Note 10. Financial Risk Management Activities

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

Commodity Prices

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

Cash Flow Hedges

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

•

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

•

the price of fuel to meet its fuel purchase requirements.

These derivative transactions are designated and effective as cash flow hedges. As of September 30, 2011 and December 31, 2010, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with these hedges was as follows:


	As of September 30, 2011		As of December 31, 2010
	Millions
Fair Value of Cash Flow Hedges	$	79	$	196
Impact on Accumulated Other Comprehensive Income (Loss) (after tax)	$	34	$	114

The expiration date of the longest-dated cash flow hedge at Power is in 2013. Power's after-tax unrealized gains on these derivatives that are expected to be reclassified to earnings during the next 12 months are $33 million. There was ineffectiveness of $3 million associated with these hedges as of September 30, 2011.

Trading Derivatives

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

Other Derivatives

Power enters into additional contracts that are derivatives, but do not qualify for or are not designated as cash flow hedges. These asset backed transactions are intended to mitigate exposure to fluctuations in commodity prices and optimize the value of our expected generation. Trade types include financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. Changes in fair market value of these contracts are recorded in earnings. The fair value of these contracts as of September 30, 2011 and December 31, 2010 was $19 million and $(4) million, respectively.

Interest Rates

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

Fair Value Hedges

PSEG enters into fair value hedges to convert fixed-rate debt into variable-rate debt. Since 2009, PSEG has entered into eleven interest rate swaps totaling $1.4 billion. These swaps convert $300 million of Power's $600 million of 6.95% Senior Notes due June 2012, Power's $250 million of 5% Senior Notes due April 2014, Power's $300 million of 5.5% Senior Notes due December 2015, $300 million of Power's $303 million of 5.32% Senior Notes due September 2016 and Power's $250 million of 2.75% Senior Notes due September 2016 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the changes in the fair value of the underlying debt. As of September 30, 2011 and December 31, 2010, the fair value of all the underlying hedges was $66 million and $39 million, respectively.

Cash Flow Hedges

PSEG and Energy Holdings use interest rate swaps and other derivatives, which are designated and effective as cash flow hedges, to manage their exposure to the variability of cash flows, primarily related to variable-rate debt instruments. As of September 30, 2011, there was no hedge ineffectiveness associated with these hedges. The total fair value of these interest rate derivatives was immaterial as of each of September 30, 2011 and December 31, 2010. The Accumulated Other Comprehensive Income (Loss) (after tax) related to interest rate derivatives designated as cash flow hedges was $(3) million and $(3) million as of September 30, 2011 and December 31, 2010, respectively.

Fair Values of Derivative Instruments

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


	As of September 30, 2011
	Power												PSE&G			PSEG			Consolidated
	Cash Flow Hedges			Non Hedges			Netting (A)			Total Power			Non Hedges			Fair Value Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps			Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	76		$	232		$	(213	)	$	95		$	0		$	18		$	113
Noncurrent Assets		7			44			(27	)		24			0			51			75

Total Mark-to-Market Derivative Assets	$	83		$	276		$	(240	)	$	119		$	0		$	69		$	188

Derivative Contracts
Current Liabilities	$	(2	)	$	(281	)	$	204		$	(79	)	$	(15	)	$	0		$	(94	)
Noncurrent Liabilities		(2	)		(41	)		26			(17	)		(11	)		(3	)		(31	)

Total Mark-to-Market Derivative (Liabilities)	$	(4	)	$	(322	)	$	230		$	(96	)	$	(26	)	$	(3	)	$	(125	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	79		$	(46	)	$	(10	)	$	23		$	(26	)	$	66		$	63


	As of December 31, 2010
	Power												PSE&G			PSEG		Consolidated
	Cash Flow Hedges			Non Hedges			Netting (A)			Total Power			Non Hedges			FairValue Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps		Total Derivatives
	Millions

Derivative Contracts
Current Assets	$	204		$	403		$	(444	)	$	163		$	0		$	19	$	182
Noncurrent Assets		3			80			(41	)		42			17			20		79

Total Mark-to-Market Derivative Assets	$	207		$	483		$	(485	)	$	205		$	17		$	39	$	261

Derivative Contracts
Current Liabilities	$	(11	)	$	(454	)	$	374		$	(91	)	$	(12	)	$	0	$	(103	)
Noncurrent Liabilities		0			(72	)		50			(22	)		0			0		(22	)

Total Mark-to-Market Derivative (Liabilities)	$	(11	)	$	(526	)	$	424		$	(113	)	$	(12	)	$	0	$	(125	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	196		$	(43	)	$	(61	)	$	92		$	5		$	39	$	136

(A)

Represents the netting of fair value balances with the same counterparty and the application of collateral. As of September 30, 2011 and December 31, 2010, net cash collateral received of $10 million and $61 million, respectively, was netted against the corresponding net derivative contract positions. Of the $10 million as of September 30, 2011, cash collateral of $(9) million and $(1) million were netted against current assets and noncurrent assets, respectively. Of the $61 million as of December 31, 2010, cash collateral of $(132) million and $(3) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $62 million and $12 million were netted against current liabilities and noncurrent liabilities, respectively.

The aggregate fair value of energy-related contracts in a liability position as of September 30, 2011 that contain triggers for additional collateral was $182 million. This potential additional collateral is included in the $765 million discussed in Note 8. Commitments and Contingent Liabilities.

The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended September 30, 2011 and 2010:


Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)				Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income	Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into income (Effective Portion)				Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)	Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	Three Months Ended September 30,					Three Months Ended September 30,					Three Months Ended September 30,
	2011		2010			2011		2010			2011		2010
	Millions
PSEG
Energy-Related Contracts	$	21	$	62	Operating Revenues	$	60	$	60	Operating Revenues	$	0	$	0
Energy-Related Contracts		0		0	Energy Costs		0		0			0		0
Interest Rate Swaps		0		0	Interest Expense		0		0			0		0

Total PSEG	$	21	$	62		$	60	$	60		$	0	$	0

Power

Energy-Related Contracts	$	21	$	62	Operating Revenues	$	60	$	60	Operating Revenues	$	0	$	0
Energy-Related Contracts		0		0	Energy Costs		0		0			0		0

Total Power	$	21	$	62		$	60	$	60		$	0	$	0

The following shows the effect on the Condensed Consolidated Statements of Operations and on AOCI of derivative instruments designated as cash flow hedges for the nine months ended September 30, 2011 and 2010:


Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)				Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income	Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)						Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)	Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	Nine Months Ended September 30,					Nine Months Ended September 30,							Nine Months Ended September 30,
	2011		2010			2011			2010				2011		2010
	Millions
PSEG (A)
Energy-Related Contracts	$	18	$	171	Operating Revenues	$	152		$	178		Operating Revenues	$	1	$	(3	)
Energy-Related Contracts		1		1	Energy Costs		2			(2	)			0		0
Interest Rate Swaps		0		0	Interest Expense		(1	)		(1	)			0		0

Total PSEG	$	19	$	172		$	153		$	175			$	1	$	(3	)

Power
Energy-Related Contracts	$	18	$	171	Operating Revenues	$	152		$	178		Operating Revenues	$	1	$	(3	)
Energy-Related Contracts		1		1	Energy Costs		2			(2	)			0		0

Total Power	$	19	$	172		$	154		$	176			$	1	$	(3	)

(A)	Includes amounts for PSEG parent.

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


Accumulated Other Comprehensive Income	Pre-Tax			After-Tax
	Millions
Balance as of December 31, 2010	$	188		$	111
Loss Recognized in AOCI (Effective Portion)		(2	)		(1	)
Less: Gain Reclassified into Income (Effective Portion)		(93	)		(56	)

Balance as of June 30, 2011	$	93		$	54

Gain Recognized in AOCI (Effective Portion)		21			12
Less: Gain Reclassified into Income (Effective Portion)		(60	)		(35	)

Balance as of September 30, 2011	$	54		$	31

The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months and nine months ended September 30, 2011 and 2010:


Derivatives Not Designated as Hedges	Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives	Pre-Tax Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
		Millions						Millions
PSEG and Power
Energy-Related Contracts	Operating Revenues	$	24		$	(6	)	$	(18	)	$	3
Energy-Related Contracts	Energy Costs		(11	)		0			(10	)		(8	)

Total PSEG and Power		$	13		$	(6	)	$	(28	)	$	(5	)

Power's derivative contracts reflected in the preceding tables include contracts to hedge the purchase and sale of electricity and the purchase of fuel. Not all of these contracts qualify for hedge accounting. Most of these contracts are marked to market. The tables above do not include contracts for which Power has elected the normal purchase/normal sales exemption, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load. In addition, PSEG has interest rate swaps designated as fair value hedges. The effect of these hedges was to reduce interest expense by $6 million for each of the three month periods and $19 million and $18 million for the nine month periods ended September 30, 2011 and 2010, respectively.

The following reflects the gross volume, on an absolute value basis, of derivatives as of September 30, 2011 and December 31, 2010:


Type	Notional	Total		PSEG		Power		PSE&G
	Millions
As of September 30, 2011
Natural Gas	Dth		593		0		350		243
Electricity	MWh		145		0		145		0
Financial Transmission Rights (FTRs)	MWh		20		0		20		0
Interest Rate Swaps	US Dollars		1,400		1,400		0		0
As of December 31, 2010
Natural Gas	Dth		704		0		424		280
Electricity	MWh		154		0		154		0
Capacity	MW days		1		0		1		0
FTRs	MWh		23		0		23		0
Interest Rate Swaps	US Dollars		1,150		1,150		0		0

Credit Risk

Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. We have established credit policies that we believe significantly minimize credit risk. These policies include an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power's and PSEG's financial condition, results of operations or net cash flows.

As of September 30, 2011, 95% of the credit for Power's operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives and non-derivatives and normal purchases/normal sales).

The following table provides information on Power's credit risk from others, net of cash collateral, as of September 30, 2011. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of Power's credit risk by credit rating of the counterparties.


Rating	Current Exposure		Securities held as Collateral		Net Exposure		Number of Counterparties >10%		Net Exposure of Counterparties >10%
			Millions						Millions
Investment Grade—External Rating	$	396	$	46	$	392		3	$	242	(A)
Non-Investment Grade—External Rating		11		0		11		0		0
Investment Grade—No External Rating		9		0		9		0		0
Non-Investment Grade—No External Rating		9		0		9		0		0

Total Credit Risk	$	425	$	46	$	421		3	$	242

(A)	Includes net exposure of $129 million with PSE&G. The remaining net exposure of $113 million is with two nonaffiliated power purchasers which are regulated investment grade counterparties.

The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more cash collateral than the outstanding exposure, in which case there would be no exposure. When letters of credit have been posted as collateral, the exposure amount is not reduced, but the exposure amount is transferred to the rating of the issuing bank. As of September 30, 2011, Power had 190 active counterparties.

Financial Risk Management Activities

Note 10. Financial Risk Management Activities

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

Commodity Prices

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

Cash Flow Hedges

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

•

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

•

the price of fuel to meet its fuel purchase requirements.

These derivative transactions are designated and effective as cash flow hedges. As of September 30, 2011 and December 31, 2010, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with these hedges was as follows:


	As of September 30, 2011		As of December 31, 2010
	Millions
Fair Value of Cash Flow Hedges	$	79	$	196
Impact on Accumulated Other Comprehensive Income (Loss) (after tax)	$	34	$	114

The expiration date of the longest-dated cash flow hedge at Power is in 2013. Power's after-tax unrealized gains on these derivatives that are expected to be reclassified to earnings during the next 12 months are $33 million. There was ineffectiveness of $3 million associated with these hedges as of September 30, 2011.

Trading Derivatives

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

Other Derivatives

Power enters into additional contracts that are derivatives, but do not qualify for or are not designated as cash flow hedges. These asset backed transactions are intended to mitigate exposure to fluctuations in commodity prices and optimize the value of our expected generation. Trade types include financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. Changes in fair market value of these contracts are recorded in earnings. The fair value of these contracts as of September 30, 2011 and December 31, 2010 was $19 million and $(4) million, respectively.

Interest Rates

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

Fair Value Hedges

PSEG enters into fair value hedges to convert fixed-rate debt into variable-rate debt. Since 2009, PSEG has entered into eleven interest rate swaps totaling $1.4 billion. These swaps convert $300 million of Power's $600 million of 6.95% Senior Notes due June 2012, Power's $250 million of 5% Senior Notes due April 2014, Power's $300 million of 5.5% Senior Notes due December 2015, $300 million of Power's $303 million of 5.32% Senior Notes due September 2016 and Power's $250 million of 2.75% Senior Notes due September 2016 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the changes in the fair value of the underlying debt. As of September 30, 2011 and December 31, 2010, the fair value of all the underlying hedges was $66 million and $39 million, respectively.

Cash Flow Hedges

PSEG and Energy Holdings use interest rate swaps and other derivatives, which are designated and effective as cash flow hedges, to manage their exposure to the variability of cash flows, primarily related to variable-rate debt instruments. As of September 30, 2011, there was no hedge ineffectiveness associated with these hedges. The total fair value of these interest rate derivatives was immaterial as of each of September 30, 2011 and December 31, 2010. The Accumulated Other Comprehensive Income (Loss) (after tax) related to interest rate derivatives designated as cash flow hedges was $(3) million and $(3) million as of September 30, 2011 and December 31, 2010, respectively.

Fair Values of Derivative Instruments

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


	As of September 30, 2011
	Power												PSE&G			PSEG			Consolidated
	Cash Flow Hedges			Non Hedges			Netting (A)			Total Power			Non Hedges			Fair Value Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps			Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	76		$	232		$	(213	)	$	95		$	0		$	18		$	113
Noncurrent Assets		7			44			(27	)		24			0			51			75

Total Mark-to-Market Derivative Assets	$	83		$	276		$	(240	)	$	119		$	0		$	69		$	188

Derivative Contracts
Current Liabilities	$	(2	)	$	(281	)	$	204		$	(79	)	$	(15	)	$	0		$	(94	)
Noncurrent Liabilities		(2	)		(41	)		26			(17	)		(11	)		(3	)		(31	)

Total Mark-to-Market Derivative (Liabilities)	$	(4	)	$	(322	)	$	230		$	(96	)	$	(26	)	$	(3	)	$	(125	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	79		$	(46	)	$	(10	)	$	23		$	(26	)	$	66		$	63


	As of December 31, 2010
	Power												PSE&G			PSEG		Consolidated
	Cash Flow Hedges			Non Hedges			Netting (A)			Total Power			Non Hedges			FairValue Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps		Total Derivatives
	Millions

Derivative Contracts
Current Assets	$	204		$	403		$	(444	)	$	163		$	0		$	19	$	182
Noncurrent Assets		3			80			(41	)		42			17			20		79

Total Mark-to-Market Derivative Assets	$	207		$	483		$	(485	)	$	205		$	17		$	39	$	261

Derivative Contracts
Current Liabilities	$	(11	)	$	(454	)	$	374		$	(91	)	$	(12	)	$	0	$	(103	)
Noncurrent Liabilities		0			(72	)		50			(22	)		0			0		(22	)

Total Mark-to-Market Derivative (Liabilities)	$	(11	)	$	(526	)	$	424		$	(113	)	$	(12	)	$	0	$	(125	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	196		$	(43	)	$	(61	)	$	92		$	5		$	39	$	136

(A)

Represents the netting of fair value balances with the same counterparty and the application of collateral. As of September 30, 2011 and December 31, 2010, net cash collateral received of $10 million and $61 million, respectively, was netted against the corresponding net derivative contract positions. Of the $10 million as of September 30, 2011, cash collateral of $(9) million and $(1) million were netted against current assets and noncurrent assets, respectively. Of the $61 million as of December 31, 2010, cash collateral of $(132) million and $(3) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $62 million and $12 million were netted against current liabilities and noncurrent liabilities, respectively.

The aggregate fair value of energy-related contracts in a liability position as of September 30, 2011 that contain triggers for additional collateral was $182 million. This potential additional collateral is included in the $765 million discussed in Note 8. Commitments and Contingent Liabilities.

The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended September 30, 2011 and 2010:


Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)				Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income	Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into income (Effective Portion)				Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)	Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	Three Months Ended September 30,					Three Months Ended September 30,					Three Months Ended September 30,
	2011		2010			2011		2010			2011		2010
	Millions
PSEG
Energy-Related Contracts	$	21	$	62	Operating Revenues	$	60	$	60	Operating Revenues	$	0	$	0
Energy-Related Contracts		0		0	Energy Costs		0		0			0		0
Interest Rate Swaps		0		0	Interest Expense		0		0			0		0

Total PSEG	$	21	$	62		$	60	$	60		$	0	$	0

Power

Energy-Related Contracts	$	21	$	62	Operating Revenues	$	60	$	60	Operating Revenues	$	0	$	0
Energy-Related Contracts		0		0	Energy Costs		0		0			0		0

Total Power	$	21	$	62		$	60	$	60		$	0	$	0

The following shows the effect on the Condensed Consolidated Statements of Operations and on AOCI of derivative instruments designated as cash flow hedges for the nine months ended September 30, 2011 and 2010:


Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)				Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income	Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)						Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)	Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	Nine Months Ended September 30,					Nine Months Ended September 30,							Nine Months Ended September 30,
	2011		2010			2011			2010				2011		2010
	Millions
PSEG (A)
Energy-Related Contracts	$	18	$	171	Operating Revenues	$	152		$	178		Operating Revenues	$	1	$	(3	)
Energy-Related Contracts		1		1	Energy Costs		2			(2	)			0		0
Interest Rate Swaps		0		0	Interest Expense		(1	)		(1	)			0		0

Total PSEG	$	19	$	172		$	153		$	175			$	1	$	(3	)

Power
Energy-Related Contracts	$	18	$	171	Operating Revenues	$	152		$	178		Operating Revenues	$	1	$	(3	)
Energy-Related Contracts		1		1	Energy Costs		2			(2	)			0		0

Total Power	$	19	$	172		$	154		$	176			$	1	$	(3	)

(A)	Includes amounts for PSEG parent.

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


Accumulated Other Comprehensive Income	Pre-Tax			After-Tax
	Millions
Balance as of December 31, 2010	$	188		$	111
Loss Recognized in AOCI (Effective Portion)		(2	)		(1	)
Less: Gain Reclassified into Income (Effective Portion)		(93	)		(56	)

Balance as of June 30, 2011	$	93		$	54

Gain Recognized in AOCI (Effective Portion)		21			12
Less: Gain Reclassified into Income (Effective Portion)		(60	)		(35	)

Balance as of September 30, 2011	$	54		$	31

The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months and nine months ended September 30, 2011 and 2010:


Derivatives Not Designated as Hedges	Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives	Pre-Tax Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
		Millions						Millions
PSEG and Power
Energy-Related Contracts	Operating Revenues	$	24		$	(6	)	$	(18	)	$	3
Energy-Related Contracts	Energy Costs		(11	)		0			(10	)		(8	)

Total PSEG and Power		$	13		$	(6	)	$	(28	)	$	(5	)

Power's derivative contracts reflected in the preceding tables include contracts to hedge the purchase and sale of electricity and the purchase of fuel. Not all of these contracts qualify for hedge accounting. Most of these contracts are marked to market. The tables above do not include contracts for which Power has elected the normal purchase/normal sales exemption, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load. In addition, PSEG has interest rate swaps designated as fair value hedges. The effect of these hedges was to reduce interest expense by $6 million for each of the three month periods and $19 million and $18 million for the nine month periods ended September 30, 2011 and 2010, respectively.

The following reflects the gross volume, on an absolute value basis, of derivatives as of September 30, 2011 and December 31, 2010:


Type	Notional	Total		PSEG		Power		PSE&G
	Millions
As of September 30, 2011
Natural Gas	Dth		593		0		350		243
Electricity	MWh		145		0		145		0
Financial Transmission Rights (FTRs)	MWh		20		0		20		0
Interest Rate Swaps	US Dollars		1,400		1,400		0		0
As of December 31, 2010
Natural Gas	Dth		704		0		424		280
Electricity	MWh		154		0		154		0
Capacity	MW days		1		0		1		0
FTRs	MWh		23		0		23		0
Interest Rate Swaps	US Dollars		1,150		1,150		0		0

Credit Risk

Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. We have established credit policies that we believe significantly minimize credit risk. These policies include an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power's and PSEG's financial condition, results of operations or net cash flows.

As of September 30, 2011, 95% of the credit for Power's operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives and non-derivatives and normal purchases/normal sales).

The following table provides information on Power's credit risk from others, net of cash collateral, as of September 30, 2011. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of Power's credit risk by credit rating of the counterparties.


Rating	Current Exposure		Securities held as Collateral		Net Exposure		Number of Counterparties >10%		Net Exposure of Counterparties >10%
			Millions						Millions
Investment Grade—External Rating	$	396	$	46	$	392		3	$	242	(A)
Non-Investment Grade—External Rating		11		0		11		0		0
Investment Grade—No External Rating		9		0		9		0		0
Non-Investment Grade—No External Rating		9		0		9		0		0

Total Credit Risk	$	425	$	46	$	421		3	$	242

(A)	Includes net exposure of $129 million with PSE&G. The remaining net exposure of $113 million is with two nonaffiliated power purchasers which are regulated investment grade counterparties.

The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more cash collateral than the outstanding exposure, in which case there would be no exposure. When letters of credit have been posted as collateral, the exposure amount is not reduced, but the exposure amount is transferred to the rating of the issuing bank. As of September 30, 2011, Power had 190 active counterparties.

Financial Risk Management Activities

Note 10. Financial Risk Management Activities

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

Commodity Prices

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

Cash Flow Hedges

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

•

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

•

the price of fuel to meet its fuel purchase requirements.

These derivative transactions are designated and effective as cash flow hedges. As of September 30, 2011 and December 31, 2010, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with these hedges was as follows:


	As of September 30, 2011		As of December 31, 2010
	Millions
Fair Value of Cash Flow Hedges	$	79	$	196
Impact on Accumulated Other Comprehensive Income (Loss) (after tax)	$	34	$	114

The expiration date of the longest-dated cash flow hedge at Power is in 2013. Power's after-tax unrealized gains on these derivatives that are expected to be reclassified to earnings during the next 12 months are $33 million. There was ineffectiveness of $3 million associated with these hedges as of September 30, 2011.

Trading Derivatives

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

Other Derivatives

Power enters into additional contracts that are derivatives, but do not qualify for or are not designated as cash flow hedges. These asset backed transactions are intended to mitigate exposure to fluctuations in commodity prices and optimize the value of our expected generation. Trade types include financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. Changes in fair market value of these contracts are recorded in earnings. The fair value of these contracts as of September 30, 2011 and December 31, 2010 was $19 million and $(4) million, respectively.

Interest Rates

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

Fair Value Hedges

PSEG enters into fair value hedges to convert fixed-rate debt into variable-rate debt. Since 2009, PSEG has entered into eleven interest rate swaps totaling $1.4 billion. These swaps convert $300 million of Power's $600 million of 6.95% Senior Notes due June 2012, Power's $250 million of 5% Senior Notes due April 2014, Power's $300 million of 5.5% Senior Notes due December 2015, $300 million of Power's $303 million of 5.32% Senior Notes due September 2016 and Power's $250 million of 2.75% Senior Notes due September 2016 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the changes in the fair value of the underlying debt. As of September 30, 2011 and December 31, 2010, the fair value of all the underlying hedges was $66 million and $39 million, respectively.

Cash Flow Hedges

PSEG and Energy Holdings use interest rate swaps and other derivatives, which are designated and effective as cash flow hedges, to manage their exposure to the variability of cash flows, primarily related to variable-rate debt instruments. As of September 30, 2011, there was no hedge ineffectiveness associated with these hedges. The total fair value of these interest rate derivatives was immaterial as of each of September 30, 2011 and December 31, 2010. The Accumulated Other Comprehensive Income (Loss) (after tax) related to interest rate derivatives designated as cash flow hedges was $(3) million and $(3) million as of September 30, 2011 and December 31, 2010, respectively.

Fair Values of Derivative Instruments

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


	As of September 30, 2011
	Power												PSE&G			PSEG			Consolidated
	Cash Flow Hedges			Non Hedges			Netting (A)			Total Power			Non Hedges			Fair Value Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps			Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	76		$	232		$	(213	)	$	95		$	0		$	18		$	113
Noncurrent Assets		7			44			(27	)		24			0			51			75

Total Mark-to-Market Derivative Assets	$	83		$	276		$	(240	)	$	119		$	0		$	69		$	188

Derivative Contracts
Current Liabilities	$	(2	)	$	(281	)	$	204		$	(79	)	$	(15	)	$	0		$	(94	)
Noncurrent Liabilities		(2	)		(41	)		26			(17	)		(11	)		(3	)		(31	)

Total Mark-to-Market Derivative (Liabilities)	$	(4	)	$	(322	)	$	230		$	(96	)	$	(26	)	$	(3	)	$	(125	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	79		$	(46	)	$	(10	)	$	23		$	(26	)	$	66		$	63


	As of December 31, 2010
	Power												PSE&G			PSEG		Consolidated
	Cash Flow Hedges			Non Hedges			Netting (A)			Total Power			Non Hedges			FairValue Hedges
Balance Sheet Location	Energy- Related Contracts			Energy- Related Contracts			Netting (A)			Total Power			Energy- Related Contracts			Interest Rate Swaps		Total Derivatives
	Millions

Derivative Contracts
Current Assets	$	204		$	403		$	(444	)	$	163		$	0		$	19	$	182
Noncurrent Assets		3			80			(41	)		42			17			20		79

Total Mark-to-Market Derivative Assets	$	207		$	483		$	(485	)	$	205		$	17		$	39	$	261

Derivative Contracts
Current Liabilities	$	(11	)	$	(454	)	$	374		$	(91	)	$	(12	)	$	0	$	(103	)
Noncurrent Liabilities		0			(72	)		50			(22	)		0			0		(22	)

Total Mark-to-Market Derivative (Liabilities)	$	(11	)	$	(526	)	$	424		$	(113	)	$	(12	)	$	0	$	(125	)

Total Net Mark-to-Market Derivative Assets (Liabilities)	$	196		$	(43	)	$	(61	)	$	92		$	5		$	39	$	136

(A)

Represents the netting of fair value balances with the same counterparty and the application of collateral. As of September 30, 2011 and December 31, 2010, net cash collateral received of $10 million and $61 million, respectively, was netted against the corresponding net derivative contract positions. Of the $10 million as of September 30, 2011, cash collateral of $(9) million and $(1) million were netted against current assets and noncurrent assets, respectively. Of the $61 million as of December 31, 2010, cash collateral of $(132) million and $(3) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $62 million and $12 million were netted against current liabilities and noncurrent liabilities, respectively.

The aggregate fair value of energy-related contracts in a liability position as of September 30, 2011 that contain triggers for additional collateral was $182 million. This potential additional collateral is included in the $765 million discussed in Note 8. Commitments and Contingent Liabilities.

The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended September 30, 2011 and 2010:


Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)				Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income	Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into income (Effective Portion)				Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)	Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	Three Months Ended September 30,					Three Months Ended September 30,					Three Months Ended September 30,
	2011		2010			2011		2010			2011		2010
	Millions
PSEG
Energy-Related Contracts	$	21	$	62	Operating Revenues	$	60	$	60	Operating Revenues	$	0	$	0
Energy-Related Contracts		0		0	Energy Costs		0		0			0		0
Interest Rate Swaps		0		0	Interest Expense		0		0			0		0

Total PSEG	$	21	$	62		$	60	$	60		$	0	$	0

Power

Energy-Related Contracts	$	21	$	62	Operating Revenues	$	60	$	60	Operating Revenues	$	0	$	0
Energy-Related Contracts		0		0	Energy Costs		0		0			0		0

Total Power	$	21	$	62		$	60	$	60		$	0	$	0

The following shows the effect on the Condensed Consolidated Statements of Operations and on AOCI of derivative instruments designated as cash flow hedges for the nine months ended September 30, 2011 and 2010:


Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)				Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income	Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)						Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)	Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	Nine Months Ended September 30,					Nine Months Ended September 30,							Nine Months Ended September 30,
	2011		2010			2011			2010				2011		2010
	Millions
PSEG (A)
Energy-Related Contracts	$	18	$	171	Operating Revenues	$	152		$	178		Operating Revenues	$	1	$	(3	)
Energy-Related Contracts		1		1	Energy Costs		2			(2	)			0		0
Interest Rate Swaps		0		0	Interest Expense		(1	)		(1	)			0		0

Total PSEG	$	19	$	172		$	153		$	175			$	1	$	(3	)

Power
Energy-Related Contracts	$	18	$	171	Operating Revenues	$	152		$	178		Operating Revenues	$	1	$	(3	)
Energy-Related Contracts		1		1	Energy Costs		2			(2	)			0		0

Total Power	$	19	$	172		$	154		$	176			$	1	$	(3	)

(A)	Includes amounts for PSEG parent.

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


Accumulated Other Comprehensive Income	Pre-Tax			After-Tax
	Millions
Balance as of December 31, 2010	$	188		$	111
Loss Recognized in AOCI (Effective Portion)		(2	)		(1	)
Less: Gain Reclassified into Income (Effective Portion)		(93	)		(56	)

Balance as of June 30, 2011	$	93		$	54

Gain Recognized in AOCI (Effective Portion)		21			12
Less: Gain Reclassified into Income (Effective Portion)		(60	)		(35	)

Balance as of September 30, 2011	$	54		$	31

The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months and nine months ended September 30, 2011 and 2010:


Derivatives Not Designated as Hedges	Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives	Pre-Tax Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended September 30,						Nine Months Ended September 30,
		2011			2010			2011			2010
		Millions						Millions
PSEG and Power
Energy-Related Contracts	Operating Revenues	$	24		$	(6	)	$	(18	)	$	3
Energy-Related Contracts	Energy Costs		(11	)		0			(10	)		(8	)

Total PSEG and Power		$	13		$	(6	)	$	(28	)	$	(5	)

Power's derivative contracts reflected in the preceding tables include contracts to hedge the purchase and sale of electricity and the purchase of fuel. Not all of these contracts qualify for hedge accounting. Most of these contracts are marked to market. The tables above do not include contracts for which Power has elected the normal purchase/normal sales exemption, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load. In addition, PSEG has interest rate swaps designated as fair value hedges. The effect of these hedges was to reduce interest expense by $6 million for each of the three month periods and $19 million and $18 million for the nine month periods ended September 30, 2011 and 2010, respectively.

The following reflects the gross volume, on an absolute value basis, of derivatives as of September 30, 2011 and December 31, 2010:


Type	Notional	Total		PSEG		Power		PSE&G
	Millions
As of September 30, 2011
Natural Gas	Dth		593		0		350		243
Electricity	MWh		145		0		145		0
Financial Transmission Rights (FTRs)	MWh		20		0		20		0
Interest Rate Swaps	US Dollars		1,400		1,400		0		0
As of December 31, 2010
Natural Gas	Dth		704		0		424		280
Electricity	MWh		154		0		154		0
Capacity	MW days		1		0		1		0
FTRs	MWh		23		0		23		0
Interest Rate Swaps	US Dollars		1,150		1,150		0		0

Credit Risk

Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. We have established credit policies that we believe significantly minimize credit risk. These policies include an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power's and PSEG's financial condition, results of operations or net cash flows.

As of September 30, 2011, 95% of the credit for Power's operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives and non-derivatives and normal purchases/normal sales).

The following table provides information on Power's credit risk from others, net of cash collateral, as of September 30, 2011. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of Power's credit risk by credit rating of the counterparties.


Rating	Current Exposure		Securities held as Collateral		Net Exposure		Number of Counterparties >10%		Net Exposure of Counterparties >10%
			Millions						Millions
Investment Grade—External Rating	$	396	$	46	$	392		3	$	242	(A)
Non-Investment Grade—External Rating		11		0		11		0		0
Investment Grade—No External Rating		9		0		9		0		0
Non-Investment Grade—No External Rating		9		0		9		0		0

Total Credit Risk	$	425	$	46	$	421		3	$	242

(A)	Includes net exposure of $129 million with PSE&G. The remaining net exposure of $113 million is with two nonaffiliated power purchasers which are regulated investment grade counterparties.

The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more cash collateral than the outstanding exposure, in which case there would be no exposure. When letters of credit have been posted as collateral, the exposure amount is not reduced, but the exposure amount is transferred to the rating of the issuing bank. As of September 30, 2011, Power had 190 active counterparties.