FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM          TO         

 

Commission
File Number

  

Registrants, State of Incorporation,

Address, and Telephone Number

  

I.R.S. Employer
Identification No.

001-09120    PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED    22-2625848
   (A New Jersey Corporation)   
   80 Park Plaza, P.O. Box 1171   
   Newark, New Jersey 07101-1171   
   973 430-7000   
   http://www.pseg.com   
001-34232    PSEG POWER LLC    22-3663480
   (A Delaware Limited Liability Company)   
   80 Park Plaza—T25   
   Newark, New Jersey 07102-4194   
   973 430-7000   
   http://www.pseg.com   
001-00973    PUBLIC SERVICE ELECTRIC AND GAS COMPANY    22-1212800
   (A New Jersey Corporation)   
   80 Park Plaza, P.O. Box 570   
   Newark, New Jersey 07101-0570   
   973 430-7000   
   http://www.pseg.com   

 

 

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files).

Public Service Enterprise Group Incorporated    Yes x    No ¨
PSEG Power LLC    Yes ¨    No ¨
Public Service Electric and Gas Company    Yes ¨    No ¨

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Public Service Enterprise Group Incorporated

  Large accelerated filer x   Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company ¨

PSEG Power LLC

  Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer x   Smaller reporting company ¨

Public Service Electric and Gas Company

  Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer x   Smaller reporting company ¨

Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 15, 2010, Public Service Enterprise Group Incorporated had outstanding 505,952,194 shares of its sole class of Common Stock, without par value.

As of April 15, 2010, 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.

PSEG Power LLC and Public Service Electric and Gas Company are wholly owned subsidiaries of Public Service Enterprise Group Incorporated and meet the conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q. Each is filing its Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H.

 

 

 


          

Page

FORWARD-LOOKING STATEMENTS

   ii

PART I. FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

Public Service Enterprise Group Incorporated

   1
  

PSEG Power LLC

   5
  

Public Service Electric and Gas Company

   9
  

Notes to Condensed Consolidated Financial Statements

   13
  

Note 1. Organization and Basis of Presentation

   13
  

Note 2. Recent Accounting Standards

   14
  

Note 3. Variable Interest Entities

   15
  

Note 4. Asset Dispositions

   16
  

Note 5. Available-for-Sale Securities

   16
  

Note 6. Pension and Other Postretirement Benefits (OPEB)

   19
  

Note 7. Commitments and Contingent Liabilities

   21
  

Note 8. Changes in Capitalization

   32
  

Note 9. Financial Risk Management Activities

   32
  

Note 10. Fair Value Measurements

   38
  

Note 11. Other Income and Deductions

   45
  

Note 12. Income Taxes

   46
  

Note 13. Comprehensive Income, Net of Tax

   47
  

Note 14. Earnings Per Share (EPS)

   48
  

Note 15. Financial Information by Business Segments

   49
  

Note 16. Related-Party Transactions

   50
  

Note 17. Guarantees of Debt

   53

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   55
  

Overview of 2010 and Future Outlook

   55
  

Results of Operations

   58
  

Liquidity and Capital Resources

   64
  

Capital Requirements

   66
  

Accounting Matters

   67

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   67

Item 4.

  

Controls and Procedures

   68

PART II. OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   69

Item 1A.

  

Risk Factors

   69

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   69

Item 5.

  

Other Information

   69

Item 6.

  

Exhibits

   72
  

Signatures

   73

 

i


FORWARD-LOOKING STATEMENTS

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 management’s beliefs as well as assumptions made by and information currently available to management. When used herein, the words “anticipate,” “intend,” “estimate,” “believe,” “expect,” “plan,” “hypothetical,” “potential,” “forecast,” “project,” variations of such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Other factors that could cause actual results to differ materially from those contemplated in any forward-looking statements made by us herein are discussed in Item 1. Financial Statements—Note 7. Commitments and Contingent Liabilities, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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 law, policies and regulation, including market structures and rules and reliability standards,

 

 

any inability of our transmission and distribution businesses to obtain adequate and timely rate relief and regulatory approvals from federal and state regulators,

 

 

changes in federal and 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 located on a multi-unit site that might adversely affect our ability to continue to operate that unit or other units located at the same site,

 

 

any inability to balance our energy obligations, available supply and trading risks,

 

 

any deterioration in our credit quality,

 

 

availability of capital and credit at commercially reasonable terms and conditions and our ability to meet cash needs,

 

 

any inability to realize anticipated tax benefits or retain tax credits,

 

 

changes in the cost of, or interruption in the supply of, fuel and other commodities necessary to the operation of our generating units,

 

 

delays or unforeseen cost escalations in our construction and development activities,

 

 

increase in competition in energy markets in which we compete,

 

 

adverse performance of our decommissioning and defined benefit plan trust fund investments and changes in discount rates and funding requirements, and

 

 

changes in technology and increased customer conservation.

Additional information concerning these factors is set forth in Part II 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. While we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if internal estimates change, unless otherwise required by applicable securities laws.

The forward-looking statements contained in this report are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

 

ii


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Millions

(Unaudited)

 

     For The Three Months Ended
March 31,
 
    

2010

   

2009

 
    

OPERATING REVENUES

   $ 3,680      $ 3,920   

OPERATING EXPENSES

    

Energy Costs

     1,768        2,068   

Operation and Maintenance

     704        674   

Depreciation and Amortization

     232        207   

Taxes Other Than Income Taxes

     42        44   
                

Total Operating Expenses

     2,746        2,993   
                

OPERATING INCOME

     934        927   

Income from Equity Method Investments

     3        10   

Other Income

     43        71   

Other Deductions

     (16     (54

Other-Than-Temporary Impairments

     (1     (61

Interest Expense

     (116     (145
                

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     847        748   

Income Tax Expense

     (356     (304
                

NET INCOME

   $ 491      $ 444   
                
    

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS):

    

BASIC

     505,950        505,986   
                
    

DILUTED

     507,147        506,548   
                

EARNINGS PER SHARE:

    

BASIC

   $ 0.97      $ 0.88   
                
    

DILUTED

   $ 0.97      $ 0.88   
                
    

DIVIDENDS PAID PER SHARE OF COMMON STOCK

   $ 0.3425      $ 0.3325   
                

See Notes to Condensed Consolidated Financial Statements.

 

1


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

    

March 31,
2010

   

December 31,
2009

 

ASSETS

    

CURRENT ASSETS

    

Cash and Cash Equivalents

   $ 312      $ 350   

Accounts Receivable, net of allowances of $76 and $79 in 2010 and 2009, respectively

     1,492        1,229   

Unbilled Revenues

     286        411   

Fuel

     497        806   

Materials and Supplies, net

     365        361   

Prepayments

     100        161   

Restricted Cash of Variable Interest Entities (VIEs)

     3        0   

Derivative Contracts

     309        243   

Other

     105        85   
                

Total Current Assets

     3,469        3,646   
                

PROPERTY, PLANT AND EQUIPMENT

     22,455        22,069   

Less: Accumulated Depreciation and Amortization

     (6,772     (6,629
                

Net Property, Plant and Equipment

     15,683        15,440   
                

NONCURRENT ASSETS

    

Regulatory Assets

     4,347        4,402   

Regulatory Assets of VIEs

     1,313        1,367   

Long-Term Investments

     1,964        2,032   

Nuclear Decommissioning Trust (NDT) Funds

     1,252        1,199   

Other Special Funds

     151        149   

Goodwill

     16        16   

Other Intangibles

     133        123   

Derivative Contracts

     214        123   

Restricted Cash of VIEs

     19        17   

Other

     214        216   
                

Total Noncurrent Assets

     9,623        9,644   
                

TOTAL ASSETS

   $ 28,775      $ 28,730   
                

See Notes to Condensed Consolidated Financial Statements.

 

2


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

   

March 31,
2010

   

December 31,
2009

 

LIABILITIES AND CAPITALIZATION

   

CURRENT LIABILITIES

   

Long-Term Debt Due Within One Year

  $ 67      $ 323   

Securitization Debt of VIEs Due Within One Year

    200        198   

Commercial Paper and Loans

    0        530   

Accounts Payable

    1,002        1,081   

Derivative Contracts

    169        201   

Accrued Interest

    149        102   

Accrued Taxes

    502        90   

Clean Energy Program

    178        166   

Obligation to Return Cash Collateral

    102        95   

Other

    431        428   
               

Total Current Liabilities

    2,800        3,214   
               

NONCURRENT LIABILITIES

   

Deferred Income Taxes and Investment Tax Credits (ITC)

    4,416        4,139   

Regulatory Liabilities

    410        397   

Regulatory Liabilities of VIEs

    8        7   

Asset Retirement Obligations

    447        439   

Other Postretirement Benefit (OPEB) Costs

    1,091        1,095   

Accrued Pension Costs

    856        1,094   

Clean Energy Program

    349        400   

Environmental Costs

    699        704   

Derivative Contracts

    65        40   

Long-Term Accrued Taxes

    377        538   

Other

    141        140   
               

Total Noncurrent Liabilities

    8,859        8,993   
               

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)

   

CAPITALIZATION

   

LONG-TERM DEBT

   

Long-Term Debt

    6,790        6,481   

Securitization Debt of VIEs

    1,098        1,145   

Project Level, Non-Recourse Debt

    18        19   
               

Total Long-Term Debt

    7,906        7,645   
               

SUBSIDIARY’S PREFERRED STOCK WITHOUT MANDATORY REDEMPTION

    0        80   
               

STOCKHOLDERS’ EQUITY

   

Common Stock, no par, authorized 1,000,000,000 shares; issued, 2010 and 2009—533,556,660 shares

    4,793        4,788   

Treasury Stock, at cost, 2010—27,621,816 shares; 2009—27,567,030 shares

    (590     (588

Retained Earnings

    5,022        4,704   

Accumulated Other Comprehensive Loss

    (24     (116
               

Total Common Stockholders’ Equity

    9,201        8,788   

Noncontrolling Interest

    9        10   
               

Total Stockholders’ Equity

    9,210        8,798   
               

Total Capitalization

    17,116        16,523   
               

TOTAL LIABILITIES AND CAPITALIZATION

  $ 28,775      $ 28,730   
               

See Notes to Condensed Consolidated Financial Statements.

 

3


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions

(Unaudited)

 

   

For the Three Months Ended

March 31,

 
   

2010

   

2009

 

CASH FLOWS FROM OPERATING ACTIVITIES

   

Net Income

  $ 491      $ 444   

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:

   

Depreciation and Amortization

    232        207   

Amortization of Nuclear Fuel

    34        29   

Provision for Deferred Income Taxes (Other than Leases) and ITC

    41        19   

Non-Cash Employee Benefit Plan Costs

    78        87   

Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes

    (114     (106

Realized and Unrealized Gains on Energy Contracts and Other Derivatives

    (112     (48

Over Recovery of Electric Energy Costs (BGS and NTC) and Gas Costs

    8        60   

Over Recovery of Societal Benefits Charge (SBC)

    30        44   

Cost of Removal

    (19     (9

Net Realized (Gains) Losses and (Income) Expense from NDT Funds

    (24     39   

Net Change in Certain Current Assets and Liabilities

    727        927   

Employee Benefit Plan Funding and Related Payments

    (276     (281

Other

    (24     (23
               

Net Cash Provided By Operating Activities

    1,072        1,389   
               

CASH FLOWS FROM INVESTING ACTIVITIES

   

Additions to Property, Plant and Equipment

    (427     (402

Proceeds from the Sale of Capital Leases and Investments

    106        140   

Proceeds from NDT Funds Sales

    181        559   

Investment in NDT Funds

    (189     (568

Restricted Funds

    0        105   

Other

    11        1   
               

Net Cash Used In Investing Activities

    (318     (165
               

CASH FLOWS FROM FINANCING ACTIVITIES

   

Net Change in Commercial Paper and Loans

    (530     (19

Issuance of Long-Term Debt

    344        209   

Redemption of Long-Term Debt

    (300     (10

Repayment of Non-Recourse Debt

    (1     (281

Redemption of Securitization Debt

    (44     (42

Cash Dividends Paid on Common Stock

    (173     (168

Redemption of Preferred Securities

    (80     0   

Other

    (8     (2
               

Net Cash Used In Financing Activities

    (792     (313
               

Net Increase (Decrease) in Cash and Cash Equivalents

    (38     911   

Cash and Cash Equivalents at Beginning of Period

    350        321   
               

Cash and Cash Equivalents at End of Period

  $ 312      $ 1,232   
               

Supplemental Disclosure of Cash Flow Information:

   

Income Taxes Paid

  $ 24      $ 9   

Interest Paid, Net of Amounts Capitalized

  $ 79      $ 76   

See Notes to Condensed Consolidated Financial Statements.

 

4


PSEG POWER LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Millions

(Unaudited)

 

    For The Three Months Ended
March 31,
 
   

2010

   

2009

 

OPERATING REVENUES

  $ 2,303      $ 2,464   

OPERATING EXPENSES

   

Energy Costs

    1,331        1,531   

Operation and Maintenance

    285        274   

Depreciation and Amortization

    48        51   
               

Total Operating Expenses

    1,664        1,856   
               

OPERATING INCOME

    639        608   

Other Income

    39        70   

Other Deductions

    (14     (50

Other-Than-Temporary Impairments

    (1     (60

Interest Expense

    (40     (50
               

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

    623        518   

Income Tax Expense

    (259     (204
               

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

  $ 364      $ 314   
               

See disclosures regarding PSEG Power LLC included in the Notes to Condensed Consolidated Financial Statements.

 

5


PSEG POWER LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

    

March 31,
2010

   

December 31,
2009

 

ASSETS

    

CURRENT ASSETS

    

Cash and Cash Equivalents

   $ 13      $ 64   

Accounts Receivable

     444        425   

Accounts Receivable—Affiliated Companies, net

     222        459   

Short-Term Loan to Affiliate

     509        0   

Fuel

     497        806   

Materials and Supplies, net

     284        290   

Derivative Contracts

     288        231   

Prepayments

     62        64   

Other

     0        3   
                

Total Current Assets

     2,319        2,342   
                

PROPERTY, PLANT AND EQUIPMENT

     8,717        8,579   

Less: Accumulated Depreciation and Amortization

     (2,276     (2,194
                

Net Property, Plant and Equipment

     6,441        6,385   
                

NONCURRENT ASSETS

    

Nuclear Decommissioning Trust (NDT) Funds

     1,252        1,199   

Goodwill

     16        16   

Other Intangibles

     126        114   

Other Special Funds

     30        30   

Derivative Contracts

     167        118   

Long-Term Accrued Taxes

     22        39   

Other

     87        90   
                

Total Noncurrent Assets

     1,700        1,606   
                

TOTAL ASSETS

   $ 10,460      $ 10,333   
                
    

LIABILITIES AND MEMBER’S EQUITY

    

CURRENT LIABILITIES

    

Long-Term Debt Due Within One Year

   $ 44      $ 0   

Accounts Payable

     589        622   

Short-Term Loan from Affiliate

     0        194   

Derivative Contracts

     169        201   

Accrued Interest

     80        43   

Other

     116        163   
                

Total Current Liabilities

     998        1,223   
                

NONCURRENT LIABILITIES

    

Deferred Income Taxes and Investment Tax Credits (ITC)

     747        644   

Asset Retirement Obligations

     230        226   

Other Postretirement Benefit (OPEB) Costs

     160        158   

Derivative Contracts

     53        26   

Accrued Pension Costs

     272        344   

Environmental Costs

     51        52   

Other

     80        72   
                

Total Noncurrent Liabilities

     1,593        1,522   
                

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)

    

LONG-TERM DEBT

    

Total Long-Term Debt

     3,122        3,121   
                

MEMBER’S EQUITY

    

Contributed Capital

     2,028        2,028   

Basis Adjustment

     (986     (986

Retained Earnings

     3,675        3,486   

Accumulated Other Comprehensive Income (Loss)

     30        (61
                

Total Member’s Equity

     4,747        4,467   
                

TOTAL LIABILITIES AND MEMBER’S EQUITY

   $ 10,460      $ 10,333   
                

See disclosures regarding PSEG Power LLC included in the Notes to Condensed Consolidated Financial Statements.

 

6


PSEG POWER LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions

(Unaudited)

 

     For the Three Months Ended
March 31,
 
    

    2010    

   

    2009    

 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Income

   $ 364      $ 314   

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:

    

Depreciation and Amortization

     48        51   

Amortization of Nuclear Fuel

     34        29   

Provision for Deferred Income Taxes and ITC

     38        14   

Net Realized and Unrealized Gains on Energy Contracts and Other Derivatives

     (112     (48

Non-Cash Employee Benefit Plan Costs

     17        19   

Net Realized (Gains) Losses and (Income) Expense from NDT Funds

     (24     39   

Net Change in Certain Current Assets and Liabilities:

    

Fuel, Materials and Supplies

     315        413   

Margin Deposit Asset

     (8     7   

Margin Deposit Liability

     62        151   

Accounts Receivable

     (21     212   

Accounts Payable

     5        (214

Accounts Receivable/Payable-Affiliated Companies, net

     295        323   

Accrued Interest Payable

     37        49   

Other Current Assets and Liabilities

     (29     (51

Employee Benefit Plan Funding and Related Payments

     (78     (78

Other

     5        10   
                

Net Cash Provided By Operating Activities

     948        1,240   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Additions to Property, Plant and Equipment

     (174     (208

Proceeds from NDT Funds Sales

     181        559   

Investment in NDT Funds

     (189     (568

Short-Term Loan—Affiliated Company, net

     (509     (896

Restricted Funds

     2        105   

Other

     15        9   
                

Net Cash Used In Investing Activities

     (674     (999
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Issuance of Recourse Long-Term Debt

     44        209   

Contributed Capital

     0        223   

Cash Dividend Paid

     (175     (325

Redemption of Non-Recourse Long-Term Debt

     0        (280

Short-Term Loan—Affiliated Company, net

     (194     0   
                

Net Cash Used In Financing Activities

     (325     (173
                

Net Increase (Decrease) in Cash and Cash Equivalents

     (51     68   

Cash and Cash Equivalents at Beginning of Period

     64        40   
                

Cash and Cash Equivalents at End of Period

   $ 13      $ 108   
                

Supplemental Disclosure of Cash Flow Information:

    

Income Taxes Paid

   $ 40      $ 1   

Interest Paid, Net of Amounts Capitalized

   $ 13      $ 9   

See disclosures regarding PSEG Power LLC included in the Notes to Condensed Consolidated Financial Statements.

 

7


 

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8


PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Millions

(Unaudited)

 

     For The Three Months Ended
March 31,
 
    

2010

    

2009

 
OPERATING REVENUES    $ 2,444       $ 2,735   
OPERATING EXPENSES      

Energy Costs

     1,540         1,859   

Operation and Maintenance

     414         395   

Depreciation and Amortization

     177         149   

Taxes Other Than Income Taxes

     42         44   
                 

Total Operating Expenses

     2,173         2,447   
                 
OPERATING INCOME      271         288   

Other Income

     5         1   

Other Deductions

     (1      (1

Interest Expense

     (77      (79
                 
INCOME BEFORE INCOME TAXES      198         209   

Income Tax Expense

     (80      (85
                 
NET INCOME      118         124   

Preferred Stock Dividends

     (1      (1
                 

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
GROUP INCORPORATED

   $ 117       $ 123   
                 

See disclosures regarding Public Service Electric and Gas Company included in the Notes to Condensed Consolidated Financial Statements.

 

9


PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

    

March 31,
2010

   

December 31,
2009

 
ASSETS     
CURRENT ASSETS     

Cash and Cash Equivalents

   $ 46      $ 240   

Accounts Receivable, net of allowances of $76 in 2010 and $78 in 2009, respectively

     1,023        800   

Unbilled Revenues

     286        411   

Materials and Supplies

     80        70   

Prepayments

     21        86   

Deferred Income Taxes

     51        52   

Restricted Cash of Variable Interest Entities (VIEs)

     3        0   

Other

     5        3   
                

Total Current Assets

     1,515        1,662   
                
PROPERTY, PLANT AND EQUIPMENT      13,145        12,933   

Less: Accumulated Depreciation and Amortization

     (4,242     (4,187
                

Net Property, Plant and Equipment

     8,903        8,746   
                
NONCURRENT ASSETS     

Regulatory Assets

     4,347        4,402   

Regulatory Assets of VIEs

     1,313        1,367   

Long-Term Investments

     212        204   

Other Special Funds

     51        51   

Derivative Contracts

     47        5   

Restricted Cash of VIEs

     19        17   

Other

     82        79   
                

Total Noncurrent Assets

     6,071        6,125   
                

TOTAL ASSETS

   $ 16,489      $ 16,533   
                

See disclosures regarding Public Service Electric and Gas Company included in the Notes to Condensed Consolidated Financial Statements.

 

10


PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

    

March 31,
2010

  

December 31,
2009

LIABILITIES AND CAPITALIZATION

     

CURRENT LIABILITIES

     

Long-Term Debt Due Within One Year

   $ 0    $ 300

Securitization Debt of VIEs Due Within One Year

     200      198

Accounts Payable

     322      337

Accounts Payable—Affiliated Companies, net

     452      496

Accrued Interest

     63      56

Accrued Taxes

     44      4

Clean Energy Program

     178      166

Obligation to Return Cash Collateral

     102      95

Other

     261      210
             

Total Current Liabilities

     1,622      1,862
             

NONCURRENT LIABILITIES

     

Deferred Income Taxes and ITC

     2,792      2,710

Other Postretirement Benefit (OPEB) Costs

     879      887

Accrued Pension Costs

     425      565

Regulatory Liabilities

     410      397

Regulatory Liabilities of VIEs

     8      7

Clean Energy Program

     349      400

Environmental Costs

     648      652

Asset Retirement Obligations

     215      211

Long-Term Accrued Taxes

     109      96

Other

     26      29
             

Total Noncurrent Liabilities

     5,861      5,954
             

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)

     

CAPITALIZATION

     

LONG-TERM DEBT

     

Long-Term Debt

     3,570      3,271

Securitization Debt of VIEs

     1,098      1,145
             

Total Long-Term Debt

     4,668      4,416
             

Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2010 and 2009—795,234 shares

     0      80
             

STOCKHOLDER’S EQUITY

     

Common Stock; 150,000,000 shares authorized; issued and outstanding, 2010 and 2009—132,450,344 shares

     892      892

Contributed Capital

     420      420

Basis Adjustment

     986      986

Retained Earnings

     2,035      1,918

Accumulated Other Comprehensive Income

     5      5
             

Total Stockholder’s Equity

     4,338      4,221
             

Total Capitalization

     9,006      8,717
             

TOTAL LIABILITIES AND CAPITALIZATION

   $ 16,489    $ 16,533
             

See disclosures regarding Public Service Electric and Gas Company included in the Notes to Condensed Consolidated Financial Statements.

 

11


PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions

(Unaudited)

 

     For The Three Months Ended
March 31,
 
    

2010

   

2009

 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Income

   $ 118      $ 124   

Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:

    

Depreciation and Amortization

     177        149   

Provision for Deferred Income Taxes and ITC

     4        6   

Non-Cash Employee Benefit Plan Costs

     54        59   

Non-Cash Interest Expense

     1        0   

Cost of Removal

     (19     (9

Over Recovery of Electric Energy Costs (BGS and NTC)

     4        20   

Over Recovery of Gas Costs

     4        40   

Over Recovery of SBC

     30        44   

Net Changes in Certain Current Assets and Liabilities:

    

Accounts Receivable and Unbilled Revenues

     (98     (86

Materials and Supplies

     (10     (4

Prepayments

     65        35   

Accrued Taxes

     40        43   

Accrued Interest

     7        1   

Accounts Payable

     (15     (14

Accounts Receivable/Payable-Affiliated Companies, net

     (77     (62

Obligation to Return Cash Collateral

     7        3   

Other Current Assets and Liabilities

     55        51   

Employee Benefit Plan Funding and Related Payments

     (168     (172

Other

     (19     (12
                

Net Cash Provided By Operating Activities

     160        216   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Additions to Property, Plant and Equipment

     (217     (194

Solar Loan Investments

     (6     (6

Other

     (2     0   
                

Net Cash Used In Investing Activities

     (225     (200
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net Change in Short-Term Debt

     0        (19

Issuance of Long-Term Debt

     300        0   

Redemption of Long-Term Debt

     (300     0   

Redemption of Securitization Debt

     (44     (42

Redemption of Preferred Securities

     (80     0   

Deferred Issuance Costs

     (4     0   

Preferred Stock Dividends

     (1     (1
                

Net Cash Provided By (Used In) Financing Activities

     (129     (62
                

Net Increase (Decrease) In Cash and Cash Equivalents

     (194     (46

Cash and Cash Equivalents at Beginning of Period

     240        91   
                

Cash and Cash Equivalents at End of Period

   $ 46      $ 45   
                

Supplemental Disclosure of Cash Flow Information:

    

Income Taxes Received

   $ (3   $ (12

Interest Paid, Net of Amounts Capitalized

   $ 66      $ 75   

See disclosures regarding Public Service Electric and Gas Company included in the Notes to Condensed Consolidated Financial Statements.

 

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

This combined Form 10-Q is separately filed by Public Service Enterprise Group Incorporated (PSEG), PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G). Information relating to any individual company is filed by such company on its own behalf. Power and PSE&G each is only responsible for information about itself and its subsidiaries.

Note 1. Organization and Basis of Presentation

Organization

PSEG is a holding company with a diversified business mix within the energy industry. Its operations are primarily in the Northeastern and Mid Atlantic United States and in other select markets. PSEG’s four principal direct wholly owned subsidiaries are:

 

 

Power—which 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 functions through three principal direct wholly owned subsidiaries. Power’s subsidiaries are subject to regulation by the Federal Energy Regulatory Commission (FERC), the Nuclear Regulatory Commission (NRC) and the states in which they operate.

 

 

PSE&G—which is an operating public utility engaged principally in the transmission of electricity and distribution of electricity and natural gas in certain areas of New Jersey. PSE&G is subject to regulation by the New Jersey Board of Public Utilities (BPU) and FERC. Pursuant to applicable BPU orders, PSE&G is also investing in the development of solar generation projects and energy efficiency programs within its service territory.

 

 

PSEG Energy Holdings L.L.C. (Energy Holdings)—which owns and operates primarily domestic projects engaged in the generation of energy and has invested in energy-related leveraged leases through its direct wholly owned subsidiaries. Certain Energy Holdings’ subsidiaries are subject to regulation by FERC and the states in which they operate. Energy Holdings is also investing in solar generation projects and exploring opportunities for other investments in renewable generation.

 

 

PSEG Services Corporation (Services)—which provides management and administrative and general services to PSEG and its subsidiaries.

Basis of Presentation

The respective financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) applicable to Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements (Notes) should be read in conjunction with, and update and supplement matters discussed in the Annual Report on Form 10-K for the year ended December 31, 2009.

The unaudited condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. The year-end Condensed Consolidated Balance Sheets were derived from the audited Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2009.

Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform to the current presentation.

 

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

As a result of new guidance adopted in 2010 on Variable Interest Entities (VIEs), we are required to present certain consolidated amounts related to VIEs separately on the face of our Condensed Consolidated Balance Sheets for PSEG and PSE&G with prior period amounts being reclassified as appropriate. See Note 2. Recent Accounting Standards for additional information.

On October 1, 2009, Energy Holdings distributed the outstanding equity of PSEG Texas, LP (PSEG Texas) to PSEG. PSEG in turn contributed it to Power as an additional equity investment. This transaction was accounted for as a noncash transfer of equity interest between entities under common control with prior period financial statements for Power being retrospectively adjusted to include the earnings related to PSEG Texas. As a result, Power’s Operating Revenues for the three months ended March 31, 2009 increased by $90 million and Power’s Net Income for the same period decreased by $4 million.

In addition, other-than-temporary impairments related to Power’s credit losses on available-for-sale debt securities in its NDT Funds were reclassified from Other Deductions to a separate line caption in the Consolidated Statements of Operations of PSEG and Power, for the three months ended March 31, 2009.

Note 2. Recent Accounting Standards

New Standards Adopted during 2010

During 2010, we have adopted the following new accounting standards. The new standards adopted did not have a material impact on our financial statements. The following is a summary of the requirements and impacts of the new standards.

Accounting for Variable Interest Entities

This accounting standard amends the criteria used to determine which enterprise has a controlling financial interest in a VIE. The amended standard includes the following provisions:

 

 

requires an enterprise to qualitatively assess whether it should consolidate a VIE based on whether it has (i) the power to direct the activities of a VIE that most significantly impact the economic performance of a VIE, and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE,

 

 

requires an ongoing reconsideration of the primary beneficiary,

 

 

amends the VIE reconsideration events (triggering events), and

 

 

requires additional disclosures for the enterprise that consolidates a VIE (the primary beneficiary)—to present separately on the face of the consolidated balance sheet (i) assets of the consolidated VIE that can be used only to settle obligations of the consolidated VIE and (ii) liabilities of a consolidated VIE for which creditors have no recourse to the general credit of the primary beneficiary.

There was no impact on our financial statements of the initial adoption of the new guidance for VIEs, other than presentation. In accordance with the guidance, we will continuously assess the primary beneficiaries. See Note 3. Variable Interest Entities for further information.

Improving Disclosures about Fair Value Measurements

 

 

requires disclosure of transfers between Level 1 and Level 2 and reasons for transfer,

 

 

requires disaggregation beyond the financial statement line item when disclosing fair value instruments in the hierarchy table, and

 

 

requires gross presentation in level 3 rollforward (purchases, sales, issuances, and settlements) effective January 1, 2011.

 

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

We did not have any transfers between level 1 and 2. We disclose the fair value instruments by appropriate classes, as required by this standard. See Note 10. Fair Value Measurements for further information.

Note 3. Variable Interest Entities

Variable Interest Entities for which PSE&G is the Primary Beneficiary

PSE&G is the primary beneficiary and consolidates two marginally capitalized VIEs, PSE&G Transition Funding LLC (Transition Funding) and PSE&G Transition Funding II LLC (Transition Funding II), which were created for the purpose of issuing transition bonds and purchasing bond transitional property of PSE&G, which is pledged as collateral to the trustee. PSE&G acts as the servicer for these entities to collect securitization transition charges authorized by the BPU. These funds are remitted to Transition Funding and Transition Funding II and are used for interest and principal payments on the transition bonds and related costs.

The assets and liabilities of these VIEs are presented separately on the face of the Condensed Consolidated Balance Sheets of PSEG and PSE&G because the Transition Funding and Transition Funding II assets are restricted and can only be used to settle the obligations of Transition Funding and Transition Funding II, respectively. The Transition Funding and Transition Funding II creditors do not have any recourse to the general credit of PSE&G in the event the transition charges are not sufficient to cover the bond principal and interest payments of Transition Funding and Transition Funding II, respectively.

PSE&G’s maximum exposure to loss is equal to its equity investment in these VIEs which was $16 million as of March 31, 2010 and December 31, 2009. The risk of actual loss to PSE&G is considered remote. PSE&G did not provide any financial support to Transition Funding and Transition Funding II during the first quarter of 2010 or in 2009. Further, PSE&G does not have any contractual commitments or obligations to provide financial support to Transition Funding and Transition Funding II.

Other Variable Interest

PSE&G has a long-term electricity and capacity purchase agreement with a potential VIE. We have requested the information necessary to determine whether the entity was a VIE and whether PSE&G is the primary beneficiary; however, the information has not been made available. Since the counterparty has not supplied PSE&G with electricity or capacity during the first quarter of 2010 or the 2009 year, we have not been required to make any payments. PSE&G is not subject to any risk of loss.

Variable Interest Entity for which Energy Holdings is the Primary Beneficiary

Energy Holdings has variable interests through its equity investment in a project for renewable energy where it is also the primary beneficiary. Energy Holdings has the power to direct the activities of the entity that most significantly impact the entity’s economic performance. Energy Holdings also has the obligation to fund up to $15 million in operating losses of the VIE through 2011. As of March 31, 2010, $7 million has been extended in the form of a note receivable.

As a result, Energy Holdings consolidates the assets and liabilities of this project which are disclosed below (excluding intercompany balances which are eliminated in consolidation):

 

 

    

As of

March 31,

  

As of

December 31,

    

2010

  

2009

     Millions
  

Current Assets

   $ 3    $ 1

Noncurrent Assets

   $ 8    $ 8

 

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Other than the $15 million obligation to fund operating losses through 2011, Energy Holdings does not have any contractual or other obligation to provide additional financial support to the VIE. There are no third party debt obligations for this VIE.

Note 4. Asset Dispositions

Leveraged Leases

During the first quarter of 2010, Energy Holdings sold its interest in two leveraged leases, including one international lease for which the IRS has indicated its intention to disallow certain tax deductions taken in prior years.

During the first quarter of 2009, Energy Holdings sold its interest in four leveraged leases, including two international leases for which the IRS has indicated its intention to disallow certain tax deductions taken in prior years.

 

 

     Three Months Ended
March 31,
    

2010

  

2009

     Millions
  

Proceeds from sales

   $ 106    $ 140

Gain (Loss) on the sales, after-tax

   $ 8    $ 12

Proceeds from the sales of the international leases was used to reduce the tax exposure related to these lease investments. For additional information see Note 7. Commitments and Contingent Liabilities.

Note 5. Available-for-Sale Securities

NDT Funds

Power maintains an external master nuclear decommissioning trust to fund its share of decommissioning for its five nuclear facilities upon termination of operation. The 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. The trust funds are managed by third party investment advisors who operate under investment guidelines developed by Power.

Power classifies investments in the NDT Funds as available-for-sale. The following tables show the fair values and gross unrealized gains and losses for the securities held in the NDT Funds:

 

 

     As of March 31, 2010
    

Cost

  

Gross
Unrealized
Gains

  

Gross
Unrealized
Losses

   

Estimated
Fair
Value

     Millions
  

Equity Securities

   $ 474    $ 192    $ (5   $ 661
                            

Debt Securities

          

Government Obligations

     320      5      (3     322

Other Debt Securities

     222      11      (2     231
                            

Total Debt Securities

     542      16      (5     553

Other Securities

     38      0      0        38
                            

Total Available-for-Sale Securities

   $ 1,054    $ 208    $ (10   $ 1,252
                            

 

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     As of December 31, 2009
    

Cost

  

Gross

Unrealized
Gains

  

Gross

Unrealized

Losses

   

Estimated
Fair
Value

     Millions
  

Equity Securities

   $ 475    $ 180    $ (5   $ 650
                            

Debt Securities

          

Government Obligations

     296      4      (3     297

Other Debt Securities

     209      10      (3     216
                            

Total Debt Securities

     505      14      (6     513

Other Securities

     37      0      (1     36
                            

Total Available-for-Sale Securities

   $ 1,017    $ 194    $ (12   $ 1,199
                            

The following table shows the value of securities in the NDT Funds that have been in an unrealized loss position for less than and greater than 12 months:

 

 

    As of March 31, 2010
Less  Than

12 Months
    As of March 31, 2010
Greater  Than

12 Months
    As of December 31, 2009
Less Than

12 Months
    As of December 31, 2009
Greater  Than

12 Months
 
   

Fair
Value

 

Gross
Unrealized
Losses

   

Fair
Value

 

Gross
Unrealized
Losses

   

Fair
Value

 

Gross
Unrealized
Losses

   

Fair
Value

 

Gross
Unrealized
Losses

 
    Millions   
 

Equity Securities(A)

  $ 54   $ (5   $ 0   $ 0      $ 61   $ (5   $ 0   $ 0   
                                                       

Debt Securities

               

Government Obligations(B)

    102     (1     30     (2     78     (2     15     (1

Other Debt Securities(C)

    55     (2     0     0        59     (3     0     0   
                                                       

Total Debt Securities

    157     (3     30     (2     137     (5     15     (1
                                                       

Other Securities

    0     0        0     0        1     (1     0     0   
                                                       

Total Available-for-Sale Securities

  $ 211   $ (8   $ 30   $ (2   $ 199   $ (11   $ 15   $ (1
                                                       

 

(A) Equity Securities—Investments in marketable equity securities within the NDT fund are primarily investments in common stocks within a broad range of industries and sectors. The unrealized losses are distributed over several hundred companies with limited impairment durations and a severity that is generally less than ten percent of cost. Power does not consider these securities to be other-than-temporarily impaired as of March 31, 2010.

 

(B) Debt Securities (Government)—Unrealized losses on Power’s NDT investments in US Treasury obligations and Federal Agency mortgage-backed securities were caused by interest rate changes. Since these investments are guaranteed by the US government or an agency of the US government, it is not expected that these securities will settle for less than their amortized cost basis, assuming Power does not intend to sell nor will it be more-likely-than-not required to sell. Power does not consider these securities to be other-than-temporarily impaired as of March 31, 2010.

 

(C)

Debt Securities (Corporate)—Power’s investments in corporate bonds are primarily with investment grade securities. It is not expected that these securities would settle at less than their amortized cost.

 

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

  Since Power does not intend to sell these securities nor will it be more-likely-than-not required to sell, Power does not consider these debt securities to be other-than-temporarily impaired as of March 31, 2010.

The proceeds from the sales of and the net realized gains on securities in the NDT Funds were:

 

 

    

Three Months Ended
March 31, 2010

   

Three Months Ended
March 31, 2009

 
     Millions  
  

Proceeds from Sales

   $ 181      $ 559   
                

Net Realized Gains (Losses):

    

Gross Realized Gains

   $ 28      $ 45   

Gross Realized Losses

     (12     (45
                

Net Realized Gains

   $ 16      $ 0   
                

Net realized gains disclosed in the above table were recognized in Other Income and Other Deductions in Power’s Consolidated Statement of Operations. Net unrealized gains of $98 million (after-tax) were recognized in Accumulated Other Comprehensive Income (OCI) in Power’s Condensed Consolidated Balance Sheet as of March 31, 2010.

The available-for-sale debt securities held as of March 31, 2010 had the following maturities:

 

 

Time Frame

  

Fair Value

     Millions

Less than one year

   $ 5

1 - 5 years

     129

6 - 10 years

     141

11 - 15 years

     55

16 - 20 years

     7

Over 20 years

     216
      
   $ 553
      

The cost of these securities was determined on the basis of specific identification.

Power periodically assesses individual securities whose fair value is less than amortized cost to determine whether the investments are considered to be other-than-temporarily impaired. For equity securities, management considers the ability and intent to hold for a reasonable time to permit recovery in addition to the severity and duration of the loss. For fixed income securities, management considers its intent to sell or requirement to sell a security prior to expected recovery. In those cases where a sale is expected, any impairment would be recorded through earnings. For fixed income securities where there is no intent to sell or likely requirement to sell, management evaluates whether credit loss is a component of the impairment. If so, that portion is recorded through earnings while the noncredit loss component is recorded through OCI. In 2010, other-than-temporary impairments of $1 million were recognized on securities in the NDT Funds. Any subsequent recoveries in the value of these securities are recognized in OCI unless the securities are sold, in which case, any gain is recognized in 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.

Rabbi Trusts

PSEG maintains certain unfunded nonqualified benefit plans to provide supplemental retirement and deferred compensation benefits to certain key employees. Certain assets related to these plans have been set aside in grantor trusts commonly known as “Rabbi Trusts.”

 

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

PSEG classifies investments in the Rabbi Trusts as available-for-sale. 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 March 31, 2010
    

Cost

  

Gross
Unrealized
Gains

  

Gross
Unrealized
Losses

  

Estimated
Fair Value

     Millions
  

Equity Securities

   $ 10    $ 4    $ 0    $ 14

Debt Securities

     102      19      0      121

Other Securities

     16      0      0      16
                           

Total PSEG Available-for-Sale Securities

   $ 128    $ 23    $ 0    $ 151
                           

 

 

     As of December 31, 2009
    

Cost

  

Gross
Unrealized
Gains

  

Gross

Unrealized
Losses

  

Estimated
Fair Value

     Millions
  

Equity Securities

   $ 10    $ 3    $ 0    $ 13

Debt Securities

     101      21      0      122

Other Securities

     14      0      0      14
                           

Total PSEG Available-for-Sale Securities

   $ 125    $ 24    $ 0    $ 149
                           

The Rabbi Trusts are invested in commingled indexed mutual funds, in which the shares have the characteristics of equity securities. Due to the commingled nature of these funds, PSEG does not have the ability to hold these securities until expected recovery. As a result, any declines in fair market value below cost are recorded as a charge to earnings. In the three months ended March 31, 2010 and 2009, proceeds from sales, realized gains and realized losses related to the Rabbi Trusts were immaterial.

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

March 31,

  

As of

December 31,

     2010    2009
     Millions
  

Power

   $ 30    $ 30

PSE&G

     51      51

Other

     70      68
             

Total PSEG Available-for-Sale Securities

   $ 151    $ 149
             

Note 6. Pension and OPEB

PSEG sponsors several qualified and nonqualified pension plans and other postretirement benefit plans covering PSEG’s and its participating affiliates’ current and former employees who meet certain eligibility criteria. The following table provides the components of net periodic benefit costs relating to all qualified and nonqualified pension and OPEB plans on an aggregate basis. OPEB costs are presented net of the federal

 

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

subsidy expected for prescription drugs under the Medicare Prescription Drug Improvement and Modernization Act of 2003. New Federal health care legislation enacted in March 2010 eliminates the tax deductibility of retiree health care costs beginning in 2013, to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D coverage. See Note 12. Income Taxes for additional information.

 

 

     Pension Benefits
Three Months Ended
    OPEB
Three Months Ended
 
     March 31,     March 31,  
    

2010

   

2009

   

2010

   

2009

 
     Millions  
  

Components of Net Periodic Benefit Costs:

        

Service Cost

   $ 22      $ 19      $ 4      $ 3   

Interest Cost

     58        59        18        18   

Expected Return on Plan Assets

     (67     (54     (4     (3

Amortization of Net

        

Transition Obligation

     0        0        7        7   

Prior Service Cost

     0        2        3        4   

Actuarial Loss

     30        28        2        (1
                                

Net Periodic Benefit Cost

   $ 43      $ 54      $ 30      $ 28   

Effect of Regulatory Asset

     0        0        5        5   
                                

Total Benefit Costs, Including Effect of Regulatory Asset

   $ 43      $ 54      $ 35      $ 33   
                                

Pension and OPEB costs for PSEG, Power and PSE&G are detailed as follows:

 

 

     Pension
Three Months Ended
March 31,
  

OPEB

Three Months Ended
March 31,

    

2010

  

2009

  

2010

  

2009

     Millions
  

Power

   $ 13    $ 16    $ 4    $ 3

PSE&G

     24      30      30      29

Other

     6      8      1      1
                           

Total Benefit Costs

   $ 43    $ 54    $ 35    $ 33
                           

PSEG Contributions to Pension Plans for Calendar Year 2010

 

 

     Contributions for the
Three Months Ended
March 31, 2010
   Expected
Full Year
Contributions
     Millions

Pension Plans

   $ 249    $ 415

Postretirement Healthcare Plan

   $ 7    $ 11

20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 7. Commitments and Contingent Liabilities

Guaranteed Obligations

Power’s 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 with numerous counterparties and brokers that may require cash, cash-related instruments or guarantees.

Power has unconditionally guaranteed payments to counterparties by its subsidiaries in commodity-related transactions in order to

 

 

support current exposure, interest and other costs on sums due and payable in the ordinary course of business, and

 

 

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.

In order for Power to incur a liability for the face value of the outstanding guarantees, its subsidiaries would have to

 

 

fully utilize the credit granted to them by every counterparty to whom Power has provided a guarantee, and

 

 

all of the related contracts would have to be “out-of-the-money” (if the contracts are terminated, Power would owe money to the counterparties).

Power believes the probability of this is unlikely. For this reason, the current exposure at any point in time is a more meaningful representation of the potential liability under these guarantees. This current exposure consists of the net of accounts receivable and accounts payable and the forward value on open positions, less any collateral posted.

Power is subject to

 

 

counterparty collateral calls related to commodity contracts, and

 

 

certain creditworthiness standards as guarantor under performance guarantees of its subsidiaries.

Changes in commodity prices can have a material impact on collateral requirements under such contracts, which are posted and received primarily in the form of cash and letters of credit. Power also routinely enters into futures and options transactions for electricity and natural gas as part of its operations. These futures contracts usually require a cash margin deposit with brokers, which can change based on market movement and in accordance with exchange rules.

 

21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The face value of outstanding guarantees, current exposure and margin positions as of March 31, 2010 and December 31, 2009 are shown below:

 

 

     As of
March 31,
2010
    As of
December 31,
2009
 
     Millions   

Face Value of Outstanding Guarantees

   $ 1,833      $ 1,783   

Exposure Under Current Guarantees

   $ 400      $ 403   

Letters of Credit Margin Posted

   $ 201      $ 122   

Letters of Credit Margin Received

   $ 178      $ 123   

Cash Deposited and Received

    

Counterparty Cash Margin Deposited

   $ 0      $ 0   

Counterparty Cash Margin Received

     (152     (90

Net Broker Balance Received

     (24     (31

In the event Power were to lose its investment grade rating:

    

Additional Collateral That Could be Required

   $ 968      $ 986   

Liquidity Available Under PSEG and Power’s Credit Facilities to Post Collateral

   $ 2,648      $ 2,368   

Additional Amounts Posted:

    

Other Letters of Credit

   $ 97      $ 52   

Power nets receivables and payables with the corresponding net energy contract balances. See Note 9. Financial Risk Management Activities for further discussion. The remaining balance of net cash (received) deposited is primarily included in Accounts Payable.

In the event of a deterioration of Power’s 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 further performance assurance. See table above.

In addition to amounts for outstanding guarantees, current exposure and margin positions, Power had posted letters of credit to support various other non-energy contractual and environmental obligations.

Environmental Matters

Passaic River

Historic operations by PSEG companies along the Passaic and Hackensack rivers, and the operations of dozens of other companies, are alleged by Federal and State agencies to have discharged substantial contamination into the Passaic River/Newark Bay Complex.

Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA)

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 CERCLA and the EPA has determined to perform a study of the entire 17-mile tidal reach of the lower Passaic River.

PSE&G and certain of its predecessors conducted operations at properties in this area on or adjacent to the Passaic River. The properties included one operating electric generating station (Essex Site), which was transferred to Power, one former generating station and four former Manufactured Gas Plant (MGP) sites. When the Essex Site was transferred from PSE&G to Power, PSE&G obtained releases and indemnities for liabilities arising out of the former Essex generating station and Power assumed any environmental liabilities.

 

22


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The EPA believes that hazardous substances were released from the Essex Site and one of PSE&G’s former MGP locations (Harrison Site). In 2006, the EPA notified the potentially responsible parties (PRPs) that the cost of its study would greatly exceed the original estimated cost of $20 million. 73 PRPs, including Power and PSE&G, agreed to assume responsibility for the study and to divide the associated costs according to a mutually agreed upon formula. The PRP group is presently executing the study. Approximately five percent of the study costs are attributable to PSE&G’s former MGP sites and approximately one percent to Power’s generating stations. Power has provided notice to insurers concerning this potential claim.

In 2007, the EPA released a draft “Focused Feasibility Study” that proposes six options to address the contamination cleanup of the lower eight miles of the Passaic River, with estimated costs from $900 million to $2.3 billion. The work contemplated by the study is not subject to the cost sharing agreement discussed above. A revised focused feasibility study is expected to be released in 2010.

In June 2008, an agreement was announced between the EPA and two PRPs for removal of a portion of the contaminated sediment in the Passaic River at an estimated cost of $80 million. The two PRPs have reserved their rights to seek contribution for the removal costs from the other PRPs, including Power and PSE&G.

New Jersey Spill Compensation and Control Act (Spill Act)

In 2005, the New Jersey Department of Environmental Protection (NJDEP) filed suit against a PRP and its related companies in the New Jersey Superior Court seeking damages and reimbursement for costs expended by the State of New Jersey to address the effects of the PRP’s discharge of hazardous substances into the Passaic River. In February 2009, third party complaints were filed against some 320 third-party defendants, including Power and PSE&G, claiming that each of the third party defendants is responsible for its proportionate share of the clean-up costs for the hazardous substances they allegedly discharged into the Passaic River. The third party complaints seek statutory contribution and contribution under the Spill Act to recover past and future removal costs and damages. Power and PSE&G believe they have good and valid defenses to the allegations contained in the third party complaints and will vigorously assert those defenses.

Natural Resource Damage Claims

In 2003, the NJDEP directed PSEG, PSE&G and 56 other 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 NJ Spill Act. The NJDEP alleged that hazardous substances had been discharged from the Essex Site and the Harrison Site. The NJDEP estimated the cost of interim natural resource injury restoration activities along the lower Passaic River at approximately $950 million. In 2007, agencies of the United States Department of Commerce and the United States Department of the Interior sent letters to PSE&G and other PRPs inviting participation in an assessment of injuries to natural resources that the agencies intended to perform. In 2008, PSEG and a number of other PRPs agreed to share certain non-material costs the trustees have incurred and will incur going forward, and to work with the trustees to explore whether some or all of the trustees’ claims can be resolved in a cooperative fashion. That effort will continue in 2010.

Newark Bay Study Area

The EPA has established the Newark Bay Study Area, which it defines as Newark Bay and portions of the Hackensack River, the Arthur Kill and the Kill Van Kull. In August 2006, the EPA sent PSEG and 11 other entities notices that it considered each of the entities to be a PRP with respect to contamination in the Study Area. The notice letter requested that the PRPs fund an 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 that OCC was conducting. The notice stated the EPA’s belief that hazardous substances were released from sites owned by PSEG companies and located on the Hackensack River, including two operating electric generating stations (Hudson and Kearny sites) and one former MGP site. PSEG is participating in and partially funding this study.

 

23


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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, the NJDEP Litigation, the Newark Bay Study Area or with respect to natural resource damages claims; however, such costs could be material.

MGP Remediation Program

PSE&G is working with the NJDEP to assess, investigate and remediate environmental conditions at PSE&G’s former MGP sites. To date, 38 sites requiring some level of remedial action have been identified. The NJDEP has also announced initiatives to accelerate the investigation and subsequent remediation of the riverbeds underlying surface water bodies that have been impacted by hazardous substances from adjoining sites. In 2005, the NJDEP initiated a program on the Delaware River aimed at identifying the 10 most significant sites for cleanup. One of the sites identified was PSE&G’s former Camden Coke facility.

During the second quarter of 2009, PSE&G updated the estimated cost to remediate all MGP sites to completion and determined that the cost to completion could range between $704 million and $804 million from June 30, 2009 through 2021. Since no amount within the range was considered to be most likely, PSE&G reflected a liability of $704 million in its Consolidated Balance Sheet as of June 30, 2009. Subsequent expenditures reduced the liability to $690 million as of March 31, 2010. Of this amount, $42 million was recorded in Other Current Liabilities and $648 million was reflected as Environmental Costs in Noncurrent Liabilities. As such, PSE&G has recorded a $690 million Regulatory Asset with respect to these costs.

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 ranging from $25,000 to $37,500 per day for each violation, depending upon when the alleged violation occurred.

In November 2006, Power reached an agreement with the EPA and the NJDEP to achieve emissions reductions targets at certain of Power’s generating stations. Under this agreement, Power was required to undertake a number of technology projects, plant modifications and operating procedure changes at Hudson and Mercer designed to meet targeted reductions in emissions of sulfur dioxide (SO2), nitrogen oxide (NOx), particulate matter and mercury. The remaining projects necessary to implement this program are expected to be completed by the end of 2010 at an estimated cost of $200 million to $250 million for Mercer and $750 million to $800 million for Hudson, of which $793 million has been spent on both projects as of March 31, 2010.

In January 2009, the EPA issued a notice of violation to Power and the other owners of the Keystone coal fired plant in Pennsylvania, alleging, among other things, that various capital improvement projects were made at the plant which are considered modifications (or major modifications) causing significant net emission increases of PSD/NSR air pollutants, beginning in 1985 for Keystone Unit 1 and in 1984 for Keystone Unit 2. The notice of violation states that none of these modifications underwent PSD/NSR permitting process prior to being put into service, which the EPA alleges was required under the Clean Air Act. The notice of violation states that the EPA may issue an order requiring compliance with the relevant Clean Air Act provisions and may seek injunctive relief and/or civil penalties. Power owns approximately 23% of the plant. Power cannot predict the outcome of this matter.

Mercury Regulation

In 2005, the EPA established a limit for nickel emissions from oil fired electric generating units and a cap-and-trade program for mercury emissions from coal fired electric generating units.

In 2008, the United States Court of Appeals for the District of Columbia Circuit rejected the EPA’s mercury emissions program and required the EPA to develop standards for mercury and nickel emissions that adhere to

 

24


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

the Maximum Available Control Technology (MACT) provisions of the Clean Air Act. In 2009, the EPA indicated that it intended to move forward with a rule-making process to develop MACT standards consistent with the Court’s ruling and agreed to finalize them by November 2011.

The full impact to PSEG of these developments is uncertain. It is expected that new MACT requirements will require more stringent control than the cap-and-trade program struck down by the D.C. Circuit Court; however, the costs of compliance with mercury MACT standards will have to be compared with the existing state mercury control requirements, as described below.

Pennsylvania

In 2007, Pennsylvania finalized its “state-specific” requirements to reduce mercury emissions from coal fired electric generating units. These requirements were more stringent than the EPA’s vacated Clean Air Mercury Rule but not as stringent as would be required by a MACT process. In 2009, the Commonwealth Court of Pennsylvania struck down the state rule, indicating that the rule violated Pennsylvania law because it was inconsistent with the Clean Air Act. On December 23, 2009, the Commonwealth Court’s decision was affirmed by the Supreme Court of Pennsylvania. Unless the law in Pennsylvania is changed requiring the regulation of mercury by the Pennsylvania Department of Environmental Protection, then our Pennsylvania generating stations likely will be subject to regulation under the EPA’s MACT rule. It is uncertain whether the Keystone and Conemaugh generating stations will be able to achieve the necessary reductions at these stations with currently planned capital projects under a MACT regulation.

Connecticut

Mercury emissions control standards were effective in July 2008 and require coal fired power plants to achieve either an emissions limit or 90% mercury removal efficiency through technology installed to control mercury emissions. With the recently installed activated carbon injection and baghouse at Bridgeport Unit 3, Power has demonstrated that it complies with the mercury limits in these standards.

New Jersey

New Jersey regulations required coal fired electric generating units to meet certain emissions limits or reduce mercury emissions by approximately 90% by December 15, 2007. Companies that are parties to multi-pollutant reduction agreements, such as Power, have been permitted to postpone such reductions on half of their coal fired electric generating capacity until December 15, 2012.

Power has achieved or will achieve the required reductions with mercury control technologies that are part of Power’s multi-pollutant reduction agreement that resolved issues arising out of the PSD/NSR air pollution control programs discussed above.

NOx Reduction

New Jersey

In April 2009, the NJDEP finalized revisions to NOx emission control regulations that impose new NOx emission reduction requirements and limits for New Jersey fossil fuel fired electric generation units. The rule will have a significant impact on Power’s generation fleet, as it imposes NOx emissions limits that will require significant capital investment for controls or the retirement of up to 102 combustion turbines (approximately 2,000 MW) and five older New Jersey steam electric generation units (approximately 800 MW) by April 30, 2015.

Power has been working with the NJDEP throughout the development of this rulemaking to minimize financial impact and to provide for transitional lead time for it to address the retirement of electric generation units. Power cannot predict the financial impact resulting from compliance with this rulemaking.

 

25


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Connecticut

Under current Connecticut regulations, Power’s Bridgeport and New Haven facilities have been utilizing Discrete Emission Reduction Credits (DERCs) to comply with certain NOx emission limitations that were incorporated into the facilities’ operating permits. On April 30, 2010, Power negotiated new agreements with the State of Connecticut extending the continued use of DERCs for certain emission units and equipment until May 31, 2014.

New Jersey Industrial Site Recovery Act (ISRA)

Potential environmental liabilities related to the alleged discharge of hazardous substances at certain generating stations have been identified. In the second quarter of 1999, in anticipation of the transfer of PSE&G’s 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 related to these obligations, which is included in Environmental Costs in Power’s and PSEG’s Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009.

Permit Renewals

Pursuant to the Federal Water Pollution Control Act (FWPCA), New Jersey Pollutant Discharge Elimination System (NPDES) permits expire within 5 years of their effective date. In order to renew these permits, but allow the plant to continue to operate, an owner or operator must file a permit application no later than six months prior to expiration of the permit. Power has filed or will be filing applications for permits in a variety of states that require discharge.

Pursuant to a consent decree with environmental groups, the EPA was required to promulgate rules governing cooling water intake structures under Section 316(b) of the FWPCA. In 2004, the EPA published a rule which did not mandate the use of cooling towers at large existing generating plants. Rather, the rule provided alternatives for compliance with 316(b), including the use of restoration efforts to mitigate for the potential effects of cooling water intake structures, as well as the use of site-specific analysis to determine the best technology available for minimizing adverse impact based upon a cost-benefit test. Power has used restoration and/or a site-specific cost-benefit test in applications filed to renew the permits at its once-through cooled plants, including Salem, Hudson and Mercer.

One of the most significant NPDES permits governing cooling water intake structures at Power is for Salem. In 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. In February 2006, Power filed with the NJDEP a renewal application allowing Salem to continue operating under its existing NJPDES permit until a new permit is issued. Power prepared its renewal application in accordance with the FWPCA Section 316(b) and the Phase II 316(b) rules published in 2004, which govern cooling water intake structures at large electric generating facilities. Power had historically 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. However, the 316(b) rules would also have been applicable to Bridgeport, and possibly, Sewaren and New Haven stations. In addition to the Salem renewal application, permit renewal applications have been submitted to the NJDEP for Hudson and Sewaren and to the Connecticut Department of Environmental Protection for Bridgeport.

Portions of the 316(b) rule were challenged by certain northeast states, environmentalists and industry groups. In January 2007, the U.S. Court of Appeals for the Second Circuit issued a decision that 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. In April 2009, the U.S. Supreme Court reversed the Second Circuit’s opinion, concluding that the EPA could rely upon cost-benefit analysis in setting the national performance standards and in providing for cost-benefit variances from those standards as part of the Phase II regulations. The matter was sent back to the Second Circuit for further proceedings consistent with the Supreme Court’s opinion. In September 2009, the Second Circuit issued an order remanding the matter to the EPA in light of the Supreme Court’s opinion.

 

26


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Supreme Court’s ruling allows the EPA to continue to use the site-specific cost-benefit test in determining best technology available for minimizing adverse environmental impact. However, the results of further proceedings on this matter could have a material impact on Power’s ability to renew permits at its larger once-through cooled plants, including Salem, Hudson, Mercer, Bridgeport and possibly Sewaren and New Haven, without making significant upgrades to existing intake structures and cooling systems. The costs of those upgrades to one or more of Power’s once-through cooled plants could be material, and would require economic review to determine whether to continue operations at these facilities. For example, in Power’s application to renew its Salem permit, filed with the NJDEP in February 2006, the estimated costs for adding cooling towers for Salem were approximately $1 billion, of which Power’s share would have been approximately $575 million. Currently, potential costs associated with any closed cycle cooling requirements are not included in Power’s forecasted capital expenditures.

The EPA has stated that it anticipates proposing a rule in September 2010, and publishing a final rule in July 2012. Until a new rule governing cooling water intake structures at existing power generating stations is finalized, the EPA and states implementing the FWPCA have been instructed to issue permits on a case-by-case basis using the agency’s best professional judgment.

In addition to the anticipated EPA rulemaking, several states have begun setting policies that may require closed cycle cooling. It is unknown how these policies will ultimately be adopted and the impact of these state policies on the EPA’s rulemaking.

In January 2010, the NJDEP issued a draft NJPDES permit to another company which would require the installation of closed cycle cooling at that company’s nuclear generating station located in New Jersey. The draft permit is subject to public comment and review prior to being finalized by the NJDEP. We cannot predict at this time the final outcome of the NJDEP decision and the impact, if any, such a decision would have on any of Power’s once-through cooled generating stations.

Stormwater

In October 2008, the NJDEP notified Power that it must apply for an individual stormwater discharge permit for its Hudson generating station. Hudson stores its coal in an open air pile and, as a result, it is exposed to precipitation. Discharge of stormwater from Hudson has been regulated pursuant to a Basic Industrial Stormwater General Permit, authorization of which has been previously approved by the NJDEP. The NJDEP has determined that Hudson is no longer eligible to utilize this general permit and must apply for an individual NJPDES permit for stormwater discharges. While the full extent of these requirements remains unclear, to the extent Power may be required to reduce or eliminate the exposure of coal to stormwater, or be required to construct technologies preventing the discharge of stormwater to surface water or groundwater, those costs could be material.

New Generation and Development

Nuclear

Power has approved the expenditure of approximately $192 million for a steam path retrofit and related upgrades at Peach Bottom Units 2 and 3. Completion of these upgrades is expected to result in an increase of Power’s share of nominal capacity by 32 MW (14 MW at Unit 3 in 2011 and 18 MW at Unit 2 in 2012). Total expenditures through March 31, 2010 are $28 million and are expected to continue through 2012. Power anticipates expenditures in pursuit of additional output through an extended power uprate of its co-owned Peach Bottom nuclear plants. The uprate is expected to be in service in 2015 for Unit 2 and 2016 for Unit 3. Power’s share of the increased capacity is expected to be 133 MW with an anticipated cost of approximately $400 million.

Connecticut

Power has been selected by the Connecticut Department of Public Utility Control in a regulatory process to build 130 MW of gas fired peaking capacity. Final approval has been received and construction is expected to

 

27


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

commence in June 2011. The project is expected to be in service by June 2012. Power estimates the cost of these generating units to be $130 million to $140 million. Total capitalized expenditures through March 31, 2010 are $15 million, which are included in Property, Plant and Equipment in the Condensed Consolidated Balance Sheets of PSEG and Power.

PJM Interconnection L.L.C. (PJM)

Power plans to construct 178 MW of gas fired peaking capacity at the Kearny site. This capacity was bid into and has cleared the PJM RPM base residual capacity auction for the 2012-2013 period. Final approval has been received and construction is expected to commence in the second quarter of 2011. The project is expected to be in service by June 2012. Power estimates the cost of these generating units to be $160 million to $200 million. Total capitalized expenditures through March 31, 2010 are $8 million which are included in Property, Plant and Equipment in Power’s and PSEG’s Condensed Consolidated Balance Sheets.

PSE&G—Solar

In January 2010, PSE&G announced that it has entered into contracts with four developers for 12 MW of solar capacity to be developed on land it owns in Edison, Linden, Trenton and Hamilton. The projects represent an investment of approximately $50 million. Construction is expected to start in the second quarter of 2010 pending receipt of necessary approvals.

Solar Source

Energy Holdings has developed a solar project in western New Jersey and has acquired two additional solar projects currently under construction in Florida and Ohio, which together have a total capacity of approximately 29 MW. Completion of the additional projects is expected by the third quarter of 2010. Energy Holdings has issued guarantees of up to $28 million for payment of obligations related to the construction of these two projects. These guarantees will terminate upon successful completion of the projects. The total investment for the three projects will be approximately $114 million.

Basic Generation Service (BGS) and Basic Gas Supply Service (BGSS)

PSE&G obtains its electric supply requirements for customers who do not purchase electric supply from third party suppliers through the annual New Jersey BGS auctions. Pursuant to applicable BPU rules, PSE&G enters into the Supplier Master Agreement (SMA) with the winners of these BGS auctions following the BPU’s approval of the auction results. PSE&G has entered into contracts with Power, as well as with other winning BGS suppliers, to purchase BGS for PSE&G’s load requirements. The winners of the auction (including Power) are responsible for fulfilling all the requirements of a PJM Load Serving Entity including the provision of capacity, energy, ancillary services, transmission and any other services required by PJM. BGS suppliers assume all volume risk and customer migration risk and must satisfy New Jersey’s renewable portfolio standards.

Power seeks to mitigate volatility in its results by contracting in advance for the sale of most of its anticipated electric output as well as its anticipated fuel needs. As part of its objective, Power has entered into contracts to directly supply PSE&G and other New Jersey electric distribution companies (EDCs) with a portion of their respective BGS requirements through the New Jersey BGS auction process, described above. In addition to the BGS-related contracts, Power also enters into firm supply contracts with EDCs, as well as other firm sales and commitments.

 

28


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

PSE&G has contracted for its anticipated BGS-Fixed Price eligible load, as follows:

 

 

     Auction Year  
    

2007

  

2008

  

2009

  

2010

 

36-Month Terms Ending

   May 2010    May 2011    May 2012    May 2013 (A) 

Load (MW)

   2,758    2,800    2,900    2,800   

$ per kWh

   0.09888    0.11150    0.10372    0.09577   

 

(A) Prices set in the 2010 BGS auction become effective on June 1, 2010 when the 2007 BGS auction agreements expire.

PSE&G has a full requirements contract with Power to meet the gas supply requirements of PSE&G’s gas customers. The contract extends through March 31, 2012, and year-to-year thereafter. Power has entered into hedges for a portion of these anticipated BGSS obligations, as permitted by the BPU. The BPU permits PSE&G to recover the cost of gas hedging up to 115 billion cubic feet or 80% of its residential gas supply annual requirements through the BGSS tariff. For additional information, see Note 16. Related-Party Transactions.

Minimum Fuel Purchase Requirements

Power has various long-term fuel purchase commitments for coal and oil to support its fossil generation stations and for supply of nuclear fuel for the Salem and Hope Creek nuclear generating stations and for firm transportation and storage capacity for natural gas.

Power’s various multi-year contracts for firm transportation and storage capacity for natural gas are primarily used to meet its gas supply obligations to PSE&G. These purchase obligations are consistent with Power’s strategy to enter into contracts for its fuel supply in comparable volumes to its sales contracts.

Power’s strategy is to maintain certain levels of uranium concentrates and uranium hexafluoride in inventory and to make periodic purchases to support such levels. As such, the commitments referred to below may include estimated quantities to be purchased that deviate from contractual nominal quantities.

Power’s nuclear fuel commitments cover approximately 100% of its estimated uranium, enrichment and fabrication requirements through 2011 and a portion for 2012, 2013 and 2014 at Salem, Hope Creek and Peach Bottom.

As of March 31, 2010, the total minimum purchase requirements included in these commitments are as follows:

 

 

Fuel Type

  

Commitments
through 2014

  

Power’s Share

     Millions

Nuclear Fuel

     

Uranium

   $ 661    $ 393

Enrichment

   $ 482    $ 306

Fabrication

   $ 214    $ 137

Natural Gas

   $ 871    $ 871

Coal/Oil

   $ 806    $ 806

Included in the $806 million commitment for coal and oil above is $503 million related to a certain coal contract under which Power can cancel contractual deliveries at minimal cost. There have been no cancellations in 2010.

 

29


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The Texas generation facilities also have a contract for low BTU content gas which commenced in late 2009 with a term of 15 years and a minimum volume of approximately 13 MMbtus per year. The gas must meet an availability and quality specification. Power has the right to cancel delivery of the gas at a minimal cost.

Regulatory Proceedings

Competition Act

In April 2007, PSE&G and Transition Funding were served with a purported class action complaint (Complaint) in New Jersey Superior Court challenging the constitutional validity of certain stranded cost recovery provisions of the Competition Act, seeking injunctive relief against continued collection from PSE&G’s electric customers of the Transition Bond Charge (TBC) of Transition Funding, as well as recovery of TBC amounts previously collected. Under New Jersey law, the Competition Act, enacted in 1999, is presumed constitutional.

In July 2007, the plaintiff filed an amended Complaint to also seek injunctive relief from continued collection of related taxes as well as recovery of such taxes previously collected. In July 2007, PSE&G filed a motion to dismiss the amended Complaint, which was granted in October 2007. In November 2007, the plaintiff filed a notice of appeal with the Appellate Division of the New Jersey Superior Court. In February 2009, the New Jersey Appellate Division affirmed the decision of the lower court dismissing the case. In May 2009, the New Jersey Supreme Court denied a request from the plaintiff to review the Appellate Division’s decision.

In July 2007, the same plaintiff also filed a petition with the BPU requesting review and adjustment to PSE&G’s recovery of the same stranded cost charges. In September 2007, PSE&G filed a motion with the BPU to dismiss the petition, which remains pending. PSE&G cannot predict the outcome of the action pending at the BPU.

BPU Deferral Audit

The BPU Energy and Audit Division conducts audits of deferred balances under various adjustment clauses. A draft Deferral Audit Phase II report relating to the 12-month period ended July 31, 2003 was released to the BPU in April 2005.

That report, which addresses Societal Benefits Charges (SBC), Market Transition Charge (MTC) and non-utility generation (NUG) deferred balances, found that the Phase II deferral balances complied in all material respects with applicable BPU Orders. It also 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 matter was referred to the Office of Administrative Law. The amount in dispute is $114 million, which if required to be refunded to customers with interest through March 2010, would be $142 million.

In January 2009, the administrative law judge (ALJ) issued a decision which upheld PSE&G’s central contention that the 2004 BPU Order approving the Phase I settlement resolved the issues being raised by the Staff and the NJ Division of Rate Counsel, and that these issues should not be subject to re-litigation in respect of the first three years of the transition period. The ALJ’s decision stated that the BPU could elect to convene a separate proceeding to address the fourth and final year reconciliation of MTC recoveries. The amount in dispute with respect to this Phase II period is approximately $50 million.

By order dated September 3, 2009, the BPU rejected the ALJ’s initial decision, elected to maintain jurisdiction over the matter and established a schedule for briefing on the merits of the question whether any MTC-related refunds are due. Generally, the BPU rejected the claims that the matters at issue had been fairly and finally litigated. Briefing has been completed and the matter is now pending before the BPU.

New Jersey Clean Energy Program

In 2008, the BPU approved funding requirements for each New Jersey utility applicable to its Renewable Energy and Energy Efficiency programs for the years 2009 to 2012. The aggregate funding amount is $1.2

 

30


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

billion for all years. PSE&G’s share is $705 million. PSE&G has recorded a discounted liability of $527 million as of March 31, 2010. Of this amount, $178 million was recorded as a current liability and $349 million as a noncurrent liability. The liability has been recorded with an offsetting Regulatory Asset, since the costs associated with this program are expected to be recovered from PSE&G ratepayers through the SBC.

Leveraged Lease Investments

The Internal Revenue Service (IRS) has issued reports with respect to its audits of PSEG’s federal corporate income tax returns for tax years 1997 through 2003, which disallowed all deductions associated with certain lease transactions. The IRS reports also proposed a 20% penalty for substantial understatement of tax liability. PSEG has filed protests of these findings with the Office of Appeals of the IRS.

PSEG believes its tax position related to these transactions was proper based on applicable statutes, regulations and case law in effect at the time that the deductions were taken. There are several pending tax cases involving other taxpayers with similar leveraged lease investments. To date, six cases have been decided at the trial court level, four of which were decided in favor of the government. An appeal of one of these decisions was affirmed. The fifth case involves a jury verdict that was challenged by both parties on inconsistency grounds but was later settled by the parties. One case, involving an investment in an energy transaction by a utility, was decided in favor of the taxpayer.

In order to reduce the cash tax exposure related to these leases, Energy Holdings is pursuing opportunities to terminate international leases with lessees that are willing to meet certain economic thresholds. Energy Holdings has terminated a total of 14 of these leasing transactions since December 2008 and reduced the related cash tax exposure by $740 million. As of March 31, 2010 and December 31, 2009, PSEG’s total gross investment in such transactions was $278 million and $347 million, respectively.

Cash Impact

As of March 31, 2010, an aggregate of approximately $600 million would become currently payable if PSEG conceded all deductions taken through that date. PSEG has deposited $320 million with the IRS to defray potential interest costs associated with this disputed tax liability, reducing its potential cash exposure to $280 million. In the event PSEG is successful in defense of its position, the deposit is fully refundable with interest. If the IRS is successful in a litigated case consistent with the positions it has taken in the generic settlement offer recently proposed, an additional $70 million to $90 million of tax would be due for tax positions through March 31, 2010.

As of March 31, 2010, penalties of $150 million would also become payable if the IRS successfully asserted and litigated a case against PSEG. PSEG has not established a reserve for penalties because it believes it has strong defenses to the assertion of penalties under applicable law. Interest and penalty exposure will grow at the rate of $6 million per quarter during 2010.

PSEG currently anticipates that it may be required to pay between $110 million and $290 million in tax, interest and penalties for the tax years 1997-2000 during 2010 and subsequently commence litigation to recover those amounts. Further it is possible that an additional payment of between $210 million and $530 million could be required during 2010 for tax years 2001-2003 followed by further litigation to recover those amounts. These amounts are in addition to tax deposits already made.

Earnings Impact

PSEG’s current reserve position represents its view of the earnings impact that could result from a settlement related to these transactions, although a total loss, consistent with the broad settlement offer proposed by the IRS, would result in an additional earnings charge of $140 million to $160 million.

 

31


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 8. Changes in Capitalization

The following capital transactions occurred in the first three months of 2010:

Power

 

 

converted $44 million of its senior Notes servicing and securing the 4.00% Pollution Control Bonds of the Pennsylvania Economic Development Authority (PEDFA) to variable rate in January 2009 when the PEDFA Bonds were converted to variable rate demand bonds. Power reacquired the PEDFA Bonds in December 2009. In January 2010, Power caused the PEDFA Bonds to be converted from Alternative Minimum Tax (AMT) to non-AMT status and to be remarketed as variable rate demand bonds backed by a letter of credit expiring in January 2011.

 

 

paid a cash dividend of $175 million to PSEG in March.

PSE&G

 

 

redeemed all of its $80 million of outstanding preferred stock in March,

 

 

paid $300 million of floating rate (Libor + .875%) First and Refunding Mortgage Bonds at maturity in March,

 

 

issued $300 million of 5.50% Medium-Term Notes (MTNs), Series G due March 2040 in March, and

 

 

paid $44 million of Transition Funding’s securitization debt.

Energy Holdings

 

 

paid $1 million of nonrecourse project debt.

In April 2010, Power issued $300 million of 2.50% unsecured Senior Notes due April 2013 and $250 million of 5.125% unsecured Senior Notes due April 2020. Power used a portion of the proceeds from these transactions to redeem its $161 million of 6.50% MTNs due 2014 and $48 million of 6.00% MTNs due 2013.

Also in April 2010, Power completed an exchange offer with eligible holders of its 7.75% Senior Notes due 2011 in order to manage long-term debt maturities. Under this transaction, an aggregate principal amount of $195 million of Power’s 7.75% Senior Notes was exchanged for total consideration from Power of $208 million. The $208 million was comprised of $156 million in newly issued 5.125% Senior Notes due April 2020 and cash payments of $52 million. Since the debt exchange was treated as a debt modification, the resulting premium of $13 million was deferred and will be amortized over the term of the newly issued debt. The deferred amount is reflected as an offset to Long-Term Debt on Power’s Condensed Consolidated Balance Sheet.

Note 9. 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.

 

32


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Power uses physical and financial transactions in the wholesale energy markets to mitigate the effects of adverse movements in fuel and electricity prices. Contracts that do not qualify for hedge accounting or normal purchases/normal sales treatment are marked to market 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. The financial effect of using such modeling techniques is not material to PSEG’s or Power’s financial statements.

Cash Flow Hedges

Power uses forward sale and purchase contracts, swaps, futures and firm transmission right 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 March 31, 2010 and December 31, 2009, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with these hedges was as follows:

 

 

     As of
March 31,
2010
   As of
December 31,
2009
     Millions

Fair Value of Cash Flow Hedges

   $ 440    $ 286

Impact on Accumulated Other Comprehensive Income (Loss) (after tax)

   $ 261    $ 184

The expiration date of the longest-dated cash flow hedge at Power is in 2012. Power’s after-tax unrealized gains on these derivatives that are expected to be reclassified to earnings during the 12 months ending March 31, 2011 and March 31, 2012 are $167 million and $93 million, respectively. Ineffectiveness associated with these hedges was $(2) million at March 31, 2010.

Trading Derivatives

In general, the main 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. Power does engage in some trading of electricity and energy-related products where such transactions are not associated with the output or fuel purchase requirements of our facilities. This trading consists mostly of energy supply contracts where we secure sales commitments with the intent to supply the energy services from purchases in the market rather than from our owned generation. Such trading activities represent approximately one percent of Power’s gross margin.

Other Derivatives

Power enters into other contracts that are derivatives, but do not qualify for cash flow hedge accounting. Most of these contracts are used for fuel purchases for generation requirements and for electricity purchases for contractual sales obligations. Prior to June 2009, some of the derivative contracts were also used in Power’s NDT Funds. Changes in fair market value of these contracts are recorded in earnings. The fair value of these contracts as of March 31, 2010 and December 31, 2009 was $105 million and $8 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 through the use of fixed and floating rate debt and interest rate derivatives.

 

33


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Fair Value Hedges

PSEG enters into fair value hedges to convert fixed-rate debt into variable-rate debt. In January 2010, we entered into a series of interest rate swaps totaling $600 million converting $300 million of Power’s $303 million of 5.32% Senior Notes due September 2016 and $300 million of Power’s $600 million of 6.95% of Senior Notes due June 2012 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. In 2009 PSEG had entered into three interest rate swaps also designated as fair value hedges. As of March 31, 2010 and December 31, 2009, the fair value of all the underlying hedges was $5 million and $(3) million, respectively.

Cash Flow Hedges

PSEG, Power, PSE&G 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 March 31, 2010, there was no hedge ineffectiveness associated with these hedges. The total fair value of these interest rate derivatives was immaterial as of each of March 31, 2010 and December 31, 2009. The Accumulated Other Comprehensive Loss related to interest rate derivatives designated as cash flow hedges was $(4) million as of each of March 31, 2010 and December 31, 2009.

Fair Values of Derivative Instruments

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

 

 

Balance Sheet Location

  As of March 31, 2010  
  Power     PSE&G   Consolidated  
  Cash Flow
Hedges
    Non Hedges     Netting
(A)
    Total
Power
    Non Hedges   Total
Derivatives
(B)
 
  Energy-
Related
Contracts
    Energy-
Related
Contracts
        Energy-
Related
Contracts
 
    Millions   

Derivative Contracts

           

Current Assets

  $ 481      $ 2,135      $ (2,328   $ 288      $ 4   $ 309   

Noncurrent Assets

    354        492        (679     167        47     214   
                                             

Total Mark-to-Market Derivative Assets

  $ 835      $ 2,627      $ (3,007   $ 455      $ 51   $ 523   
                                             

Derivative Contracts

           

Current Liabilities

  $ (214   $ (2,143   $ 2,188      $ (169   $ 0   $ (169

Noncurrent Liabilities

    (181     (470     598        (53     0     (65
                                             

Total Mark-to-Market Derivative (Liabilities)

  $ (395   $ (2,613   $ 2,786      $ (222   $ 0   $ (234
                                             

Total Net Mark-to-Market Derivative Assets (Liabilities)

  $ 440      $ 14      $ (221   $ 233      $ 51   $ 289   
                                             

 

34


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

     As of December 31, 2009  
     Power     PSE&G    Consolidated  
     Cash Flow
Hedges
    Non Hedges     Netting
(A)
    Total
Power
    Non Hedges    Total
Derivatives
(C)
 

Balance Sheet Location

   Energy-
Related
Contracts
    Energy-
Related
Contracts
        Energy-
Related
Contracts
  
     Millions  

Derivative Contracts

             

Current Assets

   $ 357      $ 1,083      $ (1,209   $ 231      $ 1    $ 243   

Noncurrent Assets

     321        255        (458     118        5      123   
                                               

Total Mark-to-Market Derivative Assets

   $ 678      $ 1,338      $ (1,667   $ 349      $ 6    $ 366   
                                               

Derivative Contracts

             

Current Liabilities

   $ (219   $ (1,124   $ 1,142      $ (201   $ 0    $ (201

Noncurrent Liabilities

     (173     (235     382        (26     0      (40
                                               

Total Mark-to-Market Derivative (Liabilities)

   $ (392   $ (1,359   $ 1,524      $ (227   $ 0    $ (241
                                               

Total Net Mark-to-Market Derivative Assets (Liabilities)

   $ 286      $ (21   $ (143   $ 122      $ 6    $ 125   
                                               

 

(A) Represents the netting of fair value balances with the same counterparty and the application of collateral. As of March 31, 2010 and December 31, 2009, net cash collateral received of $221 million and $143 million, respectively, was netted against the corresponding net derivative contract positions. Of the $221 million as of March 31, 2010, cash collateral of $(250) million and $(127) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $110 million and $46 million were netted against current liabilities and noncurrent liabilities, respectively. Of the $143 million as of December 31, 2009, cash collateral of $(114) million and $(109) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $47 million and $33 million were netted against current liabilities and noncurrent liabilities, respectively.

 

(B) Includes PSEG parent company interest rate swap assets of $17 million and interest rate swap liability of $(12) million, designated as fair value hedges, recorded in Current Assets-Derivative Contracts and Noncurrent Liability-Derivative Contracts, respectively.

 

(C) Includes PSEG parent company interest rate swap assets of $11 million and interest rate swap liability of $(14) million, designated as fair value hedges, recorded in Current Assets-Derivative Contracts and Noncurrent Liability-Derivative Contracts, respectively.

The aggregate fair value of derivative contracts in a liability position as of March 31, 2010 that contain triggers for additional collateral was $773 million. This potential additional collateral is included in the $968 million discussed in Note 7. Commitments and Contingent Liabilities.

 

35


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following shows the effect on the Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended March 31, 2010 and 2009:

 

 

Derivatives in SFAS 133
Cash Flow Hedging
Relationships

  Amount of
Pre-Tax
Gain (Loss)
Recognized in AOCI
on Derivatives
(Effective

Portion)
    Location of Pre-Tax
Gain (Loss)
Reclassified from
AOCI into

Income
  Amount of
Pre-Tax
Gain (Loss)
Reclassified
from AOCI

into  Income
(Effective
Portion)
    Location of Pre-Tax
Gain (Loss)
Recognized
in Income on
Derivatives
(Ineffective Portion)
  Amount of
Pre-Tax Gain
(Loss)
Recognized  in
Income on
Derivatives
(Ineffective
Portion)
  Three Months Ended
March 31,
        Three Months Ended
March 31,
        Three Months Ended
March 31,
    2010         2009             2010         2009             2010         2009  
    Millions

PSEG

               

Energy-Related Contracts

  $ 208      $ 382      Operating Revenue   $ 76      $ 156      Operating Revenue   $ (2   $ 8

Energy-Related Contracts

    (2     (28   Energy Costs     (1     (26       0        0

Interest Rate Swaps

    0        0      Interest Expense     0        (4       0        0
                                                 

Total PSEG

  $ 206      $ 354        $ 75      $ 126        $ (2   $ 8
                                                 

PSEG Power

               

Energy-Related Contracts

  $ 208      $ 382      Operating Revenue   $ 76      $ 156      Operating Revenue   $ (2   $ 8

Energy-Related Contracts

    (2     (28   Energy Costs     (1     (26       0        0

Interest Rate Swaps

    0        0      Interest Expense     0        (4       0        0
                                                 

Total Power

  $ 206      $ 354        $ 75      $ 126        $ (2   $ 8
                                                 

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, 2009

   $ 305      $ 180   

Gain Recognized in AOCI (Effective Portion)

     206        122   

Less: Gain Reclassified into Income (Effective Portion)

     (75     (44
                

Balance as of March 31, 2010

   $ 436      $ 258   
                

36


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months ended March 31, 2010 and 2009:

 

 

Derivatives Not Designated as Hedges

   Location of Pre-Tax
Gain (Loss)
Recognized in
Income on Derivatives
   Amount of Pre-Tax Gain  (Loss)
Recognized in Income on
Derivatives
 
        Three Months Ended  
        

2010

   

2009

 
          Millions  

PSEG and Power

       

Energy-Related Contracts

   Operating Revenues    $ 113      $ 131   

Energy-Related Contracts

   Energy Costs      (19     (87

Interest Rate Swaps

   Interest Expense      0        (1

Derivatives in NDT Funds

   Other Income      0        9   
                   

Total PSEG and Power

      $ 94      $ 52   
                   

 

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 those 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 for the three months ended March 31, 2010 was to reduce interest expense by approximately $6 million.

The following reflects the gross volume, on an absolute value basis, of derivatives as of March 31, 2010 and December 31, 2009:

 

 

Type

  

Notional

  

Total

  

PSEG

  

Power

  

PSE&G

     Millions

As of March 31, 2010

              

Natural Gas

   Dth    1,084    0    862    222

Electricity

   MWh    215    0    215    0

Capacity

   MW days    1    0    1    0

FTRs

   MWh    16    0    16    0

Emissions Allowances

   Tons    0    0    0    0

Oil

   Barrels    1    0    1    0

Renewable Energy Credits

   MWh    1    0    1    0

Interest Rate Swaps

   US Dollars    1,150    1,150    0    0

As of December 31, 2009

              

Natural Gas

   Dth    842    0    613    229

Electricity

   MWh    194    0    194    0

Capacity

   MW days    1    0    1    0

FTRs

   MWh    23    0    23    0

Emissions Allowances

   Tons    1    0    1    0

Oil

   Barrels    0    0    0    0

Renewable Energy Credits

   MWh    1    0    1    0

Interest Rate Swaps

   US Dollars    550    550    0    0

37


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 financial condition, results of operations or net cash flows. As of March 31, 2010, 97% of the credit exposure (MTM plus net receivables and payables, less cash collateral) for Power’s operations was with investment grade counterparties.

The following table provides information on Power’s credit risk from others, net of collateral, as of March 31, 2010. 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 quality of the company’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

   $ 1,734    $ 232    $ 1,612    2    $ 846 (A) 

Non-Investment Grade—External Rating

     2      1      1    0      0   

Investment Grade—No External Rating

     24      1      23    0      0   

Non-Investment Grade—No External Rating

     46      21      44    0      0   
                                  

Total

   $ 1,806    $ 255    $ 1,680    2    $ 846   
                                  

 

(A) Includes net exposure of $626 million with PSE&G. The remaining net exposure of $220 million is with a nonaffiliated power purchaser which is a regulated investment grade counterparty.

The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more cash collateral than the outstanding exposure, in which case there would be no exposure. When letters of credit have been posted as collateral, the exposure amount is not reduced, but the exposure amount is transferred to the rating of the issuing bank. As of March  31, 2010, Power had 200 active counterparties.

Note 10. Fair Value Measurements

PSEG, Power and PSE&G adopted accounting guidance for “Fair Value Measurements” for financial assets and liabilities effective January 1, 2008 and for nonrecurring fair value measurements of non-financial assets and liabilities effective January 1, 2009. The fair value measurements guidance defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy that

 

38


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

distinguishes between assumptions based on market data obtained from independent sources and those based on an entity’s own assumptions. The hierarchy prioritizes the inputs to fair value measurement into three levels:

Level 1—measurements utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that PSEG, Power and PSE&G have the ability to access. These consist primarily of listed equity securities.

Level 2—measurements include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable inputs such as interest rates and yield curves that are observable at commonly quoted intervals. These consist primarily of non-exchange traded derivatives such as forward contracts or options and most fixed income securities.

Level 3—measurements use unobservable inputs for assets or liabilities, based on the best information available and might include an entity’s own data and assumptions. In some valuations, the inputs used may fall into different levels of the hierarchy. In these cases, the financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. These consist mainly of various financial transmission rights, other longer term capacity and transportation contracts and certain commingled securities.

In addition to establishing a measurement framework, the fair value measurement guidance nullified the prior guidance which did not allow an entity to recognize an unrealized gain or loss at the inception of a derivative instrument unless the fair value of that instrument was obtained from a quoted market price in an active market or was otherwise evidenced by comparison to other observable current market transactions or based on a valuation technique incorporating observable market data.

 

39


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following tables present information about PSEG’s, Power’s and PSE&G’s respective assets and (liabilities) measured at fair value on a recurring basis at March 31, 2010 and December 31, 2009, including the fair value measurements and the levels of inputs used in determining those fair values. Amounts shown for PSEG include the amounts shown for Power and PSE&G.

 

 

    

Recurring Fair Value Measurements as of March 31, 2010

 

Description

  

Total

   

Cash
Collateral
Netting(E)

   

Quoted

Market

Prices
for
Identical

Assets
(Level 1)

  

Significant
Other
Observable
Inputs
(Level 2)

   

Significant
Unobservable
Inputs

(Level 3)

 
                 Millions             

PSEG

           

Assets:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ 506      $ (377   $ 0    $ 542      $ 341   

Interest Rate Swaps(B)

   $ 17      $ 0      $ 0    $ 17      $ 0   

NDT Funds:(C)

           

Equity Securities

   $ 661      $ 0      $ 661    $ 0      $ 0   

Debt Securities—Govt Obligations

   $ 322      $ 0      $ 0    $ 322      $ 0   

Debt Securities—Other

   $ 231      $ 0      $ 0    $ 231      $ 0   

Other Securities

   $ 38      $ 0      $ 1    $ 24      $ 13   

Rabbi Trusts—Mutual Funds(C)

   $ 151      $ 0      $ 14    $ 121      $ 16   

Other Long-Term Investments(D)

   $ 2      $ 0      $ 2    $ 0      $ 0   

Liabilities:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ (222   $ 156      $ 0    $ (293   $ (85

Interest Rate Swaps(B)

   $ (12   $ 0      $ 0    $ (12   $ 0   

Power

           

Assets:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ 455      $ (377   $ 0    $ 542      $ 290   

NDT Funds(C)

           

Equity Securities

   $ 661      $ 0      $ 661    $ 0      $ 0   

Debt Securities—Govt Obligations

   $ 322      $ 0      $ 0    $ 322      $ 0   

Debt Securities—Other

   $ 231      $ 0      $ 0    $ 231      $ 0   

Other Securities

   $ 38      $ 0      $ 1    $ 24      $ 13   

Rabbi Trusts—Mutual Funds(C)

   $ 30      $ 0      $ 3    $ 24      $ 3   

Liabilities:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ (222   $ 156      $ 0    $ (293   $ (85

PSE&G

           

Assets:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ 51      $ 0      $ 0    $ 0      $ 51   

Rabbi Trusts—Mutual Funds(C)

   $ 51      $ 0      $ 5    $ 41      $ 5   

40


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

    

Recurring Fair Value Measurements as of December 31, 2009

 

Description

  

Total

   

Cash
Collateral
Netting
(E)

   

Quoted Market
Prices of
Identical Assets
(Level 1)

  

Significant
Other
Observable
Inputs
(Level 2)

   

Significant
Unobservable
Inputs

(Level 3)

 
     Millions  

PSEG

  

Assets:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ 355      $ (223   $ 0    $ 415      $ 163   

Interest Rate Swaps (B)

   $ 11      $ 0      $ 0    $ 11      $ 0   

NDT Funds(C)

           

Equity Securities

   $ 650      $ 0      $ 650    $ 0      $ 0   

Debt Securities-Government

           

Obligations

   $ 297      $ 0      $ 0    $ 297      $ 0   

Debt Securities-Other

   $ 216      $ 0      $ 0    $ 216      $ 0   

Other Securities

   $ 36      $ 0      $ 0    $ 27      $ 9   

Rabbi Trusts—Mutual Funds(C)

   $ 149      $ 0      $ 14    $ 121      $ 14   

Other Long-Term Investments(D)

   $ 2      $ 0      $ 2    $ 0      $ 0   

Liabilities:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ (227   $ 80      $ 0    $ (267   $ (40

Interest Rate Swaps(B)

   $ (14   $ 0      $ 0    $ (14   $ 0   

Power

           

Assets:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ 349      $ (223   $ 0    $ 415      $ 157   

NDT Funds(C)

           

Equity Securities

   $ 650      $ 0      $ 650    $ 0      $ 0   

Debt Securities-Government

           

Obligations

   $ 297      $ 0      $ 0    $ 297      $ 0   

Debt Securities-Other

   $ 216      $ 0      $ 0    $ 216      $ 0   

Other Securities

   $ 36      $ 0      $ 0    $ 27      $ 9   

Rabbi Trusts—Mutual Funds(C)

   $ 30      $ 0      $ 3    $ 24      $ 3   

Liabilities:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ (227   $ 80      $ 0    $ (267   $ (40

PSE&G

           

Assets:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ 6      $ 0      $ 0    $ 0      $ 6   

Rabbi Trusts—Mutual Funds(C)

   $ 51      $ 0      $ 5    $ 41      $ 5   

 

(A)

Level 2—Fair values for energy-related contracts are obtained primarily using a market-based approach. Most derivative contracts (forward purchase or sale contracts and swaps) are valued using the average midpoint from multiple broker or dealer quotes or auction prices. Prices used in the valuation process are also corroborated independently by management to determine that values are based on actual transaction data or, in the absence of transactions, bid and offers for the day. Examples

 

41


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

  may include certain exchange and non-exchange traded capacity and electricity contracts and natural gas physical or swap contracts based on market prices, basis adjustments and other premiums where adjustments and premiums are not considered significant to the overall inputs.

 

     Level 3—For energy-related contracts, which include more complex agreements where limited observable inputs or pricing information is available, modeling techniques are employed using assumptions reflective of contractual terms, current market rates, forward price curves, discount rates and risk factors, as applicable. For certain energy-related option contracts where daily settled option prices are not observable, a traditional Black-Scholes valuation methodology is used which incorporates an internally developed volatility curve that is considered a significant unobservable input. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data.

We considered the creditworthiness of our counterparties in the valuation of our energy-related contracts and the impacts are immaterial.

 

(B) Interest rate swaps are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

 

(C) The NDT Funds maintain investments in various equity and fixed income securities classified as “available for sale.” These securities are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. All fair value measurements for the fund securities are provided by the trustees of these funds. Investments in marketable equity securities within the NDT funds are primarily investments in common stocks across a broad range of industries and sectors. Most equity securities are priced utilizing the principal market close price or in some cases midpoint, bid or ask price (primarily Level 1).

Power’s investments in fixed income securities are primarily with investment grade corporate bonds and US Treasury obligations or Federal Agency mortgage-backed securities with a wide range of maturities. Fixed income securities are priced using an evaluated pricing methodology that reflects observable market information such as the most recent exchange price or quoted bid for similar securities. (primarily Level 2). Short-term investments are valued using observable market prices or market parameters such as time-to-maturity, coupon rate, quality rating and current yield (primarily Level 2). Certain commingled cash equivalents included in temporary investment funds are measured with significant unobservable inputs and internal assumptions (primarily Level 3). The Rabbi Trust mutual funds are mainly invested in a US Bond Index fund, an S&P 500 Index fund and a commingled temporary investment fund. The equity index fund is valued based on quoted prices in an active market (Level 1) while the bond index fund is valued using recent exchange prices or a quoted bid (Level 2).

 

(D) Other long-term investments consist of equity securities and are valued using a market based approach based on quoted market prices.

 

(E) Cash collateral netting represents collateral amounts netted against derivative assets and liabilities as permitted under the accounting guidance for Offsetting of Amounts Related to Certain Contracts.

 

42


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities follows:

Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2010

 

 

     Balance as of
January 1,
2010
   Total Gains or (Losses)
Realized/Unrealized
   Purchases,
(Sales) and
Settlements
    Balance as of
March  31,

2010

Description

     

Included in
Income(A)

  

Included in
Regulatory Assets/
Liabilities(B)

    
     Millions
PSEG              

Net Derivative Assets

   $ 123    $ 117    $ 45    $ (29   $ 256

NDT Funds

   $ 9    $ 0    $ 0    $ 4      $ 13

Rabbi Trust Funds

   $ 14    $ 0    $ 0    $ 2      $ 16
Power              

Net Derivative Assets

   $ 117    $ 117    $ 0    $ (29   $ 205

NDT Funds

   $ 9    $ 0    $ 0    $ 4      $ 13

Rabbi Trust Funds

   $ 3    $ 0    $ 0    $ 0      $ 3
PSE&G              

Net Derivative Assets

   $ 6    $ 0    $ 45    $ 0      $ 51

Rabbi Trust Funds

   $ 5    $ 0    $ 0    $ 0      $ 5

Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2009

 

     Balance as of
January 1,
2009
    Total Gains or (Losses)
Realized/Unrealized
   Purchases,
(Sales) and
Settlements
    Balance as of
March 31, 2009
 

Description

    

Included in
Income(C)

  

Included in
Regulatory Assets/
Liabilities(B)

    
     Millions   
PSEG             

Net Derivative Assets

   $ 32      $ 131    $ 10    $ (7   $ 166   

NDT Funds

   $ 41      $ 0    $ 0    $ (19   $ 22   

Rabbi Trust Funds

   $ 14      $ 0    $ 0    $ 1      $ 15   
Power             

Net Derivative Assets

   $ 96      $ 131    $ 0    $ (7   $ 220   

NDT Funds

   $ 41      $ 0    $ 0    $ (19   $ 22   

Rabbi Trust Funds

   $ 3      $ 0    $ 0    $ 0      $ 3   
PSE&G             

Net Derivative Liabilities

   $ (64   $ 0    $ 10    $ 0      $ (54

Rabbi Trust Funds

   $ 5      $ 0    $ 0    $ 0      $ 5   

 

(A) PSEG’s and Power’s gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $97 million is included in Operating Revenues and $20 million is included in OCI. Of the $97 million in Operating Revenues, $73 million is unrealized and $24 million is realized.

 

(B) Mainly includes losses on PSE&G’s derivative contracts that are not included in either earnings or OCI, as they are deferred as a Regulatory Asset and are expected to be recovered from PSE&G’s customers.

 

43


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(C) PSEG’s and Power’s gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $102 million is included in Operating Revenues and $29 million is included in OCI. The $102 million in Operating Revenues is unrealized.

As of March 31, 2010, PSEG carried approximately $1.694 billion of net assets that are measured at fair value on a recurring basis, of which approximately $285 million were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represent less than 1% of PSEG’s total assets and there were no significant transfers between levels during the three months ended March 31, 2010.

As of March 31, 2009, PSEG carried approximately $943 million of net assets that are measured at fair value on a recurring basis, of which approximately $203 million were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represent less than 1% of PSEG’s total assets and there were no significant transfers in or out of Level 3 during the three months ended March 31, 2009.

Fair Value of Debt

The estimated fair values were determined using market quotations or values of instruments with similar terms, credit ratings, remaining maturities, and redemptions as of March 31, 2010 and December 31, 2009.

 

     March 31, 2010    December 31, 2009  
     Carrying
Amount
    Fair
Value(A)
   Carrying
Amount
    Fair
Value(A)
 
     Millions   
Long-Term Debt:          

PSEG (Parent)

   $ (29   $ 5    $ (38   $ (3

Power

     3,166        3,536      3,121        3,473   

PSE&G

     3,570        3,775      3,571        3,807   

Transition Funding (PSE&G)

     1,232        1,398      1,276        1,449   

Transition Funding II (PSE&G)

     66        71      67        71   

Energy Holdings:

         

Senior Notes

     127        131      127        134   

Project Level, Non-Recourse

     41        41      42        42   
                               

Total Long-Term Debt

   $ 8,173      $ 8,957    $ 8,166      $ 8,973   
                               

 

(A) Fair value excludes unamortized discounts, including amounts related to the Debt Exchange between Power and Energy Holdings that is deferred at the PSEG parent level since the exchange was between subsidiaries of the same parent company.

 

44


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 11. Other Income and Deductions

 

 

     Power    PSE&G    Other(A)     Consolidated
Total
     Millions
Other Income:           
Three Months Ended March 31, 2010           

NDT Fund Gains, Interest, Dividend and Other Income

   $ 38    $ 0    $ 0      $ 38

Other

     1      5      (1     5
                            

Total Other Income

   $ 39    $ 5    $ (1   $ 43
                            
Three Months Ended March 31, 2009           

NDT Fund Gains, Interest, Dividend and Other Income

   $ 67    $ 0    $ 0      $ 67

Other

     3      1      0        4
                            

Total Other Income

   $ 70    $ 1    $ 0      $ 71
                            

 

 

     Power    PSE&G    Other(A)    Consolidated
Total
     Millions
Other Deductions:            
Three Months Ended March 31, 2010            

NDT Fund Losses and Expenses

   $ 13    $ 0    $ 0    $ 13

Other

     1      1      1      3
                           

Total Other Deductions

   $ 14    $ 1    $ 1    $ 16
                           
Three Months Ended March 31, 2009            

NDT Fund Losses and Expenses

   $ 46