates referred to in the PSD/NSR discussion above.
Power
New Jersey Industrial Site Recovery Act (ISRA)
Potential environmental liabilities related to subsurface contamination at certain generating stations have been identified. In the second quarter of 1999, in anticipation of the transfer of PSE&Gs
generation-related assets to Power, a study was conducted pursuant to ISRA, which applied to the sale of certain assets. Power had a $50 million liability as of December 31, 2007 and December 31, 2006
related to these obligations, which is included in Environmental Costs on Powers and PSEGs Condensed Consolidated Balance Sheets.
Permit Renewals
In June 2001, the NJDEP issued a renewed (NJPDES) permit for Salem, expiring in July 2006, allowing for the continued operation of Salem with its existing cooling water intake system. A renewal
application prepared in accordance with Federal Water Pollution Control Act (FWPCA) Section 316(b) and the Phase II 316(b) rule was filed in January 2006 with the NJDEP, which allows the station to
continue operating under its existing NJPDES permit until a new permit is issued. Powers application to renew Salems NJPDES permit demonstrates that the station satisfies FWPCA Section 316(b) and
meets the Phase II 316(b) rules performance standards for reduction of impingement and entrainment through the stations existing cooling water intake technology and operations plus implemented
restoration measures. The application further demonstrates that even without the benefits of restoration, the station meets the Phase II 316(b) rules site-specific determination standards, both on a
comparison of the costs and benefits of new intake technology as
139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
well as a comparison of the costs to implement the technology at the facility to the cost estimates prepared by the EPA.
On
January 25, 2007, the U.S. Court of Appeals for the Second Circuit issued
its decision in litigation of the Phase II 316(b) regulations brought by
several environmental groups, the Attorneys General of six Northeastern states,
including New Jersey, the Utility Water Act Group and several of its members,
including Power. The court remanded major portions of the regulations and
determined that Section 316(b) of the FWPCA does not support the use of restoration
and the site-specific cost-benefit test. The court instructed the EPA to
reconsider the definition of best technology available without
comparing the costs of the best performing technology to its benefits. Prior
to this decision, Power had used restoration and/or a site-specific cost-
benefit test in applications it had filed to renew the permits at its once-through
cooled plants, including Salem, Hudson and Mercer.
On
May 25, 2007, Power and other industry petitioners filed with the Second
Circuit Court a request for a rehearing. In July 2007, the Second Circuit
Court denied the request. The parties, including Power, have requested that
the US Supreme Court review the matter. The Northeast states and the Solicitor
General have received an extension to file their oppositions to those petitions,
up through and including February 29, 2008. Industry petitioners, including
Fossil and Nuclear, have until March 12, 2008 to file a reply brief. The
briefs will then be distributed to the Supreme Court for consideration. If
the Supreme Court accepts the case, then the matter would be set for oral argument
most likely in the Courts 2008-2009 term, which begins in October.
If the Court does not accept the case, then the Second Circuits opinion
stands and the regulations are remanded to EPA for further consideration.
Although the rule applies to all of Powers electric generating units that use surface waters for once-through cooling purposes, the impact of the rule and the decision of the court cannot be determined
at this time for all of Powers facilities. Depending on the outcome of any appeals, or actions by the EPA to promulgate a revised rule, this decision could have a material impact on Powers ability to renew
its New Jersey and Connecticut permits at its larger once-through cooled plants, including Salem, Hudson, Mercer, Bridgeport and possibly Sewaren and New Haven, without making significant upgrades to
their existing intake structures and cooling systems. If the NJDEP and the Connecticut Department of Environmental Protection were to require installation of closed-cycle cooling or its equivalent at these
once-through cooled facilities, the related costs and impacts would be material to Powers financial position, results of operations and net cash flows. For example, Powers application to renew the permit,
filed in February 2006 with the NJDEP, estimated the costs associated with cooling towers for Salem to be approximately $1 billion, of which Powers share would be approximately $575 million. Potential
costs associated with any closed-cycle cooling requirements are not included in Powers currently forecasted capital expenditures.
New Generation and Development
Power
Power plans to modestly increase its generating capacity at Hope Creek and Salem Unit 2 in 2008. Phase I of the Hope Creek turbine replacement increased the capacity by 10 MW in 2005, and Phase
II, which is expected to add approximately 125 MW of capacity, is expected to be completed in the second quarter of 2008 along with the Extended Power Uprate (EPU). Phase I of the Salem Unit 2
turbine upgrade increased Powers share of the capacity by 14 MW in 2003. Phase II is currently scheduled for the spring of 2008, concurrent with steam generator replacement and is anticipated to increase
Powers share of the capacity by an additional 15 MW. As of December 31, 2007, Powers expenditures for these projects were $200 million (including IDC of $23 million) with an aggregate estimated share
of total costs for these projects of $216 million (including IDC of $28 million).
Completion of the projects discussed above within the estimated time frames and cost estimates cannot be assured. Construction delays, cost increases and various other factors could result in changes
in the operational dates or ultimate costs to complete.
Power entered into a long-term contractual services agreement with a vendor in September 2003 to provide the outage and service needs for certain of Powers generating units at market rates. The
contract covers 25 years and could result in annual payments ranging from $10 million to $50 million for services, parts and materials rendered.
140
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BGS and BGSS
Power and PSE&G
PSE&G obtains its electric supply requirements through the annual New Jersey BGS auctions for customers who do not purchase electric supply from third-party suppliers. PSE&G enters into the Supplier
Master Agreement (SMA) with the winners of these BGS auctions within three business days following the BPUs approval. PSE&G has entered into contracts with Power, as well as with other winning BGS
suppliers, to purchase BGS for PSE&Gs anticipated load requirements. The winners of the auction are responsible for fulfilling all the requirements of a PJM Load Serving Entity including capacity, energy,
ancillary services, transmission and any other services required by PJM. BGS suppliers assume any customer migration risk and must satisfy New Jerseys renewable portfolio standards.
Through the BGS auctions, PSE&G has contracted for its anticipated BGS-Fixed Price load, as follows:
Auction Year
2005
2006
2007
2008
36 Month Terms Ending
May 2008
May 2009
May 2010
May 2011(a)
Load (MW)
2,840
2,882
2,758
2,840
$ per kWh
$
0.06541
$
0.10251
$
0.09888
$
0.1115
(a)
Prices set in the February 2008 BGS Auction are effective on June 1, 2008 when the agreements for the 36-month (May 2008) supply agreements expire.
Power seeks to mitigate volatility in its results by contracting in advance for its anticipated electric output as well as its anticipated fuel needs. As part of its objective, Power has entered into contracts
to directly supply PSE&G and other New Jersey Electric Distribution Companies (EDCs) with a portion of their respective BGS requirements through the New Jersey BGS auction process, described above.
In addition to the BGS-related contracts, Power enters into firm supply contracts with EDCs, as well as other firm sales and commitments.
PSE&G has a full requirements contract with Power to meet the gas supply requirements of PSE&Gs gas customers. The contract extends through March 31, 2012, and year-to-year thereafter. Power has
also entered into contracts to supply energy, capacity and ancillary services to PSE&G through the BGS auction process. Power has entered into hedges for a portion of these anticipated BGSS obligations, as
permitted by the BPU. The BPU permits recovery of the cost of gas hedging up to 115 billion cubic feet or approximately 80% of PSE&Gs residential gas supply annually through the BGSS tariff. For
additional information, see Note 21. Related-Party Transactions.
The BPU is currently conducting an audit of the gas procurement practices of all four New Jersey gas utilities, including PSE&G. The outcome of this proceeding cannot be predicted.
Minimum Fuel Purchase Requirements
Power
Power purchases coal and oil for certain of its fossil generation stations through various long-term commitments. The total minimum purchase requirements included in these commitments amount to
approximately $1 billion through 2012.
Power has several long-term purchase contracts for the supply of nuclear fuel for the Salem and Hope Creek nuclear generating stations. Power has inventory and commitments to purchase sufficient
quantities of uranium (concentrates and uranium hexafluoride) to meet 100% of its total estimated requirements through 2011. Power has commitments for concentrates covering approximately 60% of its
estimated requirements for 2012, 30% from 2013 through 2014 and 20% through 2016. Additionally, Power has commitments for uranium hexafluoride to meet 92% of its estimated requirements for 2012,
50% for 2013 and 2014, and 20% for 2015 and 2016. These commitments, based on current market prices, which have increased substantially over the past two to three years, total $574 million ($402 million
Powers estimated share). Powers policy is to maintain certain levels of concentrates and uranium hexafluoride in inventory and to make periodic
141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchases to support such levels. As such, the commitments referred to above include estimated quantities to be purchased that are in excess of contractual minimum quantities.
Power also has commitments that provide 100% of its uranium enrichment requirements through 2011, 35% for 2012 and 26% for 2013, totaling $306 million ($203 million Powers estimated share).
Power has commitments that provide 100% of the fabrication of fuel assemblies for reloads required through 2011 for Salem and through 2012 for Hope Creek that total approximately $124 million
($90 million Powers estimated share).
Exelon Generation has informed Power that the Peach Bottom plant has inventory and commitments to purchase sufficient quantities of uranium (concentrates and uranium hexafluoride) to meet
100% of its total estimated requirements through 2010. Additionally, Exelon Generation has commitments covering approximately 100% of its estimated requirements for 2011 and 47% for 2012.
Exelon Generation also has commitments that provide 100% of its uranium enrichment requirements for the Peach Bottom plant in 2008, 2010 and 2012. Additionally, Peach Bottom has a 94%
commitment in 2009 and an 82% commitment in 2011.
Exelon Generation has commitments for the fabrication of fuel assemblies for reloads required through 2012 for Peach Bottom. In total, the Exelon Generation commitment for nuclear fuel,
conversion, enrichment and fabrication totals $406 million ($203 million Powers estimated share).
Natural Gas
In addition to its fuel requirements, Power has entered into various multi-year contracts for firm transportation and storage capacity for natural gas, primarily to meet its gas supply obligations to PSE&G.
As of December 31, 2007, the total minimum requirements under these contracts were approximately $1 billion through 2016.
These purchase obligations are consistent with Powers strategy to enter into contracts for its fuel supply in comparable volumes to its sales contracts.
PSEG Texas
The Texas generation facilities have entered into gas supply agreements for their anticipated fuel requirements to satisfy obligations under their forward energy sales contracts. As of December 31,
2007, the plants had fuel purchase commitments totaling $106 million to support all of their contracted energy sales.
Regulatory Proceedings
PSEG and PSE&G
Competition Act
On April 23, 2007, PSE&G and Transition Funding were served with a copy of a purported class action complaint (Complaint) challenging the constitutional validity of certain provisions of New Jerseys
Competition Act, seeking injunctive relief against continued collection from PSE&Gs electric customers of the TBC of PSE&G Transition Funding, as well as recovery of TBC amounts previously collected.
Notice of the filing of the Complaint was also provided to New Jerseys Attorney General. Under New Jersey law, the Competition Act, enacted in 1999, is presumed constitutional. On July 9, 2007, the
same plaintiff filed an amended Complaint to also seek injunctive relief from continued collection of related taxes as well as recovery of such taxes previously collected and also filed a petition with the BPU
requesting review and adjustment to PSE&Gs recovery of the same charges. PSE&G and Transition Funding filed a motion to dismiss the amended Complaint (or in the alternative for summary judgment) on
July 30, 2007 and PSE&G filed on September 30, 2007 a motion with the BPU to dismiss the petition. On October 10, 2007, PSE&G and Transition Fundings motion to dismiss was granted. PSE&Gs motion to
dismiss the BPU petition is pending.
142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Tax Credits
The IRS has issued several PLRs that concluded that the refunding of excess deferred tax and ITC balances to utility customers was permitted only over the related assets regulatory lives, which for
PSE&G, was terminated upon New Jerseys electric industry deregulation in 1999. Based on this fact, in 1999, PSE&G reversed the deferred tax and ITC liability relating to the generation assets that were
transferred to Power, and recorded a $235 million reduction of the extraordinary charge due to such restructuring of the industry in New Jersey. In May 2006, the IRS issued a PLR to PSE&G, which
concluded that none of the generation ITC could be passed to utility customers without violating its normalization rules. While the holding in the PLR is favorable to the action PSE&G took, an outstanding
Treasury regulation project could overturn that holding in the PLR if the Treasury were to alter a position set out in certain proposed regulations.
BPU Deferral Audit
The BPU Energy and Audit Division conducts audits of deferred balances under various adjustment clauses. A draft Deferral AuditPhase II report relating to the 12-month period ended July 31, 2003
was released by the consultant to the BPU in April 2005. The draft report addresses the SBC, MTC and NUG deferred balances. The BPU released the report on May 13, 2005.
While the consultant to the BPU found that the Phase II deferral balances complied in all material respects with the BPU Orders regarding such deferrals, the consultant noted that the BPU Staff had
raised certain questions with respect to the reconciliation method PSE&G had employed in calculating the overrecovery of its MTC and other charges during the Phase I and Phase II four-year transition
period. The amount in dispute is $114 million, which if required to be refunded to customers with interest through December 2007, would be $127 million.
At PSE&Gs request, the matter was transmitted to the Office of Administrative Law for the development of an evidentiary record and an initial decision. The BPU granted the request on February 7,
2007. On May 25, 2007, PSE&G filed a motion for Summary Judgement requesting dismissal of the matter. On September 28, 2007, the Administrative Law Judge issued an initial decision denying PSE&Gs
motion to dismiss the matter and ordering the filing of testimony and evidentiary hearings. Hearing dates have been established for July 16, 2008 to July 18, 2008. The BPU Staff and New Jersey Public
Advocates Division of Rate Counsel have both asserted in briefs that the dispusted amount be refunded to customers.
While PSE&G believes the MTC methodology it used was fully litigated and resolved by the prior BPU Orders in its previous electric base rate case, deferral audit and deferral proceedings, PSE&G
cannot predict the impact of the outcome of this proceeding.
New Jersey Clean Energy Program
The BPU has approved a funding requirement for each New Jersey utility applicable to its Renewable Energy and Energy Efficiency programs for the years 2005 to 2008. The sum of PSE&Gs electric
and gas funding requirement was $120 million and $96 million for the years ended December 31, 2007 and 2006, respectively. The remaining liability has been recorded with an offsetting Regulatory Asset,
since the costs associated with this program are expected to be recovered from PSE&G ratepayers through the SBC. The liability for the funding requirement as of December 31, 2007 and December 31, 2006
was $149 million and $253 million, respectively.
Energy Holdings
Leveraged Lease Investments
On November 16, 2006, the Internal Revenue Service (IRS) issued its Revenue Agents report for tax years 1997 through 2000, which disallowed all deductions associated with certain lease transactions
that are similar to a type that the IRS publicly announced its intention to challenge. In addition, the IRS imposed a 20% penalty for substantial understatement of tax liability. In February 2007, PSEG filed
a protest to the Office of Appeals of the IRS. As of each of December 31, 2007 and December 31, 2006, Resources total gross investment in such transactions was $1.5 billion.
143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If all deductions associated with these lease transactions, entered into by Energy Holdings between 1997 and 2002, are successfully challenged by the IRS, it could have a material adverse impact on
PSEGs financial position, results of operations and net cash flows and could impact future returns on these transactions. PSEG believes that its tax position related to these transactions is proper based on
applicable statutes, regulations and case law and will aggressively contest the IRS disallowance. PSEG believes that it is more likely than not that it will prevail with respect to the IRS challenge, although
no assurances can be given.
If the IRS disallowance of tax benefits associated with all of these lease transactions was sustained, $878 million of PSEGs deferred tax liabilities that have been recorded under leveraged lease
accounting through December 31, 2007 would become currently payable. In addition, as of December 31, 2007 interest of approximately $179 million, after-tax, and penalties of $169 million may become
payable, with potential additional interest and penalties of approximately $17 million accruing quarterly. PSEGs management has assessed the probability of various outcomes to this matter and recorded
the tax effect to be realized in accordance with FIN 48. In December 2007, PSEG deposited $100 million with the IRS to defray potential interest costs associated with this disputed tax liability. In the event
PSEG is successful in its defense of its position, the deposit is fully refundable with interest.
For additional information and guidance for leveraged leases. See Note 2. Recent Accounting Standards for additional information.
Minimum Lease Payments
PSEG, Power and PSE&G
PSEG and Power have entered into capital leases for administrative office space. The total future minimum payments and present value of these capital leases as of December 31, 2007 are:
Power
Other
(Millions)
2008
$
2
$
20
2009
2
20
2010
2
16
2011
2
10
2012
2
10
Thereafter.
5
26
Total Minimum Lease Payments
Less: Imputed Interest
(6
)
(65
)
Present Value of Net Minimum Lease Payments
$
9
$
37
PSEG and PSE&G lease administrative office space under various operating leases. Total future minimum lease payments as of December 31, 2007 are $14 million, including $11 million at PSE&G.
Note 13. Nuclear Decommissioning
Power
In accordance with NRC regulations, entities 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 owner places funds in independent external trust accounts it maintains to provide for decommissioning.
Power maintains the external master nuclear decommissioning trust previously established by PSE&G. This trust contains two separate funds: a qualified fund and a non-qualified fund. Section 468A of
the Internal Revenue Code limits the amount of money that can be contributed into a qualified fund. In the most recent study of the total cost of decommissioning, Powers share related to its five nuclear
units was estimated at approximately $2.1 billion, including contingencies.
Powers policy is that, except for investments tied to market indexes or other non-nuclear sector common trust funds or mutual funds (e.g., an S&P 500 mutual fund), assets of the trust shall not be
invested
144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the securities or other obligations of PSEG or its affiliates, or its successors or assigns; and assets shall not be invested in securities of any entity owning one or more nuclear power plants.
Power classifies investments in the NDT Funds as available-for-sale under SFAS 115. The following tables show the fair values and gross unrealized gains and losses for the securities held in the NDT
Funds.
As of December 31, 2007
Cost
Gross
Gross
Estimated
(Millions)
Equity Securities
$
573
$
191
$
(5
)
$
759
Debt Securities
Government Obligations
213
8
221
Other Debt Securities
253
4
257
Total Debt Securities.
466
12
478
Other Securities
38
3
(2
)
39
Total Available-for-Sale Securities
$
1,077
$
206
$
(7
)
$
1,276
As of December 31, 2006
Cost
Gross
Gross
Estimated
(Millions)
Equity Securities
$
571
$
217
$
(3
)
$
785
Debt Securities
Government Obligations
215
2
217
Other Debt Securities
211
4
215
Total Debt Securities
426
6
432
Other Securities
38
1
39
Total Available-for-Sale Securities
$
1,035
$
224
$
(3
)
$
1,256
Years Ended December 31,
2007
2006
2005
(Millions)
Proceeds from Sales.
$
1,672
$
1,405
$
3,223
Gross Realized Gains
$
164
$
98
$
132
Gross Realized Losses
$
88
$
54
$
36
In 2007, other-than-temporary impairments of $46 million and $26 million were recognized on $339 million of equity and $813 million of debt securities, respectively, that were included in the Estimated
Fair Value of NDT Funds as of December 31, 2007.
Net realized gains of $76 million were recognized in Other Income and Other Deductions on Powers Consolidated Statement of Operations for the year ended December 31, 2007. Net unrealized gains
of $97 million (after-tax) were recognized in Accumulated Other Comprehensive Loss on Powers Consolidated Balance Sheet as of December 31, 2007. The $7 million of gross 2007 unrealized losses has
been in an unrealized loss position for less than twelve months. The available-for-sale debt securities held as of December 31, 2007, had the following maturities: $7 million less than one year, $75 million
one to five years, $125 million five to 10 years, $55 million 10 to 15 years, $24 million 15 to 20 years, and $192 million over 20 years. The cost of these securities was determined on the basis of specific
identification.
The fair value of securities in an unrealized loss position as of December 31, 2007 was approximately $151 million. If the fair market value of the securities falls below cost, the investments are
considered to be other-than-temporarily impaired. The difference between the fair market value and cost is recorded as a charge to earnings since Power does not definitely have the ability and intent to
hold the securities for a reasonable time to permit recovery. Any subsequent recoveries in the value of these securities are recognized in Other Comprehensive Income. The assessment of fair market value
compared to cost is applied on a weighted average basis taking into account various purchase dates and initial cost detail of the securities.
145
Unrealized
Gains
Unrealized
Losses
Fair
Value
Unrealized
Gains
Unrealized
Losses
Fair
Value
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the net realized gains, Power also records interest and dividend income, other-than-temporary impairments and other costs related to the NDT Fund in Other Income and Deductions.
The total amounts recorded in Other Income and Deduction related to the NDT Fund, including the net realized gains, were $48 million, $64 million and $125 million for the years ended December 31,
2007, 2006 and 2005, respectively. The interest accretion expense on Powers ARO liability, which primarily relates to the decommissioning of the nuclear power plants for which the NDT Fund is
maintained, is recorded in Operation and Maintenance Expense and was $23 million, $33 million and $28 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Note 14. Other Income and Deductions
Other Income
Power
PSE&G
Other(A)
Consolidated
(Millions)
For the Year Ended December 31, 2007
:
Interest and Dividend Income
$
21
$
10
$
5
$
36
Gain on Disposition of Property
3
3
NDT Fund Realized Gains
164
164
NDT Interest, Dividend and Other Income
50
50
Change in Derivative Fair Value.
8
8
Arbitration Award (Konya-Ilgin)
9
9
Minority Interest
2
2
Other
4
3
3
10
Total Other Income
$
239
$
16
$
27
$
282
For the Year Ended December 31, 2006
:
Interest and Dividend Income
$
13
$
11
$
12
$
36
Gain on Disposition of Property
1
4
5
NDT Fund Realized Gains
98
98
NDT Interest, Dividend and Other Income
40
40
Foreign Currency Gains
2
2
Gain on Early Extinguishment of Debt
1
1
Contributions in Aid of Construction
9
9
Albany Contingency
4
4
Other
1
1
4
6
Total Other Income
$
157
$
25
$
19
$
201
For the Year Ended December 31, 2005
:
Interest and Dividend Income
$
11
$
11
$
12
$
34
Gain on Disposition of Property
5
3
1
9
Gain on Investments
8
8
NDT Fund Realized Gains
132
132
NDT Interest, Dividend and Other Income
35
35
Foreign Currency Gains
4
4
Other
4
1
2
7
Total Other Income
$
187
$
15
$
27
$
229
146
Total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Power
PSE&G
Other(A)
Consolidated
(Millions)
For the Year Ended December 31, 2007
:
Donations
$
$
3
$
22
$
25
NDT Fund Realized Losses and Expenses
166
166
Change in Derivative Fair Value
15
15
Loss on Retirement of Property, Plant and Equipment
2
2
Loss on Early Retirement of Debt
47
47
Other
2
1
1
4
Total Other Deductions
$
170
$
4
$
85
$
259
For the Year Ended December 31, 2006
:
Donations
$
$
2
$
$
2
NDT Fund Realized Losses and Expenses
74
74
Minority Interest
1
1
Change in Derivative Fair Value
2
2
Loss on Retirement of Property, Plant and Equipment
1
1
Environmental Reserves
15
15
Loss on Early Retirement of Debt
12
12
Other
1
1
4
6
Total Other Deductions
$
91
$
3
$
19
$
113
For the Year Ended December 31, 2005
:
Donations
$
$
2
$
13
$
15
NDT Fund Realized Losses and Expenses
42
42
Loss on Early Retirement of Debt
10
10
Foreign Currency Losses
10
10
Minority Interest
1
1
Change in Derivative Fair Value
3
3
Loss on Retirement of Property, Plant and Equipment.
1
1
2
4
Total Other Deductions
$
43
$
3
$
39
$
85
(A)
Other primarily consists of activity at PSEG (parent company), Energy Holdings, Services and intercompany eliminations.
147
Total
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of reported income tax expense for PSEG with the amount computed by multiplying pre-tax income by the statutory federal income tax rate of 35% is as follows:
2007
2006
2005
(Millions)
Net Income
$
1,335
$
739
$
661
Income (Loss) from Discontinued Operations, including Gain (Loss) On Disposal, net of tax (expense) benefit
16
60
(159
)
Cumulative Effect of a Change in Accounting Principle, net of tax
(17
)
Minority Interest in Earnings of Subsidiaries
2
(1
)
(1
)
Income from Continuing Operations, excluding Minority Interests
1,317
680
838
Preferred Dividends (net)
(4
)
(4
)
(4
)
Income from Continuing Operations, excluding Minority Interests and
$
1,321
$
684
$
842
Income taxes:
Operating income:
FederalCurrent
$
705
$
331
$
230
Deferred (A)
143
33
230
Investment Tax Credit (ITC)
(4
)
(4
)
(4
)
Total Federal
844
360
456
StateCurrent
155
81
106
Deferred (A)
58
10
(15
)
Total State
213
91
91
Total Foreign
3
9
2
Total Income Taxes
1,060
460
549
Pre-tax Income
$
2,381
$
1,144
$
1,391
Tax Computed at the Statutory Rate @35%
$
833
$
400
$
486
Increase (Decrease) Attributable to Flow-Through of
Foreign Operations
95
8
11
Other
(12
)
(3
)
(12
)
State Income Tax (net of Federal Income Tax)
144
55
64
Subtotal
227
60
63
Total Income Tax Provision
$
1,060
$
460
$
549
Effective Income Tax Rate
44.5
%
40.2
%
39.5
%
148
Preferred Dividends, net
Certain Tax Adjustments:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is an analysis of deferred income taxes for PSEG:
2007
2006
(Millions)
Deferred Income Taxes
Assets:
Current (net)
$
$
36
Non-current:
Unrecovered ITC.
14
15
OCI
313
231
Cumulative Effect of a Change in Accounting Principle
11
11
New Jersey Corporate Business Tax
166
201
OPEB.
188
161
Cost of Removal
51
51
Investment Related Adjustment
9
Development Fees
10
10
Contractual Liabilities and Environmental Costs
35
35
MTC
18
11
Related to Uncertain Tax Positions
286
Other
13
22
Total Non-current
1,105
757
Total Assets
$
1,105
$
793
Liabilities:
Current (net)
$
106
$
Non-current:
Plant-Related Items
1,627
1,361
OCI
2
Nuclear Decommissioning
132
131
Securitization.
1,001
1,110
Leasing Activities
1,984
1,842
Partnership Activity
86
51
Repair Allowance Deferred Carrying Charge
19
22
Conservation Costs
10
12
Energy Clause Recoveries
34
27
Pension Costs
119
100
SFAS 143
325
325
Taxes Recoverable Through Future Rate (net).
167
167
Related to Foreign Operations
3
(2
)
Other
(1
)
(4
)
Total Non-current Liabilities
5,508
5,142
Total Liabilities
$
5,614
$
5,142
Summary of Accumulated Deferred Income Taxes:
Net Current Assets
$
$
36
Net Current Liabilities
106
Net Non-current Liability
4,403
4,385
Total
4,509
4,349
ITC
51
55
Current Portion of SFAS 109 Transferred
44
36
Current Liabilities-APB 23/Foreign Currency Translation Transferred
(150
)
Total Deferred Income Taxes and ITC
$
4,454
$
4,440
149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of reported income tax expense for Power with the amount computed by multiplying pre-tax income by the statutory federal income tax rate of 35% is as follows:
2007
2006
2005
(Millions)
Net Income
$
941
$
276
$
192
Loss from Discontinued Operations, including Loss On Disposal, net of tax benefit
(8
)
(239
)
(226
)
Cumulative Effect of a Change in Accounting Principle, net of tax
(16
)
Income from Continuing Operations
$
949
$
515
$
434
Income taxes:
Operating income:
FederalCurrent
$
420
$
263
$
105
Deferred (A)
78
20
147
Total Federal
498
283
252
StateCurrent
121
78
44
Deferred (A)
22
2
22
Total State
143
80
66
Total Income Taxes
641
363
318
Pre-tax income
$
1,590
$
878
$
752
Tax Computed at the Statutory Rate @35%
$
557
$
307
$
263
Increase (Decrease) Attributable to Flow-Through of Certain Tax Adjustments:
State Income Tax (net of Federal Income Tax)
93
52
43
Other
(9
)
4
12
Subtotal
84
56
55
Total Income Tax Provision
$
641
$
363
$
318
Effective Income Tax Rate
40.3
%
41.3
%
42.3
%
150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is an analysis of deferred income taxes for Power:
2007
2006
(Millions)
Deferred Income Taxes
Assets:
Current (net)
$
$
Non-current:
OCI
290
193
Cumulative Effect of a Change in Accounting Principle
11
11
New Jersey Corporate Business Tax
76
77
Cost of Removal
51
51
Contractual Liabilities and Environmental Costs
35
35
Related to Uncertain Tax positions
2
Total Non-current
465
367
Total Assets
$
465
$
367
Liabilities:
Current
$
$
Non-current:
Plant-Related Items
185
(35
)
Nuclear Decommissioning
132
131
Pension Costs
32
14
SFAS 143
325
325
Other
(38
)
(26
)
Total Non-current Liabilities
636
409
Total Liabilities
$
636
$
409
Summary of Accumulated Deferred Income Taxes:
Net Current Assets
$
$
Net Non-current Liability
171
42
Total
171
42
ITC
5
6
Total Deferred Income Taxes and ITC
$
176
$
48
151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of reported income tax expense for PSE&G with the amount computed by multiplying pre-tax income by the statutory federal income tax rate of 35% is as follows:
2007
2006
2005
(Millions)
Net Income
$
376
$
261
$
344
Preferred Dividends (net)
(4
)
(4
)
(4
)
Income from Continuing Operations, Excluding Preferred Dividends, net
380
265
348
Income taxes:
Operating income:
FederalCurrent
214
299
239
Deferred (A)
(22
)
(161
)
(58
)
ITC
(3
)
(3
)
(3
)
Total Federal
189
135
178
StateCurrent
67
49
49
Deferred (A)
1
(1
)
8
Total State
68
48
57
Total Income Taxes
257
183
235
Pre-tax Income
$
637
$
448
$
583
Tax Computed at the Statutory Rate @35%
$
223
$
157
$
204
Increase (Decrease) Attributable to Flow-Through of Certain Tax Adjustments:
State Income Tax (net of Federal Income Tax)
44
31
37
Other
(10
)
(5
)
(6
)
Subtotal
34
26
31
Total Income Tax Provision
$
257
$
183
$
235
Effective Income Tax Rate
40.3
%
40.8
%
40.3
%
152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is an analysis of deferred income taxes for PSE&G:
2007
2006
(Millions)
Deferred Income Taxes
Assets:
Current (net)
$
44
$
36
Non-current:
Unrecovered ITC
14
15
New Jersey Corporate Business Tax
131
145
OPEB.
185
160
MTC
18
11
Related to Uncertain Tax Positions
14
Other
1
5
Total Non-current
363
336
Total Assets
$
407
$
372
Liabilities:
Current:
$
$
Non-current:
Plant-Related Items
1,445
1,398
OCI
2
Securitization.
1,001
1,110
Repair Allowance Deferred Carrying Charge
19
22
Conservation Costs
10
12
Energy Clause Recoveries
34
27
Pension Costs
73
73
Taxes Recoverable Through Future Rates (net).
167
167
Other
11
Total Non-current Liabilities
2,762
2,809
Total Liabilities
$
2,762
$
2,809
Summary of Accumulated Deferred Income Taxes:
Net Current Assets
$
44
$
36
Net Non-current Liability
2,399
2,473
Total
2,355
2,437
ITC
41
44
Current Portion of SFAS 109 Transferred
44
36
Total Deferred Income Taxes and ITC
$
2,440
$
2,517
153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PSEG, Power and PSE&G
Each of PSEG, Power and PSE&G provide deferred taxes at the enacted statutory tax rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing
assets and liabilities irrespective of the treatment for rate-making purposes. Management believes that it is probable that the accumulated tax benefits that previously have been treated as a flow-through
item to PSE&G customers will be recovered from PSE&Gs customers in the future. Accordingly, an offsetting regulatory asset was established. As of December 31, 2007, PSE&G had a regulatory asset of $420
million representing the tax costs expected to be recovered through rates based upon established regulatory practices, which permit recovery of current taxes payable. This amount was determined using the
enacted federal income tax rate of 35% and state income tax rate of 9%.
The 2005 Jobs Act provided a one-year window to repatriate earnings from foreign investments and claim a special 85% dividends received tax deduction on such distributions. PSEG approved a total
of three Domestic Reinvestment Plans, which provided for the repatriation of $242 million through December 2005, of which $177 million was eligible for the reduced tax rate pursuant to the 2005 Jobs Act.
The tax expense associated with such repatriation totaled $11 million and was recorded in 2005.
PSEG and its subsidiaries adopted FIN 48 effective January 1, 2007, which prescribes a model for how a company should recognize, measure, present and disclose in its financial statements uncertain
tax positions that it has taken or expects to take on a tax return. For additional information, see Note 2. Recent Accounting Standards. PSEG recorded the following amounts related to its uncertain tax
positions, which is primarily comprised of amounts recorded for Power, PSE&G and Energy Holdings:
PSEG
Power
PSE&G
Energy
(Millions)
Total Amount of Unrecognized Tax Benefits At the
$
485
$
21
$
55
$
408
Increases as a result of positions taken in a prior period
81
3
14
64
Decreases as a result of positions taken in a prior period
(35
)
(8
)
(27
)
Increases as a result of positions taken during the current period
41
2
10
29
Decreases as a result of positions taken during the current period
(16
)
(1
)
(12
)
Decreases as a result of Settlements with taxing authorities
Decreases due to lapses of applicable statute of limitations
Total Amount of Unrecognized Tax Benefits at
556
18
78
462
Accumulated Deferred Income Taxes associated with Unrecognized Tax Benefits
(286
)
(2
)
(14
)
(272
)
Regulatory Asset-Unrecognized Tax Benefits
(38
)
(38
)
Total Amount of Unrecognized Tax Benefits that if recognized, would impact the effective tax rate (including interest and penalties)
$
232
$
16
$
26
$
190
On December 17, 2007, PSEG made a tax deposit with the IRS in the amount of $100 million to defray interest costs associated with disputed tax assessments associated with certain lease investments
(see Note 12. Commitments and Contingent Liabilities). The $100 million deposit is fully refundable and is recorded as a reduction to the Unrecognized Tax Benefit liability on the PSEGs Consolidated
Balance Sheet, but is not reflected in the amounts shown above.
PSEG and its subsidiaries include all accrued interest and penalties, required to be recorded under FIN 48, as income tax expense. PSEGs interest and penalties on Unrecognized Tax Benefits as of
December 31, 2007 was $142 million, including $4 million at Power, $13 million at PSE&G and $125 million at Energy Holdings.
It is reasonably possible that approximately $31 million of unrecognized tax benefits associated with various items included in federal income tax returns for years 2001-2003 will be settled within 12
months due to agreement with the IRSs position with respect to these items. This amount includes $(8) million for
154
Holdings
Date of Adoption
December 31, 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Power, $7 million for PSE&G and $33 million for Energy Holdings. This amount relates to a number of miscellaneous adjustments proposed by the Internal Revenue Service with which PSEG does not take
issue.
It is reasonably possible that approximately $4 million of unrecognized tax benefits associated with various items applicable to Energy Holdings included in federal income tax returns for years 1997-
2000 will be settled within 12 months due to a agreement with the IRS with regard to these items. These issues dealt with the computation of gain on a transfer of certain investments outside the United
States.
It is reasonably possible that approximately $(4) million of unrecognized tax benefits associated with a change in accounting method for federal income tax purposes will be settled within 12 months due
to agreement with the IRSs position with respect to these items. The change in method related to PSE&Gs adoption of the Simplified Service cost method of capitalizing indirect costs.
Description of Income Tax years that remain subject to examination by material jurisdictions, where an examination has not already concluded:
PSEG
Power
PSE&G
United States
Federal
2001-2006
2001-2006
2001-2006
New Jersey
2000-2006
N/A
2000-2006
Pennsylvania.
2003-2006
N/A
2003-2006
Connecticut.
2003-2006
N/A
N/A
Texas
2006
N/A
N/A
California
2002-2006
N/A
N/A
Indiana
2003-2006
N/A
N/A
Ohio
2003-2005
N/A
N/A
Foreign
Chile
2004-2006
N/A
N/A
Peru
2002-2006
N/A
N/A
Note 16. Pension, OPEB and Savings Plans
PSEG
PSEG sponsors several qualified and nonqualified pension plans and other postretirement benefit plans covering PSEGs, and its participating affiliates, current and former employees who meet certain
eligibility criteria. Eligible employees of Power, PSE&G, Energy Holdings and Services participate in non-contributory pension and OPEB plans sponsored by PSEG and administered by Services. In
addition, represented and nonrepresented employees are eligible for participation in PSEGs two defined contribution plans described below.
In September 2006, the FASB issued SFAS 158, which became effective prospectively for periods ending after December 15, 2006. In accordance with SFAS 158, PSEG, Power and PSE&G were required
to record the under or over funded positions of their defined benefit pension and OPEB plans on their respective balance sheets. Such funding positions were measured as of December 31, 2007 in
compliance with SFAS 158 and in accordance with customary practice of each PSEG company prior to the issuance of SFAS 158. For under funded plans, the liability is equal to the difference between the
plans benefit obligation and the fair value of plan assets. For defined benefit pension plans, the benefit obligation is the projected benefit obligation. For OPEB plans, the benefit obligation is the
accumulated postretirement benefit obligation. In addition, the statement requires that the total unrecognized costs for defined benefit pension and OPEB plans be recorded as an after-tax charge to
Accumulated Other Comprehensive Income, a separate component of Stockholders Equity. However, for PSE&G, because the amortization of the unrecognized costs is being collected from customers, the
accumulated unrecognized costs were recorded as a Regulatory Asset. The unrecognized costs represent actuarial gains or losses, prior service costs and transition obligations arising from the adoption of
the preceding pension and OPEB accounting standards, which have not been expensed.
Prior accounting guidance required that unrecognized costs be presented in a footnote to the financial statements as part of a reconciliation of a plans funded status to amounts recorded in the financial
statements. The unrecognized costs are amortized as a component of net periodic pension or OPEB expense. Under the new standard, for Power, the charge to Other Comprehensive Income will be
amortized and recorded as net periodic pension cost in the Statement of Operations. For PSE&G, the Regulatory Asset will be amortized and recorded as net periodic pension cost in the Statement of
Operations.
155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a roll-forward of the changes in the benefit obligation and the fair value of plan assets during each of the two years in the periods ended December 31, 2007 and 2006. It
also provides the funded status of the plans and the amounts recognized and amounts not recognized in the Statement of Financial Position at the end of both years.
Pension Benefits
Other Benefits
2007
2006
2007
2006
(Millions)
Change in Benefit Obligation:
Benefit Obligation at Beginning of Year
$
3,723
$
3,759
$
1,242
$
1,219
Service Cost
83
86
16
18
Interest Cost
217
211
73
68
Actuarial Gain
(209
)
(127
)
(100
)
(1
)
Gross Benefits Paid
(213
)
(206
)
(70
)
(67
)
Medicare Subsidy Receipts
5
5
Benefit Obligation at End of Year
$
3,601
$
3,723
$
1,166
$
1,242
Change in Plan Assets:
Fair Value of Assets at Beginning of Year
$
3,390
$
3,105
$
154
$
123
Actual Return on Plan Assets
191
437
9
19
Employer Contributions
22
54
65
74
Gross Benefits Paid
(213
)
(206
)
(70
)
(67
)
Medicare Subsidy Receipts
5
5
Fair Value of Assets at End of Year
$
3,390
$
3,390
$
163
$
154
Funded Status:
Funded Status (Plan Assets less Benefit Obligation)
$
(211
)
$
(333
)
$
(1,003
)
$
(1,088
)
Amounts
Recognized in the Statement of Financial Position:
Current Accrued Benefit Cost
$
(8
)
$
(7
)
$
$
Noncurrent Accrued Benefit Cost
(203
)
(326
)
(1,003
)
(1,088
)
Amounts Recognized.
$
(211
)
$
(333
)
$
(1,003
)
$
(1,088
)
Additional Amounts Recognized in Accumulated Other Comprehensive Income, Regulated Assets and Deferred Assets:
Net Transition Obligation
$
$
$
112
$
139
Prior Service Cost
41
51
109
122
Net Actuarial Loss
489
622
78
180
Total
$
530
$
673
$
299
$
441
The pension benefits table above provides information relating to the funded status of all qualified and nonqualified pension plans and other postretirement benefit plans on an aggregate basis. The
nonqualified pension plans are partially funded with Rabbi Trusts. In accordance with SFAS 87, the plan assets in the table above do not include the assets held in the Rabbi Trusts. Including the $158
million of assets in the Rabbi Trusts as of December 31, 2007, PSEG has funded approximately 98.5% of its projected benefit obligation. The fair values of the Rabbi Trust assets are included on the
Consolidated Balance Sheets. For additional information see Rabbi Trusts below.
Accumulated Benefit Obligation
The accumulated benefit obligation for all PSEGs defined benefit pension plans was $3.1 billion as of December 31, 2007 and $3.2 billion as of December 31, 2006.
156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the components of net periodic benefit cost for the years ended December 31, 2007, 2006 and 2005:
Pension Benefits
Other Benefits
2007
2006
2005
2007
2006
2005
(Millions)
Components of Net Periodic Benefit Cost:
Service Cost
$
83
$
86
$
90
$
16
$
18
$
18
Interest Cost
217
211
206
73
68
62
Expected Return on Plan Assets
(289
)
(265
)
(249
)
(14
)
(11
)
(9
)
Amortization of Net
Transition Obligation
28
28
27
Prior Service Cost
10
11
16
13
13
9
Actuarial Loss
22
54
46
7
8
2
Net Periodic Benefit Cost
$
43
$
97
$
109
$
123
$
124
$
109
Components of Total Benefit Expense:
Net Periodic Benefit Cost
$
43
$
97
$
109
$
123
$
124
$
109
Effect of Regulatory Asset
19
19
19
Total Benefit Expense Including Effect of Regulatory Asset
$
43
$
97
$
109
$
142
$
143
$
128
The following table provides the changes recognized in Other Comprehensive Income:
Pension
OPEB
2007
2006
2007
2006
(Millions)
Net Actuarial Gain in current period
$
(111
)
$
N/A
$
(95
)
$
N/A
Amortization of Net Actuarial Gain
(22
)
N/A
(7
)
N/A
Amortization of Prior Service Credit
(10
)
N/A
(13
)
N/A
Amortization of Transition Asset
N/A
(28
)
N/A
Total
$
(143
)
$
N/A
$
(143
)
$
N/A
Amounts
that are expected to be amortized from Accumulated Other Comprehensive Income/Loss
into Net Periodic Benefit Cost in 2008 are as follows:
Pension
Other
2008
2008
(Millions)
Actuarial Loss (Gain)
$
13
$
(1
)
Prior Service Cost
$
9
$
13
Transition Obligation
$
$
27
157
Benefits
Benefits
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following assumptions were used to determine the benefit obligations and net periodic benefit costs:
Pension Benefits
Other Benefits
2007
2006
2005
2007
2006
2005
Weighted-Average Assumptions Used to Determine
Benefit Obligations as of December 31:
Discount Rate
6.50
%
6.00
%
5.75
%
6.50
%
6.00
%
5.75
%
Rate of Compensation Increase
4.69
%
4.69
%
4.69
%
4.69
%
4.69
%
4.69
%
Weighted-Average Assumptions Used to Determine Net
Periodic Benefit Cost for Years Ended December 31:
Discount Rate
6.00
%
5.75
%
6.00
%
6.00
%
5.75
%
6.00
%
Expected Return on Plan Assets
8.75
%
8.75
%
8.75
%
8.75
%
8.75
%
8.75
%
Rate of Compensation Increase
4.69
%
4.69
%
4.69
%
4.69
%
4.69
%
4.69
%
Assumed Health Care Cost Trend Rates as of December 31:
Administrative Expense
5.00
%
5.00
%
5.00
%
Dental Costs
6.00
%
6.00
%
6.00
%
Pre-65 Medical Costs
Immediate Rate
8.50
%
9.50
%
9.50
%
Ultimate Rate
5.00
%
5.00
%
5.00
%
Year Ultimate Rate Reached
2012
2012
2011
Post-65 Medical Costs
Immediate Rate
9.50
%
10.50
%
10.50
%
Ultimate Rate
5.00
%
5.00
%
5.00
%
Year Ultimate Rate Reached
2013
2013
2012
Effect of a 1% Increase in the Assumed Rate of Increase in Health Care Benefit Costs:
(Millions)
Total of Service Cost and Interest Cost
$
11
$
11
$
11
Postretirement Benefit Obligation
$
121
$
134
$
132
Effect of a 1% Decrease in the Assumed Rate of Increase in Health Care Benefit Costs:
Total of Service Cost and Interest Cost
$
(9
)
$
(9
)
$
(9
)
Postretirement Benefit Obligation
$
(101
)
$
(111
)
$
(109
)
Plan Assets
The following table provides the percentage of fair value of total plan assets for each major category of plan assets held for the qualified pension and OPEB plans as of the measurement date,
December 31:
Investments
As of December 31,
2007
2006
Equity Securities
62
%
63
%
Fixed Income Securities
31
%
29
%
Real Estate Assets
6
%
6
%
Other Investments
1
%
2
%
Total Percentage
100
%
100
%
PSEG utilizes forecasted returns, risk, and correlation of all asset classes in order to develop an optimal portfolio, which is designed to produce the maximum return opportunity per unit of risk. In 2007,
PSEG completed its latest asset/liability study. The results from the study indicated that, in order to achieve the optimal risk/return portfolio, target allocations of 62% equity securities, 30% fixed income
securities, 5% real estate investments, and 3% for other investments should be maintained. Derivative financial instruments are used by the plans investment managers primarily to rebalance the fixed
income/equity allocation of the portfolio and hedge the currency risk component of the foreign investments.
The expected long-term rate of return on plan assets was 8.75% as of December 31, 2007. For 2008, the expected long-term rate of return on plan assets will remain at 8.75%. This expected return was
determined
158
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
based on the study discussed above and considered the plans historical annualized rate of return since inception of the plans, which was an annualized return of 10.2%.
Plan Contributions
PSEG may contribute up to $50 million into its qualified pension plans and postretirement healthcare plan for calendar year 2008.
Estimated Future Benefit Payments
The following pension benefit and postretirement benefit payments are expected to be paid to plan participants. Postretirement benefit payments are shown both gross and net of the federal subsidy
expected for prescription drugs under the Medicare Prescription Drug Improvement and Modernization Act of 2003. The Act provides a nontaxable federal subsidy to employers that provide retiree
prescription drug benefits that are equivalent to the benefits of Medicare Part D.
Year
Pension
Other Benefits
Gross
Medicare
Net
(Millions)
2008
$
213
$
76
$
(5
)
$
71
2009
216
79
(5
)
74
2010
221
82
(6
)
76
2011
227
84
(6
)
78
2012
234
86
(7
)
79
20132017
1,314
443
(39
)
404
Total
$
2,425
$
850
$
(68
)
$
782
Rabbi Trusts
PSEG maintains certain unfunded, nonqualified benefit plans for which certain assets have been set aside in grantor trusts commonly known as Rabbi Trusts to provide supplemental retirement and
deferred compensation benefits to certain of its and its subsidiaries key employees and directors.
Effective January 1, 2003, PSEG began accounting for the assets in the Rabbi Trusts under SFAS 115. PSEG classifies investments in the Rabbi Trusts as available-for-sale under SFAS 115. The
following tables show the fair values, gross unrealized gains and losses and amortized cost bases for the securities held in the Rabbi Trusts:
As of December 31, 2007
Cost
Gross
Gross
Estimated
(Millions)
Equity Securities
$
12
$
4
$
$
16
Debt Securities
Government Obligations.
90
4
94
Other Debt Securities
30
2
32
Total Debt Securities
120
6
126
Other Securities.
16
16
Total Available-for-Sale Securities
$
148
$
10
$
$
158
159
Benefits
OPEB
Subsidy
OPEB
Unrealized
Gains
Unrealized
Losses
Fair
Value
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2006
Cost
Gross
Gross
Estimated
(Millions)
Equity Securities
$
12
$
3
$
$
15
Debt Securities
Government Obligations.
85
85
Other Debt Securities
28
1
29
Total Debt Securities
113
1
114
Other Securities.
15
15
Total Available-for-Sale Securities
$
140
$
4
$
$
144
In 2007 other-than-temporary impairments of $1 million were recognized on the debt securities Investments of the Rabbi Trusts.
Years Ended December 31,
2007
2006
2005
(Millions)
Proceeds from Sales
$
40
$
30
$
100
Gross Realized Gains
$
1
$
$
Gross Realized Losses.
$
(2
)
$
(1
)
$
(1
)
Net realized losses of $1 million were recognized in Other Deductions on PSEGs Consolidated Statement of Operations for the year ended December 31, 2007. The available-for-sale debt securities
held as of December 31, 2007, had the following maturities: $6 million less than one year, $29 million one to five years, $25 million five to 10 years, $9 million 10 to 15 years, $3 million 15 to 20 years, and
$54 million over 20 years. The cost of these securities was determined on the basis of specific identification.
The estimated fair value of the Rabbi Trusts related to PSEG, Power and PSE&G are detailed as follows:
As of
2007
2006
(Millions)
Power
$
45
$
43
PSE&G
57
54
Other
56
47
Total
$
158
$
144
401(k) Plans
PSEG sponsors two 401(k) plans, which are Employee Retirement Income Security Act (ERISA) defined contribution plans. Eligible represented employees of PSE&G, Power and Services participate in
the PSEG Employee Savings Plan (Savings Plan), while eligible non-represented employees of PSE&G, Power, Energy Holdings and Services participate in the PSEG Thrift and Tax-Deferred Savings Plan
(Thrift Plan). Eligible employees may contribute up to 50% of their compensation to these plans. Employee contributions up to 7% for Savings Plan participants and up to 8% for Thrift Plan participants
are matched with Employer
160
Unrealized
Gains
Unrealized
Losses
Fair
Value
December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contributions of cash equal to 50% of such employee contributions. The amount paid for Employer matching contributions to the plans for PSEG, Power and PSE&G are detailed as follows:
Thrift Plan and
Years Ended
2007
2006
2005
(Millions)
Power
$
9
$
8
$
9
PSE&G
15
15
15
Other
4
4
4
Total Employer Matching Contributions
$
28
$
27
$
28
Pension costs and OPEB costs for PSEG, Power and PSE&G are detailed as follows:
Pension Benefits
Other Benefits
Years Ended
Years Ended
2007
2006
2005
2007
2006
2005
(Millions)
Power
$
12
$
30
$
33
$
16
$
16
$
12
PSE&G
19
49
55
121
121
112
Other.
12
18
21
5
6
4
Total Benefit Expense
$
43
$
97
$
109
$
142
$
143
$
128
Note 17. Stock Based Compensation
PSEG
As approved at the Annual Meeting of Stockholders in 2004, PSEGs 2004 Long-Term Incentive Plan (LTIP) replaced the prior 1989 LTIP and 2001 LTIP. The 2004 LTIP is a broad-based equity
compensation program that provides for grants of various long-term incentive compensation awards, such as stock options, stock appreciation rights, performance shares, restricted stock, cash awards or any
combination thereof. The types of long-term incentive awards that have been granted and remain outstanding under the LTIPs are non-qualified options to purchase shares of PSEGs common stock,
restricted stock awards and performance unit awards. Under the 2004 LTIP through December 31, 2007 stock options and restricted stock have been granted.
The 2004 LTIP currently provides for the issuance of equity awards with respect to approximately 26 million shares of common stock. As of December 31, 2007, there were approximately 24 million
shares available for future awards under the 2004 LTIP.
Stock Options
Under the 2004 LTIP, non-qualified options to acquire shares of PSEG common stock may be granted to officers and other key employees of PSEG and its subsidiaries selected by the Organization
and Compensation Committee of PSEGs Board of Directors, the plans administrative committee (Committee). Option awards are granted with an exercise price equal to the market price of PSEGs
common stock at the grant date. The options generally vest based on three to five years of continuous service. Vesting schedules may be accelerated upon the occurrence of certain events, such as a change-
in-control, retirement, death or disability. Options are exercisable over a period of time designated by the Committee (but not prior to one year or longer than 10 years from the date of grant) and are
subject to such other terms and conditions as the Committee determines. 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.
161
Savings Plan
December 31,
December 31,
December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock
Under the 2004 LTIP, PSEG has granted restricted stock awards to officers and other key employees. These shares are subject to risk of forfeiture until vested by continued employment. Restricted
stock generally vests annually over three or four years, but is considered outstanding at the time of grant, as the recipients are entitled to dividends and voting rights. Vesting may be accelerated upon
certain events, such as change-in-control (unless substituted with an equity award of equal value), retirement, death or disability.
Restricted Stock Units
Under the 2004 LTIP, PSEG has granted restricted stock unit awards to officers and certain other key employees. These awards, which are bookkeeping entries only, are subject to risk of forfeiture
until vested by continued employment. Until vested, the units are credited with dividend equivalents proportionate to the dividends paid on PSEG common stock. The restricted stock units generally vest
annually over four years, and distributions are made in shares of common stock. Vesting may be accelerated upon certain events, such
as change-in-control (unless substituted with an equity award of equal
value), retirement, death or disability.
Performance Units
Under
the 2004 LTIP, performance units were granted to certain key executives,
which provide for payment in shares of PSEG common stock based on achievement
of certain financial goals over the three-year period from 2004 through 2006.
In January and December 2007, additional performance units were granted to
certain key executives that provide for payment in shares of PSEG common
stock based on achievement of certain financial goals over specific three-year
periods between 2007 through 2011. The payout varies from 0% to 200% of the
number of performance units granted depending on PSEGs performance compared to the performance of other companies in multiple peer
groups. The performance units are credited with dividend equivalents in an amount equal to dividends paid on PSEG common stock up until January 1, 2012. Vesting may be accelerated upon certain events
such as change-in-control, retirement, death or disability.
Stock-Based Compensation
Effective January 1, 2006, PSEG adopted SFAS No. 123R, Stock-Based Payment, revised 2004 (SFAS 123R). As a result, all outstanding unvested stock options as of January 1, 2006 are being
expensed based on their grant date fair values, which were determined using the Black-Scholes option-pricing model. Stock option awards are expensed on a tranche-specific basis over the requisite service
period of the award. Ultimately, compensation expense for stock options is recognized for awards that vest.
Prior to the adoption of SFAS 123R, PSEG recognized compensation expense for restricted stock over the vesting period based on the grant date fair market value of the shares. PSEG will continue to
recognize compensation expense over the vesting term.
Also prior to the adoption of SFAS 123R, PSEG recognized compensation expense for performance units. The fair value of each performance unit was based on the grant date fair value of PSEG
common stock. The accrual of compensation cost was based on the probable achievement of the performance conditions, which result in a payout from 0% to 200% of the initial grant. The current accrual is
estimated at 100% of the original grant. The accrual is adjusted for subsequent changes in the estimated or actual outcome.
PSEG
2007
2006
2005
(Millions)
Compensation Cost included in Operation and Maintenance Expense (A)
$
22
$
17
$
6
Income
Tax Benefit Recognized on Consolidated Statement of Operations
$
9
$
7
$
3
(A) Compensation cost capitalized as part of Property, Plant and Equipment was less than $1 million for each of the years ended December 31, 2007, 2006 and 2005.
162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Of the total compensation cost for the years ended December 31, 2006, $2 million, after-tax, was primarily due to expensing stock options under SFAS 123R in 2006 and increased stock option activity.
There was no impact on basic and diluted earnings per share from the implementation of SFAS 123R because there were a relatively small number of outstanding unvested stock options as of the
implementation date.
Prior
to the adoption of SFAS 123R, PSEG presented all tax benefits for deductions
resulting from the exercise of share-based compensation as operating cash
flows on the Consolidated Statement of Cash Flows. SFAS 123R requires the
benefits of tax deductions in excess of the taxes expensed on recognized
compensation cost to be reported as financing cash flows. There was $18 million,
$15 million and $30 million of excess tax benefits included as a financing
cash inflow on the Consolidated Statement of Cash Flow for the years ended
December 31, 2007, 2006 and 2005, respectively. Total cash flow will remain
unchanged from what would have been reported under prior accounting rules.
Prior to the adoption of SFAS 123R, PSEG recognized the compensation cost of stock based awards issued to retirement eligible employees that fully or partially vest upon an employees retirement
over the nominal vesting period of performance, and recognized any remaining compensation cost at the date of retirement. In accordance with SFAS 123R, PSEG recognizes compensation cost of awards
issued after January 1, 2006 over the shorter of the original vesting period or the period beginning on the date of grant and ending on the date an individual is eligible for retirement and the award vests.
Changes in stock options for 2007 are summarized as follows:
2007
Options
Weighted
Beginning of year
3,632,004
$
21.32
Granted.
1,569,300
38.37
Exercised
(2,229,004
)
22.15
Canceled.
(281,064
)
24.42
End of year
2,691,236
$
30.24
Exercisable at end of year
1,259,936
$
21.41
Options
Weighted
Aggregate
Outstanding at December 31, 2007
4.4
$
50,796,273
Exercisable at December 31, 2007
4.7
$
34,911,832
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants in 2004 and 2007:
2004
2007 options
January, March, June
December
Expected Volatility
26.74
%
24.87
%
24.60
%
Risk-Free Interest Rate
3.09
%
4.72
%
3.78
%
Expected Life (Years)
4
6.25
6.25
Weighted Average Dividend Yield
5.00
%
3.46
%
2.40
%
The intrinsic value of options is the difference between the current market price and the exercise price. Activity for options exercised is shown below:
2007
2006
2005
(Millions)
Total Intrinsic value of options exercised
$
43
$
56
$
72
Cash Received from options exercised
$
49
$
86
$
141
Tax benefit realized from options exercised
$
14
$
15
$
30
163
Average
Exercise
Price
Average
Remaining
Contractual
Term
Intrinsic
Value
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Approximately two million options vested during the year ended December 31, 2007 and approximately one million options vested during each of the years ended December 31, 2006 and 2005. The
weighted average fair value per share for options vested during the years ended December 31, 2007, 2006 and 2005 was $24.93, $20.58 and $19.13 respectively.
As of December 31, 2007, there was approximately $10 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 20
months.
Restricted Stock Information
Changes in restricted stock for the years ended December 31, 2007 are summarized as follows:
Shares
Weighted
Weighted
Aggregate
Outstanding at January 1, 2007
635,446
$
15.35
Granted.
426,210
37.18
Vested
(477,130
)
15.06
Canceled.
(24,762
)
27.89
Outstanding at December 31, 2007
559,764
$
31.67
2.2
$
23,817,011
The weighted average grant date fair value per share was $37.18, $32.94 and $28.73 for restricted stock awards granted during the years ended December 31, 2007, 2006 and 2005, respectively.
The total intrinsic value of restricted stock vested during the years ended December 31, 2007 and 2006 was $4 million and $2 million, respectively.
As of December 31, 2007, there was approximately $12 million of unrecognized compensation cost related to restricted stock, which is expected to be recognized over a weighted average period of 2
years.
Restricted Stock Units
On December 18, 2007, 66,100 restricted stock units were issued to officers and certain key employees at $48.21 per share, vesting over a period of four years. As of December 31, 2007, there was
approximately $3 million of unrecognized compensation cost related to the restricted stock units, which is expected to be recognized over a weighted average period of four years.
Performance Units Information
Performance Unit information for 2007 is detailed below:
Shares
Intrinsic
Intrinsic
Outstanding at January 1, 2007
$
Granted
480,490
Canceled
(2,200
)
Outstanding at December 31, 2007
478,290
$
49.12
$
23,462,256
During
2007, approximately 280,000 performance units were issued with an incentive
period of 2007-2009 and approximately 200,000 units were issued with an incentive
period of 2008-2011. Approximately 7,000 dividend equivalents accrued on
the performance units during the year.
Outside Directors
Through 2006, each director who was not an officer of PSEG or its subsidiaries and affiliates was paid an annual retainer of $50,000. Pursuant to the Compensation Plan for Outside Directors, 50% of
the annual retainer was paid in PSEG common stock. PSEG also maintained a Stock Plan for Outside Directors (Stock
164
Average
Grant Date
Fair Value
Average
Remaining
Contractual
Term
Intrinsic
Value
Value per
share as of
December 31,
2007
Value as of
December 31,
2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan) pursuant to which directors of PSEG who are not employees of PSEG or its subsidiaries received a restricted stock award, currently 2,000 shares per year, for each year of service as a director. The
restrictions on the stock granted under the Stock Plan 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 72nd birthday. This restriction would be deemed to have been satisfied if the directors service was terminated after a change-in-control as defined in the Stock Plan or if the director was to die in
office. PSEG also has the ability to waive this restriction for good cause shown. The fair value of these shares is recorded as compensation expense on the Consolidated Statements of Operations.
Compensation expense for the Stock Plan for each of the years ended December 31, 2006 and 2005, respectively was $1 million.
For 2007, a new Director Compensation plan was approved. Annually on May 1, each board member will be awarded stock units based on amount of annual compensation to be paid and the May 1
closing price of PSEG Common Stock. Dividend equivalents will be credited quarterly and will commence upon the director leaving the board. Compensation expense for the Stock Plan for the year ended
December 31, 2007 was approximately was $1 million.
Employee Stock Purchase Plan
PSEG maintains an employee stock purchase plan for all eligible employees of PSEG and its subsidiaries. Under the plan, shares of PSEG common stock may be purchased at 95% of the fair market
value through payroll deductions. In any year, employees may purchase shares having a value not exceeding 10% of their base pay. During the years ended December 31, 2007, 2006 and 2005, employees
purchased 88,656, 120,702 and 153,458 shares at an average price of $39.64, $30.82 and $27.00 per share, respectively. As of December 31, 2007, 3.6 million shares were available for future issuance under this
plan.
Note 18. Financial Information by Business Segment
Basis of Organization
PSEG, Power and PSE&G
The reportable segments were determined by management in accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS 131). These segments
were determined based on how management measures performance based on segment Net Income, as illustrated in the following table, and how it allocates resources to each business.
Power
Power earns revenues by selling energy, capacity and ancillary services on a wholesale basis under contract to power marketers and to load serving entities and by bidding energy, capacity and ancillary
services into the markets for these products. Power also enters into trading contracts for energy, capacity, firm transmission rights, gas, emission allowances and other energy-related contracts to optimize the
value of its portfolio of generating assets and its electric and gas supply obligations.
PSE&G
PSE&G earns revenue from its tariffs, under which it provides electric transmission and electric and gas distribution services to residential, commercial and industrial customers in New Jersey. The rates
charged for electric transmission are regulated by the FERC while the rates charged for electric and gas distribution are regulated by the BPU. Revenues are also earned from several other activities such as
sundry sales, the appliance service business, wholesale transmission services and other miscellaneous services.
Global
Global primarily earns revenues from its domestic investments in and operation of projects in the generation of energy. The generation plants sell power under long-term agreements as well as on a
merchant basis Revenues include revenues of consolidated investments. Gains and losses on sales of investments are
165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
typically recognized in revenues. Global has sold the majority of its previously owned international generation and distribution businesses. Globals largest remaining international investment is in SAESA,
which has been reclassified to discontinued operations following the announcement that Global began exploring the sale of that investment in December 2007.
Resources
Resources earns revenues from its passive investments in leveraged leases, limited partnerships, leveraged buyout funds and marketable securities. Approximately 96% of Resources investments are in
leveraged leases. Demand Side Management investments earn revenues primarily from monthly payments from utilities, representing shared electricity savings from the installation of energy efficient
equipment. Resources operates both domestically and internationally; however, revenues from all international investments are denominated in U.S. dollars. Gains and losses on sales of investments are
typically recognized in revenues.
Other
PSEGs other activities include amounts applicable to PSEG (parent corporation) and Energy Holdings (parent company), and intercompany eliminations, primarily relating to intercompany
transactions between Power and PSE&G. No gains or losses are recorded on any intercompany transactions; rather, all intercompany transactions are at cost or, in the case of the BGS and BGSS contracts
between Power and PSE&G, at rates prescribed by the BPU. For a further discussion of the intercompany transactions between Power and PSE&G, see Note 21. Related-Party Transactions. The net losses
primarily relate to financing and certain administrative and general cost.
166
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information related to the segments of PSEG and its subsidiaries is detailed below:
Power
PSE&G
Resources
Global
Other
Consolidated
(Millions)
For the Year Ended December 31, 2007:
Total Operating Revenues
$
6,796
$
8,493
$
157
$
795
$
(3,388
)
$
12,853
Depreciation and Amortization
140
591
11
27
14
783
Income from Equity Method Investments
1
114
1
116
Operating Income
1,680
957
128
314
10
3,089
Interest Income
21
10
8
(3
)
36
Interest Expense
159
332
31
109
98
729
Income (Loss) Before Income Taxes
1,590
637
97
211
(156
)
2,379
Income Tax Expense (Benefit)
641
257
39
182
(59
)
1,060
Income (Loss) From Continuing Operations
949
380
58
31
(99
)
1,319
(Loss) Income from Discontinued Operations, net of Tax (including (Loss) Gain)
(8
)
24
16
Net Income (Loss)
941
380
58
55
(99
)
1,335
Segment Earnings (Loss)
941
376
58
55
(95
)
1,335
Gross Additions to Long-Lived Assets
$
715
$
570
$
1
$
36
$
26
$
1,348
As of December 31, 2007:
Total Assets
$
8,428
$
14,637
$
2,992
$
2,334
$
1
$
28,392
Investments in Equity Method Subsidiaries
$
14
$
$
$
208
$
$
222
For the Year Ended December 31, 2006:
Total Operating Revenues
$
6,057
$
7,569
$
174
$
772
$
(2,810
)
$
11,762
Depreciation and Amortization
140
620
11
22
18
811
Income from Equity Method Investments
120
120
Operating Income (Loss)
960
772
142
(22
)
(6
)
1,846
Interest Income
13
11
6
6
36
Interest Expense
148
346
51
115
131
791
Income (Loss) Before Income Taxes
878
448
85
(135
)
(137
)
1,139
Income Tax Expense (Benefit)
363
183
22
(52
)
(56
)
460
Income (Loss) From Continuing Operations
515
265
63
(84
)
(80
)
679
(Loss) Income from Discontinued Operations, net of Tax (including (Loss) Gain on Disposal)
(239
)
298
1
60
Net Income (Loss)
276
265
63
214
(79
)
739
Segment Earnings (Loss)
276
261
63
214
(75
)
739
Gross Additions to Long-Lived Assets
$
418
$
528
$
1
$
62
$
6
$
1,015
As of December 31, 2006:
Total Assets
$
8,128
$
14,553
$
2,969
$
3,095
$
(193
)
$
28,552
Investments in Equity Method Subsidiaries
$
16
$
$
5
$
818
$
$
839
For the Year Ended December 31, 2005:
Total Operating Revenues
$
6,027
$
7,514
$
247
$
731
$
(2,670
)
$
11,849
Depreciation and Amortization
114
553
7
22
18
714
(Loss) Income from Equity Method Investments.
(1
)
125
124
Operating Income (Loss)
708
913
208
211
(28
)
2,012
Interest Income
11
11
8
4
34
Interest Expense
100
342
73
121
130
766
Income (Loss) Before Income Taxes
752
583
130
86
(165
)
1,386
Income Tax Expense (Benefit)
318
235
38
23
(65
)
549
Income (Loss) From Continuing Operations
434
348
92
63
(100
)
837
(Loss) Income from Discontinued Operations, net of tax (including Loss on Disposal)
(226
)
67
(159
)
Cumulative Effect of a Change in Accounting Principle,
(16
)
(1
)
(17
)
Net Income (Loss)
192
348
92
130
(101
)
661
Segment Earnings (Loss)
192
344
92
127
(94
)
661
Gross Additions to Long-Lived Assets
$
476
$
498
$
3
$
64
$
12
$
1,053
167
Total
net of tax
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic information for PSEG is disclosed below. The foreign assets and operations noted below relate solely to Energy Holdings:
Revenues
Assets(A)
December 31,
December 31,
2007
2006
2005
2007
2006
(Millions)
United States
$
12,619
$
11,652
$
11,736
$
25,438
$
24,844
Foreign Countries
234
110
113
2,954
3,708
Total
$
12,853
$
11,762
$
11,849
$
28,392
$
28,552
Identifiable assets in foreign countries include:
Chile(B)
$
1,161
$
1,441
Netherlands
1,221
1,231
Peru
462
Austria
196
191
Italy
162
149
Other
214
234
Total
$
2,954
$
3,708
(A)
Total assets are net of foreign currency translation adjustment of $108 million (after-tax) as of December 31, 2007 and $111 million (after-tax) as of December 31, 2006
(B)
2007 includes the assets of discontinued operations for SAESA and Electroandes. 2006 also includes the equity investment in Chilquinta which was sold in 2007. See Note 4. Discontinued Operations,
Dispositions, Acquisitions and Impairments.
168
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Property, Plant and Equipment and Jointly-Owned Facilities
Information related to Property, Plant and Equipment as of December 31, 2007 and 2006 is detailed below:
Power
PSE&G
Other
PSEG
(Millions)
2007
Generation:
Fossil Production
$
4,463
$
$
741
$
5,204
Nuclear Production
724
724
Nuclear Fuel in Service
550
550
Construction Work in Progress
767
767
Total Generation
6,504
741
7,245
Transmission and Distribution:
Electric Transmission
1,562
1,562
Electric Distribution
5,295
5,295
Gas Transmission
88
88
Gas Distribution
4,033
4,033
Construction Work in Progress
54
54
Plant Held for Future Use
8
8
Other
430
430
Total Transmission and Distribution
11,470
11,470
Other
61
61
473
595
Total
$
6,565
$
11,531
$
1,214
$
19,310
2006
Generation:
Fossil Production
$
4,342
$
$
708
$
5,050
Nuclear Production
625
625
Nuclear Fuel in Service
479
479
Construction Work in Progress
361
361
Total Generation
5,807
708
6,515
Transmission and Distribution:
Electric Transmission
1,402
1,402
Electric Distribution
5,058
5,058
Gas Transmission
88
88
Gas Distribution
3,872
3,872
Construction Work in Progress
58
58
Plant Held for Future Use
24
24
Other
455
455
Total Transmission and Distribution
10,957
10,957
Other
61
104
457
622
Total
$
5,868
$
11,061
$
1,165
$
18,094
Power and PSE&G
Power and PSE&G have ownership interests in and are responsible for providing their share of the necessary financing for the following jointly-owned facilities. All amounts reflect the share of Powers
and PSE&Gs jointly-owned projects and the corresponding direct expenses are included in the Consolidated Statements of Operations as operating expenses.
169
Consolidated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ownership
Plant
Accumulated
(Millions)
December 31, 2007
Power:
Coal Generating
Conemaugh
22.50
%
$
218
$
109
Keystone
22.84
%
$
216
$
87
Nuclear Generating
Peach Bottom
50.00
%
$
234
$
125
Salem
57.41
%
$
612
$
191
Nuclear Support Facilities
Various
$
127
$
20
Pumped Storage Facilities
Yards Creek
50.00
%
$
29
$
22
Merrill Creek Reservoir.
13.91
%
$
1
$
PSE&G:
Transmission Facilities
Various
$
117
$
56
Linden SNG Plant
90.00
%
$
5
$
6
December 31, 2006
Power:
Coal Generating
Conemaugh
22.50
%
$
213
$
105
Keystone
22.84
%
$
189
$
84
Nuclear Generating
Peach Bottom
50.00
%
$
223
$
121
Salem
57.41
%
$
541
$
172
Nuclear Support Facilities
Various
$
119
$
15
Pumped Storage Facilities
Yards Creek
50.00
%
$
29
$
22
Merrill Creek Reservoir.
13.91
%
$
1
$
PSE&G:
Transmission Facilities
Various
$
116
$
54
Linden SNG Plant
90.00
%
$
5
$
6
Power
Power holds undivided ownership interests in the jointly-owned facilities above, excluding related nuclear fuel and inventories. Power is entitled to shares of the generating capability and output of each
unit equal to its respective ownership interests. Power also pays its ownership share of additional construction costs, fuel inventory purchases and operating expenses. Powers share of expenses for the
jointly-owned facilities is included in the appropriate expense category.
Powers subsidiary, Nuclear, co-owns Salem and Peach Bottom with Exelon Generation. Nuclear is the owner-operator of Salem and Exelon Generation is the operator of Peach Bottom. A committee
appointed by the co-owners reviews/approves major planning, financing and budgetary (capital and operating) decisions. Operating decisions within the above guidelines are made by the owner-operator.
Reliant Energy, Inc. is a co-owner and the operator for Keystone Generating Station and Conemaugh Generating Station. A committee appointed by all co-owners makes all planning, financing and
budgetary (capital and operating) decisions. Operating decisions within the above guidelines are made by Reliant Energy, Inc.
Power is a co-owner in the Yards Creek Pumped Storage Generation Facility. First Energy Corporation is also a co-owner and the operator of this facility. First Energy submits separate capital and
Operations and Maintenance budgets, subject to the approval of Power.
170
Interest
Depreciation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Power is a minority owner in the Merrill Creek Reservoir and Environmental Preserve in Warren County, New Jersey. Merrill Creek Reservoir is the owner-operator of this facility. The operator
submits separate capital and Operations and Maintenance budgets, subject to the approval of the non-operating owners.
All owners receive revenues, Operations and Maintenance and capital allocations based on their ownership percentages. Each owner is responsible for any financing with respect to its pro rata share of
capital expenditures.
Note 20. Selected Quarterly Data (Unaudited)
PSEG, Power and PSE&G
The information shown below, in the opinion of PSEG, Power and PSE&G includes all adjustments, consisting only of normal recurring accruals, necessary to fairly present such amounts.
Calendar Quarter Ended
March 31,
June 30,
September 30,
December 31,
2007
2006
2007
2006
2007
2006
2007
2006
(Millions, where applicable)
PSEG Consolidated:
Operating Revenues
$
3,508
$
3,373
$
2,718
$
2,470
$
3,356
$
3,217
$
3,271
$
2,702
Operating Income
728
507
617
161
980
781
764
397
Income (Loss) from Continuing Operations
321
197
283
(15
)
490
364
225
133
Income/(Loss) from Discontinued Operations, including Gain (Loss) on Disposal, net of tax
8
6
(8
)
224
16
10
(180
)
Net Income (Loss)
329
203
275
209
506
374
225
(47
)
Earnings Per Share:
Basic:
Income (Loss) from Continuing Operations
0.63
0.39
0.56
(0.03
)
0.96
0.72
0.44
0.26
Net Income (Loss)
0.65
0.40
0.54
0.42
0.99
0.74
0.44
(0.09
)
Diluted:
Income from Continuing Operations
0.64
0.39
0.56
(0.03
)
0.46
0.72
0.44
0.26
Net Income (Loss)
0.65
0.40
0.54
0.41
0.99
0.79
0.44
(0.09
)
Weighted Average Common Shares Outstanding:
Basic
506
502
507
503
509
503
509
505
Diluted
507
504
508
504
509
505
510
506
Calendar Quarter Ended
March 31,
June 30,
September 30,
December 31,
2007
2006
2007
2006
2007
2006
2007
2006
(Millions)
Power:
Operating Revenues
$
2,149
$
1,967
$
1,305
$
1,129
$
1,580
$
1,455
$
1,762
$
1,506
Operating Income
389
217
336
162
600
391
355
190
Income from Continuing Operations
219
121
187
85
338
207
205
102
(Loss) Income from Discontinued Operations, including Loss on Disposal, net of tax
(6
)
(9
)
(3
)
(8
)
1
(2
)
(220
)
Net Income (Loss)
213
112
184
77
339
205
205
(118
)
Calendar Quarter Ended
March 31,
June 30,
September 30,
December 31,
2007
2006
2007
2006
2007
2006
2007
2006
(Millions)
PSE&G:
Operating Revenues
$
2,486
$
2,293
$
1,748
$
1,490
$
2,106
$
1,971
$
2,153
$
1,815
Operating Income
308
225
184
136
265
237
200
174
Income from Continuing Operations
132
78
63
34
107
88
78
65
Net Income
132
78
63
34
107
88
78
65
Earnings Available to PSEG
131
77
62
33
106
87
77
64
Note 21. Related-Party Transactions
The majority of the following discussion relates to intercompany transactions, which are eliminated during the PSEG consolidation process in accordance with GAAP.
171
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BGSS and BGS Contracts
Power and PSE&G
PSE&G has entered into a requirements contract with Power under which Power provides the gas supply services needed to meet PSE&Gs BGSS and other contractual requirements through March 31,
2012 and year-to-year thereafter.
Power has also entered into contracts to supply energy, capacity and ancillary services to PSE&G through the BGS auction process.
The amounts which Power charged to PSE&G for BGS and BGSS are presented below:
Billings for the Years
2007
2006
2005
(Millions)
BGS
$
1,163
$
793
$
497
BGSS
$
2,208
$
1,995
$
2,127
As of December 31, 2007 and 2006, Power had receivables from PSE&G of $451 million and $367 million, respectively, primarily related to the BGS and BGSS contracts. These transactions were
properly recognized on each companys stand-alone financial statements and were eliminated when preparing PSEGs Consolidated Financial Statements.
In addition, as of December 31, 2007 and 2006, PSE&G had a payable to Power of $55 million and $177 million, respectively, related to gas supply hedges Power entered into for BGSS. For additional
information, see Note 12. Commitments and Contingent Liabilities.
Services
Power and PSE&G
Services provides and bills administrative services to Power and PSE&G. In addition, Power and PSE&G have other payables to Services, including amounts related to certain common costs, such as
pension and OPEB costs, which Services pays on behalf of each of the operating companies. The billings for administrative services and payables are presented below:
Services Billings
Payable to
2007
2006
2005
2007
2006
(Millions)
Power
$
144
$
137
$
154
$
24
$
21
PSE&G
$
238
$
215
$
209
$
57
$
41
These transactions were properly recognized on each companys stand-alone financial statements and were eliminated when preparing PSEGs Consolidated Financial Statements. PSEG, PSE&G, Power
and Energy Holdings believe that the costs of services provided by Services approximate market value for such services.
Tax Sharing Agreement
Power and PSE&G
PSEG files a consolidated federal income tax return with its affiliated companies. A tax allocation agreement exists between PSEG and each of its affiliated companies. The general operation of these
agreements is that the subsidiary company will compute its taxable income on a stand-alone basis. If the result is a net tax liability, such amount shall be paid to PSEG. If there are net operating losses
and/or tax credits, the subsidiary shall receive payment for the tax savings from PSEG to the extent that PSEG is able to utilize those benefits.
172
Ended December 31,
for the Years
Ended December 31,
Services as of
December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Power and PSE&G had payables to PSEG related to taxes as follows:
Payable to
2007
2006
(Millions)
Power
$
43
$
28
PSE&G
$
5
$
63
In addition to these tax payable amounts, as of December 31, 2007, Power had an $8 million current receivable from PSEG and PSE&G had a $3 million current payable to PSEG related to unrecognized
tax positions. PSEG and its subsidiaries adopted FIN 48 effective January 1, 2007, which prescribes a model for how a company should recognize, measure, present and disclose in its financial statements
uncertain tax positions that it has taken or expects to take on a tax return. See Note 2. Recent Accounting Standards and Note 15. Income Taxes for additional information.
Affiliate Loans and Advances
Power
As of December 31, 2007 and December 31, 2006, Power had a demand note payable to PSEG of $238 million and $54 million, respectively, for short-term funding needs. Interest Income and Interest
Expense relating to these short term funding activities was immaterial.
PSE&G and Services
As of each of December 31, 2007 and 2006, PSE&G had advanced working capital to Services of $33 million. The amount is included in Other Noncurrent Assets on PSE&Gs Consolidated Balance Sheets.
Power and Services
As of each of December 31, 2007 and 2006, Power had advanced working capital to Services of $17 million. The amount is included in Other Noncurrent Assets on Powers Consolidated Balance Sheets.
Other
PSEG and Power
As of December 31, 2007 and 2006, PSEG had net receivables from Power of $5 million and less than $1 million, respectively, related to amounts that Power had collected on PSEGs behalf.
PSEG and PSE&G
As of December 31, 2007 and 2006, PSE&G had net receivables from PSEG of $11 million and $3 million, respectively, related to amounts that PSEG had collected on PSE&Gs behalf.
Changes in Capitalization
Power
Power paid dividends to PSEG totaling $1.075 billion to PSEG during 2007.
PSE&G
PSE&G paid common stock dividends of $200 million to PSEG in both 2007 and 2006.
173
PSEG as of
December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each series of Powers Senior Notes and Pollution Control Notes is fully and unconditionally and jointly and severally guaranteed by Fossil, Nuclear and ER&T.
The following table presents condensed financial information for the guarantor subsidiaries as well as Powers non-guarantor subsidiaries as of December 31, 2007 and 2006 and for the years ended
December 31, 2007, 2006 and 2005:
Power
Guarantor
Other
Consolidating
Total
(Millions)
For the Year Ended December 31, 2007:
Revenues
$
$
7,836
$
114
$
(1,154
)
$
6,796
Operating Expenses
4
6,152
114
(1,154
)
5,116
Operating Income.
(4
)
1,684
1,680
Equity Earnings (Losses) of Subsidiaries
930
(40
)
(890
)
Other Income
191
295
(247
)
239
Other Deductions
(1
)
(169
)
(170
)
Interest Expense
(197
)
(161
)
(49
)
248
(159
)
Income Taxes
22
(680
)
17
(641
)
Loss on Discontinued Operations, net of tax benefit
(8
)
(8
)
Net Income (Loss)
$
941
$
929
$
(40
)
$
(889
)
$
941
As of December 31, 2007:
Current Assets
$
2,553
$
3,632
$
360
$
(4,305
)
$
2,240
Property, Plant and Equipment, net.
149
3,669
934
(1
)
4,751
Investment in Subsidiaries.
3,538
168
(3,706
)
Noncurrent Assets
156
1,506
30
(255
)
1,437
Total Assets
$
6,396
$
8,975
$
1,324
$
(8,267
)
$
8,428
Current Liabilities.
$
99
$
4,556
$
1,057
$
(4,305
)
$
1,407
Noncurrent Liabilities
234
881
98
(255
)
958
Long-Term Debt
2,902
2,902
Members Equity.
3,161
3,538
169
(3,707
)
3,161
Total Liabilities and Members Equity
$
6,396
$
8,975
$
1,324
$
(8,267
)
$
8,428
For the Year Ended December 31, 2007:
Net Cash Provided By (Used In) Operating Activities
$
1,238
$
1,595
$
(584
)
$
(1,044
)
$
1,205
Net Cash (Used In) Provided By Investing Activities
$
(232
)
$
(596
)
$
(103
)
$
531
$
(400
)
Net Cash (Used In) Provided By Financing Activities.
$
(1,006
)
$
(1,001
)
$
687
$
513
$
(807
)
For the Year Ended December 31, 2006:
Revenues
$
$
7,030
$
139
$
(1,112
)
$
6,057
Operating Expenses
1
6,103
107
(1,114
)
5,097
Operating Income.
(1
)
927
32
2
960
Equity Earnings (Losses) of Subsidiaries
284
(252
)
(32
)
Other Income
171
199
6
(219
)
157
Other Deductions
(2
)
(88
)
(1
)
(91
)
Interest Expense
(188
)
(133
)
(44
)
217
(148
)
Income Taxes
12
(377
)
1
1
(363
)
Income (Loss) on Discontinued Operations, Including Loss on Disposal, net of tax benefit
8
(247
)
(239
)
Net Income (Loss)
$
276
$
284
$
(253
)
$
(31
)
$
276
As of December 31, 2006:
Current Assets
$
1,981
$
3,398
$
531
$
(3,440
)
$
2,470
Property, Plant and Equipment, net.
150
3,226
854
4,230
Investment in Subsidiaries.
4,287
201
(4,488
)
Noncurrent Assets
173
1,397
79
(221
)
1,428
Total Assets
$
6,591
$
8,222
$
1,464
$
(8,149
)
$
8,128
Current Liabilities.
$
97
$
3,160
$
1,251
$
(3,442
)
$
1,066
Noncurrent Liabilities
253
775
12
(219
)
821
Long-Term Debt
2,818
2,818
Members Equity.
3,423
4,287
201
(4,488
)
3,423
Total Liabilities and Members Equity
$
6,591
$
8,222
$
1,464
$
(8,149
)
$
8,128
174
Subsidiaries
Subsidiaries
Adjustments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Power
Guarantor
Other
Consolidating
Total
(Millions)
For the Year Ended December 31, 2006:
Net Cash Provided By (Used In) Operating Activities
$
1,105
$
1,076
$
14
$
(1,152
)
$
1,043
Net Cash (Used In) Provided By Investing Activities
$
(605
)
$
(1,016
)
$
25
$
1,206
$
(390
)
Net Cash Used In Financing Activities.
$
(500
)
$
(55
)
$
(39
)
$
(54
)
$
(648
)
For the Year Ended December 31, 2005:
Revenues
$
$
6,955
$
137
$
(1,065
)
$
6,027
Operating Expenses
6,288
95
(1,064
)
5,319
Operating Income.
667
42
(1
)
708
Equity Earnings (Losses) of Subsidiaries
218
(213
)
(5
)
Other Income
138
185
2
(138
)
187
Other Deductions
(42
)
(1
)
(43
)
Interest Expense
(142
)
(84
)
(14
)
140
(100
)
Income Taxes
(22
)
(288
)
(8
)
(318
)
Loss on Discontinued Operations, Including Loss on Disposal, net of tax benefit
7
(233
)
(226
)
Cumulative Effect of a Change in Accounting Principle, net of tax
(15
)
(1
)
(16
)
Net Income (Loss)
$
192
$
217
$
(213
)
$
(4
)
$
192
For the Year Ended December 31, 2005:
Net Cash (Used In) Provided By Operating Activities
$
(943
)
$
(371
)
$
1,050
$
400
$
136
Net Cash (Used In) Provided By Investing Activities
$
(157
)
$
133
$
37
$
(255
)
$
(242
)
Net Cash Provided By (Used In) Financing Activities
$
1,100
$
235
$
(1,087
)
$
(144
)
$
104
175
Subsidiaries
Subsidiaries
Adjustments
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
PSEG, Power and PSE&G
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
PSEG, Power and PSE&G
PSEG, Power and PSE&G have established and maintain disclosure controls and procedures to ensure that information required to be disclosed is recorded, processed, summarized and reported and is
accumulated and communicated to the Chief Executive Officer and Chief Financial Officer of each company by others within those entities. PSEG, Power and PSE&G have established a disclosure
committee which is made up of several key management employees and which reports directly to the Chief Financial Officer and Chief Executive Officer of each respective company. The committee
monitors and evaluates the effectiveness of these disclosure controls and procedures. The Chief Financial Officer and Chief Executive Officer of each company have evaluated the effectiveness of the
disclosure controls and procedures as of December 31, 2007 and, based on this evaluation, have concluded that the disclosure controls and procedures were effective in providing such reasonable assurance
during the period covered in these annual reports.
Internal Controls
PSEG, Power and PSE&G
PSEG,
Power and PSE&G have conducted assessments of their internal control
over financial reporting as of December 31, 2007, as required by Section
404 of the Sarbanes-Oxley Act, using the framework promulgated by the Committee
of Sponsoring Organizations of the Treadway Commission, commonly referred
to as COSO. Managements reports on PSEGs, Powers
and PSE&Gs internal
control over financial reporting is included on pages 177, 178 and 179, respectively.
The Independent Registered Public Accounting Firms report with respect
to the effectiveness of PSEGs internal control
over financial reporting is included on page 180. Management has concluded
that internal control over financial reporting is effective as of December
31, 2007.
PSEG, Power and PSE&G continually review their respective disclosure controls and procedures and make changes, as necessary, to ensure the quality of their financial reporting. However, there have
been no changes in internal control over financial reporting that occurred during the fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect, each registrants
internal control over financial reporting.
PSEG, Power and PSE&G
None.
176
ACCOUNTING AND FINANCIAL DISCLOSURE
MANAGEMENT REPORT ON INTERNAL CONTROL OVER
Management of Public Service Enterprise Group (PSEG) is responsible for establishing and maintaining effective internal control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. As defined by the SEC in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by,
or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and implemented by the companys management and other personnel,
with oversight by the Audit Committee of the Board of Directors to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles).
PSEGs internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of PSEGs assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of PSEG are being made only in accordance with authorizations of PSEGs management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of PSEGs assets that could have a material effect on the financial statements.
In connection with the preparation of PSEGs annual financial statements, management of PSEG has undertaken an assessment, which includes the design and operational effectiveness of PSEGs
internal control over financial reporting using the framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as COSO. The COSO
framework is based upon five integrated components of control: control environment, risk assessment, control activities, information and communications and ongoing monitoring.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on the assessment performed, management has concluded that PSEGs internal control over financial reporting is effective and provides reasonable assurance regarding the reliability of PSEGs
financial reporting and the preparation of its financial statements as of December 31, 2007 in accordance with generally accepted accounting principles. Further, management has not identified any material
weaknesses in internal control over financial reporting as of December 31, 2007.
PSEGs external auditors, Deloitte & Touche LLP, have audited PSEGs financial statements for the year ended December 31, 2007 included in this annual report on Form 10-K and, as part of that
audit, have issued a report on the effectiveness of PSEGs internal control over financial reporting, a copy of which is included in this annual report on Form 10-K.
/s/ R
ALPH
I
ZZO
Chief Executive Officer
/s/ T
HOMAS
M. OF
LYNN
Chief Financial Officer
February 27, 2008
177
FINANCIAL REPORTINGPSEG
MANAGEMENT REPORT ON INTERNAL CONTROL OVER
Management of PSEG Power LLC (Power) is responsible for establishing and maintaining effective internal control over financial reporting and for the assessment of the effectiveness of internal
control over financial reporting. As defined by the SEC in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or
under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and implemented by the companys management and other personnel,
with oversight by the Audit Committee of the Board of Directors to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles).
Powers internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of Powers assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of Power are being made only in accordance with authorizations of Powers management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Powers assets that could have a material effect on the financial statements.
In connection with the preparation of Powers annual financial statements, management of Power has undertaken an assessment, which includes the design and operational effectiveness of Powers
internal control over financial reporting using the framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as COSO. The COSO
framework is based upon five integrated components of control: control environment, risk assessment, control activities, information and communications and ongoing monitoring.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on the assessment performed, management has concluded that Powers internal control over financial reporting is effective and provides reasonable assurance regarding the reliability of Powers
financial reporting and the preparation of its financial statements as of December 31, 2007 in accordance with generally accepted accounting principles. Further, management has not identified any material
weaknesses in internal control over financial reporting as of December 31, 2007.
/s/ R
ALPH
I
ZZO
Chief Executive Officer
/s/ T
HOMAS
M. OF
LYNN
Chief Financial Officer
February 27, 2008
178
FINANCIAL REPORTINGPower
MANAGEMENT REPORT ON INTERNAL CONTROL OVER
Management of Public Service Electric and Gas Company is responsible for establishing and maintaining effective internal control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. As defined by the SEC in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by,
or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and implemented by the companys management and other personnel,
with oversight by the Audit Committee of the Board of Directors to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles).
PSE&Gs internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of PSE&Gs assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of PSE&G are being made only in accordance with authorizations of PSE&Gs management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of PSE&Gs assets that could have a material effect on the financial statements.
In connection with the preparation of PSE&Gs annual financial statements, management of PSE&G has undertaken an assessment, which includes the design and operational effectiveness of PSE&Gs
internal control over financial reporting using the framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as COSO. The COSO
framework is based upon five integrated components of control: control environment, risk assessment, control activities, information and communications and ongoing monitoring.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on the assessment performed, management has concluded that PSE&Gs internal control over financial reporting is effective and provides reasonable assurance regarding the reliability of PSE&Gs
financial reporting and the preparation of its financial statements as of December 31, 2007 in accordance with generally accepted accounting principles. Further, management has not identified any material
weaknesses in internal control over financial reporting as of December 31, 2007.
/s/ R
ALPH
I
ZZO
Chief Executive Officer
/s/ T
HOMAS
M. OF
LYNN
Chief Financial Officer
February 27, 2008
179
FINANCIAL REPORTINGPSE&G
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
We have audited the internal control over financial reporting of Public Service Enterprise Group Incorporated and subsidiaries (the Company) as of December 31, 2007, based on criteria established
in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing
similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or
fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule
listed in the Index at Item 15
as of and for the year ended December 31, 2007 of the Company and our report dated February 27, 2008 expressed an unqualified opinion on those consolidated financial
statements and consolidated financial statement schedules, and included explanatory paragraphs regarding the adoption of Financial Accounting Standards Board Interpretation No. 48,
Accounting for
Uncertainty in Income Taxesan Interpretation of FASB Statement 109
and Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans
.
D
ELOITTE
&
T
OUCHE
LLP
180
P
UBLIC
S
ERVICE
E
NTERPRISE
G
ROUP
I
NCORPORATED
:
Parsippany, New Jersey
February 27, 2008
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers
PSEG, Power and PSE&G
The Executive Officers of each of Public Service Enterprise Group (PSEG), PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G), respectively, are set forth below, as
indicated for each individual.
Name
Age as of
Office
Effective Date
Ralph Izzo (1)(2)(3)
50
Chairman of the Board, President and
April 2007 to present
Chairman of the Board and Chief
April 2007 to present
Chairman of the Board and Chief
April 2007 to present
Chairman of the Board and Chief
April 2007 to present
Chairman of the Board and Chief
April 2007 to present
President and Chief Operating
October 2006 to March 2007
President and Chief Operating
October 2003 to October 2006
Vice PresidentUtility Operations
June 2002 to October 2003
Thomas M. OFlynn (1)(2)(3)
47
Executive Vice President and Chief
July 2001 to present
Executive Vice President and Chief
February 2002 to present
Executive Vice President and Chief
January 2007 to present
President and Chief
February 2007 to present
Executive Vice PresidentFinance
June 2001 to present
Executive Vice President and Chief
August 2002 to present
William Levis (1)(2)
52
President and Chief Operating Officer
June 2007 to present
President and Chief Nuclear Officer
January 2007 to present
Senior Vice President and Chief
Nuclear Officer (Salem/Hope Creek)
January 2005December 2006
Vice PresidentMid-Atlantic Operations
of Exelon Nuclear (Exelon Corporation)
July 2003 to December 2004
Site Vice PresidentLimerick Generating
Station of Exelon Nuclear (Exelon
Corporation)
February 2001 to July 2003
Ralph LaRossa (1)(3)
44
President and Chief Operating Officer
October 2006 to present
Vice PresidentElectric Delivery
August 2003 to October 2006
Vice PresidentDelivery Operations
Support
January 2003 to August 2003
DirectorDistribution Operations
June 2001 to January 2003
181
December 31,
2007
First Elected to
Present Position
Chief Executive Officer (PSEG)
Executive Officer (Power)
Executive Officer (PSE&G)
Executive Officer (Energy Holdings)
Executive Officer (Services)
Officer (PSEG)
Officer (PSE&G)
(PSE&G)
Financial Officer (PSEG)
Financial Officer (Power)
Financial Officer (PSE&G)
Operating Officer (Energy Holdings)
(Services)
Financial Officer (Energy Holdings)
(Power)
(Nuclear)
(PSE&G)
(PSE&G)
(PSE&G)
(PSE&G)
Name
Age as of
Office
Effective Date
R. Edwin Selover (1)(2)(3)
62
Executive Vice President and
December 2006 to present
Senior Vice President and
April 2002 to December 2006
Executive Vice President and
December 2006 to present
Senior Vice President and
January 1988 to December 2006
Executive Vice President and General
Counsel
December 2006 to present
Executive Vice President and
December 2006 to present
Senior Vice President and
November 1999 to December 2006
Derek M. DiRisio (1)(2)(3)
43
Vice President and Controller (PSEG)
January 2007 to present
Vice President and Controller (PSE&G)
January 2007 to present
Vice President and Controller (Power)
January 2007 to present
Vice President and Controller
January 2007 to present
Vice President and Controller
January 2007 to present
Assistant Controller Enterprise
July 2004 to January 2007
Vice PresidentPlanning and Analysis
March 2004 to July 2004
Vice President and Controller
June 1998 to March 2004
Elbert C. Simpson (1)
59
President and Chief Operating Officer
January 2007 to present
Senior Vice PresidentInformation
May 2002 to January 2007
Kevin J. Quinn (2)
51
President (ER&T)
January 2007 to present
Vice PresidentCorporate Planning
April 2000 to January 2007
Richard Lopriore(2)
58
President (Fossil)
May 2007 to present
Vice PresidentBoiling Water Reactor
Operations of Exelon Nuclear (Exelon
Corporation)
February 2004 to April 2007
Corporate Vice PresidentOperations
Support of Exelon Nuclear (Exelon
Corporation)
July 2003 to February 2004
Site Vice PresidentByron Generating
Station of Exelon Nuclear (Exelon
Corporation)
February 2001 to July 2003
December 31,
2007
First Elected to
Present Position
General Counsel (PSEG)
General Counsel (PSEG)
General Counsel (PSE&G)
General Counsel (PSE&G)
(Power)
General Counsel (Services)
General Counsel (Services)
(Energy Holdings)
(Services)
(Services)
(Energy Holdings)
(Energy Holdings)
(Services)
Technology (Services)
(Services)
|
||||||||||||||||||||
(1) |
|
Executive Officer of PSEG |
||||||||||||||||||
|
||||||||||||||||||||
(2) |
|
Executive Officer of Power |
||||||||||||||||||
|
||||||||||||||||||||
(3) |
|
Executive Officer of PSE&G
|
Directors
PSEG
The information required by Item 10 of Form 10-K with respect to (i) present directors of PSEG who are nominees for election as directors at PSEGs 2008 Annual Meeting of Stockholders, and directors whose terms will continue beyond the meeting, and (ii) compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is set forth under the headings Election of Directors and Section 16(a) Beneficial Ownership Reporting Compliance in PSEGs definitive Proxy Statement for such Annual Meeting of Stockholders, which definitive Proxy Statement is expected to be filed with the U.S. Securities and Exchange
182
Commission (SEC) on or
about March 5, 2008 and which information set forth under said heading is
incorporated herein by this reference thereto.
PSE&G
Caroline Dorsa has been a director since February 2003. Age 48. Has been Senior Vice President of Global Human Health, Strategy and Integration of Merck & Co., Inc. (Merck), Whitehouse Station,
New Jersey, which discovers, develops, manufactures and markets human and animal health products, since February 2008. Was Senior Vice President and Chief Financial Officer of Gilead Sciences, Inc,
from November 2007 to January 2008. Was Senior Vice President and Chief Financial Officer of Avaya, Inc., Basking Ridge, New Jersey, from February 2007 to November 2007. Was Vice President and
Treasurer of Merck from December 1996 to January 2007.
Albert R. Gamper, Jr. has been a director of PSE&G since December 2000. Age 65. Director of PSEG. Until retirement, was Chairman of the Board of The CIT Group, Inc. of Livingston, New Jersey (a
commercial finance company) from July 2004 until December 2004. Was Chairman of the Board and Chief Executive Officer of The CIT Group, Inc. from September 2003 to July 2004. Was Chairman of
the Board, President and Chief Executive Officer of The CIT Group, Inc. from June 2002 to September 2003. Was President and Chief Executive Officer of The CIT Group, Inc. from February 2002 to
June 2002. Was President and Chief Executive Officer of Tyco Capital Corporation from June 2001 to February 2002. Was Chairman of the Board, President and Chief Executive Officer of The CIT Group,
Inc. from January 2000 to June 2001, and President and Chief Executive Officer of The CIT Group, Inc. from December 1989 to December 1999. Trustee to the Fidelity Group of Funds.
Conrad K. Harper has been a director of PSE&G since May 1997. Age 67. Director of PSEG. Of Counsel to the law firm of Simpson Thacher & Bartlett LLP, New York, New York since January 2003.
Was a partner from October 1996 to December 2002 and from October 1974 to May 1993. Was Legal Adviser, United States Department of State from May 1993 to June 1996. Director of New York Life
Insurance Company.
Ralph Izzo has been a director of PSE&G since October 2006. For additional information, see Executive Officers table above.
Power
Stephen
C. Byrd has been a director of Power since February 2008. Age 34. Senior
Vice President of Business Development, Strategy and M & A (Services).
Was previously Executive Director of Morgan Stanley.
Ralph Izzo has been a director of Power since October 2006.
For additional information, see Executive Officers table above.
William Levis has been a director of Power since April 2007. For additional information, see Executive Officers table above.
Richard P. Lopriore has been a director of Power since June 2007. For additional information, see Executive Officers table above.
Thomas M. OFlynn has been a director of Power since July 2001. For additional information, see Executive Officers table above.
Kevin J. Quinn has been a director of Power since April 2007. For additional information, see Executive Officers table above.
R. Edwin Selover has been a director of Power since June 1999. For additional information, see Executive Officers table above.
Elbert C. Simpson has been a director of Power since April 2007. For additional information, see Executive Officers table above.
PSEG, Power and PSE&G
Code of Ethics
Our Standards of Integrity (Standards) is a code of ethics applicable to us and our subsidiaries. The Standards are an integral part of our business conduct compliance program and embody our
commitment to conduct operations in accordance with the highest legal and ethical standards. The Standards apply to all of our directors, employees (including PSEGs, Powers and PSE&Gs principal
executive officer, principal
183
financial officer, principal
accounting officer or Controller and persons performing similar functions)
worldwide. Each such person is responsible for understanding and complying
with the Standards. The Standards are posted on our website,
www.pseg.com/investor/governance
.
We will send you a copy on request.
The Standards establish a set of common expectations for behavior to which each employee must adhere in dealings with investors, customers, fellow employees, competitors, vendors, government
officials, the media and all others who may associate their words and actions with us. The Standards have been developed to provide reasonable assurance that, in conducting our business, employees behave
ethically and in accordance with the law and do not take advantage of investors, regulators or customers through manipulation, abuse of confidential information or misrepresentation of material facts.
If we adopt any amendment (other than technical, administrative or non-substantive) to or a waiver from the Standards that applies to any director or principal executive officer, principal financial
officer, principal accounting officer or Controller, or persons performing similar functions of PSEG, Power or PSE&G and that relates to any element enumerated by the SEC, we will post the amendment or
waiver on our website,
www.pseg.com/investor/governance
.
ITEM 11. EXECUTIVE COMPENSATION
PSEG
The
information required by Item 11 of Form 10-K is set forth under the heading Executive
Compensation in PSEGs definitive Proxy Statement for the 2008
Annual Meeting of Stockholders which definitive Proxy Statement is expected
to be filed with the U.S. Securities and Exchange Commission (SEC) on or
about March 5, 2008 and such information set forth under such heading is
incorporated herein by this reference thereto.
Power
Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.
PSE&G
COMPENSATION COMMITTEE REPORT
The Organization and Compensation Committee of the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis included in this Annual Report on Form 10-K with
management and with Frederic W. Cook, Co., Inc., the Committees independent compensation consultant. Based on such review and discussions, the Organization and Compensation Committee
recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Report.
Shirley Ann Jackson, Chair
February 19, 2008
COMPENSATION DISCUSSION AND ANALYSIS
Executive compensation is administered under the direction of the Organization and Compensation Committee (Committee) of PSEG, which oversees compensation programs and policies for PSEG
and its subsidiaries. In light of responsibilities of the Committee, the Board of Directors of PSE&G does not believe it is necessary for it to have a separate committee of its own with respect to compensation
matters. The Committee is made up of directors who are independent under NYSE rules and our requirements for independent directors.
The executive officers named in the Summary Compensation Table for PSE&G are: Mr. Izzo, the Chairman of the Board and CEO since April 1, 2007, who is also the Chairman, President and CEO of
PSEG since April 1, 2007; Mr. Ferland, the former Chairman and CEO, who was also the Chairman, President and CEO of PSEG until March 31, 2007; Mr. OFlynn, the Executive Vice President and Chief
Financial Officer of PSE&G and PSEG; Mr. Selover, the Executive Vice President and General Counsel of PSE&G and PSEG; Mr. LaRossa, the President of PSE&G; and Mr. DiRisio, the Vice President and
Controller of PSE&G and PSEG. Under the compensation program administered by the Committee, each Named
184
Albert R. Gamper, Jr.
William V. Hickey
Thomas A. Renyi
Richard J. Swift
Executive Officer (NEO) is compensated on the basis of all positions he or she holds with PSEG and its subsidiaries, including PSE&G.
Compensation Philosophy and Program
We have designed our Executive Compensation Program (Program) in a way that we believe will attract, motivate and retain the high-performing executives who are critical to our long-term success.
We believe that we have structured the Program to link executive compensation to successful execution of our strategic business plans and meeting our financial, operational and other corporate targets.
This design is intended to provide executives increased compensation when we do well as measured against our goals and to provide less compensation when we do not.
In setting compensation for a particular executive position, the Committees philosophy is that the median of compensation of similar positions within an identified peer group of energy companies
provides a reasonable starting reference point, which it then adjusts based on the performance and experience of the individual, the ability of the individual to contribute to the long-term success of the
Company, and other factors, such as relative pay positioning among executives. The Committee believes that total direct compensation (salary, plus short-term incentive target, plus long-term incentive
compensation target) is a better measure for evaluating executive compensation than focusing on each of the elements individually. The Committee does not set a formula to determine the various elements.
As designed, the Committee recognizes that actual delivered short-term and long-term incentive compensation is reflective of individual and corporate performance, so that the total direct
compensation may differ from the targeted compensation for each individual in regard to each element of incentive compensation.
The Committee reviews the philosophy and objectives of the Program at least annually. The Committees experience is that the evaluations described above must be considered and revised each year in
setting compensation for executives. In assessing its continued appropriateness, the Committee examines our success and the contributions of the individual executives in achieving our business plans and
annual goals. The Committee considers the motivational impact of the Program in attaining desired business results and our continued ability to attract and retain high-quality executives. Key factors in
judging whether the Program has met its goals are the Programs relationship to our financial results, our future outlook and our ability to attract and retain key executive talent.
The Committee has the responsibility to review, approve and modify, as necessary, the Program and each of its constituent elements.
Compensation Consultant
The Committee has the authority to retain independent compensation consultants, with sole authority for their hiring and firing. Since October 2006, the Committee has retained Frederic W. Cook &
Co., Inc. (Cook) as its executive compensation consultant to provide the Committee information and advice independently from management. Cook does not and will not perform any other services for us
or our subsidiaries. Its only roles are advising the Committee on executive compensation, and the Corporate Governance Committee on matters pertaining to compensation of directors who are not
executive officers. Responsibility for assignment to, and evaluation of work by Cook is solely that of the Committee and, beginning in April 2007 with respect to non-officer directors, the Corporate
Governance Committee. In furtherance of Cooks independence, management receives copies of certain materials provided by Cook to the Committee only after the materials have been provided to the
Committee. The scope of Cooks assignment is to provide general advice relating to all aspects of executive compensation, including the review of our current compensation programs and levels, benefit
plans, provision of comparative industry trends and peer data and the recommendation of program and pay level changes.
The Committee has engaged Cook to perform reviews of our approach to and delivery of executive compensation. The scope of Cooks engagement includes annual reviews of the CEOs and other
executive officers specific compensation levels, including analysis of peer group data and the mix of base salary, equity, incentive and other payments. The results of Cooks review were used in setting
executive officers compensation for 2007. In setting executive base pay levels for 2008 and cash payments determined for 2007 performance under the Management Incentive Compensation Plan (MICP),
Cook provided data as to executive compensation trends within the peer group and within general industry. Cook also provided specific compensation data from the peer groups 2007 proxy statements and
reviewed more current peer
185
group data provided by managements external consultant, Towers Perrin, to assist the Committee in establishing the CEOs compensation and to assist the Committee in reviewing the CEOs
recommendations for the compensation of other executive officers.
We pay the fees of the compensation consultants retained by the Committee. In addition, we have agreed to indemnify Cook for certain matters related to Cooks engagement by the Committee, other
than matters involving negligence or intentional misconduct by Cook. The Committee also utilizes the services of our internal compensation professionals.
Recent Committee Activities
In setting 2008 compensation for each executive officer, the Committee examined the following elements of compensation:
Base salary;
Total cash compensation, consisting of base salary plus annual incentive target levels and the performance criteria under the MICP to earn those payments; and
Total direct compensation, consisting of total cash compensation plus long-term incentive compensation grant levels and the performance criteria under the Long-Term Incentive Plan (LTIP) to
earn those grants.
During several meetings in 2006 and 2007, the Committee considered recommendations from Cook and management with regard to compensation design and effectiveness. As a result, the Committee
determined, in January 2007, to adopt a new peer group of companies as a beginning reference point for officer compensation. At the Committees December 2007 meeting, the peer group was further
modified. These changes are described below under Peer Group.
In addition, after reviewing competitive practices within the peer group and within a larger sample of the energy services industry, the Committee approved the following actions during 2007:
Long-term equity awards, including those granted in December 2007, now reflect provisions for prorated vesting upon retirement and for the forfeiture of unvested and unpaid grants and the
return of any long-term award received within one year of termination of employment for breaches of non-compete, non-solicitation and confidentiality agreements;
Provisions were added to the MICP and LTIP for the repayment by the CEO, CFO and other participants of annual and long-term awards and any profits from the sale of PSEG securities in the
year following a restatement of financial statements due to misconduct;
A policy for the leasing and use of charter aircraft was adopted; and
A Stock Ownership and Retention Policy for officers was adopted.
In addition, in connection with its responsibilities to review, discuss and make a recommendation to the Board in regard to the Compensation Discussion and Analysis included in the annual proxy
statement, the Committee reviewed the Companys process for the reporting of executive compensation and preparation of the proxy statement. The Committee made several recommendations to
management and reviewed and discussed managements responses to SEC comments received on the executive compensation disclosure in our 2007 Proxy Statement.
Compensation Policies
The Committee has established compensation policies to implement the compensation philosophy stated above. To meet our compensation objectives and to focus executive efforts on improving
corporate performance, the Committee has developed and currently administers pay delivery systems that fall into three broad categories:
Base salary;
Annual cash incentive compensation, including annual performance-based incentives; and
Long-term incentive compensation, including awards such as restricted stock, restricted stock units, stock options and performance units.
Each of these components of compensation, including our related policies regarding determination and evaluation, is discussed further below. Our policy is to provide a mix of these components in the
proportion best designed, as determined by the Committee, to achieve our compensation objectives. The Committee annually reviews with Cook the relationships among these components relative to the
peer group, including
186
cash, equity, performance-based pay, incentives, amount at risk and vesting schedules. The Committee does not have specific proportional factors it takes into account when establishing these components.
The Committees decisions in determining compensation for 2008 were made independent of prior equity awards, outstanding performance units, pensions or future compensation opportunities.
In addition to the above components of compensation, our practice has been to provide the following benefits (described more fully below) to non-represented employees generally, including the
NEOs:
Post-employment benefits, including defined benefit pension plans, severance and change-in-control benefits;
Health care programs;
Employee Stock Purchase Plan (5% discount); and
A defined contribution plan (the Thrift Plan).
Depending upon the individual, NEOs and other key employees are provided with certain additional benefits, such as deferred compensation opportunities, enhanced post-employment benefits and a
limited number of perquisites, in amounts deemed appropriate by the Committee and management based on the individuals position and ability to contribute to the achievement of our business goals.
We do not provide a tax gross-up of benefit amounts deemed to be taxable income under federal or state income tax laws and regulations, except for gross-ups:
contained in certain employment agreements with senior managers, described below;
of certain benefits resulting from a termination of employment following a change-in-control for certain executive officers covered under our Key Executive Severance Plan;
of relocation expenses under a program generally available to all employees; and
upon individual determinations made by management on a case-by-case basis, primarily in the case of newly-hired executives.
Role of Chief Executive Officer
The
CEO attends Committee meetings, other than executive sessions. Other executive
officers and compensation professionals may attend portions of Committee
meetings as requested by the Committee. The CEO recommends changes to the
salaries of his direct reports (who include the NEOs) within an overall base
salary budget approved by the Committee and the Committee considers these
recommendations in the context of the peer group. The CEO recommends incentive
compensation targets (expressed as a percentage of base salary for the MICP)
and LTIP grants as well as the associated goals, objectives and performance
evaluations. Managements data provided to the Committee generally includes
a recommendation with respect to CEO compensation which, historically, has
reflected the average base compensation adjustment and average MICP performance
factor of other officers.
The design and effectiveness of compensation policies and programs are reviewed by the CEO periodically in light of general industry trends and the peer group and recommendations for changes are
made to the Committee as deemed advisable by the CEO. The CEO reviews such compensation matters with our internal compensation professionals and other consultants. The Committee believes that
the role played by the CEO in this process is reasonable and appropriate because the CEO is uniquely suited to evaluate the performance of his direct reports.
Peer Group
The Committee sets executive compensation so as to be competitive with other large energy companies within an identified peer group. The Committee looks at base salary, total cash compensation
(base salary plus target annual incentive) and total direct compensation (base salary plus target annual incentive plus target long-term incentive) as the elements of compensation within the peer group for
purposes of benchmarking. General industry data may sometimes be taken into consideration for certain positions where valid data for comparable positions may not be available within the peer group.
2007 Peer Group
In
determining NEO compensation for 2007 (except for Mr. DiRisio),
the following group of energy companies with reported net income averaging
approximately $1 billion a year and market capitalization averaging about
$16 billion was identified as the peer group. PSEGs net income and
market capitalization are approximately at the median of this group.
187
American Electric Power Company, Inc.
Due
to the timing of the transition to the 2007 peer group, the peer group utilized
for Mr. DiRisio for 2007 included, in addition to all those companies in
the 2007 peer group: Ameren Corporation, CenterPoint Energy Inc, CMS Energy
Corporation, Constellation Energy Group, Inc., DTE Energy Company, JEA, ONEOK,
Inc., Pepco Holdings, Inc., PPL Corporation, Reliant Resources Inc., Tennessee
Valley Authority and UPS Resources Corporation.
2008 Peer Group
In December
2007, management recommended and, after conferring with Cook, the Committee
agreed to change the peer group of companies for 2008 executive compensation
benchmarking. The Committee agreed to add Constellation Energy and PPL Corp.
to the peer panel, since their size and operations are comparable to ours,
and to remove AES Corp., TXU and Williams Companies (since AES has principally
international operators, TXU is no longer a public company and Williams is
principally a gas company). Beginning in 2008, this new peer group is being
used as a reference point for competitive executive compensation and also
as a major comparison factor in assessing our performance under our annual
and long-term incentive plans. The revised peer group had reported net income
averaging approximately $1.1 billion a year and market capitalization averaging $19.5 billion. Based on our net income, market capitalization and business focus, the Committee agrees that this group is more
closely aligned with PSEG. The new peer group is:
American Electric Power Company, Inc.
As an initial positioning, the Committee targets the median (50th percentile) for comparable positions to those of our officers within this peer group for total cash compensation, which is the total of
base salary and annual cash incentive compensation. The mix of base salary and annual cash incentive for each of the executive positions is surveyed from this peer group. The reported pay structure from
the competitive analysis is used as a general guideline in determining the appropriate mix of compensation among base salary, annual incentive opportunity and long-term compensation opportunity. There
is no predetermined formula regarding the allocation of salary and incentives. The mix of incentives is selected to be reflective of the competitive practice found in this peer group for each of the pay
components listed above and what the Committee determines to be the right mix of compensation within our officer group. As mentioned above, the Committee believes that the total direct compensation
is a better approach for evaluating executive compensation than focusing on each of the elements individually.
Compensation Components
Base Salary
The Committee considers the median of the base salaries provided to executives in the peer group who have duties and responsibilities similar to those of our executive officers as the reference point
for competitive base salaries. The Committee also considers the executives current salary and makes adjustments based principally on individual performance and experience. The NEOs base
salary levels are reviewed annually by the Committee using a budget it establishes
for merit increases and salary survey data provided by Towers Perrin. Benchmark
competitive base salary levels are determined and established for all the NEOs
as well as for other officers. Annually, the individual performance of the
executives with respect to individual and corporate performance criteria is
determined and taken into account when setting salaries.
The Committee considers base salaries and base salary adjustments for individual NEOs, other than the CEO, based on the recommendations of the CEO, considering the individuals level of
responsibilities,
188
Consolidated Edison, Inc.
Dominion Resources, Inc.
Duke Energy Corporation
Edison International
Entergy Corporation
Exelon Corporation
FirstEnergy Corp.
FPL Group, Inc.
PG&E Corporation
Progress Energy, Inc.
Sempra Energy
The AES Corporation
The Southern Company
The Williams Companies, Inc.
TXU Corp.
Xcel Energy Inc.
Consolidated Edison, Inc.
Constellation Energy Group, Inc.
Dominion Resources, Inc.
Duke Energy Corporation
Edison International
Entergy Corporation
Exelon Corporation
FirstEnergy Corp.
FPL Group, Inc.
PG&E Corporation
PPL Corporation
Progress Energy, Inc.
Sempra Energy
The Southern Company
Xcel Energy Inc.
experience in position, sustained performance over time, results during the immediately preceding year and the executives pay in relation to the benchmark median. Performance metrics included
achievement of business plans, financial targets, safety and operational results, customer satisfaction, regulatory outcomes and other factors. In addition, factors such as leadership ability, managerial skills
and other personal aptitudes and attributes are considered. Base salaries for satisfactory performance are targeted at the median (50
th
percentile) of the competitive benchmark data.
For 2007, the merit increase budget was set at 3.75% and base salaries for the NEOs as a group were increased by 3.6%. In 2007, until his retirement on March 31st, Mr. Ferland was paid a salary at an
annualized rate of $1,160,000. On Mr. Izzos election as President and COO in October 2006, Mr. Izzos annual base salary rate was set at $700,000. Effective January 1, 2007, Mr. Izzos annual rate of base
salary as COO was increased to $725,000. On his election as Chairman of the Board and CEO, effective April 1, 2007, Mr. Izzos base annual salary rate was set at $900,000.
For 2008, the merit increase budget was set at 3.75%. For 2008, NEO base salaries, as a group, increased 4.8% from 2007 levels to reflect general market adjustments for comparable positions. The
4.8% average included a special market-based pay adjustment that the Committee determined was needed to reduce the gap between current salary and the competitive pay level reported by the 2007 peer
group and the 2008 peer group companies for Mr. LaRossas position.
Effective January 1, 2008, the annual rate of base salary for Mr. Izzo was increased by 5.6% to $950,000, which is below the median of base salary provided to CEOs of the peer group companies. In
determining base salary for the CEO, the Committee considered his tenure in position, his individual performance during 2007 in relation to corporate performance factors such as achievement of business
plans, financial results, safety, human resources management, nuclear operations and civic leadership. The prime reason that Mr. Izzos new salary is below the median of the peer group is his relatively
recent promotion to the CEO position. The Committee determined the 2008 annual rates of base pay for the other NEOs as $426,000 for Mr. LaRossa, $618,000 for Mr. OFlynn, $520,000 for Mr. Selover
and $273,000 for Mr. DiRisio.
Mr. Izzos salary of $950,000 exceeds that of other NEOs due to the greater level of duties and responsibilities undertaken by the CEOs as the principal executive officers to whom NEOs typically
report, and to whom the board of directors will look for the execution of corporate business plans.
Annual Cash Incentive Compensation
The MICP, which was approved by stockholders in 2004, is an annual cash incentive compensation program for officers. To support the performance-based objectives of our compensation program,
corporate and business unit goals and measures are established each year based on factors deemed necessary to achieve our financial and non-financial business objectives. The goals and measures are
established by the CEO for the NEOs reporting to him, and for all other officers by the individual to whom he or she reports. The goals and measures applicable to each NEO for 2007 are further discussed
below.
The MICP sets a maximum award fund in any year of 2.5% of PSEGs net income. The formula for calculating the maximum award fund for any plan year was determined at the time of plan adoption
by reference to, among other things, similar award funds in use by other companies and review of executive compensation plan practices that were designed to address compliance with the requirements of
Internal Revenue Code Section (IRC) 162(m), which, as explained below, limits the Federal income tax deduction for compensation in excess of certain limits. The Committee annually reviews the
adequacy of the award fund calculation relative to the Committees determination of the appropriate level of annual cash incentive compensation for plan participants. If appropriate, the Committee will
recommend for stockholder approval any changes to the MICP it deems required to align the plans terms with the our compensation objectives.
The
CEOs maximum award cannot exceed 10% of the award fund. The maximum
award for each other participant cannot exceed 90% of the award fund divided
by the number of participants, other than the CEO, for that year. For 2007
performance under the MICP, these limits were $33,375,425 for the total award
pool (of which $10,638,200 was awarded), $3,337,543 for the CEOs maximum
award and $566,753 for each other participants maximum award.
Subject to the overall maximums stated above, NEOs are eligible for annual incentive compensation based on a combination of the achievement of individual performance goals by each officer which
determines his/her Individual Performance Factor, as adjusted by overall corporate performance, as measured by the Corporate Factor. The Corporate Factor is a financial measure, Return on Equity
(ROE), which is a relative performance assessment comparing our ROE against the median ROE of other companies. For 2007, ROE
189
was measured against the
performance of energy companies that comprise the Dow Jones Utility Index
(DJUI). For 2008, this comparison will be to the 2008 Peer Group. This Corporate
Factor is a significant determinant of MICP awards. A maximum award is based
on a comparative performance factor of 1.5 and is achieved if our annual
ROE, as measured on September 30, exceeds the median ROE performance of the
group of energy companies that make up the DJUI. The minimum award threshold,
based on a comparative performance factor of 0.5, is reached if our ROE is
not more than five hundred basis points below the DJUI median. If the ROE
is less than five hundred basis points below the DJUI median, the comparative
performance factor is 0.
Actual incentive awards for participants in the MICP are computed as follows: (A) the participants Target Award Amount (% of base salary) is multiplied by (B) the participants Individual
Performance Factor (0.0 to 1.5), which, in turn, is multiplied by (C) the Corporate Factor to arrive at the Final Award. In no case, however, may a Final Award exceed the lesser of (i) 1.5 times the
participants Target Award Amount or (ii) the maximum amount allowed for that participant under the total award pool for that year.
Performance goals and levels of achievement for NEOs are set forth below. Each NEO position has a targeted incentive award established by the Committee at the beginning of each year ranging from
60% to 100% of base salary. Annual incentive awards are intended to provide a competitive level of compensation if we meet our financial goals and the NEO achieves his or her business unit and
individual goals. Since MICP targets are set as a percentage of base salary, increases in salary affect target bonuses. Incentive award targets are established for each NEOs position and reflect the median
reported incentive target for similar positions within the peer panel.
For the 2007 performance year, based on PSEGs ROE of 19.0%, as compared with the median ROE of the companies comprising the DJUI of 14.5%, the Corporate Factor applied to MICP
participants was 1.45. For reference, the following table shows the three- year comparison of the PSEG ROE with that of the DJUI median return on equity performance as follows:
2007
19.0
14.5
1.45
2006
15.3
13.4
1.19
2005
13.2
13.2
1.00
For 2007, Mr. Izzos Individual Performance Factor was 1.162, the average of the Individual Performance Factors of all MICP participants. This individual factor was multiplied by the Corporate Factor
of 1.45, producing a result in excess of 1.5. The Committee therefore reduced the award to 1.5, as required by the Committees administrative regulations under the MICP. The MICP awards of the NEOs
for 2007 are shown in the Summary Compensation Table. The Committee made its determinations regarding MICP awards for the 2007 performance year in February 2008 for payment in early March 2008.
There were no instances in which the Committee awarded compensation absent achievement of relevant performance goals, or in which it waived or modified goals.
The
following table sets forth the goals, measure and performance factors achieved
for 2007, for each NEO other than Mr. Ferland. Mr. Ferlands compensation
is separately discussed below, in light of his retirement in March 2007.
Under the provisions of the MICP, the Individual Performance Factor achieved
by each NEO was multiplied by the Corporate Factor, with the resulting amount
subject to a maximum of 1.5 times his/her Target Award amount. The awards
of each of the NEOs were limited by this maximum of 1.5. The maximum factor
was reached because of the relative importance of the Corporate Factor in
determining a participants
Final Award. For 2007, the Corporate Factor was 1.45 out of a maximum of
1.5, which reflects PSEGs
strong operating performance and financial results for the year. As indicated
above, the MICP is designed to reflect this strong performance in the awards
granted to participants.
190
MICP
Corporate Factor ROE (%) PSEG
DJUI
Median
Corporate
Factor
2007 MICP Goals and Performance
Name
Individual
Goals
Overall Performance Result
2
Financial
Operational
Strategic
Individual
Total
Award
% of
Target
Weight
Achievement
Weight
Achievement
Weight
Achievement
Izzo
3
95
%
8
855,000
Not
Not
Not
1.162
1.500
1,282,500
OFlynn
4
60
%
360,000
30%
1.486
30%
1.148
40%
1.050
1.210
1.500
540,000
Selover
5
60
%
303,000
20%
1.304
40%
1.195
40%
0.850
1.079
1.500
454,500
LaRossa
6
60
%
228,000
40%
1.469
30%
0.872
30%
0.792
1.087
1.500
342,000
DiRisio
7
45
%
114,750
30%
1.315
40%
0.993
30%
1.100
1.139
1.500
172,100
1
Percent of annual base salary.
2
Individual Performance Factors achieved may range from a minimum of 0.0 to a maximum of 1.5, with targeted performance at 1.0. Each NEOs Individual Performance Factor as shown above was
multiplied by the Corporate Factor to determine the awards as shown in the table. Awards are capped at 1.5 times the target award amount.
3
Mr. Izzos results reflect an average of all participant goal factors.
4
Mr.
OFlynns primary goals were:
Financial goals address earnings and cash flow targets for Energy Holdings
(weighted @ 30%). The result was 1.486.
Operational goals cover improving credit profile, optimization of capital structure for PSEG Global and Energy Holdings, investor relations effectiveness, fossil operations benchmarking, accuracy of
financial reports and the assessment of PSEGs capital project results( weighted @ 30%). The result was 1.148.
Strategic goals include corporate merger and acquisition and overall business strategy (weighted @ 10%), growth opportunity assessments (weighted @ 10%), Energy Master Plan execution (weighted
@ 10%) and Energy Holdings strategic alternatives (weighted @ 10%). The results were 1.000, 1.500, 0.500 and 1.200, respectively.
5
Mr. Selovers primary goals were:
Financial goal addresses the financial planning and contribution of the Law function to Services (weighted @ 20%). The result on the measure was 1.304.
Operation goals include an end-of-year client assessment of services rendered by the various units that make up the Law organization (weighted @ 40%). The result of the measure was 1.195.
Strategic goal include plans to preserve investment in energy efficient and environmentally sound products and services as defined in PSEGs Energy Master Plan and to support PSEGs generation
business with respect to the impact of programs that regulate greenhouse gases (weighted @ 40%). The result of the measure was 0.850.
6
Mr. LaRossas primary goals were:
Financial goals address total capital expenditures against business plan and productivity improvements from prior year expenditures (weighted @ 10%) and overall earnings against target projections
(weighted @ 30%). The results were 1.375 and 1.500, respectively.
Operational goals include employee safety measures (weighted @ 10%), customer service satisfaction measures (weighted @ 10%) and electric and gas reliability and safety measures (weighted @ 10%).
Results for the safety, customer service and system reliability measures were 0.656, 1.063 and 0.896, respectively.
Strategic
goals include the introduction of a management business model across
PSE&G (weighted @ 5%), the implementation of a new customer
service and billing system (weighted @ 10%) and a
strategy to preserve investment in energy efficient and environmentally
sound products and services-Energy Master Plan (weighted @ 15%).
The result for the management model introduction was 1.250, for the customer
system implementation was 1.000 and for the Energy Master Plan was 0.500.
191
Performance
Target Award
1
Factor
Factor
$
Base
Salary
$
Factor
Factor
Factor
Applicable
Applicable
Applicable
7
Mr. DiRisios primary goals were:
Financial goals address meeting the accounting departmental budget (weighted @ 15%) and managing audit fees to be more reflective of industry standards (weighted @ 15%). The results on the
measures were 1.130 and 1.500, respectively.
Operational goals include timeliness and quality of results and controls in connection with Sarbanes Oxley Act section 404 compliance (weighted @ 16%) and accuracy of accounting records, final
adjustments and quality of accounting estimates (weighted @ 24%). The results were 1.225 and 0.838, respectively.
Strategic goals include staffing of the accounting department to reduce use of part-time contracted associates (weighted @ 18%) and implementation of a process to ensure accurate reporting of fixed
asset accounting and depreciation expense (weighted @ 12%). The results were 1.000 and 1.250, respectively.
8
Composite based on 80% for three months and 100% for nine months, reflecting Mr. Izzos election as CEO of PSEG on April 1, 2007.
For the 2008 MICP plan year, the Committee has determined to modify the approach to the CEOs proposed plan award by establishing a set of individual goals for Mr. Izzo. The Committee believes
that determining MICP compensation for the CEO on the basis of individual goal results multiplied by the Corporate Factor, rather than on the basis of the average of the individual performance factors of
all officers, will better align the CEOs individual compensation scheme to that applicable to all officers and will focus the CEOs efforts on agreed objectives that are important to the Companys success.
The Committee has established an individual performance Target Award of 100% of base pay and has established the following 2008 individual goals for Mr. Izzo, which the Committee intends to weight
approximately equally:
Financial performance, including earnings, quality of earnings, credit ratings, access to capital, adequacy of internal controls and compliance, and continuous improvement in operational performance
to produce strong financial results;
Strategic development, including deployment of capital through disciplined investment decisions, optimizing total shareholder return and quality of consultations with the Board;
Leadership and management development, including succession planning, the recruitment, development and retention of a diverse, talented workforce and support in the recruitment of Board
members; and
Thought leadership, including the prominence of PSEG in the public discourse on issues of vital importance to stockholders, employees, customers and policymakers.
The Committee believes that the 2008 goals established for the other NEOs are consistent in nature with their 2007 goals and accordingly are not necessary to an understanding of the NEOs 2007 goals
and performance. These 2008 goals will be described in the 2009 proxy statement. The NEOs 2006 goals and performance were significantly related to the proposed merger with Exelon Corporation, which
was cancelled in September 2006. The Committee believes that such goals and performance likewise are not relevant to an understanding of the NEOs 2007 goals and performance.
Long-Term Incentive Compensation
The LTIP was approved by stockholders at the 2004 Annual Meeting. To permit flexibility, the LTIP provides for different forms of equity awards including:
stock options (the right to purchase shares of Common Stock at a stated price);
restricted stock (shares of Common Stock subject to forfeiture if certain service requirements or other restrictions are not met); during the restriction period, recipients of shares of restricted stock
may exercise full voting rights with respect to those shares and are entitled to receive all dividends on the shares;
restricted stock units (the right to receive shares of Common Stock in the future which is subject to transfer restrictions and a risk of forfeiture or other restrictions that will lapse upon the completion
of service by the recipient, or achievement of other objectives); and
performance units (the right to receive a stated number of shares of Common Stock upon the attainment of certain performance goals).
192
NEOs, other officers as determined by the Committee and other key employees, as selected by the CEO within guidelines established by the Committee, are eligible to participate in the LTIP. This
plan is designed to attract and retain qualified personnel for positions of substantial responsibility, to motivate participants toward goal achievement by means of appropriate incentives, to achieve long-
range corporate goals, to provide incentive compensation opportunities that are competitive with those of other similar companies and to align participants interests with those of our stockholders.
The exercise price of any stock option granted under the LTIP may not be below the closing price of our Common Stock on the date of grant, no repricing may be done without stockholder approval
and no discounted options may be granted. Performance goals are used for any performance-based awards.
For grants made in January 2007, the Committee determined that senior officers, including the NEOs (other than Mr. DiRisio), would be granted a long-term award consisting of 50% performance
shares and 50% non-qualified stock options. For other participants, including Mr. DiRisio, 2007 awards consisted of 50% performance shares and 50% restricted stock. The Committee structured the grants
in this manner to increase the performance-related nature of the grants to senior officers. The same weighting and form of long-term award grants was used for 2008 compensation awards made in
December 2007, except that for Mr. DiRisio, restricted stock units were awarded instead of restricted stock.
Grant levels are determined by the Committee based upon several factors including the value of long-term incentive awards made by firms in the peer group to executives in similar positions and whose
cash compensation is similar to each NEO as well as the individuals ability to contribute to our overall success. The level of grants is reviewed annually by the Committee. In general, when making LTIP
grants, the Committees determinations are made independently from any consideration of the individuals prior LTIP awards.
The CEO determines his recommendations for the size of LTIP grants for NEOs and each other participant in part by analyzing long-term incentive award values granted to executives for comparable
positions as reported in the peer group. Median long-term incentive values for comparable levels of base salary for executive positions within the peer group are used as a further reference for determining
the recommended grant size for NEOs and other officers. In making his recommendation for the size of a particular LTIP grant for each NEO, the CEO adjusts this average to reflect the individuals
performance and ability to contribute to the long-term value of the Company.
In January 2007, the Committee granted stock options and performance shares to Mr. Izzo, Mr. Ferland and the other NEOs, as a component of 2007 compensation. Additional grants of performance
units and stock options were made in March 2007 to Mr. Izzo upon his election to his current position. In December 2007, grants of stock options and performance units were made to Mr. Izzo and the other
NEOs except Mr. DiRisio, who received performance units and restricted stock units, as a component of 2008 compensation.
Stock Options have a term of ten years and exercise prices based on the closing price on the date of grant. They vest one-third annually except for the December 2007 grant, which vests one-fourth
annually. The performance units are subject to the achievement of certain performance goals related to PSEGs performance with respect to Total Shareholder Return (TSR) and ROE relative to the
companies in the DJUI for a performance period ending on December 31, 2009 for the performance units granted in January and March and in the 2008 peer group for a performance period ending on
December 31, 2010 for the performance units granted in December.
Target Total Direct Compensation
The
Committee reviews base salary, target total cash compensation (base salary
plus target annual cash incentive) and target total direct compensation (base
salary plus target annual cash incentive plus long-term incentive) of each
of the NEOs in comparison to the identified peer group. The data used for
the 2007 and 2008 comparisons below are from the most recent data available
for the companies in the 2007 peer group as of the time each comparison was
made, provided to the Committee by management and Towers Perrin. The Committee
considers a range of 90% to 110% of the 50
th
percentile of comparable positions
to be within the competitive median.
193
2007
For 2007, base salary, target total cash compensation and target total direct compensation of the NEOs as a percentage of the comparative benchmark levels of the 2007 peer group are as follows:
Name
Izzo
OFlynn
Selover
LaRossa
DiRisio
Base Salary
83
97
102
86
91
Total Cash Compensation
83
93
102
84
91
Total Direct Compensation
84
96
95
93
87
The comparisons for Mr. Izzo reflect his compensation as of April 2007, when he became CEO.
2008
For 2008, base salary, target total cash compensation and target total direct compensation of the NEOs as a percentage of the comparative benchmark levels of the 2007 peer group are as follows:
Name
Izzo
OFlynn
Selover
LaRossa
DiRisio
Base Salary
77
106
111
87
95
Total Cash Compensation
77
105
111
87
97
Total Direct Compensation
81
94
97
91
98
For
2007 and 2008, Mr. Izzos total direct compensation is below the median
range primarily as a result of his recent promotion to the CEO position.
The Committee set Mr. Izzos 2008 LTIP award at
82% of the corresponding 2008 peer group level, which was designed to move
him closer to the target total direct compensation range. The Committee expects
his relative position, compared to the 2008 peer group, to change as he gains
experience as CEO.
Compensation of E. James Ferland
Mr. Ferland retired as CEO effective March 31, 2007. In January 2007, the Committee increased Mr. Ferlands base salary by 3.6%. His target MICP, set at 100% of base salary, was $1,160,000. The
Committee awarded Mr. Ferland an LTIP award of 88,000 stock options which vested upon his retirement, and 15,600 performance shares which are payable within 75 days of January 1, 2008. These LTIP
awards were made in recognition of Mr. Ferlands substantial contributions to the Company over his long tenure as CEO, and were consistent with the provisions of his employment agreement.
For
2007, Mr. Ferlands base salary, target total cash compensation and
target total direct compensation were 107%, 107% and 103%, respectively,
compared to the 2007 peer group.
Other Executive Compensation Programs
Retirement
We provide certain retirement benefits to maintain practices that are competitive with companies in the energy services industry with which we compete for executive talent. In addition to the qualified
pension plan, we maintain supplemental plans to provide competitive retirement benefits. These benefits are described below under Pension Benefits and were reviewed in November 2007 by the
Committee, with the assistance of Cook.
Severance and Change-in-Control Benefits
We provide for severance benefits in the event of certain employment terminations. These benefits are available to officers, including the NEOs, in order to be competitive with the companies in the
energy industry with which we compete for executive talent. The Committee, with the assistance of Cook, compares the benefits made available to NEOs and officers in the event of a termination or
change-in-control to that generally offered by other companies in our industry. The multiples of components of compensation chosen as severance or change-in-control payments are based upon the
comparative analysis.
We also provide severance benefits upon a change-in-control to officers, including the NEOs, and to certain key executive level employees. A change-in-control is by its nature disruptive to an
organization and to many executives. Such executives are frequently key players in the success of organizational change. To assure the continuing performance of such executives in the face of a possible
termination of employment in the event of a change-in-control, we deem it prudent to provide a competitive severance package. In
194
%
%
%
%
%
%
%
%
%
%
addition, some executives, not a key party to such transaction, may have their employment terminated following its completion. A severance plan with benefits applicable upon a change-in-control is an
important element for attracting and retaining key executives.
Severance and change-in-control benefits are described below under Potential Payments Upon Termination of Employment or Change-in-Control. As noted there, the employment agreements of
Messrs. Izzo and OFlynn also provide for certain severance benefits. The Committee, with the assistance of Cook, reviewed severance benefits in November 2007, comparing them with the benefits offered
by the 2007 peer group. This review found that, while the severance benefits following a change-in-control are appropriately competitive, the benefits provided following involuntary severance for other
reasons may not be competitive.
Perquisites
We
provide certain perquisites that we believe are reasonably within compensation
practices and are competitive with companies in the energy industry with
which we compete for executive talent. These include automobile use, financial
planning services, annual physical examinations, spousal travel to accompany
executive officers on business trips (which requires the approval of the
CEO), Company-purchased tickets to entertainment and sporting events, home
security, home computer services and chartered air travel. These perquisites
are described in the Summary Compensation Table.
Stock Ownership and Retention Policy
To strengthen the alignment of the interests of management with the interests of stockholders, we have established a Stock Ownership and Retention Policy (Policy), effective November 20, 2007.
Each officer is to maintain ownership of PSEG Common Stock having a market value in the following multiples of such officers annual base salary, as in effect from time to time:
Position
Multiple
Chief Executive Officer
5
President/Chief Operating Officer
3
Executive Vice President
3
Senior Vice President
2
Vice President
1
Determination of whether an officer has met the requirement is made by multiplying the number of shares owned by the officer by the average share price for the 12 months preceding the officers
election, promotion or change in base salary.
In fulfilling the ownership requirement, all shares owned by the officer are counted, including (i) shares held in trusts for the benefit of immediate family members where the officer is the trustee, (ii)
shares granted to the officer in the form of restricted stock and restricted stock units whether or not vested, and (iii) shares held by the officer in the Thrift Plan. Stock options and performance units (as
distinct from shares which are actually issued as a result of exercise or vesting) are not counted. Shares subject to hedging or monetization transactions (such as zero-cost collars and forward sale contracts)
that have the effect of allowing the officer to retain legal ownership without the full risks and rewards of that ownership, are not counted for purposes of either the ownership or retention provisions of the
Policy.
Each officer serving as of the date the Policy was adopted must acquire the applicable amount of shares required by the Policy by the fifth anniversary of the date of adoption. Each newly elected or
promoted officer must acquire the applicable amount of shares by the fifth anniversary of the date of election or promotion.
Each officer must retain not less than 100%, after tax and costs of issuance, of all shares acquired by the officer through equity grants including the vesting of restricted stock or restricted stock unit
grants, the payout of performance awards and the exercise of option grants, until the officers ownership requirement is met. Once the required ownership level is met, a covered officer must retain 25%,
after tax and costs of issuance, of shares so acquired until the officer retires or his or her employment otherwise ends. The retention requirement does not apply to grants made before the Policy was
adopted.
The Committee has the authority to vary the application of the provisions of the policy for good cause or exceptional circumstances. In the event an officer is not in compliance with any provision of
this policy, the Committee may take such action as it deems appropriate, consistent with the provisions of our compensation plans and applicable law and regulations, to enable the officer to achieve
compliance at the earliest
195
practicable time or otherwise enforce this policy. Such action may include establishing conditions with respect to all or part of any MICP or LTIP award.
In making 2008 grants under the LTIP, the Policy was not a factor considered by the Committee.
The following table shows, for each NEO, the dollar amount of stock ownership required by the policy and the dollar amount of actual holdings as of February 15, 2008 (see Security Ownership of
Directors, Management and Certain Beneficial Owners). For each of the NEOs, compliance must be achieved by November 20, 2012.
Name
Required Amount
1
Amount Held
2
Izzo
$
4,750,000
$
6,074,453
OFlynn
$
1,854,000
$
5,562,923
Selover
$
1,560,000
$
1,980,212
LaRossa
$
1,278,000
$
333,814
DiRisio
$
273,000
$
546,701
1
Determined on basis of base salary on January 1, 2008, the effective date of the current salary of each of the NEOs.
2
Based on average price of Common Stock for the twelve months preceding January 1, 2008
Accounting and Tax Implications
The
Committee has considered the effect of the adoption of SFAS 123R (see Note
17. Stock Based Compensation) regarding the expensing of stock
options in determining the nature of the grants under the LTIP. During 2007
the Committee, with the assistance of its independent compensation consultant,
reviewed the competitiveness of the NEOs LTIP grants, as measured against
the peer group, using reported SFAS 123R grant values and approved grants
to the NEOs accordingly as reported above in Long-Term Incentive Compensation.
The Committee considers the tax-deductibility of our compensation payments. IRC Section 162(m) generally denies a deduction for United States federal income tax purposes for compensation in
excess of $1 million for persons named in the proxy statement, except for compensation pursuant to stockholder-approved performance-based plans. Stockholder approval of the LTIP and MICP was
received at the 2004 Annual Meeting of Stockholders. As a result, performance-based compensation under these plans is not now subject to the limitation on deductions contained in Section 162(m) of the
IRC.
In 2007, Mr. Izzo and Mr. OFlynn had compensation (consisting of base salary and the taxable value of restricted stock that vested during the year) in excess of the amount deductible under Section
162(m) of the IRC. The Committee will continue to evaluate executive compensation in light of Section 162(m) of the IRC. During 2007, the Committee made all awards to the NEOs under the LTIP
performance-based, except for restricted stock and restricted stock units.
In light of Section 162(m), as well as certain NYSE rules, the Committees general policy is to present all incentive compensation plans in which executive officers participate to stockholders for
approval prior to implementation.
196
Name and
Year
Salary
Bonus
Stock
Option
Non-Equity
Change in
All Other
Total
Ralph Izzo
2007
845,388
100,000
1,364,142
671,758
1,282,500
663,930
152,213
5,079,931
Chairman of the
2006
559,920
0
778,585
272,836
437,600
620,394
49,038
2,718,373
Board, Chief Executive Officer, President and Chief Operating Officer
E. James Ferland
2007
331,833
0
1,801,918
580,800
420,000
239,158
306,758
3,680,467
Chairman of the
2006
1,115,816
0
5,166,867
109,350
1,680,000
821,233
279,035
9,172,301
Board and Chief Executive Officer
Thomas M. OFlynn
2007
596,034
50,000
681,041
153,826
540,000
170,363
70,549
2,261,813
Executive Vice
2006
552,926
0
650,435
26,730
437,600
575,436
42,796
2,285,923
President and Chief Financial Officer
R. Edwin Selover
2007
501,963
0
696,875
366,816
454,500
54,787
41,717
2,116,658
Executive Vice
2006
473,225
0
425,019
17,819
356,300
494,725
46,989
1,814,077
President and General Counsel
Ralph LaRossa
2007
377,431
0
251,879
97,944
342,000
195,000
54,653
1,318,907
President and Chief
2006
238,720
0
155,230
4,536
176,400
135,000
38,826
748,712
Operating Officer (PSE&G)
Derek DiRisio
2007
252,208
0
135,095
0
172,100
45,000
20,350
624,753
Vice President
2006
214,196
58,800
97,893
4,536
112,900
101,000
20,353
609,678
and Controller
1
Mr. Izzo was elected to his current position effective April 1, 2007. He was President and COO of PSEG from October 1, 2006 until March 31, 2007 and President and COO of PSE&G through September
30, 2006.
Mr. Ferland retired on March 31, 2007.
Mr. LaRossa was elected to his current position effective October 1, 2006. Previously, he was Vice PresidentElectric Delivery.
Mr.
DiRisio was elected to his current position effective January 3, 2007.
Previously he was Assistant Controller.
2
Mr. Ferlands 2006 salary includes $780,000 deferred under the Deferred Compensation Plan. Mr. Selovers 2007 salary includes $52,000 and his 2006 salary includes $39,000 deferred under the Deferred
Compensation Plan.
3
In 2007, Mr. Izzo and Mr. OFlynn each received a special achievement award for smooth transition of the merger termination with Exelon and strong operating performance.
In 2006, Mr. DiRisio received a bonus representing a key employee retention award.
4
The amount shown reflects the expense included on PSEGs financial statements for 2007 and 2006 related to restricted stock awards, performance units and restricted stock units granted in current or
prior years under the LTIP and still outstanding as determined under SFAS 123R. The fair value at the grant date of the number of shares of equity awards granted in 2007 is shown below in the Grants of
Plan-Based Awards Table. Generally, restricted stock and restricted stock unit awards vest one-fourth annually. Awards made prior to 2007 vest one-third annually. Recipients receive dividends at the
regular dividend rate and are paid on each regular dividend date. Under their terms, all shares of restricted stock vest upon retirement.
197
Principal Position
1
($)
2
($)
3
Awards
($)
4
Awards
($)
5
Incentive
Plan
Compensation
($)
6
Pension
Value and
Non-Qualified
Deferred
Compensation
Earnings
($)
7
Compensation
($)
8,9
($)
The amount shown for Mr. Ferland reflects the vesting of all his restricted stock and performance units upon retirement.
Performance
units are denominated in shares of Common Stock and are subject to achievement
of certain performance goals over a three-year period and are payable as
determined by the Company in shares of stock or cash. For a discussion of
the assumptions made in valuation, see Note 17. Stock Based Compensation.
Under
SFAS 123R, the respective amounts attributable to restricted stock and performance
units are as follows:
Izzo
Ferland
OFlynn
Selover
LaRossa
DiRisio
Restricted Stock (2007)
$
612,747
$
1,031,278
$
484,598
$
325,517
$
128,093
$
94,730
a
Performance Units (2007)
$
751,395
$
770,640
$
196,443
$
371,358
$
123,786
$
40,365
Restricted Stock (2006)
$
691,123
$
4,813,839
$
562,973
$
372,541
$
140,918
$
83,581
Performance Units (2006)
$
87,462
$
353,028
$
87,462
$
52,478
$
14,312
$
14,312
a
Includes restricted stock and restricted stock units, which are valued equally.
The amounts shown reflect the expense included on PSEGs financial statements for 2007 and 2006 related to options granted in current or prior years under the LTIP and still outstanding as determined
under SFAS 123R. The fair value at the grant date of the number of shares of equity awards granted in 2007 is shown below in the Grants of Plan-Based Awards Table. For a discussion of the assumptions
made in valuation see Note 17 to the Consolidated Financial Statements included in PSEGs 2007 Annual Report on Form 10-K.
6
Amounts awarded were earned under the MICP and determined and paid in the following year. Mr. Izzo and Mr. Ferland have elected to defer their entire 2007 awards under the Deferred Compensation
Plan.
The entire 2006 awards were deferred under the Deferred Compensation Plan by Messrs. Izzo, Ferland and OFlynn.
7
Includes change in actuarial present value of accumulated benefit under defined benefit pension plans and supplemental executive retirement plans between December 31, 2006 and December 31, 2007
and between December 31, 2005 and December 31, 2006 determined by calculating the benefit under the applicable plan benefit formula for each of the plans, based on credited service and earnings in
effect at the respective measurement dates. These changes are:
Izzo
Ferland
OFlynn
Selover
LaRossa
DiRisio
2007
$
626,000
$
0
$
157,000
$
15,000
$
195,000
$
45,000
2006
$
601,000
$
708,000
$
571,000
$
469,000
$
135,000
$
101,000
Includes interest earned under the Deferred Compensation Plan at Prime plus 1
/
2%, to the extent that it exceeds 120% of the applicable long-term rate. These amounts are:
Izzo
Ferland
OFlynn
Selover
LaRossa
DiRisio
2007
$
37,930
$
239,158
$
13,363
$
39,787
$
0
$
0
2006
$
19,394
$
113,233
$
4,436
$
25,725
$
0
$
0
8
Depending on the individual, includes perquisites and personal benefits which include (a) automobile, gas, parking and maintenance, (b) financial planning services, (c) physical examinations and related
transportation, (d) home computer and related services, (e) home security systems, (f) airline clubs, (g) travel on chartered aircraft, (h) spousal travel and (i) personal/family entertainment. For
automobiles, the lease value of the vehicle was used; for parking, the amount charged back to the NEOs business unit for the space was used; for the driver, actual compensation and benefit expense was
used; for gasoline and maintenance, estimates were used based on the vehicles annual mileage. For personal use of chartered aircraft, the actual cost charged to the NEOs business unit was used. For
each NEO, the amount that exceeded the greater of $25,000 or 10% of his total perquisite and personal benefit amount is shown in the following chart:
Izzo
Ferland
OFlynn
Selover
LaRossa
DiRisio
Automobile, Gas & Parking
a
2007
$
135,973
$
43,828
$
27,407
$
25,462
$
28,263
$
12,099
198
5
a
Mr. Izzo and Mr. Ferland (until his retirement on March 31, 2007) received the services of a driver for business, commuting and occasional personal use.
In addition, we chartered aircraft to transport Mr. Ferland on some occasions when business needs precluded him from taking commercial flights, which had been scheduled for personal reasons. The
cost of such charters was $25,830.
Includes $133,346 with respect to accrued vacation paid to Mr. Ferland at his retirement in 2007.
Includes compensation related to rabbi trust of $85,443 and $20,452 to Mr. Ferland and Mr. OFlynn, respectively in 2007.
Includes the following employer contributions to Thrift and Tax-Deferred Savings Plan:
Izzo
Ferland
OFlynn
Selover
LaRossa
DiRisio
2007
$
9,002
$
6,751
$
9,003
$
9,006
$
9,002
$
7,876
2006
$
8,803
$
6,600
$
8,803
$
8,806
$
8,804
$
7,704
GRANTS OF PLAN-BASED AWARDS TABLE*
Name
Grant
Estimated Possible Payouts
Estimated Future Payouts
All Other
All Other
Exercise
Grant
Threshold
Target
Maximum
Threshold
Target
Maximum
Ralph Izzo
N/A
427,500
855,000
1,282,500
0
0
Performance Units
01/16/07
0
24,600
49,200
992,979
Stock Options
01/16/07
140,000
32.93
1,019,200
Performance Units
03/20/07
0
23,000
46,000
1,261,205
Stock Options
03/20/07
113,000
39.17
1,023,780
Performance Units
12/18/07
0
52,800
105,600
2,788,104
Stock Options
12/18/07
199,800
48.21
2,289,708
E. James Ferland
N/A
580,000
1,160,000
1,740,000
0
0
Performance Units
01/16/07
0
15,600
31,200
770,640
Stock Options
01/16/07
88,000
32.93
580,800
Thomas M. OFlynn
N/A
180,000
360,000
540,000
0
0
Performance Units
01/16/07
0
14,600
29,200
589,329
Stock Options
01/16/07
82,000
32.93
596,960
Performance Units
12/18/07
0
11,000
22,000
580,855
Stock Options
12/18/07
45,800
48.21
524,868
R. Edwin Selover
N/A
151,500
303,000
454,500
0
0
Performance Units
01/16/07
0
9,200
18,400
371,358
Stock Options
01/16/07
52,000
32.93
353,600
Performance Units
12/18/07
0
7,800
15,600
411,879
Stock Options
12/18/07
33,000
48.21
378,180
Ralph LaRossa
N/A
114,000
228,000
342,000
0
0
Performance Units
01/16/07
0
9,200
18,400
371,358
Stock Options
01/16/07
52,000
32.93
378,560
Performance Units
12/18/07
0
7,800
15,600
411,879
Stock Options
12/18/07
33,000
48.21
378,180
Derek DiRisio
N/A
57,375
114,750
172,125
0
0
Performance Units
01/16/07
0
3,000
6,000
121,095
Restricted Stock
01/16/07
2,800
92,190
Performance Units
12/18/07
0
2,300
4,600
121,452
Restricted Stock
Units
12/18/07
2,200
106,051
*
Reflects 2-for-1 split of PSEG Common Stock effective February 4, 2008
199
9
Date
1
Under Non-Equity Incentive
Plan Awards
2
Under Equity Incentive
Plan Awards
3
Stock
Awards:
Number
of Shares
of Stock
or Units
(#)
Option
Awards:
Number of
Securities
Underlying
Options
(#)
or Base
Price of
Option
Awards
($/Sh)
Date
Fair
Value
of Stock
and
Option
Awards($)
4
($)
($)
($)
(#)
(#)
(#)
1
Relates to equity awards.
2
Represents possible payouts under MICP for 2007 performance. The actual awards were determined in February 2008; will be paid in March 2008 and are reported in the Summary Compensation Table.
Amounts for Mr. Izzo are pro-rated 9 months at 100% target and 3 months at 80% target.
Amounts for Mr. Ferland are prorated 3/12th, as he retired on March 31, 2007.
3
Represents LTIP awards described below.
4
Represents
the fair value at the grant date of the equity awards granted in 2007.
For a discussion of the assumptions made in valuation see Note 17. Stock
Based Compensation.
Material Factors Concerning Awards Shown in Summary Compensation Table, Grants of Plan-Based Awards Table and Employment Agreements
Stock Split
The Board of Directors approved a 2-for-1 split for PSEGs common stock effective February 4, 2008. All share amounts and related exercise prices included in this proxy statement, retroactively reflect
the effect of the stock split.
MICP
The Plan-Based awards for annual incentive compensation included in the Summary Compensation Table were paid in 2008 with respect to 2007 performance under the terms of the MICP. The range
of possible awards for each NEO in relation to his Target Award is set forth in the Grants of Plan-Based Awards Table above. An explanation of the MICP and each NEOs individual performance goals,
measures and performance factors achieved are described above under 2007 MICP Goals and Performance in Compensation Discussion and Analysis.
The NEOs MICP awards for 2007 were as follows:
Izzo
Ferland
OFlynn
Selover
LaRossa
DiRisio
$1,282,500
$420,000
$540,000
$454,500
$342,000
$172,100
LTIP
As discussed in the Compensation Discussion and Analysis and on the table shown above, LTIP awards were made to NEOs in 2007. The Committee, on January 16, 2007, approved the regularly
scheduled grants in the form of stock options and performance shares to Mr. Izzo and the other named NEOs. In addition, Mr. Ferland received a grant of 88,000 stock options that vested on March 31,
2007, his retirement date and 15,600 performance shares which are payable within 75 days of January 1, 2008, subject to achievement of performance results. The January 16, 2007, grants for the other NEOs
are shown in the above table with a performance measurement period for performance shares ending on December 31, 2009. The Committee approved, on March 20, 2007, a grant of 113,000 stock options
to Mr. Izzo upon his election to the position of Chairman of the Board and CEO effective April 1, 2007. The Committee approved, on December 18, 2007, additional grants to the NEOs of stock options
and performance shares. One-fourth of the options vest each December over a four-year period. A three-year performance period for performance shares ends December 31, 2010.
Grants of performance shares made on January 16, 2007 and June 19, 2007, allow award recipients to receive 100% of their grant amount if, for the three-year performance period ending on December
31, 2009, (a) PSEGs TSR placed it within the third quintile of the companies within the DJUI and (b) PSEGs ROE was within one percent (1%) of the ROE of the DJUI. For performance above or below
these levels, the final award could be increased to as much as 200% of the grant amount (TSR in the first quintile and ROE more than 2% above the DJUI) or decreased to zero. Grants of performance
shares made on December 18, 2007, allow award recipients to receive an award, as described above, but measured against the 2008 peer group rather than the DJUI for the three-year performance period
ending on December 31, 2010. Restricted stock units granted on December 18, 2007 accrue dividend credits equivalent to the dividends paid on shares of PSEG Common Stock and vest one-fourth annually.
200
Employment Agreements
PSEG entered into an employment agreement with Mr. Izzo dated October 18, 2003, covering his employment as President and COO of PSE&G and in other executive positions to which he may be
elected through October 18, 2008. The agreement provides that his base salary, target annual incentive bonus and long-term incentive bonus will be determined based on compensation practices of similar
companies and that his annual salary will not be reduced during its term. The Agreement also awarded him options with respect to 500,000 shares of Common Stock, 100,000 of which vest on each October
18 from 2004 through 2008, and expire on October 18, 2013, provided he has remained continuously employed through each such vesting date.
PSEG entered into an employment agreement dated as of April 18, 2001, and amended as of December 21, 2001, with Mr. OFlynn covering his employment as Executive Vice President and Chief
Financial Officer. The term of the agreement continued until July 1, 2007, with an additional year added to the term annually unless a notice of non-renewal is given by Mr. OFlynn or us at least 90 days in
advance of such date. In the event of a change-in-control (as defined in such agreement), the term of Mr. OFlynns employment is automatically continued until the second anniversary of the change-in-
control. The agreement provides that Mr. OFlynns base salary, target annual incentive bonus and long-term incentive bonus will be determined based on compensation practices of similar companies and
that his annual salary will not be reduced during its term. The agreement also provided for an award to him of 200,000 shares of restricted Common Stock, which have fully vested. The agreement awarded
Mr. OFlynn options with respect to the purchase of 500,000 shares of Common Stock, which are fully vested and expire on July 1, 2011. The agreement also awarded 100,000 options, which have fully
vested. The agreement provides for the granting, upon the completion of five years of service, of 15 years of credit under the Mid-Career Plan for Mr. OFlynns prior experience.
For additional information regarding severance benefit provisions in the Employment Agreements of Messrs. Izzo and OFlynn, see Potential Payments Upon Termination of Employment or Change-
in-Control below.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (12/31/07) TABLE*
Name
Option Awards
Stock Awards
Number of
Number of
Equity
Option
Option
Number of
Market
Equity
Equity
Ralph
Izzo
0
0
0
21,086
1,035,744
101,976
5,009,061
300,000
100,000
2
0
20.39
6
10/18/2013
22,000
0
0
21.38
7
05/03/2014
0
140,000
3
0
32.93
8
01/16/2017
0
113,000
4
0
39.17
9
03/20/2017
0
199,800
5
0
48.21
10
12/18/2017
E. James Ferland
0
0
0
0
0
0
0
Thomas M. OFlynn
354,000
0
0
22.93
11
07/01/2011
16,668
818,732
26,054
1,279,772
22,000
0
0
21.38
7
05/03/2014
0
82,000
3
0
32.93
8
01/16/2017
0
45,800
5
0
48.21
10
12/18/2017
R.
Edwin Selover
0
0
0
11,202
550,242
17,290
849,285
0
52,000
3
0
32.93
8
01/16/2017
0
33,000
5
0
48.21
10
12/18/2017
Ralph
LaRossa
0
0
0
21,086
1,035,744
101,976
5,009,061
0
52,000
3
0
32.93
8
01/16/2017
0
33,000
5
0
48.21
10
12/18/2017
Derek
DiRisio
0
0
0
7,468
366,828
5,394
264,953
201
Securities
Underlying
Unexercised
Options
Exercisable
(#)
1
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
1
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
Exercise
Price
($)
Expiration
Date
Shares or
Units of
Stock
that have
Not Vested
(#)
12
Value of
Shares or
Units of
Stock
that have
Not Vested
($)
13
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other Rights
that have
Not Vested
(#)
14
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other Rights
that have
Not Vested
($)
13
*
Reflects the 2-for-1 split of PSEG Common Stock effective February 4, 2008
1
Grants of non-qualified options to purchase Common Stock. The date of grant is ten years prior to the option expiration date.
2
These options vest on October 18, 2008.
3
25% of options vest on each January 16 of 2008, 2009, 2010, and 2011.
4
25% of options vest on each March 20 of 2008, 2009, 2010, and 2011.
5
25% of options vest on each December 18 of 2008, 2009, 2010, and 2011.
6
Closing price on NYSE on grant date of December 18, 2003.
7
Closing price on NYSE on grant date of May 3, 2004.
8
Closing price on NYSE on grant date of January 16, 2007.
9
Closing price on NYSE on grant date of March 20, 2007 was $39.15.
10
Closing price on NYSE on grant date of December 18, 2007.
11
Closing price on NYSE on grant date of July 1, 2001.
12
Shares of restricted stock units awarded under the LTIP, which vest as shown below. Dividends accrue at the regular dividend rate and are paid on each regular dividend payment date as declared by the
Board of Directors.
Vesting Date
Grant Date
Izzo
Ferland
OFlynn
Selover
LaRossa
DiRisio
01/18/2008
01/18/2005
10,668
9,000
6,068
1,468
1,468
12/20/2008
12/20/2005
8,334
7,668
5,134
1,268
1,000
12/20/2008
10/02/2006
2,084
1,600
01/01/2008
01/16/2007
700
01/01/2009
01/16/2007
700
01/01/2010
01/16/2007
700
01/01/2011
01/16/2007
700
12/18/2008
12/18/2007
550
12/18/2009
12/18/2007
550
12/18/2010
12/18/2007
550
12/18/2011
12/18/2007
550
Mr. Ferland became fully vested upon retirement on March 31, 2007.
13
Value represents number of shares multiplied by the closing price on the NYSE on December 31, 2007 of $49.12.
14
For explanation of performance shares, see LTIP section above, following the Grants of Plan-Based Awards Table. Mr. Ferland became fully vested upon retirement on March 31, 2007.
OPTION EXERCISES AND STOCK VESTED DURING 2007 TABLE*
Name
Option Awards
Stock Awards
Number of
Value
Number of
Value
Ralph Izzo
0
0
21,084
850,391
E. James Ferland
1,420,000
28,278,627
169,350
6,777,630
Thomas M. OFlynn
0
0
16,666
663,586
R. Edwin Selover
14,666
309,754
11,200
445,679
Ralph LaRossa
3,734
77,736
4,332
185,704
Derek DiRisio
4,200
65,625
2,466
96,155
*
Reflects the 2-for-1 split of PSEG Common Stock effective February 4, 2008
202
(#)
(#)
(#)
(#)
(#)
(#)
Shares
Acquired on
Exercise
(#)
Realized on
Exercise
($)
1
Shares
Acquired on
Vesting
(#)
2
Realized on
Vesting
($)
3
1
Reflects difference between the exercise price and the market price on the date of exercise, multiplied by the number of shares acquired.
2
Represents: (i) the aggregate number of shares acquired from the vesting of restricted stock awards under the LTIP and (ii) the aggregate number of performance units granted under the LTIP which
vested on 03/31/07, upon Mr. Ferlands retirement, as follows:
Izzo (#)
Ferland (#)
OFlynn (#)
Selover (#)
LaRossa (#)
DiRisio (#)
Restricted stock
01/18/07
10,666
43,334
9,000
6,066
1,466
1,466
03/31/07
0
110,002
0
0
0
0
12/20/07
10,418
0
7,666
5,134
2,866
1,000
Performance units
a
03/31/07
0
16,014
0
0
0
0
3
The value attributable to the vested restricted stock is based on the closing price of PSEG Common Stock on the respective vesting dates of 01/18/07, 03/31/07 and 12/20/07 of $32.86, $41.52 and $47.99,
respectively. The value attributable to the performance units, which vested on 03/31/07 upon Mr. Ferlands retirement, is based upon the closing price of PSEG Common Stock on December 31, 2007 of
$49.12. These amounts are:
Izzo ($)
Ferland ($)
OFlynn ($)
Selover ($)
LaRossa ($)
DiRisio ($)
Restricted stock
01/18/07
350,431
1,423,739
295,695
199,298
48,165
48,165
03/31/07
0
4,567,283
0
0
0
0
12/20/07
499,960
0
367,891
246,381
137,539
47,990
Performance units
a
03/31/07
0
786,608
0
0
0
0
a
Amounts shown represent the number and value of the Target Award, since the final comparative performance data necessary to calculate the final award amount is not expected to be available until
March 2008.
203
PENSION BENEFITS TABLE
Name
Plan Name
Number of
Present Value of
Payments
Ralph Izzo
Qualified Pension Plan
1
15.70
295,000
0
Retirement Income Reinstatement Plan
2
15.70
841,000
Mid-Career Hire Supplemental Retirement Income Plan
3
3.07
546,000
Limited Supplemental Benefits Plan
4
18.77
1,067,000
Total
2,749,000
E. James Ferland
7
Qualified Pension Plan
1
20.83
1,297,000
87,143
Retirement Income Reinstatement Plan
2
20.83
3,797,000
255,044
Mid-Career Hire Supplemental Retirement Income Plan
3
27.0
6,609,000
443,972
Limited Supplemental Benefits Plan
4
47.83
0
0
Total
11,703,000
786,159
Thomas M. OFlynn
Qualified Pension Plan
1
6.50
55,000
0
Retirement Income Reinstatement Plan
2
6.50
103,000
Mid-Career Hire Supplemental Retirement Income Plan
3
16.75
34,000
Limited Supplemental Benefits Plan
4
23.25
2,926,000
6
Total
3,118,000
R. Edwin Selover
Qualified Pension Plan
1
35.33
1,255,000
0
Retirement Income Reinstatement Plan
2
35.33
2,552,000
Mid-Career Hire Supplemental Retirement Income Plan
3
5.00
541,000
Limited Supplemental Benefits Plan
4
40.33
459,000
Total
4,807,000
Ralph LaRossa
Qualified Pension Plan
1
22.51
418,000
0
Retirement Income Reinstatement Plan
2
22.51
284,000
Mid-Career Hire Supplemental Retirement Income Plan
3
0
0
Limited Supplemental Benefits Plan
4
22.51
0
Total
702,000
Derek DiRisio
Qualified Pension Plan
1
16.31
294,000
0
Retirement Income Reinstatement Plan
2
16.31
147,000
Mid-Career Hire Supplemental Retirement Income Plan
3
0
0
Limited Supplemental Benefits Plan
4
16.31
0
Total
441,000
1
All NEOs participate in either a traditional defined benefit pension plan (Pension Plan) or a cash balance pension plan (Cash Balance Plan), depending on date of hire, each of which is a qualified plan
under the IRC. Such plans are available to all other employees under the same terms and conditions. Messrs. Izzo, Ferland, Selover, LaRossa and DiRisio participate in the pension plan. Mr. OFlynn
participates in the cash balance plan. Years shown reflect actual years of service.
2
Years shown reflect actual years of service.
3
Certain
employees receive additional years of credited service for the purpose
of retirement benefit calculations in recognition of prior work experience
before joining the Company, including 22 years for Mr. Ferland and 15
years for Mr. OFlynn, pursuant to their respective employment agreements.
In addition, participants receive an additional 5 years which vest at
age 60 as described below under Mid-Career Plan.
4
Years shown reflect the sum of actual years of service and years credited under the Mid-Career Hire Supplemental Retirement Income Plan.
5
Amounts shown represent actuarial present value of accumulated benefit computed as of the same pension plan measurement date used for PSEGs financial statements for the year ended December 31,
2007, with two exceptions: (i) NEOs were assumed to retire at the earliest point at which the benefits were payable on
204
Years Credited
Service
(#)
Accumulated
Benefit
($)
5
During Last
Fiscal Year
($)
an unreduced basis in the plan providing the largest target benefit and (ii) no pre-retirement termination, disability or death was assumed to occur. For a discussion of the valuation method and material
assumptions applied in quantifying the present value, see Note 16 Pension, OPEB and Savings Plans.
6
The actuarial present value of accumulated benefits based on actual years of service is $1,915,000 and the actuarial present value of accumulated benefits based on additional years of service is $1,011,000.
7
Mr. Ferland retired on March 31, 2007.
Qualified Pension Plans
All of our employees are eligible to participate in either a Pension Plan or a Cash Balance Plan. The Pension Plan covers employees hired prior to January 1, 1996 and provides participants with a life
annuity benefit at normal retirement (age 65) pursuant to a formula based upon (a) the participants number of years of service and (b) the average of the participants five highest years of compensation
after December 21, 1994 up to the limit imposed by the IRC.
The benefit formula is A
+
B
+
C:
A
=
1.3% of the lesser of 5-year final average earnings not in excess of $24,600 times years of credited service not exceeding 35 years,
B
=
1.5% of the amount by which 5-year final average earnings exceeds $24,600 times years of credited service not exceeding 35 years,
C
=
1.5% of 5-year final average earnings times years of credited service in excess of 35 years.
An additional benefit equal to $4.00 per month for each year of credited service is payable until the retiree reaches age 65.
Participants become fully vested in their Pension Plan benefit upon completion of five years of service. Benefits are payable on an unreduced basis (i) at age 65, (ii) at age 60, if the participants age,
plus years of service, equals or exceeds 80 or (iii) at age 55, if the participant has 25 or more years of service. Participants whose age, plus years of service, equals or exceeds 80, but who are not yet age 55,
may commence their Pension Plan benefits on a reduced basis.
The Cash Balance Plan covers employees hired or rehired on or after January 1, 1996 and provides each participant with a life annuity benefit at normal retirement (age 65) equal to the actuarial
equivalent of a notational amount maintained for him/her. Participants are eligible for retirement under the Cash Balance Plan upon the attainment of age 55 with five or more years of service. Participants
accounts are credited each year with a percentage of compensation, which is determined based on the participants age plus years of service measured at year-end.
Sum of Age
Percentage of
<30
2.00
%
3039
2.50
%
4049
3.25
%
5059
4.25
%
6069
5.50
%
7079
7.00
%
8089
9.00
%
90+
12.00
%
Each participants notional amount grows each year with interest credits based on a 6.0% annual rate of interest. Participants become immediately fully vested in their Cash Balance Plan benefit.
Reinstatement Plan
All employees are eligible to participate in a non-qualified excess benefit retirement plan, the Retirement Income Reinstatement Plan for Non-Represented Employees (Reinstatement Plan), designed
to replace earned pension benefits as determined by the qualified pension formula, but which are not eligible for payment from the qualified pension plans as a result of IRC mandated limits for qualified
plans. The
205
and Service
Compensation
Credited
benefits payable under this plan mirror those of the qualified plans described above except that the compensation considered in computing the benefit (i) will not be limited by qualified plan limits, (ii) will
include any amounts that the participant may have deferred under deferred compensation plans, (iii) will include amounts earned under MICP (which are not considered under the qualified pension plans),
(iv) will be limited to 150% of average base salary for the applicable five years and (v) will be offset by any benefits received by the participant under the qualified plan.
Mid-Career Plan
Certain employees receive additional years of service for the purpose of retirement benefit calculations in recognition of prior work experience. Such benefits are paid from a non-qualified plan, the
Mid-Career Hire Supplemental Retirement Income Plan (Mid-Career Plan). Under the Mid-Career Plan, certain participants, including the NEOs, receive an additional five years of credited service for the
purpose of pension benefit calculations if they retire between ages 60 and 65. The credited years of service reduce by one year for each six-month period such participant works beyond age 65. This feature
of the plan is designed to encourage retirement on or before age 65. Benefits payable under the Mid-Career Plan mirror those payable under the Reinstatement Plan, except that the additional years of
service are considered in calculating the amount of benefit. Any benefit payable under this plan is offset by benefits payable under the qualified plan and the Reinstatement Plan.
Limited Plan
Certain employees, including the NEOs participate in a limited non-qualified supplemental retirement plan, the Limited Supplemental Benefits Plan for Certain Employees (Limited Plan). This plan
seeks to provide a total target replacement income percentage equal to credited service for qualified pension calculation purposes, Mid-Career Plan calculation purposes plus 30 to a maximum of 75%.
Compensation covered for the Limited Plan is the same as for the Mid-Career Plan. The target replacement amount under the Limited Plan is reduced by any pension benefits accrued and vested from a
previous employer at the time of hire, by the participants Social Security benefit at normal retirement age and by the pension benefits provided by each other PSEG retirement benefit plan (qualified plans
and non-qualified plans). The Limited Plan also provides a death benefit equal to 150% of base compensation if death occurs while the participant is actively employed. Participants become entitled to a
Limited Plan benefit only upon (a) retirement under the terms of the qualified plan in which they participate (Pension Plan or Cash Balance Plan) or (b) death, at which point the benefit is payable as an
annuity on an unreduced basis.
NON-QUALIFIED DEFERRED COMPENSATION TABLE
Name
Executive
Registrant
Aggregate
Aggregate
Aggregate
Ralph Izzo
1
437,600
0
112,040
0
1,375,423
E. James Ferland
2
3,337,506
0
708,847
909,876
8,299,001
Thomas M. OFlynn
3
437,600
0
60,523
0
885,368
R. Edwin Selover
4
298,386
0
118,016
0
1,520,103
Ralph LaRossa
0
0
0
0
0
Derek DiRisio
0
0
0
0
0
1
The amount shown under Executive Contributions in Last Fiscal Year (2007) was previously reported in our 2006 10-K. $37,930 of the amount shown under Aggregate Earnings in Last Fiscal Year (2007)
is reported in the Summary Compensation Table in this report under Change in Pension Value and Non-Qualified Deferred Compensation as earnings in excess of 120% of the applicable long-term rate
as discussed in footnote 7 of that Table. $1,178,479 of the amount shown under Aggregate Balance at Last Fiscal Year End (12/31/07) is reported in the Summary Compensation Table for the Last Fiscal
Year in this report or in reports for previous years.
2
The amount shown under Executive Contributions in Last Fiscal Year (2007) was previously reported in our 2006 10-K. $239,158 of the amount shown under Aggregate Earnings in Last Fiscal Year
(2007) is reported in this report in the Summary Compensation Table under Change in Pension Value and Non-
206
Contributions
in Last
Fiscal Year
(2007) ($)
Contributions in
Last
Fiscal Year
(2007) ($)
Earnings in Last
Fiscal Year
(2007) ($)
Withdrawals/
Distributions
($)
Balance at
Last Fiscal
Year End
(12/31/07)
($)
Qualified Deferred Compensation as earnings in excess of 120% of the applicable long-term rate as discussed in footnote 7 of that Table. $5,855,170 of the amount shown under Aggregate Balance at Last
Fiscal Year End (12/31/07) is reported in the Summary Compensation Table for the Last Fiscal Year in this report or in reports for previous years.
3
The amount shown under Executive Contributions in Last Fiscal Year (2007) was previously reported in our 2006 10-K. $13,363 of the amount shown under Aggregate Earnings in Last Fiscal Year (2007)
is reported in the Summary Compensation Table in this report under Change in Pension Value and Non-Qualified Deferred Compensation as earnings in excess of 120% of the applicable long-term rate
as discussed in footnote 7 of that Table. $768,406 of the amount shown under Aggregate Balance at Last Fiscal Year End (12/31/07) is reported in the Summary Compensation Table for the Last Fiscal
Year in this report or in reports for previous years.
4
The amount shown under Executive Contributions in Last Fiscal Year (2007) is reflected in the Summary Compensation Table in this report. $39,787 of the amount shown under Aggregate Earnings in
Last Fiscal Year (2007) is reported in the Summary Compensation Table in this report under Change in Pension Value and Non-Qualified Deferred Compensation as earnings in excess of 120% of the
applicable long-term rate as discussed in footnote 7 of that Table. $438,332 of the amount shown under Aggregate Balance at Last Fiscal Year End (12/31/07) is reported in the Summary Compensation
Table for the Last Fiscal Year in this report or in reports for previous years.
Deferred Compensation Plan
Under the PSEG Deferred Compensation Plan for Certain Employees (Deferred Compensation Plan), participants, including the NEOs, may elect to defer any portion of their compensation by making
appropriate elections in the calendar year prior to the year in which the services giving rise to the compensation being deferred is rendered. For performance-based compensation, elections may be made up
to the date that is six months before the end of the related performance period, as long as (a) the performance period is at least 12 months in length, (b) the participant performed services continuously from
the date the performance criteria were established through the date the deferral election is made and (c) at the time the deferral election is made, the performance-based compensation is not both (i)
substantially certain to be paid and (ii) readily ascertainable. A participant may change an election to defer compensation not later than the date that is the last date that an election to defer may be made.
At the same time he/she elects to defer compensation, the participant must make an election as to the timing and the form of distribution from his/her Deferred Compensation Plan account.
Distributions may commence (a) on the thirtieth day after the date he/she terminates employment or, in the alternative, (b) on January 15th of any calendar year following termination of employment
elected by him/her, but in any event no later than the later of (i) the January of the year following the year of his/her 70th birthday or (ii) the January following termination of employment. Notwithstanding
the forgoing, however, for NEOs, distribution of his/her account may not occur earlier than six months following the date of his/her termination of service. Participants may elect to receive the distribution
of their Deferred Compensation account in the form of (x) one lump-sum payment, (y) annual distributions over a five-year period or (z) annual distributions over a 10-year period.
Participants may make changes of distribution elections on a prospective basis. Participants may also make changes of distribution elections with respect to prior deferred compensation as long as (a)
any such new distribution election is made at least one year prior to the date that the commencement of the distribution would otherwise have occurred and (b) the revised commencement date is at least
five years later than the date that the commencement of the distribution would otherwise have occurred.
Amounts deferred under the Deferred Compensation Plan are credited with earnings based on (i) the performance of one or more of the pre-mixed lifestyle investment portfolio funds or the S&P 500
Fund available to employees under our 401(k) Plans or (ii) at the rate of Prime plus
1
/
2
%, in such percentages as selected by the participant. A participant who fails to provide a designation of investment
funds will accrue earnings on his/her account at the rate of Prime plus
1
/
2
%.
207
For 2007 the rates of return for these funds were as follows:
Conservative Pre-Mixed Portfolio
5.66
%
Moderate Pre-Mixed Portfolio
6.12
%
Aggressive Pre-Mixed Portfolio
6.09
%
S&P 500 Fund
5.40
%
Prime Plus
1
/
2
%
9.03
%
A participant may change fund selection once a year.
POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT
The employment agreements of Messrs. Izzo and OFlynn discussed above each provide for certain severance benefits. Each of these agreements provides that if the individual is terminated without
cause (a willful failure to perform his duties) or resigns for good reason (a reduction in pay, position or authority) during the term of such agreement, the respective entire restricted stock award and/or
entire option award becomes vested, the individual will be paid a benefit of two times base salary and target bonus, and his welfare benefits will be continued for two years unless he is sooner employed. In
the event such a termination occurs after a change-in-control (as defined below), the payment to the individual 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 of providing three years additional service under our retirement plans and a gross-up for excise taxes due under the IRC on any
termination payments. Each of the agreements provides that the individual is prohibited for one year from competing with and for two years from recruiting employees from us or its subsidiaries or
affiliates, after termination of employment. Violations of these provisions require a forfeiture of the respective restricted stock and option grants and certain benefits.
PSEGs Key Executive Severance Plan provides severance benefits to Messrs. Selover, LaRossa and DiRisio and to certain of our key executive-level employees whose employment is terminated
without cause after a change-in-control.
Under the Key Executive Severance Plan, if any of Messrs. Selover, LaRossa or DiRisio is terminated without cause or resigns his employment for good reason within two years after a change-in-
control, he will receive (1) a pro rata bonus based on his target annual incentive compensation, (2) three times the sum of his salary and target incentive bonus, (3) accelerated vesting of equity-based awards,
(4) a lump sum payment equal to the actuarial equivalent of his benefits under all of our retirement plans in which he participates calculated as though he remained employed for three years beyond the date
his employment terminates less the actuarial equivalent of such benefits on the date his employment terminates, (5) three years continued welfare benefits (the first 18 months of which will be provided
through PSEG-paid COBRA continuation coverage), (6) one year of PSEG-paid outplacement services and (7) vesting of any compensation previously deferred.
Messrs. Selover, LaRossa and DiRisio also participate in PSEGs Separation Allowance Benefit Plan for Non-Represented Employees (Separation Allowance Plan) which provides certain severance
benefits to non-represented employees who suffer a termination of employment as a result of a reduction in force or reorganization. Under the Separation Allowance Plan, key managers, including Messrs.
Selover, LaRossa and DiRisio are entitled to two weeks of base salary for each year of service, with a minimum of 26 weeks and a maximum of 52 weeks of base salary, as well as a prorated payment of
their target incentive award and certain outplacement services, educational assistance, health care and life insurance coverage.
If a termination without cause, with good reason or for a reduction in force or reorganization had occurred on December 31, 2007, each of the NEOs would have received the following benefits:
Izzo
$
12,857,859
OFlynn
$
4,800,635
Selover
$
2,409,213
LaRossa
$
1,825,499
DiRisio
$
618,369
208
OR CHANGE-IN-CONTROL
If a termination without cause or with good reason had occurred on December 31, 2007 following a change-in-control, each of the NEOs would have received the following benefits:
Izzo
$
20,564,901
OFlynn
$
6,164,611
Selover
$
4,423,523
LaRossa
$
4,972,637
DiRisio
$
1,344,566
Change-in-Control under the Employment Agreements of Mr. Izzo and Mr. OFlynn and under the Key Executive Severance Plan generally means the occurrence of any of the following events:
(a) any person is or becomes the beneficial owner of our securities representing 25% or more of the combined voting power of our then outstanding securities; or
(b) a majority of the Board of Directors is replaced without approval of the current Board; or
(c) there is consummated a merger or consolidation of us, other than a merger or consolidation which would result in our voting securities outstanding immediately prior to such merger continuing
to represent at least 75% of the combined voting power of the securities of us or such surviving entity immediately after such merger or consolidation; or
(d) our shareholders approve a plan of complete liquidation or dissolution of us or there is consummated an agreement for the sale or disposition by us of all or substantially all of our assets.
DIRECTOR COMPENSATION TABLE
Name
Fees
Stock
Option
Non-Equity
Change in
All Other
Total
Caroline Dorsa
84,500
67,375
0
0
0
0
151,875
Albert R. Gamper, Jr.
100,500
67,375
0
0
0
0
167,875
Conrad K. Harper
92,000
67,375
0
0
0
0
159,375
1
Includes all meeting fees, chair/committee retainer fees and the annual retainer. During 2007, each director who was not an officer of us or our subsidiaries and affiliates was paid an annual retainer of
$45,000 and a fee of $1,500 for attendance at any Board or committee meeting, inspection trip, conference or other similar activity relating to us or PSE&G. No additional retainer is paid for service as a
director of PSE&G. Each Committee Chair received an additional annual retainer of $5,000, except for the Chair of the Audit Committee, who received $15,000 and the Chair of the Organization and
Compensation Committee who received $10,000. In addition, each member of the Audit Committee received an additional annual retainer of $5,000.
2
Amount shown reflects the expense included on PSEGs Financial Statements for 2007 related to awards under the 2007 Equity Compensation Plan for Outside Directors (Directors Equity Plan) granted
on May 1, 2007 and still outstanding as determined under SFAS 123R. The Directors Equity Plan is a deferred compensation plan and, under its terms, each outside director is granted an award of stock
units each May 1st (in an amount determined from time-to-time by the Board) which is recorded in a bookkeeping account in her/his name and accrues earnings credits equivalent to the earnings on
shares of PSEG Common Stock. If a director fails to remain as a member of the Board (other than on account of disability or death) until the earlier of the succeeding April 30th or the next Annual
Meeting of Stockholders, the award for that year will be prorated to reflect actual service. Distributions under the Directors Equity Plan are made in shares of PSEG Common Stock after the director
terminates service on the Board in accordance with distribution elections made by her/him.
For each outside director the grant date fair value of the award was $100,000 on May 1, 2007, which equated to 2,306 stock units based on the then-current market price of the Common Stock. In addition,
each outside directors account is credited with additional stock units on the quarterly dividend dates at the
209
Earned
or Paid
In Cash
($)
1
Awards
($)
2
Awards
($)
Incentive Plan
Compensation
($)
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
Compensation
($)
($)
then current dividend rate. For a discussion on the assumptions made in valuation, see Note 17. Stock Based Compensation.
Directors Deferred Compensation Plan
Under PSEG Deferred Compensation Plan for Directors (Directors Deferred Compensation Plan), directors who are not employees may elect to defer any portion of their retainer and meeting
attendance fees by making appropriate elections in the calendar year prior to the year in which the services giving rise to the compensation being deferred is rendered. A participant may change an election
to defer compensation not later than the date that is the last date that an election to defer may be made.
At the same time he/she elects to defer compensation, the participant must make an election as to the timing and the form of distribution from his/her Directors Deferred Compensation Plan account.
Distributions may commence (a) on the thirtieth day after the date he/she terminates service as a director or, in the alternative, (b) on January 15th of any calendar year following termination of service
elected by him/her, but in any event no later than the later of (i) the January of the year following the year of his/her 71st birthday or (ii) the January following termination of service. Participants may elect
to receive distribution of their Directors Deferred Compensation account in the form of (x) one lump-sum payment, or (y) annual distributions over a period selected by the participant, up to 10 years.
Restricted stock awarded to directors pursuant to stock plan for outside directors. The shares are subject to forfeiture if the director leaves prior to age 72.
The following table shows outstanding stock units and restricted shares as of December 31, 2007 adjusted for the stock split:
Dorsa
Gamper
Harper
Stock units
2,306
2,306
2,306
Restricted stock
8,800
9,600
13,200
Participants may make changes of distribution elections on a prospective basis. Participants may also make changes of distribution elections with respect to prior deferred compensation as long as (A)
any such new distribution election is made at least one year prior to the date that the commencement of the distribution would otherwise have occurred and (B) the revised commencement date is at least
five years later than the date that the commencement of the distribution would otherwise have occurred.
Amounts deferred under the Directors Deferred Compensation Plan are credited with earnings based on (i) the performance of one or more of the pre-mixed lifestyle investment portfolio funds or the
S&P 500 fund available to employees under the Companys 401(k) Plans, (ii) at the rate of Prime plus
1
/
2
% or (iii) by reference to the performance of the Companys Common Stock, in such percentages
designated by the participant. A participant who fails to provide a designation will accrue earnings on his/her account at the rate of Prime plus
1
/
2
%.
For 2007, the rates of return for these funds were as follows:
Conservative Pre-Mixed Portfolio
5.66
%
Moderate Pre-Mixed Portfolio
6.12
%
Aggressive Pre-Mixed Portfolio
6.09
%
S&P 500 Fund
5.40
%
Prime Plus
1
/
2
%
9.03
%
PSEG Common Stock
50.35
%
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
PSE&G does not have a compensation committee. Decisions regarding compensation of PSE&Gs executive officers are made by the Organization and Compensation Committee of PSEG. During 2007,
each of the following individuals served as a member of the Organization and Compensation Committee: Shirley Ann Jackson, Chair, Ernest H. Drew, Albert R. Gamper, Jr., Conrad K. Harper, William V.
Hickey, Thomas A. Renyi and Richard J. Swift. During 2007, no member of the Organization and Compensation Committee was an officer or employee or a former officer or employee of any PSEG
company. No PSEG officer served as a director of or on the compensation committee of any of the companies for which any of these individuals served as an officer. Other than as described below under
Transactions With Related Persons, no member of
210
(#)
(#)
(#)
the Organization and Compensation Committee had a direct or indirect material interest in any transaction with us.
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
PSEGs definitive Proxy Statement for the 2008 Annual Meeting of Stockholders
which definitive Proxy Statement is expected to be filed with the SEC on
or about March 5, 2008, and such information set forth under such heading
is incorporated herein by this reference thereto.
For information relating to securities authorized for issuance under equity compensation plans, see Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Power
Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.
PSE&G
The following table sets forth, as of February 15, 2008, the record date, beneficial ownership of Common Stock, including options, by the directors and executive officers named in the Summary
Compensation Table. None of these amounts exceeds 1% of the Common Stock outstanding.
Name
Amount and Nature
Derek DiRisio
12,818
1
Caroline Dorsa
13,560
2
E. James Ferland
588,252
3
Albert R. Gamper, Jr.
15,282
4
Conrad K. Harper
21,932
5
Ralph Izzo
1,017,222
6
Ralph LaRossa
92,827
7
Thomas M. OFlynn
634,229
8
R. Edwin Selover
131,428
9
All directors and executive officers as a group (9 persons)
2,527,550
10
1
Includes 3,100 shares of restricted stock. Includes 2,532 shares held under the Thrift Plan. Includes 360 shares jointly held with wife.
2
Includes 8,800 shares of restricted stock. Includes 1,000 shares jointly owned with husband.
3
Includes the equivalent of 42 shares held under the Thrift Plan. Includes 378,000 shares held in a trust. Mr. Ferland retired effective March 31, 2007.
4
Includes 9,600 shares of restricted stock.
5
Includes 13,200 shares of restricted stock.
6
Includes the equivalent of 702 shares held under the Thrift Plan. Includes 10,418 shares of restricted stock. Includes options to purchase 874,800 shares, 322,000 of which are currently exercisable. Includes
131,302 shares held in a trust.
7
Includes 2,868 shares of restricted stock. Includes options to purchase 85,000 shares, none of which are currently exercisable.
8
Includes
the equivalent of 32 shares held under the Thrift Plan. Includes 7,668
shares of restricted stock. Includes options to purchase 503,800 shares,
376,000 of which are currently exercisable.
211
of Beneficial
Ownership*
9
Includes the equivalent of 24 shares under the Thrift Plan. Includes 5,134 shares of restricted stock. Includes options to purchase 85,000 shares, 13,000 of which are exercisable.
10
Includes the equivalent of 3,332 shares held under the Thrift Plan. Includes 60,788 shares of restricted stock. Includes options to purchase 1,548,600 shares, 711,000 of which are currently exercisable.
Includes 509,302 shares held in trusts. Includes 1,360 shares jointly owned with spouses.
*
Reflects the 2-for-1 split of PSEG Common Stock effective February 4, 2008.
Certain Beneficial Owners
The following table sets forth, as of February 15, 2008, beneficial ownership by any person or group known to us to be the beneficial owner of more than five percent of the Common Stock. According
to the Schedule 13G filed with the SEC, these securities were acquired and are held in the ordinary course of business and not for the purpose of changing or influencing the control of the Company.
Name and Address
Amount and Nature
Percent
Franklin Resources, Inc.
One Franklin Parkway
San Mateo, CA 94403-1906
26,427,400
1
5.2
1
1
Section 16 Beneficial Ownership Reporting Compliance
During 2007, none of our directors or executive officers was late in filing a Form 3, 4 or 5 in accordance with the requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, with
regard to transactions involving Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PSEG
The information required by Item 13 of Form 10-K is set forth under the heading Transactions with Related Persons in PSEGs definitive Proxy Statement for the 2008 Annual Meeting of
Stockholders which definitive Proxy Statement is expected to be filed with the SEC on or about March 3, 2008. Such information set forth under such heading is incorporated herein by this reference
thereto.
Power
Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.
PSE&G
Transactions with Related Persons
Except as stated below, there were no transactions during 2007, and there are no transactions currently proposed, in which PSE&G was or is to be a participant and the amount involved exceeded
$120,000 and in which any related person (director, nominee, executive officer, or their immediate family members) had or will have a direct or indirect material interest.
Thomas A. Renyi, a director of PSE&G, is Executive Chairman of the Board of The Bank of New York Mellon Corporation (BNY), a participant in three credit facilities of PSEG and its subsidiaries.
Each of these facilities, and BNYs participation, was made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable loans with persons not related to BNY, and did not involve more than the normal risk of collectibility or present other unfavorable features.
212
of Beneficial
Ownership
As reported on Schedule 13G/A filed February 20, 2008
Our policies and procedures with regard to transactions with related parties, including the review, approval or ratification of any such transactions, the standards applied and the responsibilities for
application are set forth in the Corporate Governance Principles and the Standards of Integrity, discussed above. These are our only written policies and procedures regarding the review, approval or
ratification of transactions with related persons.
Under
the Corporate Governance Principles, a director of PSE&G must notify the
Chair of the PSEG Corporate Governance Committee if he or she encounters
a conflict of interest or proposes to accept a position with an entity which
may present a conflict of interest, so that the issue may be reviewed. Potential
conflicts of interest include positions that directors or immediate family
members hold as directors, officers or employees of other companies with
which we do business or propose to do business and charitable and other
tax-exempt organizations to which we contribute or propose to contribute.
The Standards of Integrity establish expectations for behavior for directors,
officers and employees regarding, among other things, corporate opportunity,
conflict of interest, and customer, supplier, competitor and governmental
relations. The Standards of Integrity establish a procedure for seeking guidance,
reporting concerns, investigation and discipline.
Director Independence
The Board has determined that all of the current directors, except Ralph Izzo, the Chairman of the Board, President and CEO who is an employee of the Company, are independent under the
Corporate Governance Principles and the requirements of the NYSE. Similarly, E. James Ferland, who served as Chairman of the Board and CEO until March 31, 2007, was not independent under these
criteria as he was an employee of the Company. These determinations were based upon a review of the questionnaires submitted by each director, our relevant business records, publicly available
information and the applicable SEC and NYSE requirements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 of Form 10-K is set forth under the heading Fees Billed to PSEG by Deloitte & Touche LLP for 2007 and 2006 in PSEGs definitive Proxy Statement for the 2008
Annual Meeting of Stockholders which definitive Proxy Statement is expected to be filed with the SEC on or about March 5, 2008. Such information set forth under such heading is incorporated herein by
this reference thereto.
213
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A)
The following Financial Statements are filed as a part of this report:
Public Service Enterprise Group Incorporateds Consolidated Balance Sheets as of December 31, 2007 and 2006 and the related Consolidated Statements of Operations, Cash Flows and Common
Stockholders Equity for the three years ended December 31, 2007 on pages 90 and 91, 89, 92 and 93, respectively.
b.
PSEG
Power LLCs Consolidated Balance Sheets as of December 31, 2007
and 2006 and the related Consolidated Statements of Operations, Cash
Flows and Capitalization and Members Equity for
the three years ended December 31, 2007 on pages 95, 94, 96 and 97, respectively.
c.
Public Service Electric and Gas Companys Consolidated Balance Sheets as of December 31, 2007 and 2006 and the related Consolidated Statements of Operations, Cash Flows and Common
Stockholders Equity for the three years ended December 31, 2007 on pages 100 and 101, 99, 102 and 103, respectively.
(B)
The following documents are filed as a part of this report:
PSEGs Financial Statement Schedules:
Schedule IIValuation and Qualifying Accounts for each of the three years in the period ended December 31, 2007 (page 214).
b.
Powers Financial Statement Schedules:
Schedule IIValuation and Qualifying Accounts for each of the three years in the period ended December 31, 2007 (page 215).
c.
PSE&Gs Financial Statement Schedules:
Schedule IIValuation and Qualifying Accounts for each of the three years in the period ended December 31, 2007 (page 215).
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 documents are filed as part of this report:
LIST OF EXHIBITS:
214
a.
a.
10a(7)
Deferred Compensation Plan for Directors
7
10a(8)
Deferred Compensation Plan for Certain Employees
8
10a(9)
1989 Long-Term Incentive Plan, as amended
9
10a(10)
2001 Long-Term Incentive Plan
10
10a(11)
Restated and Amended Management Incentive Compensation Plan
11
10a(12)
Employment Agreement with Thomas M. OFlynn dated April 18, 2001
12
10a(13)
Amendment to Employment Agreement with Thomas M. OFlynn dated December 21, 2001
13
10a(14)
Key Executive Severance Plan
14
10a(15)
Employment Agreement with Ralph Izzo dated October 18, 2003
15
10a(16)
Stock Plan for Outside Directors, as amended
16
10a(17)
Compensation Plan for Outside Directors
17
10a(18)
2004 Long-Term Incentive Plan
18
10b(1)
Operating Services Contract
19
11
Inapplicable
12
Computation of Ratios of Earnings to Fixed Charges
13
Inapplicable
14
Code of Ethics
16
Inapplicable
18
Inapplicable
21
Subsidiaries of the Registrant
22
Inapplicable
23
Consent of Independent Registered Public Accounting Firm
24
Inapplicable
31a
Certification by Ralph Izzo, pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934 (1934 Act)
31b
Certification by Thomas M. OFlynn pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
32a
Certification by Ralph Izzo, pursuant to Section 1350 of Chapter 63 of Title 18 of the US Code
32b
Certification by Thomas M. OFlynn, pursuant to Section 1350 of Chapter 63 of Title 18 of the US
Code
b.
Power:
3a
Certificate of Formation of PSEG Power LLC
20
3b
PSEG Power LLC Limited Liability Company Agreement
21
3c
Trust Agreement for PSEG Power Capital Trust I
22
3d
Trust Agreement for PSEG Power Capital Trust II
23
3e
Trust Agreement for PSEG Power Capital Trust III
24
3f
Trust Agreement for PSEG Power Capital Trust IV
25
3g
Trust Agreement for PSEG Power Capital Trust V
26
4a
Indenture dated April 16, 2001 between and among PSEG Power, PSEG Fossil, PSEG Nuclear,
PSEG Energy Resources & Trade and The Bank of New York and form of Subsidiary Guaranty
included therein
27
4b
First Supplemental Indenture, supplemental to Exhibit 4a, dated as of March 13, 2002
28
10a(1)
Amended and Restated Limited Supplemental Benefits Plan for Certain Employees
10a(2)
Mid Career Hire Supplemental Retirement Income Plan
215
10a(3)
Retirement Income Reinstatement Plan for Non-Represented Employees
10a(4)
Employment Agreement with William Levis dated December 8, 2006
10a(6)
Employee Stock Purchase Plan
6
10a(7)
Deferred Compensation Plan for Certain Employees
8
10a(8)
1989 Long-Term Incentive Plan, as amended
9
10a(9)
2001 Long-Term Incentive Plan
10
10a(10)
Restated and Amended Management Incentive Compensation Plan
11
10a(11)
Employment Agreement with Thomas M. OFlynn dated April 18, 2001
12
10a(12)
Amendment to Employment Agreement with Thomas M. OFlynn dated December 21, 2001
13
10a(13)
Key Executive Severance Plan
29
10a(14)
Employment Agreement with Ralph Izzo dated October 18, 2003
15
10a(15)
2004 Long-Term Incentive Plan
18
10b(1)
Operating Services Contract
19
11
Inapplicable
12c
Computation of Ratio of Earnings to Fixed Charges
13
Inapplicable
14
Code of Ethics
16
Inapplicable
18
Inapplicable
19
Inapplicable
23
Consent of Independent Registered Public Accounting Firm
24
Inapplicable
31e
Certification by Ralph Izzo, pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
31f
Certification by Thomas M. OFlynn pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
32e
Certification by Ralph Izzo, pursuant to Section 1350 of Chapter 63 of Title 18 of the US Code
32f
Certification by Thomas M. OFlynn, pursuant to Section 1350 of Chapter 63 of Title 18 of the US
Code
c.
PSE&G
3a(1)
Restated Certificate of Incorporation of PSE&G
30
3a(2)
Certificate of Amendment of 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
31
3a(3)
Certificate of Amendment of 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 Preferred Stock
32
3a(4)
Certificate of Amendment of 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
33
3a(5)
Certificate of Amendment of 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
34
3b(1)
By-Laws of PSE&G as in effect April 17, 2007
35
216
217
10a(9)
1989 Long-Term Incentive Plan, as amended
9
10a(10)
2001 Long-Term Incentive Plan
10
10a(11)
Restated and Amended Management Incentive Compensation Plan
11
10a(12)
Employment Agreement with Thomas M. OFlynn dated April 18, 2001
12
10a(13)
Amendment to Employment Agreement with Thomas M. OFlynn dated December 21, 2001
13
10a(14)
Key Executive Severance Plan
65
10a(15)
Employment Agreement with Ralph Izzo dated October 18, 2003
15
10a(16)
Stock Plan for Outside Directors, as amended
16
10a(17)
Compensation Plan for Outside Directors
17
10a(18)
2004 Long-Term Incentive Plan
18
11
Inapplicable
12a
Computation of Ratios of Earnings to Fixed Charges
12b
Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements
13
Inapplicable
14
Code of Ethics
16
Inapplicable
18
Inapplicable
19
Inapplicable
21a
Inapplicable
23a
Consent of Independent Registered Public Accounting Firm
24
Inapplicable
31c
Certification by Ralph Izzo, pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
31d
Certification by Thomas M. OFlynn pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
32c
Certification by Ralph Izzo, pursuant to Section 1350 of Chapter 63 of Title 18 of the US Code
32d
Certification by Thomas M. OFlynn, pursuant to Section 1350 of Chapter 63 of Title 18 of the US
Code
(1)
Filed as Exhibit 3.1a with Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, File No. 001-09120 on May 4, 2007 and incorporated herein by this reference.
(2)
Filed as Exhibit 3.2 with Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, File No. 001-09120 on May 4, 2007 and incorporated herein by this reference.
(3)
Filed as Exhibit 3.1b with Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, File No. 001-09120 on May 4, 2007 and incorporated herein by this reference.
(4)
Filed as Exhibit 3.1c with Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, File No. 001-09120 on May 4, 2007 and incorporated herein by this reference.
(5)
Filed as Exhibit 4(f) with Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, File No. 001-09120 on May 13, 1998 and incorporated herein by this reference.
(6)
Filed with Registration Statement on Form S-8, File No. 333-106330 filed on June 20, 2003 and incorporated herein by this reference.
(7)
Filed as Exhibit 10a(1) with Annual Report on Form 10-K for the year ended December 31, 2005, File Nos. 001-09120 and 001-00973, and incorporated herein by reference.
(8)
Filed as Exhibit 10a(2) with Annual Report on Form 10-K for the year ended December 31, 2005, File Nos. 001-09120 and 001-00973 and incorporated herein by reference.
(9)
Filed as Exhibit 10 with Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, File No. 001-09120, on November 2, 2002 and incorporated herein by this reference.
218
(10)
Filed as Exhibit 10a(7) with Annual Report on Form 10-K for the year ended December 31, 2000, File No. 001-09120, on March 6, 2001 and incorporated herein by this reference.
(11)
Filed as Exhibit 10a(8) with Annual Report on Form 10-K for the year ended December 31, 2000, File No. 001-09120, on March 6, 2001 and incorporated herein by this reference.
(12)
Filed as Exhibit 10a(24) with Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 001-09120, on August 9, 2001 and incorporated herein by this reference.
(13)
Filed as Exhibit 10a(12) with Annual Report on Form 10-K for the year ended December 31, 2001, File No. 001-09120, on March 1, 2002 and incorporated herein by this reference.
(14)
Filed as Exhibit 10a(14) with Annual Report on Form 10-K for the year ended December 31, 2005, File No. 001-09120, and incorporated herein by reference.
(15)
Filed as Exhibit 10 with Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 001-09120, on October 30, 2003 and incorporated herein by this reference.
(16)
Filed as Exhibit 10a(17) with Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-09120, on February 26, 2003 and incorporated herein by this reference.
(17)
Filed as Exhibit 10a(20) with Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-09120, on February 26, 2003 and incorporated herein by this reference.
(18)
Filed as Exhibit 10a(21) with Annual Report on Form 10-K for the year ended December 31, 2003, File No. 001-09120, on February 25, 2004 and incorporated herein by this reference.
(19)
Filed as Exhibit 99.2 with Current Report on Form 8-K, File No. 001-09120, on December 20, 2004 and incorporated herein by this reference.
(20)
Filed as Exhibit 3.1 to Registration Statement on Form S-4, No. 333-69228 filed on October 5, 2001 and incorporated herein by this reference.
(21)
Filed as Exhibit 3.2 to Registration Statement on Form S-4, No. 333-69228 filed on October 5, 2001 and incorporated herein by this reference.
(22)
Filed as Exhibit 3.6 to Registration Statement on Form S-3, No. 333-105704 filed on May 30, 2003 and incorporated herein by this reference.
(23)
Filed as Exhibit 3.7 to Registration Statement on Form S-3, No. 333-105704 filed on May 30, 2003 and incorporated herein by this reference.
(24)
Filed as Exhibit 3.8 to Registration Statement on Form S-3, No. 333-105704 filed on May 30, 2003 and incorporated herein by this reference.
(25)
Filed as Exhibit 3.9 to Registration Statement on Form S-3, No. 333-105704 filed on May 30, 2003 and incorporated herein by this reference.
(26)
Filed as Exhibit 3.10 to Registration Statement on Form S-3, No. 333-105704 filed on May 30, 2003 and incorporated herein by this reference.
(27)
Filed as Exhibit 4.1 to Registration Statement on Form S-4, No. 333-69228 filed on October 5, 2001 and incorporated herein by this reference.
(28)
Filed as Exhibit 4.7 with Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, File No. 000-49614, on May 15, 2002 and incorporated herein by this reference.
(29)
Filed as Exhibit 10a(13) with Annual Report on Form 10-K for the year ended December 31, 2005, File No. 000-49614, and incorporated herein by reference.
(30)
Filed as Exhibit 3(a) with Quarterly Report on Form 10-Q for the quarter ended June 30, 1986, File No. 001-00973, on August 28, 1986 and incorporated herein by this reference.
(31)
Filed as Exhibit 3a(2) with Annual Report on Form 10-K for the year ended December 31, 1987, File No. 001-00973, on March 28, 1988 and incorporated herein by this reference.
(32)
Filed as Exhibit 3a(3) on Form 8-A, File No. 001-00973, on February 4, 1994 and incorporated herein by this reference.
(33)
Filed as Exhibit 3a(4) on Form 8-A, File No. 001-00973, on February 4, 1994 and incorporated herein by this reference.
219
(34)
Filed as Exhibit 3a(5) on Form 8-A, File No. 001-00973, on February 4, 1994 and incorporated herein by this reference.
(35)
Filed as Exhibit 3.3 with Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, File No. 001-00973 on May 4, 2007 and incorporated herein by this reference.
(36)
Filed as Exhibit 4b(1) with Annual Report on Form 10-K for the year ended December 31, 1980, File No. 001-00973 on February 18, 1981 and incorporated herein by this reference.
(37)
Filed as Exhibit 4b(2) with Annual Report on Form 10-K for the year ended December 31, 1980, File No. 001-00973 on February 18, 1981 and incorporated herein by this reference.
(38)
Filed as Exhibit 4b(3) with Annual Report on Form 10-K for the year ended December 31, 1980, File No. 001-00973 on February 18, 1981 and incorporated herein by this reference.
(39)
Filed as Exhibit 4b(4) with Annual Report on Form 10-K for the year ended December 31, 1980, File No. 001-00973 on February 18, 1981 and incorporated herein by this reference.
(40)
Filed as Exhibit 4b(5) with Annual Report on Form 10-K for the year ended December 31, 1980, File No. 001-00973 on February 18, 1981 and incorporated herein by this reference.
(41)
Filed as Exhibit 4b(6) with Annual Report on Form 10-K for the year ended December 31, 1980, File No. 001-00973 on February 18, 1981 and incorporated herein by this reference.
(42)
Filed as Exhibit 4(i) on Form 8-A, File No. 001-00973 on July 1, 1991 and incorporated herein by this reference.
(43)
Filed as Exhibit 4(ii) on Form 8-A, File No. 001-00973 on May 25, 1993 and incorporated herein by this reference.
(44)
Filed as Exhibit 4(i) with Current Report on Form 8-K, File No. 001-00973 on December 1, 1993 and incorporated herein by this reference.
(45)
Filed as Exhibit 4 with Current Report on Form 8-K, File No. 001-00973 on December 1, 1993 and incorporated herein by this reference.
(46)
Filed as Exhibit 4 on Form 8-A, File No. 001-00973 on February 3, 1994 and incorporated herein by this reference.
(47)
Filed as Exhibit 4(i) on Form 8-A, File No. 001-00973 on March 15, 1994 and incorporated herein by this reference.
(48)
Filed as Exhibit 4a(91) with Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, File No. 001-00973, on November 8, 1994 and incorporated herein by this reference.
(49)
Filed as Exhibit 4a(2) on Form 8-A, File No. 001-00973 on January 26, 1996 and incorporated herein by this reference.
(50)
Filed as Exhibit 4a(3) on Form 8-A, File No. 001-00973 on January 26, 1996 and incorporated herein by this reference.
(51)
Filed as Exhibit 4 on Form 8-A, File No. 001-00973 on May 15, 1998 and incorporated herein by this reference.
(52)
Filed as Exhibit 4a(97) with Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-00973 on February 25, 2003 and incorporated herein by this reference.
(53)
Filed as Exhibit 4a(98) with Annual Report on Form 10-K for the year ended December 31, 2003, File No. 001-00973 on February 25, 2004 and incorporated herein by this reference.
(54)
Filed as Exhibit 4a(99) with Annual Report on Form 10-K for the year ended December 31, 2003, File No. 001-00973 on February 25, 2004 and incorporated herein by this reference.
(55)
Filed as Exhibit 4a(25) with Annual Report on Form 10-K for the year ended December 31, 2004, File No. 001-00973 on March 1, 2005 and incorporated herein by this reference.
(56)
Filed as Exhibit 4a(26) with Annual Report on Form 10-K for the year ended December 31, 2004, File No. 001-00973 on March 1, 2005 and incorporated herein by this reference.
(57)
Filed as Exhibit 4a(27) with Annual Report on Form 10-K for the year ended December 31, 2004, File No. 001-00973 on March 1, 2005 and incorporated herein by this reference.
220
(58)
Filed as Exhibit 4a(28) with Annual Report on Form 10-K for the year ended December 31, 2004, File No. 001-00973 on March 1, 2005 and incorporated herein by this reference.
(59)
Filed as Exhibit 4a(100) with Annual Report on Form 10-K for the year ended December 31, 2003, File No. 001-00973 on February 25, 2004 and incorporated herein by this reference.
(60)
Filed as Exhibit 4a(101) with Annual Report on Form 10-K for the year ended December 31, 2003, File No. 001-00973 on February 25, 2004 and incorporated herein by this reference.
(61)
Filed as Exhibit 4a(102) with Annual Report on Form 10-K for the year ended December 31, 2003, File No. 001-00973 on February 25, 2004 and incorporated herein by this reference.
(62)
Filed as Exhibit 4 with Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, File No. 001-00973 on August 3, 2004 and incorporated herein by this reference.
(63)
Filed as Exhibit 4 with Current Report on Form 8-K, File No. 001-00973 on December 1, 1993 and incorporated herein by this reference.
(64)
Filed as Exhibit 4.6 to Registration Statement on Form S-3, No. 333-76020 filed on December 27, 2001 and incorporated herein by this reference.
(65)
Filed as Exhibit 10a(12) with Annual Report on Form 10-K for the year ended December 31, 2005, File No. 001-00973, and incorporated herein by reference.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
Column A
Column B
Column C
Column D
Column E
Description
Balance at
Additions
Deductions
Balance at
Charged to
Charged to
(Millions)
2007:
Allowance for Doubtful Accounts
$
47
$
64
$
$
65
(A)
$
46
Materials and Supplies Valuation Reserve
8
2
4
(B)
6
Other Valuation Allowances
8
8
2006:
Allowance for Doubtful Accounts
$
42
$
77
$
$
72
(A)
$
47
Materials and Supplies Valuation Reserve
6
7
5
(B)
8
Other Reserves
3
3
(C)
Other Valuation Allowances
8
8
2005:
Allowance for Doubtful Accounts
$
34
$
65
$
$
57
(A)
$
42
Materials and Supplies Valuation Reserve
9
3
(B)
6
Other Reserves
2
1
(C)
3
Other Valuation Allowances
8
8
(A)
Accounts Receivable/Investments written off.
(B)
Reduced reserve to appropriate level and to remove obsolete inventory.
(C)
Includes various liquidity, credit and bad debt reserves.
221
Schedule IIValuation and Qualifying Accounts
Years Ended December 31, 2007December 31, 2005
Beginning
of Period
describe
End of
Period
cost and
expenses
other
accounts
describe
PSEG POWER LLC
Column A
Column B
Column C
Column D
Column E
Description
Balance at
Additions
Deductions
Balance at
Charged to
Charged to
(Millions)
2007:
Materials and Supplies Valuation Reserve
$
8
$
2
$
$
4
(A)
$
6
2006:
Materials and Supplies Valuation Reserve
$
6
$
7
$
$
5
(A)
$
8
Other Reserves
3
3
(B)
2005:
Materials and Supplies Valuation Reserve
$
9
$
$
$
3
(A)
$
6
Other Reserves
2
1
(B)
3
(A)
Reduced reserve to appropriate level and removed obsolete inventory.
(B)
Includes various liquidity, credit and bad debt reserves.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
Column A
Column B
Column C
Column D
Column E
Description
Balance at
Additions
Deductions
Balance at
Charged to
Charged to
(Millions)
2007:
Allowance for Doubtful Accounts
$
46
$
64
$
$
65(A
)
$
45
2006:
Allowance for Doubtful Accounts
$
41
$
77
$
$
72(A
)
$
46
2005:
Allowance for Doubtful Accounts
$
34
$
64
$
$
57(A
)
$
41
(A)
222
Schedule IIValuation and Qualifying Accounts
Years Ended December 31, 2007December 31, 2005
Beginning
of Period
describe
End of
Period
cost and
expenses
other
accounts
describe
Schedule IIValuation and Qualifying Accounts
Years Ended December 31, 2007December 31, 2005
Beginning
of Period
describe
End of
Period
cost and
expenses
other
accounts
describe
Accounts Receivable/Investments written off.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
P
UBLIC
S
ERVICE
E
NTERPRISE
G
ROUP
I
NCORPORATED
By:
/
S
/ R
ALPH
I
ZZO
Ralph Izzo
Date: February 27, 2008
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. The signatures of the undersigned shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
Signature
Title
Date
/
S
/ R
ALPH
I
ZZO
Ralph Izzo
Chairman of the Board, President,
February 27, 2008
/
S
/ T
HOMAS
M. OF
LYNN
Thomas M. OFlynn
Executive Vice President and Chief
February 27, 2008
/
S
/ D
EREK
M. D
I
R
ISIO
Derek M. DiRisio
Vice President and Controller
February 27, 2008
/
S
/ C
AROLINE
D
ORSA
Caroline Dorsa
Director
February 27, 2008
/
S
/ E
RNEST
H. D
REW
Ernest H. Drew
Director
February 27, 2008
/
S
/ A
LBERT
R. G
AMPER
, J
R
.
Albert R. Gamper, Jr.
Director
February 27, 2008
/
S
/ C
ONRAD
K. H
ARPER
Conrad K. Harper
Director
February 27, 2008
/
S
/ W
ILLIAM
V. H
ICKEY
William V. Hickey
Director
February 27, 2008
/
S
/ S
HIRLEY
A
NN
J
ACKSON
Shirley Ann Jackson
Director
February 27, 2008
/
S
/ T
HOMAS
A. R
ENYI
Thomas A. Renyi
Director
February 27, 2008
/
S
/ R
ICHARD
J. S
WIFT
Richard J. Swift
Director
February 27, 2008
223
Chairman of the Board, President and
Chief Executive Officer
Chief Executive Officer and
Director (Principal Executive Officer)
Financial Officer (Principal Financial
Officer)
(Principal Accounting Officer)
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. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
PSEG P
OWER
LLC
By:
/
S
/ W
ILLIAM
L
EVIS
William Levis
Date: February 27, 2008
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. The signatures of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
Signature
Title
Date
/
S
/ R
ALPH
I
ZZO
Ralph Izzo
Chairman of the Board and Chief
February 27, 2008
/
S
/ T
HOMAS
M. OF
LYNN
Thomas M. OFlynn
Executive Vice President and Chief
February 27, 2008
/
S
/ D
EREK
M. D
I
R
ISIO
Derek M. DiRisio
Vice President and Controller
February 27, 2008
/
S
/ S
TEPHEN
C. B
YRD
Stephen C. Byrd
Director
February 27, 2008
/
S
/ W
ILLIAM
L
EVIS
William Levis
Director
February 27, 2008
/
S
/ R
ICHARD
P. L
OPRIORE
Richard Lopriore
Director
February 27, 2008
/
S
/ K
EVIN
J. Q
UINN
Kevin J. Quinn
Director
February 27, 2008
/
S
/ R. E
DWIN
S
ELOVER
R. Edwin Selover
Director
February 27, 2008
/
S
/ E
LBERT
C. S
IMPSON
Elbert C. Simpson
Director
February 27, 2008
224
President and
Chief Operating Officer
Executive Officer and Director
(Principal Executive Officer)
Financial Officer and Director
(Principal Financial Officer)
(Principal Accounting Officer)
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. The signature of the undersigned shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
P
UBLIC
S
ERVICE
E
LECTRIC
AND
G
AS
C
OMPANY
By:
/
S
/ R
ALPH
L
A
R
OSSA
Ralph LaRossa
Date: February 27, 2008
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. The signatures of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
Signature
Title
Date
/
S
/ R
ALPH
I
ZZO
Ralph Izzo
Chairman of the Board and Chief
February 27, 2008
/
S
/ T
HOMAS
M. OF
LYNN
Thomas M. OFlynn
Executive Vice President and Chief
February 27, 2008
/
S
/ D
EREK
M. D
I
R
ISIO
Derek M. DiRisio
Vice President and Controller
February 27, 2008
/
S
/ C
AROLINE
D
ORSA
Caroline Dorsa
Director
February 27, 2008
/
S
/ A
LBERT
R. G
AMPER
, J
R
.
Albert R. Gamper, Jr.
Director
February 27, 2008
/
S
/ C
ONRAD
K. H
ARPER
Conrad K. Harper
Director
February 27, 2008
225
President and
Chief Operating Officer
Executive Officer and Director
(Principal Executive Officer)
Financial Officer (Principal Financial
Officer)
(Principal Accounting Officer)
The following documents are filed as a part of this report:
a.
PSEG:
Exhibit 10a(1): Amended and Restated Limited Supplemental Benefits Plan for Certain Employee, effective April 2007
Exhibit 10a(2): Amended Mid Career Hire Supplemental Retirement Income plan, effective April 2007
Exhibit 10a(3): Amended Retirement Income Reinstatement Plan for Non-Represented Employees, effective April 2007
Exhibit 10a(4): Employment Agreement with William Levis dated December 8, 2006
Exhibit 10a(5): 2007 Equity Compensation Plan for Outside Directors
Exhibit 12: Computation of Ratios of Earnings to Fixed Charges
Exhibit 14: Code of Ethics
Exhibit 21: Subsidiaries of the Registrant
Exhibit 23: Consent of Independent Registered Public Accounting Firm
Exhibit 31a: Certification by Ralph Izzo Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 31b: Certification by Thomas M. OFlynn Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 32a: Certification by Ralph Izzo Pursuant to Section 1350 of Chapter 63 of Title 18 of the US Code
Exhibit 32b: Certification by Thomas M. OFlynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the US Code
b.
Power:
Exhibit 10a(1): Amended and Restated Limited Supplemental Benefits Plan for Certain Employee, effective April 2007
Exhibit 10a(2): Amended Mid Career Hire Supplemental Retirement Income plan, effective April 2007
Exhibit 10a(3): Amended Retirement Income Reinstatement Plan for Non-Represented Employees, effective April 2007
Exhibit 10a(4): Employment Agreement with William Levis dated December 8, 2006
Exhibit 12a: Computation of Ratios of Earnings to Fixed Charges
Exhibit 23b: Consent of Independent Registered Public Accounting Firm
Exhibit 31e: Certification by Ralph Izzo Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 31f: Certification by Thomas M. OFlynn Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 32e: Certification by Ralph Izzo Pursuant to Section 1350 of Chapter 63 of Title 18 of the US Code
Exhibit 32f: Certification by Thomas M. OFlynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the US Code
c.
PSE&G:
Exhibit 4a(28): Supplemental Indenture to Mortgage Indenture, dated April 1, 2007
Exhibit 10a(1): Amended and Restated Limited Supplemental Benefits Plan for Certain Employee, effective April 2007
Exhibit 10a(2): Amended Mid Career Hire Supplemental Retirement Income plan, effective April 2007
Exhibit 10a(3): Amended Retirement Income Reinstatement Plan for Non-Represented Employees, effective April 2007
Exhibit 10a(5): 2007 Equity Compensation Plan for Outside Directors
Exhibit 12b: Computation of Ratios of Earnings to Fixed Charges
Exhibit 12c: Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements
Exhibit 21a: Subsidiaries of Registrant
Exhibit 23a: Consent of Independent Registered Public Accounting Firm
Exhibit 31c: Certification by Ralph Izzo Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 31d: Certification by Thomas M. OFlynn Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 32c: Certification by Ralph Izzo Pursuant to Section 1350 of Chapter 63 of Title 18 of the US Code
Exhibit 32d: Certification by Thomas M. OFlynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the US Code
226
Exhibit 14: Code of Ethics
Exhibit 14: Code of Ethics
Exhibit 4a(28)
|
SUPPLEMENTAL MORTGAGE |
|
Supplemental Indenture
Dated April 1, 2007
|
PUBLIC SERVICE ELECTRIC AND GAS COMPANY |
TO |
US BANK NATIONAL ASSOCIATION |
Trustee
|
Morristown, New Jersey 07960 |
|
PROVIDING FOR THE ISSUE OF |
$850,000,000 FIRST AND REFUNDING MORTGAGE BONDS, |
MEDIUM-TERM NOTES SERIES E |
|
|
RECORD IN MORTGAGE BOOK AND RETURN TO:
JAMES T. FORAN, ESQ.
80 PARK PLAZA, T5B
NEWARK, N.J. 07102-4194
Prepared by
(DONALD S. LEIBOWITZ, ESQ.)
TABLE OF CONTENTS
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Page |
R ECITALS |
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1 |
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F ORM O F B OND |
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3 |
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F ORM O F C ERTIFICATE O F A UTHENTICATION |
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5 |
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G RANTING C LAUSES |
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6 |
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ARTICLE I. |
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B ONDS OF THE M EDIUM -T ERM N OTES S ERIES E. |
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D ESCRIPTION OF SERIES |
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7 |
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ARTICLE II. |
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R EDEMPTION OF B ONDS OF M EDIUM -T ERM N OTES S ERIES E. |
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S ECTION 2.01. |
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RedemptionRedemption Price |
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7 |
S ECTION 2.02. |
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Redemptions Pursuant to Section 4C of |
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Article Eight of the Indenture |
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7 |
S ECTION 2.03. |
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Interest on Called Bonds to Cease |
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8 |
S ECTION 2.04. |
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Bonds Called in Part |
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8 |
S ECTION 2.05. |
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Provisions of Indenture Not Applicable |
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8 |
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ARTICLE III. |
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C REDITS WITH R ESPECT TO B ONDS OF THE |
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M EDIUM -T ERM N OTES S ERIES E. |
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S ECTION 3.01. |
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Credits |
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8 |
S ECTION 3.02. |
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Certificate of the Company |
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8 |
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ARTICLE IV. |
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M ISCELLANEOUS . |
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S ECTION 4.01. |
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Authentication of Bonds of Medium-Term |
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Notes Series E |
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8 |
S ECTION 4.02. |
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Additional Restrictions on Authentication of |
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Additional Bonds Under Indenture |
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8 |
S ECTION 4.03. |
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Restriction on Dividends |
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9 |
S ECTION 4.04. |
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Use of Facsimile Seal and Signatures |
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9 |
S ECTION 4.05. |
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Time for Making of Payment |
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9 |
S ECTION 4.06. |
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Effective Period of Supplemental Indenture |
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9 |
S ECTION 4.07. |
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Effect of Approval of Board of Public Utilities |
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of the State of New Jersey |
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9 |
S ECTION 4.08. |
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Execution in Counterparts |
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9 |
A CKNOWLEDGEMENTS |
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10 |
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C ERTIFICATE OF R ESIDENCE |
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12 |
SUPPLEMENTAL INDENTURE, dated the 1st day of April 2007, for convenience of reference and effective from the time of execution and delivery hereof, between P UBLIC S ERVICE E LECTRIC AND G AS C OMPANY , a corporation organized under the laws of the State of New Jersey, hereinafter called the Company, party of the first part, and US Bank National Association, a national banking association organized under the laws of the United States of America, as successor Trustee to Wachovia Bank, National Association (previously known as Fidelity Union Trust Company) under the indenture dated August 1, 1924, below mentioned, hereinafter called the Trustee, party of the second part.
WHEREAS, on July 25, 1924, the Company executed and delivered to F IDELITY U NION T RUST C OMPANY , a certain indenture dated August 1, 1924 (hereinafter called the Indenture) to secure and to provide for the issue of First and Refunding Mortgage Gold Bonds of the Company; and
W HEREAS , the Indenture has been recorded in the following counties of the State of New Jersey, in the offices, and therein in the books and at the pages, as follows:
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County |
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Office |
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Book Number |
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Page
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Atlantic |
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Clerks |
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1955 |
of Mortgages |
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160 |
Bergen |
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Clerks |
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94 |
of Chattel Mortgages |
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123 etc. |
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693 |
of Mortgages |
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88 etc. |
Burlington |
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Clerks |
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52 |
of Chattel Mortgages |
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Folio 8 etc. |
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177 |
of Mortgages |
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Folio 354 etc. |
Camden |
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Registers |
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45 |
of Chattel Mortgages |
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184 etc. |
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239 |
of Mortgages |
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1 etc. |
Cumberland |
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Clerks |
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786 |
of Mortgages |
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638 & c. |
Essex |
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Registers |
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437 |
of Chattel Mortgages |
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1-48 |
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T-51 |
of Mortgages |
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341-392 |
Gloucester |
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Clerks |
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34 |
of Chattel Mortgages |
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123 etc. |
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142 |
of Mortgages |
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7 etc. |
Hudson |
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Registers |
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453 |
of Chattel Mortgages |
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9 etc. |
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1245 |
of Mortgages |
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484, etc. |
Hunterdon |
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Clerks |
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151 |
of Mortgages |
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344 |
Mercer |
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Clerks |
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67 |
of Chattel Mortgages |
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1 etc. |
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384 |
of Mortgages |
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1 etc. |
Middlesex |
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Clerks |
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113 |
of Chattel Mortgages |
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3 etc. |
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437 |
of Mortgages |
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294 etc. |
Monmouth |
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Clerks |
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951 |
of Mortgages |
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291 & c. |
Morris |
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Clerks |
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N-3 |
of Chattel Mortgages |
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446 etc. |
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F-10 |
of Mortgages |
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269 etc. |
Ocean |
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Clerks |
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1809 |
of Mortgages |
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40 |
Passaic |
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Registers |
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M-6 |
of Chattel Mortgages |
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178, etc. |
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R-13 |
of Mortgages |
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268 etc. |
Salem |
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Clerks |
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267 |
of Mortgages |
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249 etc. |
Somerset |
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Clerks |
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46 |
of Chattel Mortgages |
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207 etc. |
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N-10 |
of Mortgages |
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1 etc. |
Sussex |
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Clerks |
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123 |
of Mortgages |
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10 & c. |
Union |
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Registers |
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9584 |
of Mortgages |
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259 etc. |
Warren |
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Clerks |
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124 |
of Mortgages |
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141 etc. |
2
and
W HEREAS , the Indenture has also been recorded in the following counties of the Commonwealth of Pennsylvania, in the offices, and therein in the books and at the pages, as follows:
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Page
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County |
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Office |
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Book Number |
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Adams |
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Recorders |
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22 of Mortgages |
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105 |
Armstrong |
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Recorders |
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208 of Mortgages |
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381 |
Bedford |
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Recorders |
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90 of Mortgages |
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917 |
Blair |
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Recorders |
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671 of Mortgages |
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430 |
Cambria |
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Recorders |
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407 of Mortgages |
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352 |
Cumberland |
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Recorders |
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500 of Mortgages |
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136 |
Franklin |
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Recorders |
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285 of Mortgages |
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373 |
Huntington |
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Recorders |
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128 of Mortgages |
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47 |
Indiana |
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Recorders |
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197 of Mortgages |
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281 |
Lancaster |
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Recorders |
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984 of Mortgages |
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1 |
Montgomery |
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Recorders |
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5053 of Mortgages |
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1221 |
Westmoreland |
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Recorders |
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1281 of Mortgages |
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198 |
York |
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Recorders |
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31-V of Mortgages |
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446 |
and
W HEREAS , the Indenture granted, bargained, sold, aliened, remised, released, conveyed, confirmed, assigned, transferred and set over unto the Trustee certain property of the Company, more fully set forth and described in the Indenture, then owned or which might thereafter be acquired by the Company; and
W HEREAS , the Company, by various supplemental indentures, supplemental to the Indenture, the last of which was dated August 1, 2004 (No. 4), has granted, bargained, sold, aliened, remised, released, conveyed, confirmed, assigned, transferred and set over unto the Trustee certain property of the Company acquired by it after the execution and delivery of the Indenture; and
W HEREAS , since the execution and delivery of said supplemental indenture dated August 1, 2004 (No. 4), the Company has acquired property which, in accordance with the provisions of the Indenture, is subject to the lien thereof and the Company desires to confirm such lien; and
W HEREAS , the Indenture has been amended or supplemented from time to time; and
W HEREAS , it is provided in the Indenture that no bonds other than those of the 5-1/2% Series due 1959 therein authorized may be issued thereunder unless a supplemental indenture providing for the issue of such additional bonds shall have been executed and delivered by the Company to the Trustee; and
W HEREAS , the Company is making provisions for the issuance and sale of its Secured Medium-Term Notes, Series E (the Series E Notes), to be issued under an Indenture of Trust (the Note Indenture) dated as of July 1, 1993 between the Company and The Chase Manhattan Bank (National Association) as predecessor trustee (The Bank of New York, as successor trustee to the predecessor trustee), as Trustee (the Note Trustee); and
W HEREAS , such Note Indenture provides, among other things, for the pledge and delivery by the Company of a series of First and Refunding Mortgage Bonds of the Company to evidence the Companys obligation to pay the principal and interest with respect to outstanding Series E Notes; and for such purpose and in order to service and secure payment of the principal and interest in respect of the Series E Notes, the Company desires to provide for the issue of $850,000,000 aggregate principal amount of bonds under the Indenture of a series to be designated as First and Refunding Mortgage Bonds, Medium-Term Notes Series E (hereinafter sometimes called Bonds of the Medium-Term Notes Series E); and
W HEREAS , the text of the Bonds of the Medium-Term Notes Series E and of the certificate of authentication to be borne by the Bonds of the Medium-Term Notes Series E shall be substantially of the following tenor:
3
(F ORM OF B OND )
This Bond is not transferable except as provided in the Indenture and in the Indenture of Trust dated as of July 1, 1993 between the Company and The Chase Manhattan Bank (National Association) (The Bank of New York, successor trustee) as Trustee.
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REGISTERED |
REGISTERED |
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NUMBER |
AMOUNT |
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R |
$850,000,000 |
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
F
IRST AND
R
EFUNDING
M
ORTGAGE
B
OND
,
M
EDIUM
-T
ERM
N
OTES
S
ERIES
E
Public Service Electric and Gas Company (hereinafter called the Company), a corporation of the State of New Jersey, for value received, hereby promises to pay to The Bank of New York as succssor trustee to The Chase Manhattan Bank (National Association)), under the Indenture of Trust dated as of July 1, 1993 between the Company and such trustee, or registered assigns, on the surrender hereof, the principal sum of Eight Hundred Fifty Million Dollars, on April 1, 2042, and to pay interest thereon from the date hereof, at the rate of 10% per annum, and until payment of said principal sum, such interest to be payable April 1 and October 1 in each year; provided, however, that the Company shall receive certain credits against such obligations as set forth in the Supplemental Indenture dated April 1, 2007 referred to below.
Both the principal hereof and interest hereon shall be paid at the principal corporate trust office of US Bank National Association in the City of Morristown, State of New Jersey, or (at the option of the registered owner) at the corporate trust office of any paying agent appointed by the Company, in such coin or currency of the United States of America as at the time of payment shall constitute legal tender for the payment of public and private debts; provided, however, that any such payments of principal and interest shall be subject to receipt of certain credits against such payment obligations as set forth in the Supplemental Indenture dated April 1, 2007 referred to below.
This Bond is one of the First and Refunding Mortgage Bonds of the Company issued and to be issued under and pursuant to, and all equally secured by, an indenture of mortgage or deed of trust dated August 1, 1924, as supplemented and amended by supplemental indentures thereto, including the Supplemental Indenture dated April 1, 2007, duly executed by the Company and US Bank National Association as Trustee. This Bond is one of the Bonds of the Medium-Term Notes Series E, which series is limited to the aggregate principal amount of $850,000,000 and is issued pursuant to said Supplemental Indenture dated April 1, 2007. Reference is hereby made to said indenture and all supplements thereto for a specification of the principal amount of Bonds from time to time issuable thereunder, and for a description of the properties mortgaged and conveyed or assigned to said Trustee or its successors, the nature and extent of the security, and the rights of the holders of said Bonds and any coupons appurtenant thereto, and of the Trustee in respect of such security.
In and by said indenture, as amended and supplemented, it is provided that with the written approval of the Company and the Trustee, any of the provisions of said indenture may from time to time be eliminated or modified and other provisions may be added thereto provided the change does nor alter the annual interest rate, redemption price or date, date of maturity or amount payable on maturity of any then outstanding Bond or conflict with the Trust Indenture Act of 1939 as then in effect, and provided the holders of 85% in principal amount of the Bonds secured by said indenture and then outstanding (including, if such change affect the Bonds of one or more series but less than all series then outstanding, a like percentage of the then outstanding Bonds of each series affected by such change, and excluding Bonds owned or controlled by the Company or by the parties owning at least 10% of the outstanding voting stock of the Company, as more fully specified in said indenture) consent in writing thereto, all as more fully set forth in said indenture, as amended and supplemented.
4
First and Refunding Mortgage Bonds issuable under said indenture are issuable in series, and the Bonds of any series may be for varying principal amounts and in the form of coupon bonds and of registered bonds without coupons, and the Bonds of any one series may differ from the Bonds of any other series as to date, maturity, interest rate and otherwise, all as in said indenture provided and set forth. The Bonds of the Medium-Term Notes Series E, in which this Bond is included, are designated First and Refunding Mortgage Bonds, Medium-Term Notes Series E.
In case of the happening of an event of default as specified in said indenture and said supplemental indenture dated March 1, 1942, the principal sum of the Bonds of this series may be declared or may become due and payable forthwith, in the manner and with the effect in said indenture provided.
The Bonds of this series are subject to redemption as provided in the Supplemental Indenture dated April 1, 2007.
This Bond is transferable, but only as provided in said indenture and the Indenture of Trust dated as of July 1, 1993 between the Company and The Chase Manhattan Bank (National Association) as predecessor trustee (The Bank of New York, as successor trustee to the predecessor trustee), as trustee, upon surrender hereof, by the registered owner in person or by attorney duly authorized in writing, at either of said offices where the principal hereof and interest hereon are payable; upon any such transfer a new fully registered Bond similar hereto will be issued to the transferee. This Bond may in like manner be exchanged for one or more new fully registered Bonds of the same series of other authorized denominations but of the same aggregate principal amount. No service charge shall be made for any such transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto. The Company and the Trustee hereunder and any paying agent may deem and treat the person in whose name this Bond is registered as the absolute owner hereof for the purpose of receiving payment of or on account of the principal hereof and the interest hereon and for all other purposes; and neither the Company nor the Trustee hereunder nor any paying agent shall be affected by any notice to the contrary.
The Bonds of this series are issuable only in fully registered form, in any denomination authorized by the Company.
No recourse under or upon any obligation, covenant or agreement contained in said indenture or in any indenture supplemental thereto, or in any Bond issued thereunder, or because of any indebtedness arising thereunder, shall be had against any incorporator, or against any past, present or future stockholder, officer, or director, as such, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, it being expressly agreed and understood that said indenture, any indenture supplemental thereto and the obligations issued thereunder, are solely corporate obligations, and that no personal liability whatever shall attach to, or be incurred by, such incorporators, stockholders, officers or directors, as such, of the Company, or of any successor corporation, or any of them, because of the incurring of the indebtedness thereby authorized, or under or by reason of any of the obligations, covenants or agreements contained in the indenture or in any indenture supplemental thereto or in any of the Bonds issued thereunder, or implied therefrom.
This Bond shall not be entitled to any security or benefit under said indenture, as amended and supplemented, and shall not become valid or obligatory for any purpose, until the certificate of authentication, hereon endorsed, shall have been signed by US Bank National Association as Trustee, or by its successor in trust under said indenture.
5
I
N
W
ITNESS
W
HEREOF
, the
Company has caused this Bond to be duly executed by its proper officers under
its corporate seal.
Dated
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P UBLIC S ERVICE E LECTRIC AND G AS C OMPANY , |
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By |
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(Vice) President |
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(Seal) |
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Attest: |
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(Assistant) Secretary |
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(F
ORM OF
C
ERTIFICATE OF
A
UTHENTICATION
)
C
ERTIFICATE OF
A
UTHENTICATION
This Bond is one of the Bonds of the series designated therein which is described in the within-mentioned indenture and supplemental indenture dated April 1, 2007, as secured thereby.
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US BANK NATIONAL A SSOCIATION , T RUSTEE , |
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By |
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Authorized Signatory |
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W HEREAS , the execution and delivery of this supplemental indenture have been duly authorized by the Board of Directors of the Company; and
W HEREAS , the Company represents that all things necessary to make the bond of the series hereinafter described, when duly authenticated by the Trustee and issued by the Company, a valid, binding and legal obligation of the Company, and to make this supplemental indenture a valid and binding agreement supplemental to the Indenture, have been done and performed:
N OW , THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH that the Company, in consideration of the premises and the execution and delivery by the Trustee of this supplemental indenture, and in pursuance of the covenants and agreements contained in the Indenture and for other good and valuable consideration, the receipt of which is hereby acknowledged, has granted, bargained, sold, aliened, remised, released, conveyed, confirmed, assigned, transferred and set over, and by these presents does grant, bargain, sell, alien, remise, release, convey, confirm, assign, transfer and set over unto the Trustee, its successors and assigns, forever, all the right, title and interest of the Company in and to all property of every kind and description (except cash, accounts and bills receivable and all merchandise bought, sold or manufactured for sale in the ordinary course of the Companys business, stocks, bonds or other corporate obligations or securities, other than such as are described in Part V of the Granting Clauses of the Indenture, not acquired with the proceeds of bonds secured by the Indenture, and except as in the Indenture and herein otherwise expressly excluded) acquired by the Company since the execution and delivery of the supplemental indenture dated August 1, 2004 (No. 4), subsequent to the Indenture (except any such property duly released from, or disposed of, free from the lien of the Indenture, in accordance with the provisions thereof) and all such property which at any time hereafter may be acquired by the Company;
All of which property it is intended shall be included in and granted by this supplemental indenture and covered by the lien of the Indenture as heretofore and hereby amended and supplemented;
U NDER AND SUBJECT to any encumbrances or mortgages existing on property acquired by the Company at the time of such acquisition and not heretofore discharged of record; and
S UBJECT also, to the exceptions, reservations and provisions in the Indenture and in this supplemental indenture recited, and to the liens, reservations, exceptions, limitations, conditions and restrictions imposed by or contained in the several deeds, grants, franchises and contracts or other instruments through which the Company acquired or claims title to the aforesaid property; and Subject, also, to the existing leases, to liens on easements or rights of way, to liens for taxes, assessments and governmental charges not in default or the payment of which is deferred, pending appeal or other contest by legal proceedings, pursuant to Section 4 of Article Five of the indenture, or the payment of which is deferred pending billing, transfer of title or final determination of amount, to easements for alleys, streets, highways, rights of way and railroads that may run across or encroach upon the said property, to joint pole and similar agreements, to undetermined liens and charges, if any, incidental to construction, and other encumbrances permitted by the indenture as heretofore and hereby amended and supplemented;
T O HAVE AND TO HOLD the property hereby conveyed or assigned, or intended to be conveyed or assigned, unto the Trustee, its successor or successors and assigns, forever;
I N TRUST, NEVERTHELESS , upon the terms, conditions and trusts set forth in the Indenture as heretofore and hereby amended and supplemented, to the end that the said property shall be subject to the lien of the Indenture as heretofore and hereby amended and supplemented, with the same force and effect as though said property had been included in the Granting Clauses of the Indenture at the time of the execution and delivery thereof;
A ND THIS SUPPLEMENTAL INDENTURE FURTHER WITNESSETH that for the considerations aforesaid, it is hereby covenanted between the Company and the Trustee as follows:
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ARTICLE I.
B ONDS OF THE M EDIUM -T ERM N OTES S ERIES E.
The series of bonds authorized by this supplemental indenture to be issued under and secured by the Indenture shall be designated First and Refunding Mortgage Bonds, Medium-Term Notes Series E; shall be limited to the aggregate principal amount of $850,000,000; shall be issued initially to the Note Trustee and shall mature and bear interest as set forth in the form of bond set forth herein; provided, however, that the Company shall receive certain credits against principal and interest as set forth in Section 3.01 hereof. The date of each Bond of the Medium-Term Notes Series E shall be the interest payment date next preceding the date of authentication, unless such date of authentication be an interest payment date, in which case the date shall be the date of authentication, or unless such date of authentication be prior to the first semi-annual interest payment date, in which case the date shall be April 1, 2007.
Bonds of the Medium-Term Notes Series E shall be issuable only in the form of fully registered bonds in any denomination authorized by the Company. Interest on the Bonds of the Medium-Term Notes Series E shall be payable semi-annually in arrears on April 1 and October 1 of each year, payable initially on October 1, 2007, subject to receipt of certain credits against principal and interest as set forth in Section 3.01 hereof and shall be payable as to both principal and interest in such coin or currency of the United States of America as at the time of payment shall constitute legal tender for the payment of public and private debts, at the principal corporate trust office of the Trustee, or at the corporate trust office of any paying agent appointed.
Bonds of the Medium-Term Notes Series E shall be transferable and exchangeable, but only as provided in the Indenture and the Note Indenture, upon surrender thereof for cancellation by the registered owner in person or by attorney duly authorized in writing at either of said offices. The Company hereby waives any right to make a charge for any transfer or exchange of Bonds of the Medium-Term Notes Series E, but the Company may require payment of a sum sufficient to cover any tax or any other governmental charge that may be imposed in relation thereto.
ARTICLE II.
R EDEMPTION OF B ONDS OF M EDIUM -T ERM N OTES S ERIES E.
Section 2.01. RedemptionRedemption Price. Bonds of the Medium-Term Notes Series E shall be subject to redemption prior to maturity under the conditions, and upon payment of the amounts as may be specified in the following conditions:
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(a) at any time in whole or in part at the option of the Company upon receipt by the Trustee of written certification of the Company and of the Note Trustee that the principal amount of the Series E Notes then outstanding under the Note Indenture is not in excess of such principal amount of the Bonds of the Medium-Term Notes Series E as shall remain pledged to the Note Trustee after giving effect to such redemption; or (b) at any time by the application of any proceeds of released property or other money held by the Trustee and which, pursuant to Section 4C of Article Eight of the Indenture, as amended and supplemented, are applied to the redemption of Bonds of the Medium-Term Notes Series E, upon payment of 100% of the principal amount thereof, together with interest accrued to the redemption date, provided that any such payment shall be subject to receipt by the Company of certain credits against such obligations as set forth in Section 3.01 hereof. |
S ECTION 2.02. Redemptions Pursuant to Section 4C of Article Eight of the Indenture. If, pursuant to Section 4C of Article Eight of the Indenture, as amended and supplemented, any proceeds of released property or other money then held by the Trustee shall be applied to the redemption of the Bonds of the Medium-Term Notes Series E, the Trustee shall give at least 45 days prior written notice of such redemption to the Note Trustee whereupon on the date fixed for redemption such principal amount thereof as is equal to such proceeds shall be redeemed; provided that no such redemption shall be made unless the Trustee shall be in receipt of a written certification of the Company and the Note Trustee that a like principal amount of Series E Notes shall have been theretofore redeemed in accordance with the provisions of the Note Indenture. For purposes of determining which of the Companys First and Refunding Mortgage Bonds are subject to such mandatory redemption, the Mortgage Trustee shall consider the 10% stated annual interest rate of the Bonds of the Medium-Term Notes Series E, not the weighted average interest rate of outstanding Series E Notes. Bonds of said series so redeemed shall be cancelled.
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S ECTION 2.03. Interest on Called Bonds to Cease. Each Bond of the Medium-Term Notes Series E or portion thereof called for redemption under Section 2.02 hereof shall be due and payable at the office of the Note Trustee, as paying agent hereunder, at its redemption price and on the specified redemption date, anything herein or in such Bond to the contrary notwithstanding. From and after the date when each Bond of the Medium-Term Notes Series E or portion thereof shall be due and payable as aforesaid (unless upon said date the full amount due thereon shall not be held by the Note Trustee, as paying agent hereunder, and be immediately available for payment), all further interest shall cease to accrue on such bond or on such portion thereof, as the case may be.
S ECTION 2.04. Bonds Called in Part. If only a portion of any Bond of the Medium-Term Notes Series E shall be called for redemption pursuant to Section 2.02 hereof, upon payment of the portion so called for redemption, the Note Trustee shall make an appropriate notation upon the Bond of the principal amount so redeemed.
S ECTION 2.05. Provisions of Indenture Not Applicable. The provisions of Article Four of the Indenture, as amended and supplemented, shall not apply to the procedure for the exercise of any right of redemption reserved by the Company, or to any mandatory redemption provided, in this Article in respect of the Bonds of the Medium-Term Notes Series E. There shall be no sinking fund for the Bonds of the Medium-Term Notes Series E.
ARTICLE III.
C REDITS WITH R ESPECT TO B ONDS OF THE M EDIUM -T ERM N OTES S ERIES E.
Section 3.01. Credits. In addition to any other credit, payment or satisfaction to which the Company is entitled with respect to the Bonds of the Medium-Term Notes Series E, the Company shall be entitled to credits against amounts otherwise payable in respect of the Bonds of the Medium-Term Notes Series E in an amount corresponding to (i) the principal amount of any of the Companys Series E Notes issued under the Note Indenture surrendered to the Note Trustee by the Company, or purchased by the Note Trustee, for cancellation, (ii) the amount of money held by the Note Trustee and available and designated for the payment of principal or redemption price (exclusive of any premium) of, and/or interest on, the Series E Notes, regardless of the source of payment to the Note Trustee of such moneys and (iii) the amount by which principal of and interest due on the Bonds of the Medium-Term Notes Series E exceeds principal of and interest due on the Series E Notes. The Note Trustee shall make notation on such Bonds authorized hereby of any such credit.
S ECTION 3.02. Certificate of the Company. A certificate of the Company signed by the President or any Vice President, and attested to by the Secretary or any Assistant Secretary, and consented to by the Note Trustee, stating that the Company is entitled to a credit under Section 3.01 hereof or that Bonds of the Medium-Term Notes Series E have been cancelled, and setting forth the basis therefor in reasonable detail, shall be conclusive evidence of such entitlement, and the Trustee shall accept such certificate as such evidence without further investigation or verification of the matters stated therein.
ARTICLE IV.
M ISCELLANEOUS .
Section 4.01. Authentication of Bonds of Medium-Term Notes Series E. None of the Bonds of the Medium-Term Notes Series E, the issue of which is provided for by this supplemental indenture, shall be authenticated by or on behalf of the Trustee except in accordance with the provisions of the Indenture, as amended and supplemented, and this supplemental indenture, and upon compliance with the conditions in that behalf therein contained.
S ECTION 4.02. Additional Restrictions on Authentication of Additional Bonds Under Indenture. The Company covenants that from and after the date of execution of this supplemental indenture no additional bonds (as defined in Section 1 of Article Two of the Indenture) shall be authenticated and delivered by the Trustee under Subdivision A of Section 4 of said Article Two on account of additions or improvements to the mortgaged property;
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(1) unless the net earnings of the Company for the period required by Subdivision C of Section 6 of said Article Two shall have been at least twice the fixed charges (in lieu of 1-3/4 times such fixed charges, as required by said Subdivision C); and for the purpose of this condition (a) such fixed charges shall in each case include interest on the bonds applied for, notwithstanding the parenthetical provision contained in clause (4) of said Subdivision C, and (b) in computing such net earnings there shall be included in expenses of operation (under paragraph (c) of said Subdivision C) all charges against earnings for depreciation, renewals or replacements, and all certificates with respect to net earnings delivered to the Trustee in connection with any authentication of additional bonds under said Article Two shall so state; and (2) except to the extent of 60% (in lieu of 75% as permitted by Subdivision A of Section 7 of said Article Two) of the cost or fair value to the Company of the additions or improvements forming the basis for such authentication of additional bonds. |
S ECTION 4.03. Restriction on Dividends. The Company will not declare or pay any dividend on any shares of its common stock (other than dividends payable in shares of its common stock) or make any other distribution on any such shares, or purchase or otherwise acquire any such shares (except shares acquired without cost to the Company) whenever such action would reduce the earned surplus of the Company to an amount less than $10,000,000 or such lesser amount as may remain after deducting from said $10,000,000 all amounts appearing in the books of account of the Company on December 31, 1948, which shall thereafter, pursuant to any order or rule of any regulatory body entered after said date, be required to be removed, in whole or in part, from the books of account of the Company by charges to earned surplus.
S ECTION 4.04. Use of Facsimile Seal and Signatures. The seal of the Company and any or all signatures of the officers of the Company upon any of the Bonds of the Medium-Term Notes Series E may be facsimiles.
S ECTION 4.05. Time for Making of Payment. All payments of principal or redemption price of, and interest on, the Bonds of the Medium-Term Notes Series E shall be made either prior to the due date thereof or on the due date thereof in immediately available funds. In any case where the date of any such payment shall be a Saturday or Sunday or a legal holiday or a day on which banking institutions in the city of payment are authorized by law to close, then such payment need not be made on such date but may be made on the next succeeding business day with the same force and effect as if made on the due date, and no interest on such payment shall accrue for the period after such date.
S ECTION 4.06. Effective Period of Supplemental Indenture. The preceding provisions of Articles I, II and III of this supplemental indenture shall remain in effect only so long as any of the Bonds of the Medium-Term Notes Series E shall remain outstanding.
S ECTION 4.07. Effect of Approval of Board of Public Utilities of the State of New Jersey. The approval of the Board of Public Utilities of the State of New Jersey of the execution and delivery of these presents and of the issue of any Bond of the Medium-Term Notes Series E shall not be construed as approval of said Board of any other act, matter or thing which requires approval of said Board under the laws of the State of New Jersey.
S ECTION 4.08. Execution in Counterparts. For the purpose of facilitating the recording hereof, this supplemental indenture has been executed in several counterparts, each of which shall be and shall be taken to be an original, and all collectively but one instrument.
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I N WITNESS WHEREOF , Public Service Electric and Gas Company, party hereto of the first part, after due corporate and other proceedings, has caused this supplemental indenture to be signed and acknowledged or proved by its President or one of its Vice Presidents and its corporate seal hereunto to be affixed and to be attested by the signature of its Secretary or an Assistant Secretary; and US Bank National Association, as Trustee, party hereto of the second part, has caused this supplemental indenture to be signed and acknowledged or proved by its President or one of its Vice Presidents, and its corporate seal to be hereunto affixed and to be attested by the signature of its Secretary, Assistant Secretary; Vice President, or an Assistant Vice President. Executed and delivered this 5th day of April 2007.
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S TATE OF N EW J ERSEY |
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SS :) |
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C OUNTY OF E SSEX |
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Be it Remembered, that on this 5th day of April, 2007, before me, the subscriber, a Notary Public of the State of New Jersey, personally appeared M.A. Plawner, who, I am satisfied, is a Vice President of Public Service Electric and Gas Company, one of the corporations named in and which executed the foregoing instrument, and is the person who signed the said instrument as such officer, for and on behalf of such corporation, and I having first made known to him the contents thereof, he did acknowledge that he signed the said instrument as such officer, that the said instrument was made by such corporation and sealed with its corporate seal, that the said instrument is the voluntary act and deed of such corporation, made by virtue of authority from its Board of Directors, and that said corporation the mortgagor, has received a true copy of said instrument.
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June Barnett |
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Notary Public of New Jersey |
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My Commission Expires July 31, 2008 |
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S TATE OF N EW J ERSEY |
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SS :) |
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C OUNTY OF E SSEX |
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Be it Remembered, that on this 5th day of April 2007, before me, the subscriber, a Notary Public of the State of New Jersey, personally appeared Norman Barnes, who, I am satisfied, is a Vice President of US Bank National Association, one of the corporations named in and which executed the foregoing instrument, and is the person who signed the said instrument as such officer, for and on behalf of such corporation, and I having first made known to him the contents thereof, he did acknowledge that he signed the said instrument as such officer, that the said instrument was made by such corporation and sealed with its corporate seal, and that the said instrument is the voluntary act and deed of such corporation, made by virtue of authority from its Board of Directors.
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Melody Nedrick |
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Notary Public of New Jersey |
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My Commission Expires March 3, 2010 |
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CERTIFICATE OF RESIDENCE
US Bank National Association, Mortgagee and Trustee within named, hereby certifies that its precise residence is 21 South Street, Morristown, New Jersey 07960.
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US BANK N ATIONAL A SSOCIATION |
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By |
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N. Barnes |
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Vice President |
Exhibit 10a(1)
LIMITED SUPPLEMENTAL BENEFITS PLAN
FOR CERTAIN EMPLOYEES OF
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
AND ITS SUBSIDIARIES
Amended April 2007, Effective as of January 1, 2006
LIMITED SUPPLEMENTAL BENEFITS PLAN
FOR CERTAIN EMPLOYEES OF
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
AND ITS SUBSIDIARIES
TABLE OF CONTENTS
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Page |
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1. |
PURPOSE |
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2. |
DEFINITIONS OF TERMS USED IN THE PLAN |
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3. |
DEATH BENEFIT |
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4. |
RETIREMENT BENEFIT |
5 |
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5. |
ADMINISTRATION OF ACCOUNTS |
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6. |
DESIGNATION OF BENEFICIARIES |
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7. |
LIMITATION OF BENEFITS |
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8. |
PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT |
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9. |
AMENDMENT OR TERMINATION OF THE PLAN |
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10. |
WHAT CONSTITUTES NOTICE |
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11. |
ADVANCE DISCLAIMER OF WAIVER |
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12. |
EFFECT OF INVALIDITY OF ANY PART OF THE PLAN |
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13. |
PLAN BINDING ON ANY SUCCESSOR |
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14. |
FUNCTION OF THE COMMITTEE |
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15. |
LAW GOVERNING THE PLAN |
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16. |
MISCELLANEOUS |
12 |
-i-
LIMITED
SUPPLEMENTAL BENEFITS PLAN
FOR CERTAIN EMPLOYEES OF
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
AND ITS SUBSIDIARIES
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(a) |
Account Any account established pursuant to Paragraph 3(b) or 4(f) of the Plan. |
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(b) |
Assets All amounts that have been credited to an Employees Account in accordance with Paragraph 3(b), 4(f), or 5(b) of the Plan. |
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(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. |
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(d) |
Cash Balance Plan The Cash Balance Pension Plan of Public Service Enterprise Group Incorporated. |
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(e) |
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: |
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(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 the Companys securities of (not including in the securities beneficially owned by such person any securities |
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acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Companys then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (A) of paragraph (iii) below; or |
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(ii) |
the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 15, 1998, constitute the board of directors of the Company (Board) and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Companys 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 |
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(iii) |
there is consummated a merger or consolidation of the Company or any direct or indirect wholly owned subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Companys then outstanding securities; or |
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(iv) |
the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets, other than a sale or disposition by the Company of all or substantially all of the Companys assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders |
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of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. |
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Notwithstanding the foregoing subparagraphs (i), (ii), (iii) and (iv), a Change in Control shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. |
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(f) |
Code The Internal Revenue Code of 1986, as amended. |
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(g) |
Committee The Employee Benefits Committee of the Company as selected by its Board of Directors. |
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(h) |
Company Public Service Enterprise Group Incorporated. |
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(i) |
Compensation |
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(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 |
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(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 i) the Companys cost for any public or private employee benefit plan 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) and ii) all awards to the Participant under the Companys Long-Term Incentive Compensation Plan, for the five years ending at the earlier of such Participants 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 who is also a participant in the Companys Management Incentive Compensation Plan or the PSEG Power LLC Incentive Compensation Program for PSEG Energy Resources and Trade LLC Employees shall not exceed the amount which is 150% of the average annual base salary of the Participant for the applicable five-year period. |
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(j) |
ERISA The Employee Retirement Income Security Act of 1974, as amended. |
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(k) |
ERISA Affiliate any organization which is a member of a controlled group of corporations (as defined in Code Section 414(b)) 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). |
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(l) |
Participant Each employee of the Company or an ERISA Affiliate nominated by the Chief Executive Officer of the Company and designated by the Companys Employee Benefits Policy Committee. The Chief Executive Officer of the Company shall nominate such select and key employees of the Company and its ERISA Affiliates upon such terms as he shall deem appropriate due to the employees responsibilities and opportunity to contribute substantially to the financial and operating objectives of the Company. |
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(m) |
Pension Plan The Pension Plan of Public Service Enterprise Group Incorporated. |
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(n) |
Plan The Limited Supplemental Benefits Plan for Certain Employees of Public Service Enterprise Group Incorporated and its Subsidiaries, the terms of which are contained herein |
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(o) |
Retirement For the purposes of the Plan, Retirement shall mean either (i) or (ii), as the case may be: |
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(i) |
in the case of a Participant who participates in the Pension Plan, the Participant shall incur a Retirement for purposes of the Plan if he or she incurs a termination of service with the Company and its ERISA Affiliates after having attained the right to receive an immediately payable periodic benefit under the Pension Plan or when the sum of Participants age and service are equal to or exceed 80. In determining whether the Participant has attained the right to an immediately payable periodic benefit under the Pension Plan, he or she shall receive additional years of age and service in accordance with any employment, change in control, or similar arrangement applicable to the Participant, provided the Participant incurs a termination of service from the Company and its ERISA Affiliates during the two-year period commencing upon the date of a Change in Control. |
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(ii) |
in the case of a Participant who participates in the Cash Balance Plan, the Participant shall incur a Retirement for purposes of the Plan if he or she incurs a termination of service with the Company and its ERISA Affiliates after his or her Early Retirement Date or Normal Retirement Date (as those terms are defined in the Cash Balance Plan). In determining whether the Participant has attained his or her Early Retirement Date or Normal |
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Retirement Date, he or she shall receive additional years of age and service in accordance with any employment, change in control, or similar arrangement applicable to the Participant, provided the Participant incurs a termination of service from the Company and its ERISA Affiliates during the two-year period commencing upon the date of a Change in Control. |
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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 participants Cash Balance Account under the Cash Balance Plan. |
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(p) |
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 or an ERISA Affiliate, 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. |
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(q) |
Voting Stock Outstanding stock of a corporation entitled to vote in the election of the directors of that corporation. |
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3. |
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(a) |
Amount of Benefit If a Participant dies while in the active employment of the Company or an ERISA Affiliate, the Company shall provide a death benefit to such Participants Beneficiary in an amount equal to 150% of the Participants 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. |
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(b) |
Establishment of Account Upon the death of a Participant during employment with the Company or an ERISA Affiliate, the Company shall establish an Account for the benefit of such Participants 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. |
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4. |
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(a) |
General At Retirement, the Company shall provide each Participant with a retirement benefit calculated as provided in this Paragraph 4. |
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(b) |
Determination of Benefit |
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(i) |
Pension Plan Participants: |
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(A) |
The Participants Compensation shall be multiplied by an amount equal to one one-hundredth of the sum of (x) the number of the Participants years of credited service under the Pension Plan at Retirement (including any additional years of age and service provided to the Participant in accordance with any employment, change in control, or similar arrangement applicable to the Participant so long as the Participant incurs a termination of service from the Company and its ERISA Affiliates during the two-year period commencing upon the date of a Change in Control), (y) the number of any additional years of service credit to which the Participant may be entitled from the Company under the Mid-Career Supplemental Retirement Income Plan of Public Service Enterprise Group Incorporated and its Affiliates or any written arrangement with the Company or an ERISA Affiliate Company (excluding any written arrangement between the Company or ERISA Affiliate and the Participant relating to a Change in Control), and (z) 30; but, in no event, shall the multiple be greater than 0.75. |
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(B) |
The amount determined under subparagraph (A) of this Paragraph 4(b)(i) shall be reduced by the sum of (x) the amount the Participant would be entitled to at Retirement as an annual pension benefit under the Pension Plan and any supplemental retirement plan (other than this Plan) maintained by the Company or an ERISA Affiliate calculated as a single life annuity without reduction for any pre-retirement survivors 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 or an ERISA Affiliate, the 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 |
- 6 -
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Participant shall file a declaration of all such amounts with the Performance and Rewards Department of the Companys subsidiary, PSEG Services Corporation, in such form as the Committee may require from time to time. No benefit shall be paid under the Plan until such a declaration, in satisfactory form, shall be filed with the Performance and Rewards Department. If a Participant is granted a disability Social Security benefit, he shall notify the Performance and Rewards Department thereof within 30 days thereof, and the Participants 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. |
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(ii) |
Cash Balance Plan Participants : |
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(A) |
The Participants Compensation shall be multiplied by an amount equal to one one-hundredth of the sum of (x) the number of the Participants 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 and including any additional years of age and service provided to the participant in accordance with any employment, change in control, or similar arrangement applicable to the Participant so long as the Participant incurs a termination of service from the Company and its ERISA Affiliates during the two-year period commencing upon the date of a Change in Control, (y) the number of any additional years of service credit to which the Participant may be entitled from the Company under the Mid-Career Supplemental Retirement Income Plan of Public Service Enterprise Group Incorporated and its Affiliates or any written arrangement with the Company or an ERISA Affiliate (excluding any written arrangement between the Company or ERISA Affiliate relating to a Change in Control) the , and (z) 30; but, in no event, shall the multiple be greater than 0.75. |
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(B) |
The amount determined under subparagraph (A) of this Paragraph 4(b)(ii) shall be reduced by the sum of (x) the amount the Participant would be entitled to at Retirement as an annual |
- 7 -
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pension benefit under the Cash Balance Plan and any supplemental retirement plan (other than this Plan) maintained by the Company or an ERISA Affiliate the calculated as a single life annuity payable at the Participants Normal Retirement Date (as defined under the Cash Balance Plan) , (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 or an ERISA Affiliate, such Social Security Benefits and benefits under all Retirement Plans to be calculated as single life annuities without any reductions, under rules, procedures and equivalents determined by the Committee. To determine the amounts referred to under (y) and (z) above, the Participant shall file a declaration of all such amounts with the Performance and Rewards Department in such form as the Committee may require from time to time. No benefit shall be paid under the Plan until such a declaration, in satisfactory form, shall be filed with the Performance and Rewards Department. If a Participant is granted a disability Social Security benefit, he shall notify the Performance and Rewards Department thereof within 30 days thereof, and the Participants 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. |
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(c) |
Forms of Benefit The annual amount determined under paragraph (b) of this Paragraph 4 shall be paid in the form of a life annuity; either a single life annuity in monthly installments or a joint and survivor annuity in monthly installments based upon such annual amount and calculated in accordance with the form of benefit option selected by the Participant; provided, however, that if the Participant has selected a lump-sum distribution under the Pension Plan or the |
- 8 -
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Cash Balance Plan, distribution under this Plan shall be made in the form of a single life annuity. |
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Provided, further, that that if the vested Plan benefit of a participant or beneficiary, as presently valued at the time of commencement of the payment of such benefit, does not exceed $10,000, such person shall be paid a lump sum distribution of the actuarial equivalent of his/her vested plan benefit (in determining the amount of a lump sum distribution under this Plan, actuarial equivalence shall be determined by using the Applicable Mortality Table and the Applicable Interest Rate as those terms are defined in Section 1 of the Pension Plan of Public Service Enterprise Group Incorporated as then in effect). |
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(d) |
Commencement of Benefit The benefit to be paid pursuant to this Paragraph 4 shall commence at the same time as the Participants benefit under the Pension Plan or Cash Balance Plan except that for any Participant who is a Key Employee, as defined in the Code, commencement of his/her benefit may not occur earlier than six months following his/her Retirement. |
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5. |
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(a) |
General Accounts shall be established under the Plan only pursuant to Paragraph 3(b) hereof. All Accounts shall be administered in accordance with the provisions of this Paragraph 5. |
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(b) |
Interest on Assets in the Account The Assets credited to an Account shall accrue interest at a market rate of interest as may be determined from time to time by the Committee. |
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(c) |
Timing of the Distribution(s) A Beneficiary shall receive the distribution of the Account in the form of monthly distributions over a ten-year period commencing in the month following the month of the Participants death. The amount of each installment shall be determined by dividing the then unpaid balance in the Account, including accrued and unpaid interest, by the number of installments remaining to be paid. |
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(d) |
Request for Change in Distribution A Beneficiary or legal representative may request a change in the timing, frequency or amount of payments made from a 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 Beneficiary or legal representative exists and which would cause such 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 Beneficiary or legal representative of its decision within sixty (60) days of receipt of the written request. |
- 9 -
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6. |
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(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. |
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(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. |
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(c) |
Retirement Benefits |
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(i) |
Single Life Annuity . If a Participants 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 Participants death. |
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(ii) |
Joint and Survivor Annuity . If a Participants retirement benefit under Paragraph 4(c)(ii) of the Plan is paid as joint and survivor annuity, the post-retirement survivorship shall be paid to the Participants spouse. If the Participants spouse predeceases the Participant within five years from the date of Participants Retirement, the Participants 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 spouse died. If, however, the spouse predeceases the Participant more than five years after Participants Retirement, the Participants reduced retirement benefit shall continue during his life and no survivor benefit shall be paid. |
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(d) |
Designation by Last Remaining Beneficiary After a Participants death, if there is only one remaining Beneficiary with respect to a death benefit under Paragraph 3 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 Beneficiarys death. If no such further designation is made, such remainder shall be paid to such Beneficiarys estate. In the event of such Beneficiarys 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. |
- 10 -
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7. |
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(a) |
The Plan shall be unfunded with respect to all benefits to be paid hereunder. In addition, 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. |
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(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. |
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(c) |
If the Company should terminate the Plan pursuant to Paragraph 9 hereof, the Companys obligation to pay any benefits under the Plan shall likewise terminate; provided, however, that, except as otherwise provided in said Paragraph 9, the Company may not terminate the Plan with respect to any Participant subsequent to that Participants Retirement or death. |
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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 or any ERISA Affiliate. The Company and each ERISA Affiliate reserves the right to modify a Participants Compensation at any time and from time to time as it considers appropriate and to terminate any Participants employment for any reason at any time notwithstanding the Plan. |
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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 his Beneficiary or his legal representative shall consent to such change. Provided, further, however, that after a Change in Control, this Plan may not be terminated nor the benefit calculation reduced with respect to any Participant in the Plan on the date of such Change in Control unless such Participant or his Beneficiary or his legal representative shall consent to such change. No right to a death benefit under the Plan shall accrue until a Participants death and no right to a retirement benefit shall accrue until a Participants Retirement. |
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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 persons last known address. Any notice to the Company or the Committee hereunder (including the filing of Schedule A) shall be given by delivering it in person or by overnight express service, or depositing it in the United States mail, postage prepaid, to the Secretary of the Employee Benefits Committee, Public Service Enterprise Group Incorporated, 80 Park Plaza, T10B, P.O. Box 1171, Newark, New Jersey, 07101. |
- 11 -
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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. |
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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. |
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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 Companys assets and business or with or into which the Company may be consolidated or merged. |
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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. |
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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. This Plan is specifically intended to comply with the provisions of the American Jobs Creation Act of 2004 (the AJCA) and Section 409A of the Code and it shall automatically incorporate all applicable restrictions of the AJCA, the Code and its related regulations, and the Company will amend the Plan to the extent necessary to comply with those requirements. The timing under which a Participant will have a right to receive any payment under this Plan will be deemed to be automatically modified, and a Participants rights under the Plan limited to conform to any requirements under, the AJCA, the Code and its related regulations. |
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16. |
MISCELLANEOUS . |
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(a) |
The masculine pronoun shall mean the feminine wherever appropriate. |
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(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. |
- 12 -
LIMITED
SUPPLEMENTAL BENEFITS PLAN
FOR CERTAIN EMPLOYEES OF
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
AND ITS SUBSIDIARIES
SCHEDULE A
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Section 1. |
DESIGNATION OF BENEFICIARY(IES) FOR DEATH AND 10-YEAR CERTAIN ANNUITY BENEFITS |
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 death benefits owing to me under Paragraph 3 or 4, and any 10-year certain annuity retirement benefits owing to me under Paragraphs 5(c)(iii) and (iv), of the Limited Supplemental Death Benefits and Retirement Plan of Public Service Electric and Gas Company (Plan).
PRIMARY BENEFICIARIES -The following beneficiary(ies) shall receive all such 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 beneficiarys share(s) shall be divided equally among the remaining primary beneficiaries.
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Employees Signature |
Page 1 of 3 Schedule A
Section 1 (Continued)
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NAME
AND PRESENT ADDRESS
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PROPORTIONATE
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RELATIONSHIP
TO
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% |
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SECONDARY BENEFICIARIES -The following beneficiary(ies) shall receive all such benefits payable under the Plan in the event of my death in 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 beneficiarys share(s) shall be divided equally among the remaining secondary beneficiaries.
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NAME
AND PRESENT ADDRESS
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PROPORTIONATE
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RELATIONSHIP
TO
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Employees Signature |
Page 2 of 3 Schedule A
Section 1 (Continued)
ESTATE - In the event I have declined to designate a beneficiary under this Section 1 with respect to any such benefits payable under the Plan, or if all of the beneficiaries that I have designated predecease me, then all such benefits payable under the Plan shall be payable to my estate.
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Section 2. |
DESIGNATION OF BENEFICIARY FOR JOINT AND SURVIVOR ANNUITY . |
In the event of my death, if I am not paid a joint and survivor annuity under the Pension Plan of Public Service Electric and Gas Company, I hereby designate the following individual to be the beneficiary with respect to any joint and survivor annuity paid to me under Paragraph 5(c) (ii) of the Plan. If I am paid a joint and survivor annuity under the Pension Plan, I understand my beneficiary for a survivor benefit under Paragraph 5(c)(ii) of the Plan will be the same as under the Pension Plan.
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Name: |
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Address: |
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Relationship
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Date of Birth: |
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Date: |
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WITNESS |
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EMPLOYEES SIGNATURE |
Page 3 of 3 Schedule A
Exhibit 10a(2)
MID-CAREER HIRE SUPPLEMENTAL RETIREMENT INCOME PLAN
FOR SELECTED EMPLOYEES OF
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
AND ITS AFFILIATES
Amended April 2007, Effective as of January 1, 2006
TABLE OF CONTENTS
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Section 1. Definitions |
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1 |
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Section 2. Eligibility |
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3 |
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Section 3. Supplemental Retirement Benefit |
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4 |
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Section 4. Supplemental Surviving Spouse Benefit |
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5 |
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Section 5. Administration of the Plan |
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5 |
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Section 6. Claims Procedure and Status Determination |
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7 |
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Section 7. Amendment or Termination |
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7 |
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Section 8. General Provisions |
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8 |
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Section 9. Miscellaneous |
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9 |
MID-CAREER
HIRE SUPPLEMENTAL RETIREMENT INCOME PLAN
FOR SELECTED EMPLOYEES OF
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED AND ITS AFFILIATES
Public Service Electric and Gas Company previously established effective as of January 1, 1997, and currently maintains, the Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Electric and Gas Company and its Affiliates. Effective December 13, 1999, Public Service Electric and Gas Company transferred sponsorship of the plan to the Company and the plan was renamed the Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Enterprise Group Incorporated and its Affiliates. Furthermore, effective as of December 1, 2005, the Plan was amended as set forth in this document to conform with the requirements of The American Jobs Creation Act of 2004. This Plan was established for the purpose of assisting in attracting and retaining a stable pool of key managerial and professional talent and long-term key employee commitment by providing certain supplemental retirement benefits based upon additional service credit for a selected number of key employees who participate in the Pension Plan of Public Service Enterprise Group Incorporated. This Plan is intended to constitute an unfunded plan of deferred compensation for a select group of management or highly compensated employees for purposes of Title 1 of ERISA.
The Plan was last amended, effective as of January 1, 2006, to conform the Plan to certain requirements of Code Section 409A, as well as to provide for lump sum payments of deminimus benefits and the terms contained herein shall supersede all prior iterations of the Plan.
When used herein, the words and phrases hereinafter defined shall have the following meanings unless a different meaning is clearly required by the context of the Plan:
1.1 Affiliate shall mean any organization which is a member of a controlled group of corporations (as defined in Code Section 414(b), as modified by Code Section 415(h)) which includes the Company; or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c), as modified by Code Section 415(h)) with the Company; or a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company or any other entity required to be aggregated with the Company as required by regulations promulgated pursuant to Code Section 414(o).
1.2 Beneficiary shall mean any person or persons selected by a Participant on a form provided by the Company who may become eligible to receive the benefits provided under this Plan in the event of such Participants death.
1.3 Board of Directors or Board shall mean the Board of Directors of the Company.
1
1.4 Code shall mean the Internal Revenue Code of 1986, as amended, and as same may be amended from time to time.
1.5 Company shall mean Public Service Enterprise Group Incorporated.
1.6 Compensation shall mean compensation as defined in the Reinstatement Plan.
1.7 Credited Service shall mean the aggregate of all periods of employment with the Company or an Affiliate or former Affiliate and all periods of additional service credit granted by the Company for which a Participant will be given credit in computing his Supplemental Retirement Benefit.
1.8 Employee Benefits Committee or Committee shall mean the Employee Benefits Committee of the Company.
1.9 Employee Benefits Policy Committee or Policy Committee shall mean the Employee Benefits Policy Committee of the Company.
1.10 ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended, and as the same may be amended from time to time.
1.11 Normal Retirement Date shall mean the first day of the month coinciding with or next following a Participants attainment of age 65 or the date at which the sum of Participants age and years of service is equal to or exceeds 80.
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 employees responsibilities and opportunity to contribute to the financial and operating objectives of the Company or Participating Affiliate.
1.13 Participating Affiliate shall mean any Affiliate of the Company which (a) is the sponsor or a Participating Affiliate of the Reinstatement Plan; (b) adopts this Plan with the approval of the Board of Directors; (c) authorizes the Board of Directors and the Employee Benefits Committee to act for it in all matters arising under or with respect to this Plan; and (d) complies with such other terms and conditions relating to this Plan as may be imposed by the Board of Directors.
1.14 Pension Plan shall mean the Pension Plan of Public Service Enterprise Group Incorporated (formerly known as the Pension Plan of Public Service Electric and Gas Company), and each successor or replacement plan.
1.15 Plan shall mean this Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Enterprise Group Incorporated and its Affiliates (formerly
2
known as the Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Electric and Gas Company and its Affiliates).
1.16 Plan Year shall mean the calendar year.
1.17 Reinstatement Plan shall mean the Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Enterprise Group Incorporated and its Affiliates (formerly known as the Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and its Affiliates).
1.18 Reinstatement Plan Retirement Benefit shall mean the aggregate annual benefit payable to a Participant pursuant to the Reinstatement Plan by reason of his termination of employment with the Company and all Affiliates for any reason other than death.
1.19 Reinstatement Plan Surviving Spouse Benefit shall mean the aggregate annual benefit payable to the Surviving Spouse of a Participant pursuant to the Reinstatement Plan in the event of the death of the Participant at any time prior to commencement of payment of his Reinstatement Plan Retirement Benefit.
1.20 Supplemental Retirement Benefit shall mean the benefit payable to a Participant pursuant to this Plan by reason of his termination of employment with the Company and all Affiliates for any reason other than death.
1.21 Surviving Spouse shall mean a person who is married to a Participant at the date of his death.
1.22 Year of Service shall mean Year of Service as defined in the Pension Plan.
1.23 Supplemental Surviving Spouse Benefit shall mean the benefit payable to a Surviving Spouse pursuant to this Plan.
2.1 A Participant who is selected by the Chief Executive Officer of the Company to participate in this Plan shall be eligible to receive a Supplemental Retirement Benefit. The Surviving Spouse of a Participant described in the preceding sentence who dies prior to commencement of payment of his Reinstatement Plan Retirement Benefit shall be eligible to receive a Supplemental Surviving Spouse Benefit.
2.2 Upon selection for participation in the Plan, the Chief Executive Officer shall designate the number of years of additional Credited Service to which such Participant shall be entitled to be credited in calculating his Supplemental Retirement Benefit under this Plan. The Chief Executive Officer shall notify the Vice President - Human Resources in writing of such selection and designation.
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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:
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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 |
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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 Participants 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 form of a life annuity in monthly installments or a joint and survivor annuity in monthly installments based calculated in accordance with the form of benefit option selected by the Participant; provided, however, that if the Participant has selected a lump-sum distribution under the Pension Plan or the Cash Balance Plan, distribution under this Plan shall be made in the form of a single annuity.
Provided, further, that that if the vested Plan benefit of a participant or beneficiary, as presently valued at the time of commencement of the payment of such benefit, does not exceed $10,000, such person shall be paid a lump-sum distribution of the actuarial equivalent of his/her vested plan benefit (in determining the amount of a lump sum distribution under this Plan, actuarial equivalence shall be determined by using the Applicable Mortality Table and the Applicable Interest Rate as those terms are defined in Section 1 of the Pension Plan of Public Service Enterprise Group Incorporated as then in effect).
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 except that for any Participant who is a Key Employee, as defined in the Code, commencement of his/her benefit may not occur earlier than six months following his/her Retirement.
3.4 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 Participants 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
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retirement benefits payable pursuant to the Pension Plan on the date for commencement of payment hereunder.
Section 4. Supplemental Surviving Spouse Benefit
4.1 If a Participant dies prior to commencement of payment of his Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit under circumstances in which a Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit is payable to his Surviving Spouse, then a Supplemental Surviving Spouse Benefit shall be payable to his Surviving Spouse as hereinafter provided. The Supplemental Surviving Spouse Benefit payable to a Surviving Spouse shall be equal to the excess of (a) over (b) where:
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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 |
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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 Spouses death.
Provided, further, that that if the vested Plan benefit of the Surviving Spouse, as presently valued at the time of commencement of the payment of such benefit, does not exceed $10,000, such person shall be paid a lump-sum distribution of the actuarial equivalent of his/her vested plan benefit (in determining the amount of a lump sum distribution under this Plan, actuarial equivalence shall be determined by using the Applicable Mortality Table and the Applicable Interest Rate as those terms are defined in Section 1 of the Pension Plan of Public Service Enterprise Group Incorporated as then in effect).
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.
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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
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employ agents to carry out non-fiduciary responsibilities; |
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employ agents to carry out fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA); |
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consult with counsel, who may be counsel to the Company or an Affiliate; and |
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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 erected by the Committee only by a resolution approved by a majority of the Committee. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to this Plan.
5.3 The Committee shall keep written minutes of all its proceedings, which shall be open to inspection by the Board of Directors. In the case of any decision by the Committee with 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
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for the exclusive purpose of providing benefits to Participants and their Beneficiaries; |
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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 alike character and with like aims; and |
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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.
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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, 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.
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8.1 This Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company or any Affiliate for payment of any benefits hereunder. No Participant, Beneficiary, Surviving Spouse or any other person shall have any interest in any particular assets of the Company or any Affiliate by reason of the right to receive a benefit under this Plan and any such Participant, Beneficiary, Surviving Spouse or other person shall have only the rights of a general unsecured creditor with respect to any rights under the Plan.
8.2 Except as otherwise expressly provided herein, all terms and conditions of the Pension Plan and the Reinstatement Plan applicable to a benefit paid to a Participant or a Surviving Spouse Benefit under such plans shall also be applicable to a Supplemental Retirement Benefit or a Supplemental Surviving Spouse Benefit payable hereunder. Any benefit payable under the Pension Plan or the Reinstatement Plan, shall be paid solely in accordance with the respective terms and conditions of the Pension Plan and the Reinstatement Plan and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan or the Reinstatement Plan.
8.3 Nothing contained in this Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company or any Affiliate will be sufficient to pay any benefit hereunder.
8.4 No Participant or Surviving Spouse shall have any right to a benefit under this Plan except in accordance with the terms of this Plan. Establishment of this Plan shall not be construed to give any Participant the right to be retained in the service of the Company or any Affiliate.
8.5 No interest of any person or entity in, or right to receive a benefit under, this Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind; nor any such interest or right to receive a benefit be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings.
8.6 This Plan shall be construed and administered under the laws of the United States and the State of New Jersey to the extent not superseded by Federal law. This Plan is specifically intended to comply with the provisions of The American Jobs Creation Act of 2004 (the AJCA) and Section 409A of the Code and it shall automatically incorporate all applicable restrictions of the AJCA, the Code and its related regulations, and the Company will amend the Plan to the extent necessary to comply with those requirements. The timing under which a Participant will have a right to receive any payment under this Plan will be deemed to be automatically modified, and a Participants rights under the Plan limited to conform to any requirements under, the AJCA, the Code and its related regulations.
8.7 If the present value of any Supplemental Retirement Benefit or Supplemental Surviving Spouse benefit under this Plan and all other plans required under the Section 409A of the Code to be aggregated with this Plan, is less than $1,000, the Company may pay the present
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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 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 Companys 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 Participants 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.
9.1 As used herein, words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless otherwise required by the context. Any headings used herein are included for ease of reference only and are not to be construed so as to alter the terms hereof.
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Exhibit 10a(3)
RETIREMENT INCOME REINSTATEMENT PLAN
FOR NON-REPRESENTED EMPLOYEES OF
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
AND ITS AFFILIATES
Amended April 2007, Effective as of January 1, 2006
TABLE OF CONTENTS
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Section 1. |
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Definitions |
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Section 2. |
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Eligibility |
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Section 3. |
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Supplemental Retirement Benefit |
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Section 4. |
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Supplemental Surviving Spouse Benefit |
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Section 5. |
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Administration of the Plan |
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Section 6. |
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Claims Procedure and Status Determination |
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Section 7. |
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Amendment or Termination |
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Section 8. |
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General Provisions |
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Section 9. |
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Miscellaneous |
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RETIREMENT INCOME REINSTATEMENT PLAN
FOR NON-REPRESENTED EMPLOYEES OF
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
AND ITS AFFILIATES
Public Service Electric and Gas Company previously established effective January 1, 1995, and currently maintains the Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and its Affiliates. Effective December 13, 1999, Public Service Electric and Gas Company transferred sponsorship of the plan to the Company and renamed the plan the Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Enterprise Group Incorporated and its Affiliates. The Plan was further amended, effective as of December 1, 2005, as set forth in this document to conform with the requirements of The American Jobs Creation Act of 2004. This Plan was established for the purpose of assisting in attracting and retaining a stable pool of key managerial and professional talent and long-term key employee commitment by providing certain supplemental retirement benefits for certain of their employees who participate in the Pension Plan of Public Service Enterprise Group Incorporated or the Cash Balance Pension Plan of Public Service Enterprise Group Incorporated. This Plan is intended to constitute an unfunded excess benefit plan as defined in Section 3(36) of ERISA, to the extent it provides benefits that would be paid under the Pension Plan of Public Service Enterprise Group Incorporated or the Cash Balance Pension Plan of Public Service Enterprise Group Incorporated but for the limitations of Section 415 of the Code, and an unfunded plan of deferred compensation for a select group of management or highly compensated employees for purposes of Title 1 of ERISA, to the extent it provides other benefits.
The Plan was last amended, effective as of January 1, 2006, to conform the Plan to certain requirements of Code Section 409A, as well as to provide for lump sum payments of deminimus benefits and the terms contained herein shall supersede all prior iterations of the Plan.
Section 1. Definitions
When used herein, the words and phrases hereinafter defined shall have the following meanings unless a different meaning is clearly required by the context of the Plan:
1.1 Affiliate shall mean any organization which is a member of a controlled group of corporations (as defined in Code Section 414(b), as modified by Code Section 415(h)) which includes the Company; or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c), as modified by Code Section 415(h)) with the Company; or a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company or any other entity required to be aggregated with the Company as required by regulations promulgated pursuant to Code Section 414(o).
1.2 Beneficiary shall mean any person or persons selected by a Participant on a form provided by the Company who may become eligible to receive the benefits provided under this Plan in the event of such Participants death.
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1.3 Benefit Limitation shall mean the maximum annual benefit payable to a Participant under the Pension Plan or the Cash Balance Plan in accordance with Section 415 of the Code.
1.4 Board of Directors or Board shall mean the Board of Directors of the Company.
1.5 Cash Balance Plan shall mean the Cash Balance Pension Plan of Public Service Enterprise Group Incorporated (formerly known as the Cash Balance Pension Plan of Public Service Electric and Gas Company) and each successor or replacement plan.
1.6 Code shall mean the Internal Revenue Code of 1986, as amended, and as same may be amended from time to time.
1.7 Company shall mean Public Service Enterprise Group Incorporated.
1.8 Compensation with respect to any Participant shall mean the average of the total remuneration paid to such Participant for services rendered to the Company, excluding i) the Companys cost for any public or private employee benefit plan 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) and ii) all awards to the Participant under the Companys Long-Term Incentive Compensation Plan, for the five years ending at the earlier of such Participants date of Retirement or attainment of normal retirement age under the Pension Plan; provided, however, that for the purposes of Sections 3 and 4 of the Plan, Compensation with respect to any Participant who is also a participant in the Companys Management Incentive Compensation Plan or the PSEG Power LLC Incentive Compensation Program for PSEG Energy Resources and Trade LLC Employees shall not exceed the amount which is 150% of the average annual base salary of the Participant for the applicable five-year period.
1.9 Compensation Limitation shall mean the maximum amount of annual compensation under Section 401(a)(17) of the Code that may be taken into account in any Plan Year for benefit accrual purposes under the Pension Plan or the Cash Balance Plan.
1.10 Employee shall mean any individual in the employ of the Company or a Participating Affiliate who is not included within a unit of employees covered by a collective bargaining agreement. The term Employee shall not include a director of the Company or a Participating Affiliate who serves in no capacity other than as a director, a consultant or independent contractor doing work for the Company or a. Participating Affiliate or a person employed by a consultant or independent contractor doing work for the Company or a Participating Affiliate.
1.11 Employee Benefits Committee or Committee shall mean the Employee Benefits Committee of the Company.
1.12 Employee Benefits Policy Committee shall mean the Employee Benefits Policy Committee of Public Service Enterprise Group Incorporated.
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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 Participants attainment of age 65 or the date at which the sum of Participants age and years of service is equal to or exceeds 80.
1.15 Participant shall mean any Employee or former Employee of the Company or a Participating Affiliate who meets the requirements of Subsection 2.1 of the Plan.
1.16 Participating Affiliate shall mean any Affiliate of the Company which (a) is the sponsor or a Participating Affiliate of the Pension Plan and/or the Cash Balance Plan; (b) adopts this Plan with the approval of the Board of Directors; (c) authorizes the Board of Directors and the Employee Benefits Committee to act for it in all matters arising under or with respect to this Plan; and (d) complies with such other terms and conditions relating to this Plan as may be imposed by the Board of Directors.
1.17 Pension Plan shall mean the Pension Plan of Public Service Enterprise Group Incorporated 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 Participants 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 Participants Pension Plan Retirement Benefit.
1.20 Plan shall mean this Retirement Income Reinstatement Plan for NonRepresented Employees of Public Service Enterprise Group Incorporated and its Affiliates (formerly known as the Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and Its Affiliates).
1.21 Plan Year shall mean the calendar year.
1.22 Supplemental Retirement Benefit shall mean the benefit payable to a Participant pursuant to this Plan by reason of the Participants 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 Participants death.
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1.24 Supplemental Surviving Spouse Benefit shall mean the benefit payable to a Surviving Spouse pursuant to this Plan.
Section 2. Eligibility
2.1 A Participant who is eligible to receive a Pension Plan Retirement Benefit, the amount of which is reduced by reason of (a) the application of the limitations on benefits imposed by application of any provisions of the Code, as in effect on the date for commencement of the Pension Plan Retirement Benefit or as in effect at any time thereafter, to the Pension Plan or the Cash Balance Plan, as the case may be, or (b) the restrictions of Subsection 1.10(a) of the Pension Plan or Subsection 1.1(m)(1) of the Cash Balance Plan, shall be eligible to receive a Supplemental Retirement Benefit. The Surviving Spouse of a Participant described in the preceding sentence who dies prior to commencement of payment of his Pension Plan Retirement Benefit shall be eligible to receive a Supplemental Surviving Spouse Benefit.
Section 3. Supplemental Retirement Benefit
3.1 The Supplemental Retirement Benefit payable to an eligible Participant shall be equal to the excess of (a) over (b) where:
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is the amount of Pension Plan Retirement Benefit to which the Participant would have been entitled under the Pension Plan or the Cash Balance Plan, as the case may be, if such benefit were computed without regard to (i) the exclusion of any amounts pursuant to Subsection 1.10(a) of the Pension Plan, (ii) the exclusion of any amounts pursuant to Subsection 1.1(m)(1) of the Cash Balance Plan, (iii) the Benefit Limitation or (iv) the Compensation Limitation; and |
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is the amount of the Pension Plan Retirement Benefit actually payable to the Participant or payable to a third party on the Participants 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 form of a life annuity in monthly installments or a joint and survivor annuity in monthly installments based calculated in accordance with the form of benefit option selected by the Participant; provided, however, that if the Participant has selected a lump-sum distribution under the Pension Plan or the Cash Balance Plan, distribution under this Plan shall be made in the form of a single annuity
Provided, further, that that if the vested Plan benefit of a participant or beneficiary, as presently valued at the time of commencement of the payment of such benefit, does not exceed
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$10,000, such person shall be paid a lump sum distribution of the actuarial equivalent of his/her vested plan benefit (in determining the amount of a lump sum distribution under this Plan, actuarial equivalence shall be determined by using the Applicable Mortality Table and the Applicable Interest Rate as those terms are defined in Section 1 of the Pension Plan of Public Service Enterprise Group Incorporated as then in effect).
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, except that for any Participant who is a Key Employee, as defined in the Code, commencement of his/her benefit may not occur earlier than six months following his/her Retirement.
3.4 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 Participants 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:
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is the amount of Pension Plan Surviving Spouse Benefit to which the Surviving Spouse would have been entitled under the Pension Plan or the Cash Balance Plan, as the case may be, if such benefit were computed without regard to (i) the exclusion of any amounts pursuant to Subsection 1.10(a) of the Pension Plan, (ii) the exclusion of any amounts pursuant to Subsection 1.1(m)(1) of the Cash Balance Plan, (iii) the Benefit Limitation or (iv) the Compensation Limitation; and |
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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 Spouses death.
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Provided, further, that that if the vested Plan benefit of a Surviving Spouse, as presently valued at the time of commencement of the payment of such benefit, does not exceed $10,000, such person shall be paid a lump sum distribution of the actuarial equivalent of his/her vested plan benefit (in determining the amount of a lump sum distribution under this Plan, actuarial equivalence shall be determined by using the Applicable Mortality Table and the Applicable Interest Rate as those terms are defined in Section 1 of the Pension Plan of Public Service Enterprise Group Incorporated as then in effect).
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
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employ agents to carry out non-fiduciary responsibilities; |
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employ agents to carry out fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA); |
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consult with counsel, who may be counsel to the Company or an Affiliate; and |
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provide for the allocation of fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA) among its members. |
However, any action described in sub-paragraphs (b) or (d) of this subsection 5.2, and any modification or rescission of any such action, may be effected by the Committee only by a resolution approved by a majority of the Committee. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to this Plan.
5.3 The Committee shall keep written minutes of all its proceedings, which shall be open to inspection by the Board of Directors. In the case of any decision by the Committee with 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
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(a) |
for the exclusive purpose of providing benefits to Participants and their Beneficiaries; |
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(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 alike character and with like aims; and |
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(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, 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.
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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 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.
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
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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. This Plan is specifically intended to comply with the provisions of The American Jobs Creation Act of 2004 (the AJCA) and Section 409A of the Code and it shall automatically incorporate all applicable restrictions of the AJCA, the Code and its related regulations, and the Company will amend the Plan to the extent necessary to comply with those requirements. The timing under which a Participant will have a right to receive any payment under this Plan will be deemed to be automatically modified, and a Participants rights under the Plan limited to conform to any requirements under, the AJCA, the Code and its related regulations.
8.7 If the present value of any Supplemental Retirement Benefit or Supplemental Surviving Spouse benefit under this Plan and all other plans required under the Section 409A of the Code to be aggregated with this Plan, is less than $1,000, the Company may pay the present value of such Benefit to the Participant or Surviving Spouse in a single lump sum in lieu of any further benefit payments hereunder.
8.8 Actuarial assumptions to determine the present value of any benefit hereunder shall be the same as used to determine the present value of benefits under the Pension Plan or the Cash Balance Plan, as the case may be.
8.9 If any person entitled to a benefit payment under this Plan is deemed by the Committee to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Committee may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and this Plan therefor.
8.10 The Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Companys 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 Participants 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
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any benefit hereunder to such Participant or Surviving Spouse or any other person and such benefit shall be irrevocably forfeited.
8.12 Notwithstanding any of the preceding provisions of this Plan, none of the Company, the Committee or any individual acting as an employee or agent of the Company or the Committee shall be liable to any Participant, former Participant, Surviving Spouse or any other person for any claim, loss, liability or expense incurred in connection with this Plan.
Section 9. Miscellaneous
9.1 As used herein, words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless otherwise required by the context. Any headings used herein are included for ease of reference only and are not to be construed so as to alter the terms hereof.
Exhibit 10a(4)
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Margaret M. Pego, SPHR |
Human Resources |
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Vice President - Human Resources |
80 Park Plaza, 21A, Newark, NJ 07102 |
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tel: 973.430.7243 fax: 973.643.6063 |
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email: Margaret.Pego@pseg.com |
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PSEG |
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Services Corporation |
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December 8, 2006 |
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Mr. William Levis |
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106 Carlton Drive |
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Chaddsford, PA 19317 |
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Dear Bill: |
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We are pleased to offer you the position of President and Chief Nuclear Officer of PSEG Nuclear, LLC, a subsidiary of PSEG Power, LLC, effective January 1, 2007 (DOE). In this position, you will be an employee of PSEG Power. While you are employed by PSEG Power, you will devote substantially all of your business time and efforts to the performance of your duties and use your best efforts in such endeavors. Your acceptance of this offer of employment constitutes your representation that your execution and performance of the requirements of this position will not be in violation of any other agreement to which you are a party. PSEG Power is a subsidiary of Public Service Enterprise Group Incorporated (Enterprise or PSEG). You may be assigned to another executive position of similar or greater responsibility by the Chief Executive Officer of Enterprise.
You will be paid a base salary of $500,000 and will be eligible for your first salary review in December 2007. Salary reviews will be conducted annually thereafter.
Within 45 days following your DOE, PSEG Power will make a cash payment to you in the amount of $500,000 (subject to withholdings according to the IRS and Company policy). This bonus must be repaid, and you agree to repay it, if you leave the Company (voluntarily or are terminated for cause): within five (5) years of your DOE. In addition, if your 2006 annual incentive payment from Exelon Corporation is less than $230,000, you will receive a lump sum payment equaling the difference between $230,000 and such amount within ninety days.
You will participate in PSEGs Management Incentive Compensation Plan (MICP) under the terms and conditions of that Plan. Your target incentive award will be 60% of your base salary. You may, however, be eligible to receive up to 90% of your base salary
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1 Cause means (i) the willful or negligent dereliction of, and continued failure by you to perform your duties with PSEG Power (other than any such failure resulting from your incapacity due to physical or mental illness), after a written demand for performance is delivered to you by the President - PSEG Power, L.L.C., which identifies the manner in which he believes that you have not so performed your duties; (ii) any conduct constituting a felony or moral turpitude; (iii) fraud or embezzlement; or (iv) failure to comply with the Standards of Integrity. |
dependent upon business results. This may be adjusted from time to time in accordance with established plan procedures. There is no guarantee of payment under the MICP, and any such payment will be contingent upon your establishment and successful completion of goals and objectives.
You will be a participant in the Long-Term Incentive Plan (LTIP) of Enterprise and you will receive an initial grant of 50,000 shares of Restricted Stock of Enterprise, subject to the approval of the Organization and Compensation Committee of the Board. Under the LTIP, 20,000 shares will vest on the third anniversary of your DOE. The remaining 30,000shares will vest on the sixth anniversary of your DOE. All of the shares will vest in the event of your death or total and permanent disability or, if your employment is terminated without cause. You will be paid any dividends on the shares in cash. In addition, long-term compensation opportunity is reviewed annually pursuant to the terms of the LTIP. The first such review will take place in the first quarter of 2007, and is expected to provide total value of approximately $500,000. In the years thereafter, the number and form of LTIP grants recommended in any given year will appropriately reflect your responsibilities and ability to contribute to the long-term success of Enterprise.
You are eligible for financial counseling on the same terms and conditions as applied to other officers of PSEG. You are also eligible to participate in the PSEG Deferred Compensation Plan For Certain Employees, which allows you to defer all or a portion of your base pay and/or any incentive bonus you may receive in any given year upon employment. You are also eligible for an executive annual physical examination arranged through PSEGs Medical Department. In addition, you are eligible to receive thirty (30) vacation days with pay beginning January 2, 2007.
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You are eligible for those benefits available to associates of PSEG Power with a similar date of hire generally, except as otherwise provided in this letter. In addition, you are eligible for the following: You will be eligible to participate in the Limited Supplemental Benefit Plan for Certain Employees of Public Service Enterprise Group and its Subsidiaries (the Limited Plan)if you remain employed by PSEG through January 16, 2013. Upon your retirement, The Limited Plan will provide a target supplemental pension. For example, if you complete 10 years of service with the Company upon your retirement, the Plan will provide retirement income equal to 40% of your final average earnings less the aggregate of 1) your actual pension provided by the Cash Balance Plan, b) your vested Exelon pension at your DOE and c) your primary Social Security benefit payable at normal retirement age. In addition, the Plan provides a supplemental death benefit equal to 150% of base compensation if death occurs while employed and before retirement. |
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Upon retirement (not before age 55 with at least five years of service), you will be eligible for the same cost sharing provisions for retiree medical coverage as those employees not currently eligible for Benefits 2000 (employed prior to January 1996). To facilitate this benefit, upon your retirement, PSEG Power will make a lump sum payment equal to the present value of the normal employer contribution toward health and welfare benefits |
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in retirement, as if you were eligible for such benefits as a retiree. You will make the same contributions as those made by a similarly situated employee eligible for such benefits and employer contribution. |
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For the purpose of determining the duration of full-pay short-term temporary disability benefits, as of your DOE, you will be treated as if you had ten (10)years of service with PSEG. |
A representative of the Human Resources Department from Compensation and Benefits will meet with you at your convenience to explain in more detail the provisions of the above plans. Please call Camille Valvano at 973-430-5879 to arrange this meeting.
The Company will provide you with a full size American made automobile and shall provide the related maintenance, repairs, insurance and costs of operation thereof.
You are eligible for reimbursement under the Companys relocation policy for any future assignment or position with PSEG that would require you to relocate.
Your employment with PSEG is at-will and therefore you may be discharged with or without cause and with or without notice at any time.
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In the event that your employment is terminated without cause, except as provided in the bullet below, you will be eligible those benefits attributed to Key Managers under the Public Service Enterprise Group Incorporated Separation Allowance Benefits Plan for Non-Represented Employees, except for those benefits set forth in Section 4.1 of the Plan. In lieu of those benefit sprescribed in Section 4.1, you will be eligible for a payment equaling one year of your then base salary, plus that years target annual incentive |
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In the event that your employment is terminated without cause or pursuant to the Change in Control provisions of the Key Executive Severance Plan of Public Service Enterprise Group, Inc., then the provisions of that Plan, in which you will be a Schedule B participant, will govern the severance to which you are entitled. |
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During the course of your employment, you will have access to and become familiar with Confidential Information as defined below. You agree that you will not, directly orindirectly, disclose or use any Confidential Information, except as required in the course of your employment with PSEG Nuclear or its affiliates and subsidiaries and consistent with their interests. All files, records, documents, or recordings, electronic or otherwise, containing or relating to Confidential Information, whether prepared by you or otherwise coming into your possession, will remain the exclusive property of PSEG Power or its affiliates and subsidiaries.
As used herein, the term Confidential Information means all trade secrets, proprietary and confidential business information belonging to, used by, or in the possession of PSEG Power or its affiliates and subsidiaries, with respect to their respective business
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strategies, plans and financial information, purchase or sale of property, leasing, pricing sales programs-or-tactics, actual or past sellers, purchasers, lessees, lessors or customers, those with whom PSEG Power or its affiliates and subsidiaries has begun negotiations for new business, costs, employee compensation, marketing and development plans, inventions and technology, whether such Confidential Information is oral, written or electronically recorded or stored, except information in the public domain, information known to you prior to your employment with PSEG Power, and information received by you from sources other than PSEG Power or its affiliates and subsidiaries, without obligation of confidentiality. This obligation survives the termination of your employment with PSEG Power, regardless of the reason for that termination.
You acknowledge and agree that in the event of a breach by you of any of the confidentiality terms of this Agreement, PSEG will suffer irreparable harm for which money damages are not an adequate remedy, and that, in the event of such breach, PSEG will beentitled to obtain an order of a court of competent jurisdiction for equitable relief from such breach, including, but not limited to, temporary restraining orders and preliminary and/or permanent injunctions against the breach of such agreements by you. Finally, you agree that you will execute a Non-Compete and Non-Solicitation Agreement in the form annexed hereto, as a condition of you employment in your new position.
Notwithstanding any provision of this letter to the contrary, if you are a specified employee as defined in Section 409A of the Internal Revenue Code of 1986, as amended (Code Section 409A), you will not be entitled to any payments upon a termination of your employment until the earlier of (i) the date which is six months after your termination of employment for any reason other than death or (ii) the date of your death. The provisions of this Section 8 will only .apply if, and to the extent, required to comply with Code Section409A.
If you (or your representative) inform the Company that any provision of this letter would cause you to incur any additional tax or interest under Code Section 409A or any regulations or Treasury guidance promulgated thereunder, the Company will consider in good faith reforming such provision, after consulting with you and receiving your approval (which will not be unreasonably withheld); provided that the Company agrees to maintain, to the maximum extent practicable, the original intent and economic benefit to you of the applicable provision without violating the provisions of Code Section 409A.
Any and all disputes arising out of or relating to this your employment, other than an unemployment or workers compensation claim, will, at the demand of either you or PSEG Power, whether made before or after the institution of any legal proceeding, be resolved through binding arbitration administered by the American Arbitration Association (AAA) in accordance with the Employment Dispute Resolution Rules of the AAA and with the United States Arbitration Act. The arbitration will be conducted in Newark, New Jersey before one arbitrator. If the parties cannot agree on the arbitrator within 30 days after the demand for arbitration then either party may request the AAA to select an arbitrator, which selection will be deemed acceptable to both parties. To the maximum extent practicable, the arbitration proceeding will be concluded within 180 days of filing the demand for arbitration with the AAA. The parties will share all costs and fees of the arbitration equally, unless otherwise
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awarded by the arbitrator. Each party agrees to keep all such disputes and arbitration proceedings strictly confidential except for disclosure of information required by law. Each party further agrees to abide by and perform any award rendered by the arbitrator, and that a judgment of a court of competent jurisdiction may be entered on the award.
Your employment is governed by the laws of New Jersey, without reference to any conflict of law rules or regulations. If a court finds any provision of this letter to be invalid, unenforceable or void, such provision will be severed from this letter and will not affect the validity or enforceability of any other provision of set forth herein. Moreover, this letter contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter discussed herein, other than the non-compete and non-solicitation agreement attached. No modifications to this agreement will be valid unless made in writing and signed by both parties.
As part of PSEG Powers requirement for a work force that is free from the influence of foreign chemical substances, this offer of employment is conditional upon your successful completion of a medical examination which will include definitive analysis of a freshly voided urine specimen for the presence of commonly abused drugs, including marijuana. This offer is also conditional upon a satisfactory background investigation and reference check.
If the foregoing is in accordance with your understanding, please sign the enclosed copy of this letter and return it to me.
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Sincerely, |
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/s/ Margaret M. Pego |
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Margaret M. Pego |
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Vice President Human Resources |
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Agreed to this 12 th day |
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of December, 2006. |
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/s/ William Levis |
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Attachments: Non-Compete and
Non-Solicitation Agreement
Responsibilities of Corporate
Officers and Directors
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1
NON-COMPETITION-SOLICITATION AGREEMENT
In consideration of employment with Public Service Enterprise Group Incorporated, or any subsidiary, affiliate or successor-in-interest thereof (the Company), I agree to the following:
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Non-Compete |
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During my employment with the Company, I agree not to compete in any manner, either directly or indirectly, whether for compensation or otherwise, with the Company, or to assist any other person or entity, business or otherwise, to compete with the Company. Further, during my employment with the Company, I agree not to engage in other conduct, employment or business enterprise that is in conflict with, may present an actual conflict with, or may appear to be in conflict with or to present a conflict with, the Company without the prior written permission of the Company. Such permission shall be by granted by the President of Power or his superior only. |
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2. |
Non-Solicitation |
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During my employment with the Company and for a period of 2 years following my employment with the Company, I agree either on my own behalf or on behalf of any other person or entity, business or otherwise, directly or indirectly, not: (i) to hire, solicit, or encourage to leave the employ of the Company any person who is then an employee of the Company; (ii) to solicit, entice away or divert any person or entity who was or is then a customer or supplier of the Company or any other person sharing a business relationship with the Company; or (iii) to solicit, entice away or divert any person or entity who was identified as a potential customer or supplier of the Company at the time I was an employee of the Company and with respect to which I participated, directly or actively, in providing, selling, attempting to sell, or delivering services of the Company. |
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3. |
General |
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a. |
This Agreement shall be governed by and in accordance with the laws of the State of New Jersey and is being executed in the State of New Jersey. The laws of New Jersey (including the choice of law rule of New Jersey) shall govern the validity and interpretation of this Agreement as well as the performance by me and the Company of our respective duties and obligations. Ally dispute or claim relating to this Agreement shall be brought in a court of competent jurisdiction in New Jersey, and I hereby agree and consent to personal jurisdiction in New Jersey. |
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b. |
This Agreement shall not in any way be construed as to change, alter or modify the employment-at-will relationship between me and the Company. |
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c. |
If any provision or clause of this Agreement, or portion thereof, shall be held by any court or other tribunal of competent jurisdiction to be illegal, void or unenforceable in such jurisdiction, the remainder of such provisions shall not thereby be affected and shall be given full effect, without regard to the invalid portion. It is agreed that it is the intention of the parties to this Agreement that if any court construes any provision or clause of this Agreement, or any. portion thereof, to be illegal, void or unenforceable because of the duration of such provision or the area or matter covered thereby, such court shall reduce the duration, area, or matter of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced. |
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d. |
I agree that if subsequent to execution of this Agreement I am transferred to or accept another position with any company affiliated with the Company, this Agreement shall continue in effect and shall be deemed as having been automatically assigned to such entity. Further, no change in assignment, position, department, division, unit or location to which I am assigned shall in any way affect the obligations under this Agreement. This Agreement shall not be affected by any change in name of the Company, or any consolidation, merger, acquisition or addition or deletion, and shall be automatically assigned to any successor company of the Company, and continue in effect thereafter in accordance with its terms. |
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e. |
This Agreement shall inure to the benefit of the Companys successors or assigns and, as far as legally possible, shall be binding upon my heirs, legal representations and assigns. |
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f. |
This Agreement shall survive termination of my employment with the Company irrespective of the reasons therefor. |
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g. |
I acknowledge that: (i) I have read and understand this agreement; (ii) I fully understand the limitations which it imposes on me; (iii) I have had the opportunity to review this Agreement with the counsel of my choice; and (iv) I have signed and entered into this Agreement voluntarily and of my own free will. |
Acknowledged, accepted and agreed this 8 th day of December, 2006.
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Signature of Employee: |
/s/ William Levis |
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Exhibit 10a(5)
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
2007 EQUITY COMPENSATION PLAN FOR OUTSIDE DIRECTORS
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I. |
PURPOSE |
The purpose of this Public Service Enterprise Group Incorporated 2007 Equity Compensation 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.
It is intended that the Plan will be interpreted and administered to prevent taxation under Section 409A of the Code. Any provision of or amendment to this Plan that would cause any amount to be taxable under Section 409A with respect to any individual is void and without effect. Any election by any participant, and any administrative action by the Committee that would cause any amount to be taxable under Section 409A with respect to any individual is void and without effect under the Plan. In the event that a Participant fails to make a Section 409A-compliant payment election, the Plans default payment provisions, as set forth in Subsection V.G and Article VIII, shall apply. It is further intended that the Plan will be amended in accordance with present and future guidance issued by the Treasury Department under Section 885 of the American Jobs Creation Act of 2004.
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II. |
DEFINITIONS |
The following words and phrases shall have the meanings set forth below unless a different meaning is required by the context:
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Annual Meeting : The Annual Meeting of Stockholders of the Company. |
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b) |
Board : The Board of Directors of the Company. |
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c) |
Code : The Internal Revenue Code of 1986, as amended. |
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d) |
Committee : Those persons who are members of the Board but who are not Outside Directors. |
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e) |
Common Stock : The Common Stock without nominal or par value of the Company. |
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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. |
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g) |
Disability : Any physical or mental condition of a permanent nature which, in sole reasonable judgment of the Committee, renders an Outside Director incapable of performing the duties of a member of the Board. |
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h) |
Effective Date : Upon approval by stockholders at the 2007 Annual Meeting of Stockholders. |
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i) |
Exchange Act : The Securities and Exchange Act of 1934, as amended, or as it may be amended from time to time. |
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j) |
NYSE : The New York Stock Exchange, Inc. |
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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. |
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l) |
Participant: An Outside Director who receives a Stock Unit Award under this Plan. |
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m) |
Plan : This Public Service Enterprise Group Incorporated 2007 Equity Compensation Plan for Outside Directors, as it may be amended from time to time. |
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n) |
Securities Act : The Securities Act of 1933, as amended, or as it may be amended from time to time. |
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o) |
Service : A Directors service as a member of the Board. |
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p) |
Stock Unit Award : An award, representing the right to receive shares of Common Stock upon termination of service as an Outside Director, subject to the provisions of Article IV hereof. |
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q) |
Year of Service : The annual period commencing on May 1 st of each year and ending at the earlier of the succeeding April 30 th or the next Annual Meeting of Stockholders. For any person first elected a member of the Board after May 1 st of any year, his/her first Year of Service shall commence upon his/her election as a Director and shall end at the earlier of the succeeding April 30 th or the next Annual Meeting of Stockholders. |
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III. |
SHARES SUBJECT TO THE PLAN |
200,000 shares of Common Stock are reserved to satisfy awards of Stock Units pursuant to the terms of this Plan. Such shares may be acquired directly from the Company or, at the discretion of the Company, purchased on the open market by the Company or its agent.
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IV. |
STOCK UNIT AWARDS |
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A. |
Upon the commencement of each Year of Service as a member of the Board, each Outside Director shall be granted an award of Stock Units in an amount as shall be established from time to time by the Board of Directors. The date of grant shall be the first business day of May. With respect to an Outside Director first elected as a director after May 1 of any year, the date of such Outside Directors initial award grant under this Plan shall be the first business day of the month next following the Outside Directors initial election as a member of the Board. |
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B. |
The number of Stock Units to be awarded on any particular date of grant shall be equal to the amount of the award grant (expressed in dollars) divided by the closing price of the Common Stock on the NYSE on the date of grant as provided in Section IV.A, rounded up to the next whole share. |
|
|
|
|
C. |
If a Participant fails to complete the Year of Service with respect to which a Stock Unit Award has been granted, other than on account of Disability or death, such Stock Unit Award and any earnings thereon shall be prorated to reflect the portion of the Year of Service actually served by the Participant. |
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|
|
|
D. |
No stock certificates shall be issued in connection with any Stock Unit Award and the Stock Unit Awards shall be evidenced by bookkeeping account in the name of the Participant maintained by the Company. The Company shall not be required to segregate any amounts credited to these Stock Unit Award accounts, which shall be established merely as an accounting convenience. Amounts credited to the Stock Unit Award accounts shall at all times remain solely the property of the Company subject to the claims of its general creditors and available for the Companys use for whatever purpose desired. Stock Unit Award accounts shall be credited with dividend equivalents at a rate equal to such dividends as may be declared by the Company on the Common Stock. Such dividends equivalents shall be invested as additional Stock Units as of the last business day of each quarter at a share price equal to closing price of the Common Stock on the NYSE on the date the transaction is credited. |
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|
|
|
E. |
Until distribution of shares of Common Stock from the Plan, neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participants or any other persons bankruptcy or insolvency. |
|
|
|
|
|
Provided, however, that, in the event that a domestic relations order of any State is received by the Plan and thereafter determined to be a Qualified Domestic Relations Order (QDRO) within the meaning of Code section 414(p), the portion |
4
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|
|
|
of the Account of the Participant to which such QDRO is directed shall be apportioned as specified in such QDRO, valued as of the business day preceding the date specified in such QDRO. Upon notice to the Committee that a QDRO is being sought with respect to a Participants Account, no distribution shall be made to a Participant until such time as the status of the QDRO is determined. The alternate payee of the Participants Account shall thereafter participate in the Plan in accordance with its terms, except such person shall not have the rights or benefits provided in Subsection IV.A. If a QDRO is issued and the amount awarded the alternate payee exceeds the value of the Participants Account, the amount apportioned shall be limited to the amount then in the account. If a QDRO so provides, benefits may be paid to an alternate payee before they would otherwise be distributable under the Plan, and no such distribution to an alternate payee shall be treated as a distribution to the Participant for purposes of Article V. |
|
|
|
|
F. |
No Participant shall have any of the rights of a stockholder (including the right to vote and to receive dividends and other distributions) with respect to Stock Units unless and until shares of Common Stock are actually issued in his/her name. |
|
|
|
|
G. |
In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of Company assets to shareholders, or any other change affecting the Common Stock, such adjustments, if any, as are appropriate to reflect such change shall be made with respect to outstanding Stock Unit Awards. |
|
|
|
|
H. |
Upon a Change in Control of the Company all outstanding Stock Unit Awards shall be considered as having met the requirements of Section IV.C. 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 Exchange Act is or becomes the beneficial owner within the meaning of Rule 13d-3 under the Exchange Act (a Beneficial Owner), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Companys then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (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 Company) whose appointment or election by the Board of Directors or nomination for |
5
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|
|
|
|
election by the Companys 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 April 17, 2007 or whose appointment, election or nomination for election was previously so approved or recommended; or |
|
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|
|
|
|
c) |
there is consummated a merger or consolidation of the Company or any direct or indirect wholly owned subsidiary of the Company with any other corporation other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Companys then outstanding securities; or |
|
|
|
|
|
|
d) |
the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets, other than a sale or disposition by the Company of all or substantially all of the Companys assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. |
|
|
|
|
|
Notwithstanding the foregoing 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 Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. |
|
|
V. |
DISTRIBUTIONS |
|
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|
|
|
A. |
Upon the termination of a Participants service as an Outside Director, the Company shall issue to the Participant certificates for shares of Common Stock equal to the number of whole Stock Units in his/her account without any legend or restriction of any kind in accordance with such Participants distribution |
6
|
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|
|
|
elections hereunder. Any remaining fractional Stock Units shall be paid in cash based upon the closing price of the Common Stock on the NYSE on the day prior to the date of distribution. |
|
|
|
|
B. |
By written notice to the Plan filed with the Companys Secretary, a Participant may elect to have distribution of his/her Stock Unit Award account commence: (1) on the 30 th day following the date of termination of the Participants Service, (2) on the 15 th day of January next following the date of termination of the Participants Service or (3) on the 15 th day of January of any calendar year following termination of the Participants Service, but not later than the January following the Participants 72 nd birthday, unless the Participant is still a Director at such time, in which case distribution shall commence on the 30 th day following the date the Participant 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 awards. In the event no election is made as to the commencement of distribution, such distribution shall commence on the 30 th day following the date the Participant ceases to be a Director of the Company. |
|
|
|
|
C. |
By written notice to the Plan filed with the Companys Secretary, a Participant may elect to receive the distribution of his/her Stock Unit Award account in the form of (1) one lump-sum payment, or (2) annual distributions over a period selected by the Participant of up to ten years. In the event a lump-sum payment is made under the Plan, the amount then standing to the Participants credit in his/ her Stock Unit Award account shall be paid to the Participant on the date determined under Section V.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 V.B, annual installments from the amount then standing to his or her credit in his or her Stock Unit Award account, including earnings credits on the unpaid balance to the date of distribution. The amount of each installment shall be determined by dividing the then unpaid balance, plus earnings credits, in the Participants Stock Unit Award 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 or her Stock Unit Award account, such distribution shall be made in the form of a lump sum. |
|
|
|
|
D. |
In the event of a Participants death, the balance of the Participants Stock Unit Award account shall be distributed to the Participants Beneficiary(ies) in a lump-sum payment within 30 days following the Participants death. A Participant may change Beneficiary designations by filing a subsequent notice with the Secretary of the Company. If a Participant does not make a Beneficiary designation, or if the Beneficiary has predeceased the Participant, such distribution shall be made as a lump-sum to his/her estate. |
|
|
|
|
E. |
Participants may, (i) by notice filed with the Company prior to December 31 st of any year, make changes of distribution elections on a prospective basis; and (ii) |
7
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|
|
by notice filed with the Company, make changes of distribution elections with respect to prior deferred compensation as long as (A) any such new distribution election is made at least one year prior to the date that the commencement of the distribution would otherwise have occurred and (B) the revised commencement date is at least five years later than the date that the commencement of the distribution would otherwise have occurred; provided that such an election may not defer payment beyond the later of the January following the Participants 72 nd birthday or the Participants termination of service as a director. For the purposes of this subsection V.E, if a Participant has elected a distribution in installments, each installment shall be deemed a separate election. |
|
|
|
|
F. |
Notwithstanding any other provision of the Plan, if the Board, by vote of the Outside Directors, other than the Participant making the claim, shall determine in its sole discretion that the time of payment of a Participants Stock Unit Award account should be advanced because of protracted illness or other undue hardship, then the Board may advance the time or times of payment (whether before or after the date of Participants termination of service as a Director) of an amount or amounts needed to meet the emergency in accordance with the requirements of Code Section 409A and the regulations promulgated thereunder. |
|
|
|
|
G. |
Distribution in Case of Certain Tax Events If, with respect to any Participant, the Plan fails to meet the requirements of the Code with respect to the deferral of tax liability, the Company may accelerate distribution from a Participants Account amounts sufficient to meet such Participants resulting Federal, State, Local and/or Foreign tax liability (including any interest and penalties). |
|
|
VI. |
FURTHER CONDITIONS |
|
|
|
|
A. |
Unless the shares of Common Stock to be distributed pursuant to the Plan have been registered with the Securities and Exchange Commission under the Securities Act prior to issuance, the Participant receiving such shares 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 Stock 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. |
8
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|
|
|
C. |
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 award of Stock Units or the distribution of any Common Stock, including, but not limited to (i) the withholding of delivery of certificates for 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 Participants other compensation. |
|
|
VII. |
ADMINISTRATION |
The Plan shall be administered by the Committee, which shall establish rules and regulations regarding the administration and operation of the Plan.
|
|
VIII. |
TERMINATION, MODIFICATION AND AMENDMENT |
Although the Company anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that the Company will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, the Company, by the Board of Directors, reserves the right to discontinue its sponsorship of the Plan or to terminate the Plan (or both), at any time, by the action of the Board of Directors. In general, upon the termination of the Plan, the affected Participants shall receive payment of their benefits in accordance with the terms of Article V. However, the Company may, in its discretion, terminate the entire Plan and pay each Participant a single lump-sum distribution of his or her entire Account Balance, in the event that the Company satisfies any of the following:
(a) such distributions are made between 12 and 24 months following the termination of the Plan, and the Company does not adopt a new plan which would be aggregated with this Plan under IRS guidance under Code Section 409A at any time within the five years following the Plan termination.
(b) the Plan is terminated within the 30 days preceding or the 12 months following a Change in Control, all payments are made within 12 months of the date of termination, and all substantially similar arrangements sponsored by the Company are terminated as well.
(c) the Plan is terminated within 12 months of a corporate dissolution, as defined in IRS guidance under Code Section 409A, and lump sum payments are made in the latest of (i) the year of the termination, (ii) the year in which amounts are no longer subject to a substantial risk of forfeiture; or (iii) the first year in which payment is administratively practicable.
The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination.
9
|
|
IX. |
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 Stock Unit Awards 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.
|
|
X. |
MISCELLANEOUS |
|
|
|
|
A. |
The costs and expenses of administering the Plan shall be borne by the Company and shall not be charged against any award or to any Outside Director receiving an award. |
|
|
|
|
B. |
This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of New Jersey. |
|
|
|
|
C. |
The captions and section numbers appearing in this Plan are inserted only as a matter of convenience. They do not define, limit or describe the scope or intent of the provisions of 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. |
|
|
|
|
D. |
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. |
EXHIBIT 12
PUBLIC
SERVICE
ENTERPRISE GROUP
INCORPORATED
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings as Defined in Regulation S-K (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income from Continuing Operations |
|
$ |
2,379 |
|
$ |
1,139 |
|
$ |
1,386 |
|
$ |
1,220 |
|
$ |
1,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) Loss from Equity Investees, net of Distributions |
|
|
(10 |
) |
|
(2 |
) |
|
(37 |
) |
|
78 |
|
|
79 |
|
Fixed Charges |
|
|
782 |
|
|
851 |
|
|
888 |
|
|
894 |
|
|
953 |
|
Capitalized Interest (B) |
|
|
(26 |
) |
|
(33 |
) |
|
(92 |
) |
|
(109 |
) |
|
(116 |
) |
Preferred Securities Dividend Requirements of Subsidiaries |
|
|
(6 |
) |
|
(6 |
) |
|
(6 |
) |
|
(6 |
) |
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earnings |
|
$ |
3,119 |
|
$ |
1,949 |
|
$ |
2,139 |
|
$ |
2,077 |
|
$ |
2,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges as Defined in Regulation S-K (C) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$ |
765 |
|
$ |
834 |
|
$ |
872 |
|
$ |
879 |
|
$ |
939 |
|
Interest Factor in Rentals |
|
|
11 |
|
|
11 |
|
|
10 |
|
|
9 |
|
|
8 |
|
Preferred Securities Dividend Requirements of Subsidiaries |
|
|
6 |
|
|
6 |
|
|
6 |
|
|
6 |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Charges |
|
$ |
782 |
|
$ |
851 |
|
$ |
888 |
|
$ |
894 |
|
$ |
953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges |
|
|
3.99 |
|
|
2.29 |
|
|
2.41 |
|
|
2.32 |
|
|
2.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
The term earnings shall be defined as pre-tax Income from Continuing Operations before income or loss from equity investees plus distributed income from equity investees. Add to pre-tax income the amount of fixed charges adjusted to exclude (a) the amount of any interest capitalized during the period and (b) the actual amount of any preferred securities dividend requirements of majority-owned subsidiaries stated on a pre-tax level. |
|
|
(B) |
Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense, (c) an estimate of interest implicit in rentals and (d) preferred securities dividend requirements of majority-owned subsidiaries stated on a pre-tax level. |
|
|
(C) |
Capitalized Interest excludes AFUDC for PSE&G. |
EXHIBIT 12a
PSEG POWER LLC
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
December 31, |
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings as Defined in Regulation S-K (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income from Continuing Operations |
|
$ |
1,590 |
|
$ |
878 |
|
$ |
752 |
|
$ |
594 |
|
$ |
815 |
|
Fixed Charges |
|
|
193 |
|
|
190 |
|
|
197 |
|
|
198 |
|
|
219 |
|
Capitalized Interest |
|
|
(23 |
) |
|
(30 |
) |
|
(89 |
) |
|
(107 |
) |
|
(106 |
) |
Preferred Stock Dividend Requirements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Earnings |
|
$ |
1,760 |
|
$ |
1,038 |
|
$ |
860 |
|
$ |
685 |
|
$ |
928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges as Defined in Regulation S-K (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$ |
192 |
|
$ |
189 |
|
$ |
195 |
|
$ |
197 |
|
$ |
217 |
|
Preferred Securities Dividend Requirements of Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Factor in Rentals |
|
|
1 |
|
|
1 |
|
|
2 |
|
|
1 |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Charges |
|
$ |
193 |
|
$ |
190 |
|
$ |
197 |
|
$ |
198 |
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges |
|
|
9.12 |
|
|
5.46 |
|
|
4.37 |
|
|
3.46 |
|
|
4.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
The term earnings shall be defined as pre-tax Income from Continuing Operations. Add to pre-tax income the amount of fixed charges adjusted to exclude the amount of any interest capitalized during the period. |
|
|
(B) |
Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense and (c) an estimate of interest implicit in rentals. |
Exhibit 12b
PUBLIC
SERVICE ELECTRIC AND GAS COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||
|
|
|
|
|||||||||||||
|
|
(Millions, except ratios) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings as Defined in Regulation S-K (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income from Continuing Operations |
|
$ |
637 |
|
$ |
448 |
|
$ |
583 |
|
$ |
592 |
|
$ |
376 |
|
Fixed Charges |
|
|
332 |
|
|
346 |
|
|
342 |
|
|
362 |
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
$ |
969 |
|
$ |
794 |
|
$ |
925 |
|
$ |
954 |
|
$ |
766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges as Defined in Regulation S-K (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$ |
332 |
|
$ |
346 |
|
$ |
342 |
|
$ |
362 |
|
$ |
390 |
|
Interest Factor in Rentals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Charges |
|
$ |
332 |
|
$ |
346 |
|
$ |
342 |
|
$ |
362 |
|
$ |
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges |
|
|
2.92 |
|
|
2.29 |
|
|
2.70 |
|
|
2.64 |
|
|
1.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
The term earnings shall be defined as pretax income from continuing operations. Add to pretax income the amount of fixed charges adjusted to exclude the amount of any interest capitalized during the period. |
|
|
(B) |
Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense and (c) an estimate of interest implicit in rentals. |
EXHIBIT 12c
PUBLIC
SERVICE ELECTRIC AND GAS COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Plus Preferred Security Dividend Requirements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|||||||||||||
|
|
|
|
|||||||||||||
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
|||||
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings as Defined in Regulation S-K (A): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Income from Continuing Operations |
|
$ |
637 |
|
$ |
448 |
|
$ |
583 |
|
$ |
592 |
|
$ |
376 |
|
Fixed Charges |
|
|
339 |
|
|
353 |
|
|
349 |
|
|
369 |
|
|
397 |
|
Preferred Securities Pre Tax |
|
|
(7 |
) |
|
(7 |
) |
|
(7 |
) |
|
(7 |
) |
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
$ |
969 |
|
$ |
794 |
|
$ |
925 |
|
$ |
954 |
|
$ |
766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges as Defined in Regulation S-K (B) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$ |
332 |
|
$ |
346 |
|
$ |
342 |
|
$ |
362 |
|
$ |
390 |
|
Interest Factor in Rentals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Securities Dividends |
|
|
4 |
|
|
4 |
|
|
4 |
|
|
4 |
|
|
4 |
|
Adjustment to state Preferred Securities Dividends on a pre-income tax basis |
|
|
3 |
|
|
3 |
|
|
3 |
|
|
3 |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Charges |
|
$ |
339 |
|
$ |
353 |
|
$ |
349 |
|
$ |
369 |
|
$ |
397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of Earnings to Fixed Charges |
|
|
2.86 |
|
|
2.25 |
|
|
2.65 |
|
|
2.59 |
|
|
1.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
The term earnings shall be defined as pretax income from continuing operations. Add to pretax income the amount of fixed charges adjusted to exclude (a) the amount of any interest capitalized during the period (b) the actual amount of any preferred securities dividend requirements of majority owned subsidiaries (c) preferred stock dividends which were included in such fixed charges amount but not deducted in the determination of pre-tax income. |
|
|
(B) |
Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount and premium expense (c) an estimate of interest implicit in rentals and (d) preferred securities dividend requirements of majority owned subsidiaries and preferred stock dividends, increased to reflect the pre-tax earnings requirement for PSE&G. |
Exhibit 14
|
|
Table of Contents |
|
|
|
Definitions |
|
Message From The Chairman |
|
|
|
Section 1 - Integrity Process |
|
Introduction |
|
Resources for Answering Questions |
|
Reporting Concerns |
|
PSEG Integrity Line |
|
Waivers |
|
Training |
|
Certification of Compliance |
|
Retaliation |
|
Discipline |
|
|
|
Section 2 - Personal and Public Responsibility |
|
Safety and Health |
|
Substance Abuse |
|
Environmental Responsibility |
|
|
|
Section 3 - Business Relationships |
|
Equal Opportunity and Diversity |
|
Discrimination and Harrassment |
|
Workplace Violence |
|
Customer Relations |
|
Supplier Relations |
|
Government Relations |
|
Gift Giving to Government Officials |
|
Competitor Relations |
|
|
|
Section 4 - Personal Conduct |
|
Gifts Meals and Entertainment |
|
Corporate Opportunities |
|
Conflict of Interest |
|
Outside Employment |
|
Community Service |
|
Insider Trading |
|
Games of Chance |
|
|
|
Section 5 - Company Property |
|
Company Assets |
|
Confidential Information |
|
Computer and Information Resources |
|
|
|
Records Management Retention and Destruction |
|
|
|
Section 6 - Business Controls |
|
Internal Controls |
|
Executive Officers |
|
Fair Disclosure |
|
PSEG Attorneys |
|
|
|
Section 7 - Legal Requirements |
|
Affiliate Standards |
|
Political Contributions and Activities |
|
Competitive Rules |
|
Energy Trading |
|
Foreign Corrupt Practices |
|
|
|
Conclusion |
|
Definitions
When used in the Standards of Integrity (Standards), the terms set forth below have the following meaning :
PSEG or Company - Public Service Enterprise Group Incorporated and all of its subsidiaries. Subsidiaries are defined as companies in which PSEG directly or indirectly owns more than 50% of the voting stock.
Member of the PSEG Board of Directors : Any outside member of the PSEG or PSE&G Board of Directors
Associate: Any PSEG employee, including any officer, non-represented employee or represented employee.
Supplier: Any auditing firm, law firm, vendor, contractor, consultant or other third party engaged by PSEG to provide products, services (professional or otherwise) or materials to the Company or to a third party on behalf of the Company.
Workplace : Any place where an associate conducts activities on behalf of the Company including the land, buildings, facilities, and vehicles owned or used by the Company; customer and supplier premises; Company-sponsored or supported events whether on or off Company property; and business travel.
Executive Officers : PSEGs Chief Executive Officer; Chief Financial Officer; Accounting Officer; Treasurer; General Counsel; and the presidents of major subsidiaries.
Compliance Council : A body comprised of certain of the Companys Executive Officers
having responsibilities for the design, maintenance and execution of the Companys Compliance Program and implementation activities.
Message From The Chairman
This is a time of considerable change, growth and opportunity for PSEG. We have new leadership. Many employees are in new positions. Quite a few are new to the Company.
As we take on new challenges, there can be no change in the good, strong values that guide us. Integrity is basic to everything our Company stands for and hopes to achieve. PSEG has built an outstanding reputation for integrity since being founded more than a century ago. It is up to each of us to uphold and safeguard this reputation in all our actions.
Integrity does not allow for shortcuts or compromises. It is about doing the right thing, in keeping with the letter and spirit of the law. The PSEG Standards of Integrity embody our unwavering commitment to ethical business conduct. It is essential that each of us be familiar with the Standards of Integrity, understand them thoroughly and act accordingly.
The best rulebook, however, cannot anticipate every situation. If you are unsure about what is the right thing to do, ask for advice. Business issues can be complex, but integrity comes down to some simple principles: Keeping our commitments, acting honestly and treating others with the same dignity and respect we want for ourselves.
Integrity must continue to define the character of our Company. With your continued support and dedication, I am confident it will.
Sincerely,
Ralph Izzo
PSEG Chairman, President and Chief Executive Officer
July 2007
Section 1 - Integrity Process
Introduction
The Standards of Integrity (Standards) embody the commitment of Public Service Enterprise Group Incorporated (PSEG or Company) to conduct operations in accordance with the highest ethical standards and in compliance with law. They establish a set of common expectations for behavior in dealings with investors, customers, employees, competitors, suppliers, government officials, the media and other stakeholders.
The Standards apply to all who work for, or on behalf of, PSEG including all associates, members of PSEGs Board of Directors and, where appropriate, suppliers.
All are responsible to comply with the Standards and law while conducting activities on behalf of the Company. The Standards apply to conduct in the workplace or in any other place where these individuals are conducting activities for, or on behalf of, the Company.
The Standards are a condition of employment for associates, a condition of service for members of the Board of Directors and a condition of engagement for suppliers.
The Standards do not cover all situations where questions of ethics or compliance may arise. Doing that would be virtually impossible, given our varied opportunities for decision-making.
To help implement the Standards, the following questions are provided to guide your judgment and behavior:
|
|
|
|
|
Will your action comply with the intent and purpose of the Standards? |
|
|
|
|
|
Is your action honest in every respect? |
|
|
|
|
|
Could you defend your action in front of supervisors, fellow associates, the general public and your family? |
|
|
|
|
|
Will this action appear appropriate to others? |
|
|
|
|
|
Do you feel comfortable about doing this, or does it violate your personal code of conduct? |
In judging the appropriateness of any action, you should be able to answer yes to each of these questions. Honesty, common sense and good judgment provide the best general guidelines for appropriate behavior. The Company relies on the personal judgment and thoughtful behavior of each associate in conducting the Companys business.
If you are unsure about how to act, resources are available to answer questions regarding the interpretation or application of the Standards or law. Those resources are identified in the next section.
Resources for Answering Questions
Associates are encouraged to contact a manager or supervisor as the first source of guidance regarding the interpretation or application of the Standards. If discussion with a manager or supervisor is impractical or uncomfortable, associates may contact either: R. Edwin Selover, PSEG Ethics Counselor, Newark, Mail Code T4, 973-430-6450, Edwin.Selover@pseg.com , or Hugh J. Mahoney, PSEG Compliance Counsel, Newark, Mail Code T5, 973-430-6405, Hugh.Mahoney@pseg.com Associates may also call the PSEG Integrity Line toll free at 1-800-655-7269 . These contacts may be made anonymously.
Reporting Concerns
Associates are required to report suspected violations of the Standards or law, where
there is a reasonable basis to know that a violation is occurring or has occurred, using the resources described in the Resources for Questions section or by contacting the Integrity Line. Where an associate reports a suspected violation to a manager or supervisor, the manager or supervisor should report the suspected violation to PSEGs Compliance Counsel.
All reports of suspected violations of the Standards or law will be treated confidentially to the extent possible under the circumstances. Concerns regarding accounting, internal accounting controls or auditing matters, material violations of the securities laws and material breaches of fiduciary duty will be reported to the Audit Committee of PSEGs Board of Directors. A prompt, full, fair and confidential investigation will be conducted of reported concerns. Associates are required to cooperate in any investigation of a compliance or ethics concern.
A report documenting the results of all investigations will be prepared and transmitted to PSEGs Ethics Counselor. If an investigation discloses the need for corrective action, appropriate corrective action will be implemented to prevent recurrence. A summary report documenting all reported concerns and the results of the investigations of such concerns will be periodically provided to PSEGs Compliance Council and the Audit Committee.
PSEG Nuclear associates should report concerns regarding nuclear safety or quality to a manager or supervisor. If this is impractical or uncomfortable, they may contact the Employee Concerns Group at 1-800-353-2792, extension 1402. This contact may be made anonymously.
PSEG Integrity Line
If associates are uncomfortable talking to someone at the Company regarding an interpretation or application of the Standards or law, or a concern with respect to a suspected violation of the Standards or law, associates may call the PSEG Integrity Line toll free at 1-800-655-7269 . The service is provided by an independent third-party contractor, is multilingual and is available 24 hours a day, seven days a week. All calls to the Integrity Line are answered by employees of the contractor.
Associates may choose to remain anonymous when contacting the Integrity Line . Where anonymity is requested, the contractor will not use caller ID or other methods to identify the caller. The contractor may monitor calls for quality assurance. Quality assurance recordings are not made available to the Company.
Reports of all calls are made and forwarded to PSEGs Compliance Counsel for review and appropriate action.
Associates will be given a case number and requested to contact the Integrity Line in three (3) business days in the event additional information is required. The case number may also be used by the caller to obtain a response to a question or a progress statement on any investigation regarding a reported concern. The Integrity Line will not, however,
provide any details regarding any investigation of a reported concern.
Waivers
A waiver of any provision of the Standards may be granted, but only in exceptional circumstances and for substantial cause. A waiver request must be submitted to the Ethics Counselor or the Compliance Counsel for decision. A waiver of any provision of the Standards for any member of the Board of Directors or an Executive Officer may only be made by the PSEG Board of Directors.
All waivers will be disclosed to the PSEG Compliance Council. Waivers for Members of the Board of Directors or Executive Officers will be disclosed to stockholders.
Training
PSEG is committed to provide annual training to all associates regarding the Standards. All associates must complete the training made available by the Company regarding the Standards. Associates failing to complete the training may be subject to disciplinary action.
Certification of Compliance
Non-represented associates, members of the Board of Directors and certain supplier employees are required each year to complete a certification of compliance questionnaire. The questionnaire requires these individuals to acknowledge their understanding of the Standards, self-assess compliance with the Standards and disclose any exceptions to compliance by themselves or others. Completion of a certification questionnaire is a condition of employment for non-represented associates, a condition of service for members of the Board of Directors, and a condition of engagement for certain suppliers.
The certification of compliance questionnaire is administered by a third-party supplier on a confidential basis in collaboration with PSEGs Internal Audit Services Group. Exceptions that identify suspected violations of the Standards or law are forwarded to PSEGs Compliance Counsel for review and, where necessary, investigation. All exceptions will be treated confidentially to the extent possible under the circumstances.
Retaliation
Associates may not discharge, demote, suspend, threaten, harass or in any manner discriminate in the terms and conditions of employment regarding another associate who in good faith asks a question or reports a concern regarding a suspected violation of the Standards or law. Associates also may not discriminate or retaliate against another associate who participates in an investigation of any such matter. PSEG does not and will not tolerate any such discrimination or retaliation, and any PSEG associate who engages in such discrimination or retaliation will be subject to disciplinary action, up to and including discharge.
Discipline
Discipline, up to and including discharge, may be taken against any associate who:
|
|
|
|
|
Authorizes or participates in an action which violates the Standards or law; |
|
|
|
|
|
Fails to report a violation of the Standards or law where there is a reasonable basis to know that a violation is occurring or has occurred; |
|
|
|
|
|
Reports a violation of the Standards or law that is knowingly false and intentionally made in bad faith; |
|
|
|
|
|
Fails to cooperate with an investigation or intentionally conceals information or otherwise intentionally obstructs an investigation concerning a suspected violation of the Standards or law; |
|
|
|
|
|
Retaliates or discriminates in any way against anyone who in good faith reports a suspected violation of the Standards or law by another person; |
|
|
|
|
|
Retaliates or discriminates in any way against anyone who cooperates in any investigation of any such suspected violation; or, |
|
|
|
|
|
Fails to complete or falsely completes a certification of compliance questionnaire. |
Self-reporting of wrongdoing will be a favorable factor considered by management in connection with any discipline that may be imposed for a violation of the Standards or law.
Section 2 - Personal And Public Responsibility
Safety and Health
Safety and health is PSEGs top priority and must never be compromised. PSEG conducts operations with the highest regard for the safety and health of associates, customers, suppliers and the general public in compliance with safety and health laws and regulations. To do so, PSEG maintains a work environment that is safety conscious and a workforce that is properly equipped, properly trained and knowledgeable of regulatory requirements, industry guidelines and Company policies, practices and procedures regarding safety and health. PSEG remains committed to fostering a culture that embraces safety and health as a way of life, both on and off the job, to achieve an accident-free work environment.
PSEG also remains committed to protecting public safety in connection with the operation of its plants, facilities, equipment and operating systems. This commitment means that the Company maintains its plants, facilities, equipment and operating systems in sound operating condition and utilizes operating practices and procedures that are consistent with prevailing industry practices and standards.
Associates are expected to understand and accept responsibility for their safety and health, maintain a positive safety attitude, be alert to unsafe work conditions and exercise caution during the conduct of their work to prevent accidents involving themselves and others. Associates must comply with all laws, regulations and Company policies, practices and procedures regarding worker safety and health.
Associates are expected to adhere to the following values to promote the safety and
health culture to achieve an accident-free environment:
Trust: respect and trust each others opinions and decisions and follow through on all safety and health concerns
Care: approach each day with the determination to care for ourselves, co-workers, suppliers and the communities we serve
Knowledge : possess the knowledge and skills to protect our health and safety
Communication : communicate in a clear, open and honest manner Associates have the absolute right, as well as obligation, to question, stop and correct any unsafe act or condition. Retaliation is prohibited from being taken against any associate who in good faith raises a safety or health concern for resolution.
PSEG establishes key measures to track the Companys performance, sets objectives and targets to drive continuous performance improvement, conducts audits and assessments, and promptly corrects conditions that threaten the safety and health of associates, customers and the general public.
Substance Abuse
The Company is committed to maintaining a work environment that ensures the safety, health and welfare of associates, customers, suppliers and the general public. Illegal drug use and alcohol abuse may impact workplace safety and productivity, disrupt associates lives and may jeopardize the attainment of this commitment.
Associates are prohibited from possessing or using (except when prescribed by a licensed physician), selling, purchasing, distributing, transferring or manufacturing any controlled dangerous substance or other illegal drug or making any arrangement for such activity on Company time or property.
Associates are also prohibited from reporting to work unfit for duty as a result of off-the-job use of any medication or controlled dangerous substance or other illegal drug. Associates who for medical reasons are using prescription or non-prescription drugs with side effects that may impair alertness or judgment and, therefore, jeopardize worker safety must inform their immediate supervisor about the potential for such side effects. If discussion with a supervisor is impractical or uncomfortable, the associate must contact the Companys Medical Department at 973-430-5942 .
Associates are prohibited from consuming alcoholic beverages on Company time, property, or at Company-sponsored events unless the consumption is authorized by an associate at the level of Vice President or above. Any consumption of alcohol on Company time, property or at Company-sponsored events must be supervised, moderate and reasonable. Also, they must not violate any legal or regulatory requirements, such as those established by the Nuclear Regulatory Commission or Department of Transportation.
Associates are prohibited from reporting to work unfit for duty as a result of off-the-job consumption of alcohol. Consumption of alcohol by any associate while assigned to on-call or standby duty is prohibited for the entire period of the assignment.
Associates are encouraged to seek professional help to resolve drug or alcohol dependency. The Company maintains an Employee Assistance Program (EAP) that provides confidential, professional third-party help for associates and their families who have a problem with drug or alcohol abuse. An EAP representative may be contacted at 1-800-430-0747. PSEG Nuclear associates may call 1-800-339-5077 for assistance.
Environmental Responsibility
PSEG remains committed to conducting operations in a way that protects the environment, and complies with all applicable laws, regulations and other relevant standards to which the Company may voluntarily subscribe. PSEG maintains the management systems, training and resources necessary to achieve this objective.
PSEG and its associates will:
|
|
|
|
|
Comply with all applicable laws and regulations regarding the environment; |
|
|
|
|
|
Obtain and comply with all permits applicable to the construction, modification or operation of facilities and equipment or the conduct of such other activities that may result in a release of a pollutant to the environment; |
|
|
|
|
|
Make timely, accurate, true and complete reports of any unauthorized release of pollutants to the environment; |
|
|
|
|
|
Maintain open and honest dialogue with stakeholders and the public about environmental issues and environmental performance; |
|
|
|
|
|
Assess and manage the environmental risks associated with all aspects of the Companys business to protect the environment; |
|
|
|
|
|
Factor pollution prevention and resource conservation opportunities into the Companys business planning and operating decisions to help reduce impacts to the environment; and, |
|
|
|
|
|
Promptly correct conditions that threaten the environment. |
PSEG establishes key measures to track environmental performance, sets objectives and targets to drive continuous performance improvement, and conducts audits and assessments to assure compliance with laws, regulations and internal standards.
Section 3 - Business Relationships
Equal Opportunity and Diversity
PSEG is an equal opportunity employer and recruits, selects, trains and pays based on merit, experience and other work-related criteria without regard to the characteristics or traits protected by law. Characteristics or
traits protected by law include race, religion, creed, color, national origin, nationality, ancestry, age, disability or handicap, marital status, affectional or sexual orientation, sex, atypical hereditary cellular or blood trait, status as a special disabled veteran, veteran of the Vietnam era or any other covered veteran, and those obligated to serve in the Armed Forces of the United States (Protected Characteristics).
PSEG remains committed to maintaining a workplace where diversity is valued and where associates of all backgrounds have the opportunity to make contributions to the Company and reach their full career potential.
Associates must comply with the Companys commitment to equal opportunity employment, value diversity and treat each other with respect and dignity.
Discrimination and Harrassment
The Company maintains an environment where associates can participate and contribute to corporate success and shareholder value, free from discrimination and harassment. Associates are prohibited from discriminating against other associates based on any Protected Characteristic.
Associates are also prohibited from engaging in harassment. Harassment means offensive conduct that singles out an associate or group of associates to the detriment or objection of those individuals and which is severe and pervasive. Offensive conduct may include insults, jokes, slurs, solicitations, pictures, cartoons or posters which create an intimidating, hostile or offensive work environment.
Sexual harassment is also prohibited. It includes, but is not limited to, any quid pro quo (i.e., giving something in return for something else), unwelcome sexual advance or suggestion, request for sexual favors, unwanted physical contact, displays of sexuallyoriented pictures, cartoons and posters, sexual remarks, or other unwelcome verbal or physical conduct of a sex-based nature which affects or interferes with an individuals work performance or creates an intimidating, hostile or offensive work environment.
Associates who believe they are being subjected to discrimination or harassment should report the conduct to their immediate supervisor, or the Employee Solutions Group in Human Resources. The Employee Solutions Group can be contacted by phone at 973-430-5545 or by e-mail at employeesolutions@pseg.com .
Workplace Violence
Violent acts, abusive verbal or physical behavior and threats, or other expressions of violence by any associate against another, are prohibited.
Associates are prohibited from possessing any deadly or dangerous weapon as defined by
law unless prior approval is obtained from PSEGs Ethics Counselor or PSEGs Compliance Counsel.
Customer Relations
PSEG is committed to understanding and being sensitive to customers needs and providing them with energy and energy services in a professional and prompt manner. To that end, PSEG associates shall:
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Work in a safe and responsible manner when on the property of a customer or other third party; |
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Act in a professional and empathetic manner when interacting with customers; |
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Treat customers fairly by being honest and flexible in meeting their needs; |
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Respond promptly, courteously and proactively to customer inquiries and requests; |
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Keep commitments to customers by following up through completion when resolving a customers inquiry or request and by working to prevent a recurrence; |
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Reasonably restore a customers or other third partys property when work is completed; |
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Accurately and appropriately represent all services in offerings or advertising, marketing and sales efforts; |
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Not unduly discriminate against or provide undue preferential treatment to any customer; and, |
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Respect and maintain the confidentiality of all information obtained from or provided by the customer in connection with the provision of energy and energy services. |
Associates shall appropriately safeguard customer information, and use it solely for the purpose of conducting Company business. Associates shall not release customer information to any third party, including any associate in an affiliated company, without proper authorization from the customer, except as authorized by Company policy, law, a lawfully issued order, subpoena or administrative request.
Supplier Relations
Associates must comply with PSEG procurement practices during any procurement activity, including identifying potential suppliers, bidding, awarding bids, negotiating and contracting, issuing requisitions, managing purchase orders or contracts and processing invoices.
Associates must make procurement decisions with integrity and based on criteria, such as quality, price, reliability, availability, capability, schedule requirements and services, that will deliver the best total value to PSEG. Associates must deal with suppliers ethically and fairly, and avoid the appearance of impropriety. They must maintain positive and professional relations with suppliers and conduct business with them in good faith and, where possible, resolve disputes quickly and equitably.
Associates may not directly solicit charitable or other contributions from suppliers where the solicitation would create an expectation by the supplier of a quid pro quo .
Associates may not engage the Companys independent auditor, Deloitte & Touche LLP, to perform any services without the prior approval of PSEGs Chief Financial Officer.
Government Relations
PSEG is committed to conducting its business with government agencies and officials consistent with the highest ethical standards and in compliance with applicable laws, regulations and rules.
Associates must cooperate with government agencies and officials in a straightforward manner and must exercise the utmost integrity at all times in conducting business with such agencies and officials, including:
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Providing accurate, responsive and timely disclosure of information in connection with responding to regulatory reporting requirements and in connection with the conduct of regulatory proceedings; |
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Ensuring that all responses to reasonable requests or inquiries from government agencies or officials are accurate, complete and timely; and, |
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Representing themselves and the Company professionally and with honesty and integrity when appearing before or interacting with government agencies or officials. |
PSEG is also committed to cooperating with governmental enforcement investigators and law enforcement officials. All inquiries, requests or demands from such investigators and officials must be referred to PSEGs Ethics Counselor or PSEGs Compliance Counsel.
There will be situations where PSEG will consider it necessary to contest or oppose governmental requests, inquiries or existing or proposed governmental policies, decisions or actions, including proposed legislative and regulatory actions. Associates will present the Companys opposition and its positions, interests and views factually, responsibly, professionally and with the utmost honesty and integrity.
Gift Giving to Government Officials
There are many laws, regulations and rules governing the giving of benefits to government officials including gifts, entertainment, food and beverage, travel and lodging, honoraria, loans, or any other thing of value. Associates who interact with government agencies and officials must be aware of and comply with such requirements and any codes of conduct applicable to such agencies and officials.
Associates are prohibited from giving anything of value, directly or indirectly, to any government official to influence the officials judgment in the performance of official duties or as a reward for such performance. Associates may not provide any benefit to
any government official for any other reason without obtaining the prior approval of the Vice PresidentFederal Affairs and Policy or the Vice PresidentState Governmental Affairs, as appropriate.
Associates in foreign countries where the Company does business must obtain prior approval from the Companys Ethics Counselor in advance of providing any benefit to any government official.
Competitor Relations
PSEG promotes its products and services through fair and accurate comparisons with its competitors and sells them on the strength of such products and services and the Companys reputation. Associates must not engage in unfair, misleading or inaccurate comparisons of the Companys products and services with those of its competitors.
The Company has a right to learn about competitors and will comply with the laws related to the collection of competitive intelligence. Associates are prohibited from misrepresenting themselves in the collection of competitive intelligence. Associates are also prohibited from using, soliciting, accepting or otherwise obtaining trade secrets or other competitive information that they know to be confidential, proprietary or acquired through unlawful means.
Associates formerly employed by a competitor may not use or disclose information about the competitor that the associate believes to be proprietary or confidential.
Section 4 - Personal Conduct
Gifts, Meals and Entertainment
PSEG is committed to having associates make business decisions objectively and solely on the basis of the best quality, service, price or other competitive factor. Associates may not solicit or accept from or give gifts, services, discounts, gratuities or other things of value (collectively Gifts) to a supplier, customer, union official or other third party doing business or seeking to do business with the Company. Gifts received by an associate from such parties must be returned to the donor, accompanied with an explanation about PSEGs Standards.
Mementos, souvenirs, advertising novelties and other items of a modest value (typically not greater than $100 retail), customarily associated with legitimate business relationships, are excluded from these restrictions. Food or beverage of a modest value (typically not greater than $100 retail) is also excluded from these restrictions. Perishable food or beverage received by an associate in excess of this amount should be donated to a charitable organization and the donor so notified. Finally, supplier discounts that are available to all associates are also excluded from these restrictions.
Meals or attendance at entertainment (e.g., attendance at sporting or theater events) or business events with a third party, the primary purpose of which is to maintain necessary business relationships, are considered legitimate business activity as long as the underlying business purpose is valid. Associates should attempt to reciprocate when the next business occasion occurs. Associates who have ongoing working relationships with suppliers must, however, avoid the offer or acceptance of frequent meals and entertainment. Associates must also decline any offers of lavish business meals, entertainment or business events. As a measure of whether a particular meal, entertainment or business event is lavish, associates may only accept such offers of a value that their management would approve if included by the associate on his or her expense account.
Associates may provide individuals outside PSEG with meals, entertainment, attendance at business events, refreshments, transportation, lodging or incidental hospitality. Such expenditures, however, must have a valid business purpose, be moderate, done within the framework of good business judgment and consistent with law.
It may be customary in some foreign countries for individuals doing business with each other to give or exchange Gifts. Associates may respect these customs, when appropriate, but only in accordance with local laws. Gifts received by associates in this context become PSEG property and must be reported to the Ethics Counselor or Compliance Counsel.
Corporate Opportunities
Associates have a duty to the Company to serve and advance the Companys legitimate interests when the opportunity arises. Associates must not:
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Deprive the Company of a business opportunity; |
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Use a company asset, confidential information or position to obtain a business opportunity for personal or third-party gain or advantage; or, |
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Compete with the Company. |
Conflict of Interest
An actual conflict of interest occurs when an associates personal interest interferes in any way with the interests of the Company. A perceived conflict of interest occurs when an associates personal interest could lead others to doubt the associates objectivity or impartiality regarding the associates management of the interests of the Company. A conflict of interest may take many forms, and loss or harm to the Company is not necessary for a conflict of interest to occur.
Associates must avoid any actual or perceived conflict of interest and must specifically avoid activities, interests or associations that:
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Take advantage or appear to take advantage of their employment with the Company for personal gain or for the gain of family members, friends and acquaintances; |
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Interfere, or appear to interfere, with the performance of their duties in an objective, impartial and effective manner; |
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Reflect unfavorably, or appear to reflect unfavorably, upon PSEGs good name and reputation; |
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Divide, or appear to divide, their primary duty to the Company versus an outside activity, personal interest or interest of a family member, friend or acquaintance; |
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Take advantage, or appear to take advantage, of confidential information, if the information has not been publicly announced; or, |
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Otherwise conflict, or be perceived to otherwise conflict, with PSEGs interests. |
Outside Employment
Associates may accept work with another business organization while in the Companys employ, as long as the outside employment:
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Is not with a competitor; |
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Does not create an actual or perceived conflict of interest; |
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Is not done on Company time and does not involve the use of company assets; |
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Does not involve any attempt to sell products or services to PSEG; |
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Does not interfere with the associates duty to PSEG; or, |
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Does not prevent the associate from dedicating the time and effort required to fulfill the associates responsibilities to PSEG. |
Community Service
PSEG supports the involvement of associates in service to the community. Associates may volunteer for civic activities, or serve in public office and other positions in the community as long as such activities do not exploit or conflict with their employment, or create or appear to create a conflict of interest. Associates must report any public office or position they hold to their manager, disclose the potential for any conflict or appearance of any conflict of interest, and disqualify themselves from Company decisions affecting the community where they serve or from community decisions affecting the Company.
Insider Trading
Federal law and SEC regulations prohibit any associates from buying or selling any PSEG securities based on material information obtained in the course of employment if the information is not available to the general public (Inside Information).
Federal law and SEC regulations also prohibit associates from conveying Inside Information to anyone who may, based on such Inside Information, buy or sell any PSEG security. Finally, they also prohibit associates from trading in the securities of suppliers, customers or third parties, including a merger partner, with whom PSEG has a business
relationship and about whom an associate acquires Inside Information.
Material information, for purposes of this provision is information (whether favorable or unfavorable) that a reasonable investor would consider important in deciding whether to buy or sell a security of the Company.
Inside Information includes: information with respect to financial results; earnings projections; changes in dividend rates; issuance or repurchase of securities; changes in credit or debt ratings; contracts; expansion or curtailment plans; mergers and acquisitions; sale or purchase of assets; major litigation; regulatory filings or decisions; or material labor negotiations or disputes.
If an associate has access to Inside Information about PSEG or a company with whom PSEG has a business relationship, he or she must abstain from buying, selling or trading the securities of those companies or from making buy or sell recommendations while in possession of such information. Associates must also refrain from disclosing such information to anyone who does not have a clear need to know.
PSEG has adopted and posted on the PSEG website a policy that more specifically describes the Companys expectations for behavior for all Directors and associates regarding the SECs insider trading rules. The policy, which is incorporated herein by reference, may be found on the PSEG intranet website under Corporate Resources Integrity & Compliance Insider Trading.
Games of Chance
Gambling is illegal except where specifically authorized by statute. Gambling is defined as risking something of value upon the outcome of a contest of chance on the understanding that something of value will be received in the event of a certain outcome. A contest of chance is any game (e.g., sports pool, lottery or raffle) in which the outcome depends in a material degree on an element of chance, notwithstanding that the skill of contestants may be a factor.
Associates may not operate or participate in any contests of chance (including sports pools, lotteries, or raffles) not specifically authorized by law on Company property or Company time.
Raffles may, however, be conducted on Company property or Company time if the raffle is sponsored by an organization qualified by law; the sponsoring organization obtains or possesses an appropriate license to conduct the raffle; and is coordinated and monitored by the qualified organization; and is approved by a Vice President. The Company is not qualified by law to sponsor raffles.
Section 5 - Company Property
Company Assets
PSEGs assets consist of all associates and the contracted services and tangible and intangible property which the Company owns, possesses and/or utilizes to conduct its business, including funds, credit cards, land, plants and facilities, equipment, vehicles, computer and information resources, inventory, confidential information, contract rights, licenses, patents, trademarks, service marks or other legal rights. Company assets that are obsolete or scrap remain the property of the Company (hereinafter collectively Company Assets).
Associates shall safeguard and take reasonable care to prevent the unauthorized use, damage, waste, loss or theft of Company Assets. Associates are prohibited from damaging, sabotaging, embezzling, stealing or otherwise misappropriating any Company Asset, even if the property is obsolete or scrap. Associates may only use or authorize the use of any Company Asset for legitimate business purposes, unless approved by an associate at a director level or above and only where such other use is not otherwise prohibited by the Standards or law.
Confidential Information
Confidential information is information about the Companys business or operations that is non-public and, if disclosed, may adversely impact the Company, associates, customers, suppliers or other third parties. Confidential information includes information regarding: facilities; equipment; systems; operations; outages; financial results; earnings forecasts; budgets; sales forecasts; pricing; sensitivity analyses; studies; business strategies; research; leads; plans and proposals; development or construction; contracts; associates; customers; suppliers; business partners; mergers, acquisitions and divestitures (hereinafter, collectively, Confidential Information).
Associates must protect and are responsible for securing and safeguarding Confidential Information. They must also comply with law, Company policies and practices and confidentiality agreements designed to protect the Confidential Information from unauthorized disclosure. Confidential Information needed for an associates job must be used solely for that purpose and may be shared only with other associates who have a right and need to know. Associates may only use Confidential Information for business-related purposes and are specifically prohibited from using it for personal interest, benefit or gain or that of a third party.
Associates may not disclose Confidential Information to a third party, unless the disclosure is appropriately authorized, legally mandated or done pursuant to a confidentiality agreement.
Associates must return all Confidential Information upon resignation, retirement or termination. Confidential Information gained as a result of PSEG employment may not be used or shared with any individual, firm or other organization after employment with PSEG has ended.
Computer and Information Resources
Computer and information resources include all of the Companys information technology infrastructure and applications, electronic communication systems, messaging, telephone and voicemail, and external computer-based services when accessed through PSEGs networks systems (hereinafter, collectively, Computer and Information Resources).
Computer and Information Resources are for the use of associates and authorized suppliers and may be used only for legitimate Company-related business purposes. Incidental personal use of these resources by associates may be permitted if the use is reasonable, does not impact performance or productivity, does not violate other restrictions management has established and is otherwise consistent with the Standards and law.
Associates and authorized suppliers must use, safeguard and protect Computer and Information Resources responsibly and in accordance with law, Company policies and practices and licensing and copyright agreements. Associates who are information system owners are responsible for ensuring that their systems and the information the systems contain are appropriately secured for use solely by those authorized to have access.
Associates and authorized suppliers may not disguise their identity or directly or indirectly circumvent security and administrative access controls when using Computer and Information Resources.
Associates and authorized suppliers are prohibited from utilizing Computer and Information Resources to access, intentionally receive, transmit and/or view messages or materials that are: sexually explicit; pornographic; hate-related; discriminatory; offensive; malicious; libelous; slanderous; terroristic; or threatening in nature.
Associates and authorized suppliers who use Computer and Information Resources from remote locations (e.g., home or other non-PSEG locations) are subject to the requirements set forth in the remote access subscription agreements and these Standards.
Associates and authorized suppliers should have no expectation of privacy or confidentiality while using Computer and Information Resources. The Company reserves the right, without notice, to monitor, access, inspect, acquire and disclose the contents of all messages and materials contained in Computer and Information Resources.
Records Management, Retention and Destruction
PSEG maintains policies, practices and schedules intended to identify, manage, maintain and retain records required for the conduct of the Companys business (Company Records) and to ensure the consistent and documented destruction of such records. Company Records consist of documentary materials created or received in the ordinary course of business, regardless of the specific nature, medium or form and include
documents, photographs, microfilm, and electronic, digital and audio files, including e-mails.
Associates must maintain, retain and destroy Company Records in accordance with applicable Company policies, practices and schedules. Associates must not, however, discard, destroy, conceal or alter the integrity of any Company Record if the associate is notified or otherwise becomes aware that Company Records are relevant to a pending, threatened or reasonably anticipated inquiry, investigation, administrative proceeding or litigation involving the Company. If there is a question as to whether a Company Record should be discarded or destroyed, associates should contact the Law Department for guidance.
Section 6 - Business Controls
Internal Controls
PSEG maintains a system of internal controls to provide reasonable assurance that:
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Financial and operational accounting and reporting are full, fair, accurate, timely and reliable; |
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Authority and accountability to conduct business is delegated in a manner that balances efficient decision-making with protection of PSEGs assets and interests; |
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Adequate segregation of duties exists between authorization, creation, approval, custody, record keeping and reconciliation; |
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Fraud and misconduct are prevented and detected; |
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Compliance with PSEGs policies and practices and applicable laws and regulations is promoted, communicated and maintained; |
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Financial integrity remains strong and risk is effectively managed; |
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Assets are used in PSEGs best interest and are appropriately safeguarded and accounted for; and, |
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Operations and activities are effective and efficient. |
Associates are responsible for:
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Understanding and complying with the system of controls established and maintained in their respective organizations; |
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Recording all business transactions, events and conditions in an accurate, complete and timely manner; |
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Ensuring that all transactions are properly authorized and approved; and, |
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Reporting control deficiencies that have the potential to adversely affect the ability of the Company to record, process, summarize or report financial or operational data. |
Associates are prohibited from:
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Falsifying data, information or records with respect to the Companys finances or operations, including those related to assets, liabilities, revenues, expenses, earnings, quality, safety and security, environmental performance, plants, facilities and |
equipment, claims, benefits, and time reporting;
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Accelerating, postponing or otherwise manipulating the accurate and timely recording of assets, liabilities, revenues, expenses or earnings; |
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Creating off-book accounts or funds or making any other entry in any other record that intentionally misrepresents, conceals or disguises the true nature of any transaction, event or condition; and, |
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Taking any action to improperly influence, coerce, manipulate or mislead any internal or external auditor or investigator engaged in a review of the Companys transactions, activities or operations. |
Executive Officers
PSEG maintains a code of ethics for its Executive Officers to address the provisions of the Sarbanes-Oxley Act and the Securities and Exchange Commissions (SEC) implementing regulations. Consistent with this guidance, PSEGs Executive Officers must comply with the following principles in discharging their responsibilities:
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Act honestly and ethically, including the ethical handling of actual or perceived conflicts of interest between personal and professional relationships; |
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Make full, fair, accurate, timely and understandable disclosure in reports and documents filed with, or submitted to, the SEC and in other public communications; |
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Ensure that the internal controls around financial reporting and disclosure are properly designed and effective; |
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Establish an environment in the workplace that promotes honest and ethical behavior; |
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Promote accountability for adherence to the Standards, including these principles, and administer the Standards and these principles to deter wrongdoing; |
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Make prompt reporting of violations of the Standards and these principles to PSEGs Ethics Counselor or PSEGs Compliance Counsel; and, |
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Comply with applicable laws, rules and regulations. |
Associates must act with the same high regard for fairness, honesty, accuracy and good faith regarding their responsibilities to enable the Executive Officers to meet these principles.
Associates may not utilize any Company Asset or any PSEG business relationship to extend, maintain, arrange for or guarantee the extension of credit in the form of a personal loan to or for the benefit of any member of the Board of Directors or Executive
Officer, except as may be otherwise specifically authorized by law.
Fair Disclosure
The SECs Regulation FD (Regulation FD) prohibits selective disclosure of material, nonpublic information by public companies to investors and market professionals, such as analysts and investment advisors, under circumstances where it is reasonably foreseeable that such persons would trade on the basis of that information. Material non-public information for purposes of Regulation FD is equivalent to Inside Information defined in the Insider Trading provision. The objective of Regulation FD is to foster a level information playing field for all investors by requiring the simultaneous disclosure to the public of all material non-public information which a company makes available to market professionals and investors. Disclosures of this information must be done broadly and simultaneously. Disclosures made pursuant to appropriate confidentiality arrangements are excluded from this prohibition.
Associates authorized to communicate on behalf of PSEG with investors and market professionals (other than for shareholder administrative matters) are limited to the Chief Executive Officer, Chief Financial Officer, Presidents of the Companys major subsidiaries, the Treasurer, Vice President and staff of the Investor Relations Department and certain other senior officers, who may be specifically designated.
All other associates are prohibited from communicating with investors or market professionals, the media or any other external audience regarding Inside Information. Associates must refer all inquiries from these individuals to the Investor Relations Department. Instances of unintentional disclosure of Inside Information must be immediately reported to the Office of the Corporate Counsel, as PSEG is required to make broad public disclosure of this information within twenty-four (24) hours of the unintentional disclosure.
PSEG has adopted a policy which more specifically describes the Companys methods and practices for the communication of Inside Information and the handling of inquiries from investors and market professionals. The policy, which is incorporated herein by reference, may be found on the PSEG intranet website under Corporate Resources Integrity and Compliance Regulation FD Disclosure Policy.
PSEG Attorneys
PSEG maintains standards of professional conduct that require attorneys to report evidence of wrongdoing by the Company, members of the Board of Directors or associates. PSEG attorneys (including in-house and outside counsel) who become aware of evidence of a material violation of the securities laws or a fiduciary duty must report evidence of the violation to PSEGs General Counsel and their supervisory attorney. The attorney may report the evidence to the Companys Audit Committee if the attorney reasonably believes that reporting the evidence to the Companys General Counsel would be futile. The attorney must report the evidence to the Audit Committee if the attorney concludes that the response from the Companys General Counsel to the matter is not appropriate.
Section 7 - Legal Requirements
PSEG business operations and transactions are subject to a multitude of legal requirements. Legal requirements of particular importance to PSEG and its business operations are summarized in this section. If a question arises regarding any legal requirement, the associate should contact the Law Department for guidance.
Affiliate Standards
The Federal Energy Regulatory Commission and the New Jersey Board of Public Utilities have adopted regulations governing the relationships between PSE&G and its affiliates to ensure that:
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PSE&G employees, who operate or plan the transmission system, function independently from employees of affiliates engaged in buying or selling gas or electricity in the wholesale market or operating generating plants (energy affiliates); |
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Preferential treatment, including preferential access to PSE&Gs customers or transmission systems, is not provided to any seller of electricity, gas, or energy services, whether an affiliate or a competitor; |
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PSE&G does not disclose non-public information regarding transmission operations or generation to any energy affiliate; |
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PSE&G customer information is not provided to third parties, including any affiliate or competitive business of the utility, without the written consent of the customer or unless the disclosure is made in accordance with law or Company policy; |
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Leads are not provided to and tying, preferences or similar activities designed to provide a competitive advantage are not engaged in for the benefit of any competitive business of the utility or any affiliate; and, |
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Costs are appropriately charged or allocated between PSE&G and its affiliates and between PSE&Gs Appliance Service Business and PSE&Gs other businesses. |
Associates are responsible for understanding and must comply with these regulations.
Political Contributions and Activities
PSEG respects the right of associates to be actively involved in political activities of their own choosing, including the making of political contributions. When speaking on or otherwise becoming involved in public issues as a private citizen, associates must make clear that the views expressed are their own and not those of PSEG. When making political contributions, associates may do so solely on their own behalf, and may not be reimbursed for such contributions by the Company.
Associates may not solicit contributions from other associates for personal political purposes on Company time and may not use Company property or other resources for their own political purposes. Associates may also not have other associates, including
administrative or other support staff, perform activities to support an associates personal political purposes.
Federal law prohibits corporations from making contributions of any kind to a candidate, political party, or political committee in connection with a federal election. A corporation nonetheless is allowed to use corporate resources to solicit contributions to candidates, parties or political committees in connection with a federal election, so long as the solicitation is limited to the corporations so-called restricted class. The restricted class generally includes associates who have policymaking, managerial, professional or supervisory responsibilities who are U.S. citizens or permanent residents. These solicitations are subject to specific legal requirements and associates making solicitations on behalf of the Company must coordinate them in advance with the Vice PresidentFederal Affairs and Policy.
Federal law does authorize corporations to fund the establishment and maintenance of a federal political action committee (PAC), which may make contributions to candidates for federal elective office using monies collected from the Companys restricted class. Federal law does not, however, permit corporations to make any contributions to the PAC to support federal candidates. PSEG has established and provides administrative support to PSEGs federal PAC. An associates participation in the Companys PAC must be strictly voluntary and associates have the absolute right to refuse to contribute without fear of reprisal of any kind.
States also have laws and regulations governing corporate contributions and activities to support candidates for state or local office. New Jersey, for example, prohibits a gas, electric or power company or any affiliate from making contributions, or providing other things of value, to aid or promote the nomination or election of any person to state or local office in New Jersey. Other states may permit contributions by the Company to candidates for elective office. Decisions with respect to making corporate contributions to and the conduct of activities to support state or local candidates in states other than New Jersey must be reviewed with PSEGs Vice PresidentFederal Affairs and Policy prior to making such political contributions or conducting such activities.
State laws also authorize the formation of PACs to solicit monies from associates for the purpose of making contributions to candidates for state or local elective office. Associate participation in state PACs must be strictly voluntary, and associates have the absolute right to refuse to contribute without fear of reprisal of any kind. State laws differ on the nature and scope of a corporations relationship with a state PAC. For example, the Company is neither permitted to support the administration of PSExecPAC nor permitted to contribute money to the PAC for making contributions to candidates for state elective office.
Associates interacting with candidates for federal or state elective office on behalf of the Company, or those managing activities of any PAC affiliated with the Company, must understand and comply with the laws and regulations regarding the conduct of these activities.
PSEG conducts activities intended to influence legislation, regulation or governmental processes (Lobbying Activities) at both the federal and state level. Federal and state law require the Company to file reports identifying the associates and suppliers engaged in Lobbying Activities on its behalf and providing specific information regarding those activities. While pre-registration by individuals conducting those activities is not required under federal law, it may be required under state law, such as in New Jersey.
Lobbying Activities at the federal level and in states other than New Jersey may only be conducted by associates authorized by the Vice PresidentFederal Affairs and Policy. Such activities in New Jersey must be conducted only by associates registered as Governmental Affairs Agents or those otherwise authorized by the Vice PresidentState Governmental Affairs.
Competitive Rules
Activities that limit competition, restrict trade or otherwise create dominance in a market may violate antitrust laws. These laws generally prohibit joint action which restrains competition as well as improper unilateral action which either unfairly propels one competitor into a monopoly position in the market or seriously threatens to do so. Other aspects of antitrust laws prohibit certain types of unfair trade practices. Specific activities that may be prohibited include the following:
Price Fixing - make an agreement or reach a mutual understanding with a competitor to fix levels of production, prices or rates;
Bid Rigging - agree with a competitor or a supplier on what or when to bid in preparing bids or proposals;
Dividing Markets - divide or allocate sales territories, customers or products/services with any customer, supplier or competitor;
Boycotts - make joint agreements, especially among competitors, to refuse to deal with a particular competitor, customer or supplier;
Tying Agreements - force a customer to buy an unwanted product or service as a condition of buying a desired product or service;
Exclusive Dealing - make agreements that restrict customers from dealing with the Companys competitors;
Refusal To Deal - arbitrarily refuse to deal with or purchase from others simply because they are competitors or they have chosen a competitors product or services;
Joint Purchasing - collaborate with other buyers of the same goods or services in a collective purchasing scheme;
Reciprocal Dealing - agree that one party buys products from another on condition that the second party will buy products from the first; and
Information Exchange - exchange competitively sensitive information that is not publicly available with competitors, e.g. prices, pricing policy, costs, marketing and services plans, capacity plans and capabilities.
In addition to the antitrust laws, state laws may impose liability on PSEG or associates for conduct including:
Business Disparagement - making false statements about a competitors business or integrity; and
Interfere With Contract - knowingly inducing a third party to breach a contract in order to do business with the Company.
Associates who believe that the activities listed in this provision are occurring must contact PSEG Ethics Counselor or PSEG Compliance Counsel for advice and guidance.
Energy Trading
PSEG is committed to employing lawful and ethical trading practices in connection with conducting the Companys electric power and gas supply businesses and trading operations. Consistent with this commitment, associates must adhere to the following principles when conducting activities related to such businesses and operations:
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Engage only in transactions with a legitimate business purpose or that otherwise have economic substance; |
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Operate and schedule generating facilities, undertake maintenance, declare outages and commit or otherwise bid supply in a manner that complies with the regulations, rules and guidelines of the applicable power market; |
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Manage the physical operation of supply resources and schedule power transactions in a manner consistent with the reliable operation of the transmission grid; |
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Disclose information to regulators, market monitors and the media, including market publications and publishers of surveys and price indices, that is accurate and consistent; |
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Prepare and maintain for a reasonable period of time adequate and accurate documentation of all commodity and trading transactions; and, |
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Otherwise comply with applicable laws, regulations, tariffs, rules and requirements when conducting activities related to such businesses and operations. |
Additionally, associates must not:
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Engage in transactions intended to artificially boost revenues or volumes or intended to manipulate market prices or market conditions; |
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Engage in transactions that create artificial supply or shortages to affect market prices or that misrepresent the operational capabilities of units to affect the same result; |
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Engage in transactions or schedule resources to create congestion to manipulate prices or to jeopardize the security of dispatch operations; |
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Collude with other market participants to affect the price or supply of any commodity, allocate territories, customers or products, or otherwise unlawfully restrain competition; and, |
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Arrange and execute simultaneous offsetting buy and sell trades with intent to artificially affect reported revenues, trading volumes or market prices. |
Foreign Corrupt Practices
The Foreign Corrupt Practices Act (FCPA) and similar laws in many countries in which PSEG currently has operations make it a crime for companies, as well as their officers, directors, employees and agents, to promise or give anything of value to a foreign official, foreign political party, or party official or to any candidate for foreign political office (Covered Individuals) in order to obtain or retain business, obtain any improper advantage, or otherwise influence their judgment in the performance of official duties. These laws also prohibit making payments to agents, sales representatives or other third parties if there is reason to believe the payment will be used illegally or will go directly or indirectly to a Covered Individual. Associates are prohibited from promising or giving anything of value, either directly or indirectly, to or for the benefit of Covered Individuals to obtain or retain business or any improper advantage.
There may be instances where local custom allows incidental payments to officials to expedite the performance of routine governmental action of a non-discretionary nature. Payments of this nature are not prohibited by the FCPA. Such payments should be considered only in the event that the payment does not violate applicable anti-bribery laws and no other reasonable alternative is available. The payments should be minimal, made only to minor foreign government employees, and accurately recorded in the Companys books and records. Associates should not make any payment to a Covered Individual regardless of amount or local custom without consultation with the Law Department.
The FCPA and similar laws in other countries require covered companies (such as PSEG) to maintain accurate books, records and accounts and to devise a system of internal accounting controls sufficient to provide reasonable assurance that the Companys books and records accurately reflect transactions and dispositions of assets. Associates and agents of PSEG must maintain such books, records and accounts that reflect all transactions and dispositions of Company Assets for domestic and foreign business activities.
Conclusion
Act legally and with the highest ethical standards. It is required for PSEGs business success. If you have a question or a concern, please use the resources provided to obtain the assistance you require.
* * *
The Standards of Integrity are not a contract of employment and are not intended to create any contractual obligations on the part of PSEG. The Standards of Integrity do not alter the existing at -will employment relationship between PSEG and its associates. Labor organizations that represent associates have been placed on notice that these Standards are among the work rules applicable to their members.
PSEG Internal Use Only
www.informationcentral.pseg.com
EXHIBIT 21
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
SIGNIFICANT SUBSIDIARIES
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Name |
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Ownership % |
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State of
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|
|
|
|
|
|
Public Service Electric and Gas Company |
|
100 |
|
|
New Jersey |
PSEG Power LLC |
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100 |
|
|
Delaware |
PSEG Fossil LLC |
|
100 |
|
|
Delaware |
PSEG Energy Resources & Trade LLC |
|
100 |
|
|
Delaware |
PSEG Energy Holdings L.L.C. |
|
100 |
|
|
New Jersey |
PSEG Resources L.L.C. |
|
100 |
|
|
New Jersey |
The remaining subsidiaries of Public Service Enterprise Group Incorporated are not significant subsidiaries as defined in Regulation S-X.
EXHIBIT 21a
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
SIGNIFICANT SUBSIDIARIES
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Name |
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Ownership % |
|
State of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSE&G Transition Funding LLC |
|
100 |
|
|
Delaware |
The remaining subsidiaries of Public Service Electric and Gas Company are not significant subsidiaries as defined in Regulation S-X.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 33-44581, 33-44582, 333-106330, 333-39738, 333-66426 and 333-120100 on Form S-8 and Registration Statement Nos. 333-47714, 333-120111 and 333-128002 on Form S-3 of our report dated February 27, 2008, relating to the consolidated financial statements and consolidated financial statement schedule of Public Service Enterprise Group Incorporated, which report expresses an unqualified opinion and includes explanatory paragraphs for the adoption of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement 109 and Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans , and our report dated February 26, 2008, relating to the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Public Service Enterprise Group Incorporated for the year ended December 31, 2007.
/s/ Deloitte & Touche LLP
February 27, 2008
Exhibit 23a
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-105704 on Form S-3 of our report dated February 27, 2008, relating to the consolidated financial statements and consolidated financial statement schedule of PSEG Power LLC, which report expresses an unqualified opinion and includes explanatory paragraphs for the adoption of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement 109 and Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans appearing in this Annual Report on Form 10-K of PSEG Power LLC for the year ended December 31, 2007.
/s/ Deloitte & Touche LLP
February 27, 2008
Exhibit 23b
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-115100 on Form S-3 of our report dated February 27, 2008, relating to the consolidated financial statements and consolidated financial statement schedule of Public Service Electric and Gas Company, which report expresses an unqualified opinion and includes an explanatory paragraph for the adoption of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement 109 , and Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, appearing in this Annual Report on Form 10-K of Public Service Electric and Gas Company for the year ended December 31, 2007.
/s/ Deloitte & Touche LLP
February 27, 2008
EXHIBIT 31a
Certification Pursuant to Rules
13a-14 and 15d-14
of the 1934 Securities Exchange Act
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I, Ralph Izzo, certify that: |
||||
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1. |
I have reviewed this Annual Report on Form 10-K of Public Service Enterprise Group Incorporated; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
||
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
||
|
|
|
|
|
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
||
|
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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|
|
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|
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(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
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5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
||
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|
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
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|
|
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
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Date: |
February 27, 2008 |
|
/s/ Ralph Izzo |
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Ralph Izzo |
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|
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Public Service Enterprise Group Incorporated |
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|
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Chief Executive Officer |
EXHIBIT 31b
Certification Pursuant to Rules
13a-14 and 15d-14
of the 1934 Securities Exchange Act
|
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|
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I, Thomas M. OFlynn, certify that: |
|||
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|
|
|
|
1. |
I have reviewed this Annual Report on Form 10-K of Public Service Enterprise Group Incorporated; |
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|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
|
|
|
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
|
|
|
|
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
February 27, 2008 |
|
/s/ Thomas M. OFlynn |
|
|
|
|
|
|
|
Thomas M. OFlynn |
|
|
|
Public Service Enterprise Group Incorporated |
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|
|
Chief Financial Officer |
EXHIBIT 31c
Certification Pursuant to Rules
13a-14 and 15d-14
of the 1934 Securities Exchange Act
|
|
|
|
|
I, Ralph Izzo, certify that: |
||||
|
|
|
||
|
1. |
I have reviewed this Annual Report on Form 10-K of Public Service Electric and Gas Company; |
||
|
|
|
|
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
||
|
|
|
|
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
||
|
|
|
|
|
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
||
|
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
||
|
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
February 27, 2008 |
|
/s/ Ralph Izzo |
|
|
|
|
|
|
|
Ralph Izzo |
|
|
|
Public Service Electric and Gas Company |
|
|
|
Chief Executive Officer |
EXHIBIT 31d
Certification Pursuant to Rules
13a-14 and 15d-14
of the 1934 Securities Exchange Act
|
|
|
|
I, Thomas M. OFlynn, certify that: |
|||
|
|
|
|
|
1. |
I have reviewed this Annual Report on Form 10-K of Public Service Electric and Gas Company; |
|
|
|
|
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
|
|
|
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
|
|
|
|
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
February 27, 2008 |
|
/s/ Thomas M. OFlynn |
|
|
|
|
|
|
|
Thomas M. OFlynn |
|
|
|
Public Service Electric and Gas Company |
|
|
|
Chief Financial Officer |
EXHIBIT 31e
Certification Pursuant to Rules
13a-14 and 15d-14
of the 1934 Securities Exchange Act
|
|
|
|
I, Ralph Izzo, certify that: |
|||
|
|
|
|
|
1. |
I have reviewed this Annual Report on Form 10-K of PSEG Power LLC; |
|
|
|
|
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
|
|
|
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
|
|
|
|
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
February 27, 2008 |
|
/s/ Ralph Izzo |
|
|
|
|
|
|
|
Ralph Izzo |
|
|
|
PSEG Power LLC |
|
|
|
Chief Executive Officer |
EXHIBIT 31f
Certification Pursuant to Rules 13a-14 and
15d-14
of the 1934 Securities Exchange Act
I, Thomas M. OFlynn, certify that:
|
|
|
|
|
1. |
I have reviewed this Annual Report on Form 10-K of PSEG Power LLC; |
|
|
|
|
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
|
|
|
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
|
|
|
|
|
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
|
|
|
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
|
|
|
|
|
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
|
|
|
|
|
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
Date: |
February 27, 2008 |
|
/s/ Thomas M. OFlynn |
|
|
|
|
|
|
|
Thomas M. OFlynn |
|
|
|
PSEG Power LLC |
|
|
|
Chief Financial Officer |
EXHIBIT 32a
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Ralph Izzo, Chief Executive Officer of Public Service Enterprise Group Incorporated, to the best of my knowledge, certify that (i) the Annual Report of Public Service Enterprise Group Incorporated on Form 10-K for the year ended December 31, 2007 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Public Service Enterprise Group Incorporated.
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/s/ Ralph Izzo |
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Ralph Izzo |
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Public Service Enterprise Group Incorporated |
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Chief Executive Officer |
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February 27, 2008 |
EXHIBIT 32b
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Thomas M. OFlynn, Chief Financial Officer of Public Service Enterprise Group Incorporated, to the best of my knowledge, certify that (i) the Annual Report of Public Service Enterprise Group Incorporated on Form 10-K for the year ended December 31, 2007 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Public Service Enterprise Group Incorporated.
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/s/ Thomas M. OFlynn |
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Thomas M. OFlynn |
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Public Service Enterprise Group Incorporated |
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Chief Financial Officer |
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February 27, 2008 |
EXHIBIT 32c
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Ralph Izzo, Chief Executive Officer of Public Service Electric and Gas Company, to the best of my knowledge, certify that (i) the Annual Report of Public Service Electric and Gas Company on Form 10-K for the year ended December 31, 2007 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Public Service Electric and Gas Company.
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/s/ Ralph Izzo |
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Ralph Izzo |
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Public Service Electric and Gas Company |
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Chief Executive Officer |
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February 27, 2008 |
EXHIBIT 32d
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Thomas M. OFlynn, Chief Financial Officer of Public Service Electric and Gas Company, to the best of my knowledge, certify that (i) the Annual Report of Public Service Electric and Gas Company on Form 10-K for the year ended December 31, 2007 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Public Service Electric and Gas Company.
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/s/ Thomas M. OFlynn |
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Thomas M. OFlynn |
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Public Service Electric and Gas Company |
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Chief Financial Officer |
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February 27, 2008 |
EXHIBIT 32e
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Ralph Izzo, Chief Executive Officer of PSEG Power LLC, to the best of my knowledge, certify that (i) the Annual Report of PSEG Power LLC on Form 10-K for the year ended December 31, 2007 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PSEG Power LLC.
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/s/ Ralph Izzo |
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Ralph Izzo |
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PSEG Power LLC |
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Chief Executive Officer |
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February 27, 2008 |
EXHIBIT 32f
Certification Pursuant to Section 1350 of
Chapter 63 of Title 18
of the United States Code
I, Thomas M. OFlynn, Chief Financial Officer of PSEG Power LLC, to the best of my knowledge, certify that (i) the Annual Report of PSEG Power LLC on Form 10-K for the year ended December 31, 2007 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of PSEG Power LLC.
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/s/ Thomas M. OFlynn |
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Thomas M. OFlynn |
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PSEG Power LLC |
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Chief Financial Officer |
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February 27, 2008 |