Form 10-Q
Table of Contents

 

 

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 June 30, 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 July 15, 2010, Public Service Enterprise Group Incorporated had outstanding 505,962,783 shares of its sole class of Common Stock, without par value.

As of July 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.

 

 

 


Table of Contents
         

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

  
 

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

   17
 

Note 6. Pension and Other Postretirement Employee Benefits (OPEB)

   20
 

Note 7. Commitments and Contingent Liabilities

   22
 

Note 8. Changes in Capitalization

   34
 

Note 9. Financial Risk Management Activities

   34
 

Note 10. Fair Value Measurements

   41
 

Note 11. Other Income and Deductions

   49
 

Note 12. Income Taxes

   50
 

Note 13. Comprehensive Income, Net of Tax

   52
 

Note 14. Earnings Per Share (EPS)

   53
 

Note 15. Financial Information by Business Segments

   54
 

Note 16. Related-Party Transactions

   55
 

Note 17. Guarantees of Debt

   57

Item 2.

 

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

   60
 

Overview of 2010 and Future Outlook

   60
 

Results of Operations

   64
 

Liquidity and Capital Resources

   75
 

Capital Requirements

   77
 

Accounting Matters

   78

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   78

Item 4.

 

Controls and Procedures

   79

PART II. OTHER INFORMATION

Item 1.

 

Legal Proceedings

   80

Item 1A.

 

Risk Factors

   80

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   80

Item 5.

 

Other Information

   80

Item 6.

 

Exhibits

   84
 

Signatures

   85

 

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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. These include, but are not limited to, future performance, revenues, earnings, strategies, prospects, consequences and all other statements that are not purely historical. 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,” “should,” “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, transmission planning 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 in receipt of necessary permits and approvals for our construction and development activities,

 

 

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 customer usage patterns.

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.

 

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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Millions

(Unaudited)

 

     For The Three Months
Ended June 30,
    For The Six Months
Ended June 30,
 
    

2010

   

2009

   

2010

   

2009

 

OPERATING REVENUES

   $ 2,455      $ 2,560      $ 6,135      $ 6,480   

OPERATING EXPENSES

        

Energy Costs

     1,147        1,067        2,915        3,135   

Operation and Maintenance

     610        627        1,314        1,301   

Depreciation and Amortization

     233        203        465        410   

Taxes Other Than Income Taxes

     28        26        70        70   
                                

Total Operating Expenses

     2,018        1,923        4,764        4,916   
                                

OPERATING INCOME

     437        637        1,371        1,564   

Income from Equity Method Investments

     5        1        8        11   

Other Income

     47        91        90        162   

Other Deductions

     (12     (44     (28     (99

Other-Than-Temporary Impairments

     (5     (1     (6     (61

Interest Expense

     (120     (133     (236     (278
                                

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     352        551        1,199        1,299   

Income Tax (Expense) Benefit

     (128     (240     (484     (544
                                

NET INCOME

   $ 224      $ 311      $ 715      $ 755   
                                

WEIGHTED AVERAGE COMMON SHARES

        

OUTSTANDING (THOUSANDS):

        

BASIC

     506,109        505,990        506,030        505,988   
                                

DILUTED

     507,091        506,936        507,119        506,812   
                                

EARNINGS PER SHARE:

        

BASIC

   $ 0.44      $ 0.61      $ 1.41      $ 1.49   
                                

DILUTED

   $ 0.44      $ 0.61      $ 1.41      $ 1.49   
                                

DIVIDENDS PAID PER SHARE OF COMMON STOCK

   $ 0.3425      $ 0.3325      $ 0.6850      $ 0.6650   
                                

See Notes to Condensed Consolidated Financial Statements.

 

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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

     June 30,     December 31,  
    

2010

   

2009

 

ASSETS

    

CURRENT ASSETS

    

Cash and Cash Equivalents

   $ 57      $ 350   

Accounts Receivable, net of allowances of $66 and $79 in 2010 and 2009, respectively

     1,251        1,229   

Unbilled Revenues

     313        411   

Fuel

     677        806   

Materials and Supplies, net

     367        361   

Prepayments

     443        161   

Derivative Contracts

     269        243   

Other

     108        85   
                

Total Current Assets

     3,485        3,646   
                

PROPERTY, PLANT AND EQUIPMENT

     22,833        22,069   

Less: Accumulated Depreciation and Amortization

     (6,876     (6,629
                

Net Property, Plant and Equipment

     15,957        15,440   
                

NONCURRENT ASSETS

    

Regulatory Assets

     4,220        4,402   

Regulatory Assets of Variable Interest Entities (VIEs)

     1,257        1,367   

Long-Term Investments

     1,939        2,032   

Nuclear Decommissioning Trust (NDT) Funds

     1,175        1,199   

Other Special Funds

     153        149   

Goodwill

     16        16   

Other Intangibles

     132        123   

Derivative Contracts

     169        123   

Restricted Cash of VIEs

     21        17   

Other

     218        216   
                

Total Noncurrent Assets

     9,300        9,644   
                

TOTAL ASSETS

   $ 28,742      $ 28,730   
                

See Notes to Condensed Consolidated Financial Statements.

 

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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

    June 30,     December 31,  
   

2010

   

2009

 

LIABILITIES AND CAPITALIZATION

   

CURRENT LIABILITIES

   

Long-Term Debt Due Within One Year

  $ 799      $ 323   

Securitization Debt of VIEs Due Within One Year

    202        198   

Commercial Paper and Loans

    390        530   

Accounts Payable

    996        1,081   

Derivative Contracts

    119        201   

Accrued Interest

    106        102   

Accrued Taxes

    35        90   

Clean Energy Program

    181        166   

Obligation to Return Cash Collateral

    96        95   

Other

    325        428   
               

Total Current Liabilities

    3,249        3,214   
               

NONCURRENT LIABILITIES

   

Deferred Income Taxes and Investment Tax Credits (ITC)

    4,171        4,139   

Regulatory Liabilities

    524        397   

Regulatory Liabilities of VIEs

    8        7   

Asset Retirement Obligations

    455        439   

Other Postretirement Benefit (OPEB) Costs

    1,088        1,095   

Accrued Pension Costs

    700        1,094   

Clean Energy Program

    305        400   

Environmental Costs

    701        704   

Derivative Contracts

    31        40   

Long-Term Accrued Taxes

    480        538   

Other

    149        140   
               

Total Noncurrent Liabilities

    8,612        8,993   
               

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)

   

CAPITALIZATION

   

LONG-TERM DEBT

   

Long-Term Debt

    6,680        6,481   

Securitization Debt of VIEs

    1,049        1,145   

Project Level, Non-Recourse Debt

    17        19   
               

Total Long-Term Debt

    7,746        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

    4,786        4,788   

Treasury Stock, at cost, 2010—27,593,877 shares; 2009—27,567,030 shares

    (593     (588

Retained Earnings

    5,072        4,704   

Accumulated Other Comprehensive Loss

    (139     (116
               

Total Common Stockholders’ Equity

    9,126        8,788   

Noncontrolling Interest

    9        10   
               

Total Stockholders’ Equity

    9,135        8,798   
               

Total Capitalization

    16,881        16,523   
               

TOTAL LIABILITIES AND CAPITALIZATION

  $ 28,742      $ 28,730   
               

See Notes to Condensed Consolidated Financial Statements.

 

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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions

(Unaudited)

 

     For the Six Months Ended
June 30,
 
    

2010

   

2009

 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Income

   $ 715      $ 755   

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

    

Depreciation and Amortization

     465        410   

Amortization of Nuclear Fuel

     68        57   

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

     72        139   

Non-Cash Employee Benefit Plan Costs

     158        173   

Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes

     (172     (364

Net Gain on Lease Investments

     (16     (99

Realized and Unrealized (Gains) Losses on Energy Contracts and Other Derivatives

     2        (71

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

     (2     8   

Over (Under) Recovery of Societal Benefits Charge (SBC)

     1        47   

Market Transition Charge Refund

     122        0   

Cost of Removal

     (32     (23

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

     (48     (3

Net Change in Certain Current Assets and Liabilities

     (364     307   

Employee Benefit Plan Funding and Related Payments

     (464     (409

Other

     15        (138
                

Net Cash Provided By (Used In) Operating Activities

     520        789   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Additions to Property, Plant and Equipment

     (911     (816

Proceeds from the Sale of Capital Leases and Investments

     161        510   

Proceeds from NDT Funds Sales

     426        1,475   

Investment in NDT Funds

     (439     (1,491

Restricted Funds

     (2     108   

Other

     10        4   
                

Net Cash Provided By (Used In) Investing Activities

     (755     (210
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net Change in Commercial Paper and Loans

     (141     314   

Issuance of Long-Term Debt

     1,194        209   

Redemption of Long-Term Debt

     (548     (320

Repayment of Non-Recourse Debt

     (2     (283

Redemption of Securitization Debt

     (91     (87

Cash Dividends Paid on Common Stock

     (347     (336

Redemption of Preferred Securities

     (80     0   

Other

     (43     (4
                

Net Cash Provided By (Used In) Financing Activities

     (58     (507
                

Net Increase (Decrease) in Cash and Cash Equivalents

     (293     72   

Cash and Cash Equivalents at Beginning of Period

     350        321   
                

Cash and Cash Equivalents at End of Period

   $ 57      $ 393   
                

Supplemental Disclosure of Cash Flow Information:

    

Income Taxes Paid (Received)

   $ 645      $ 613   

Interest Paid, Net of Amounts Capitalized

   $ 227      $ 254   

See Notes to Condensed Consolidated Financial Statements.

 

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PSEG POWER LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Millions

(Unaudited)

 

    For The Three Months
Ended June 30,
    For The Six Months
Ended June 30,
 
   

      2010      

   

      2009      

   

      2010      

   

      2009      

 

OPERATING REVENUES

  $ 1,358      $ 1,363      $ 3,661      $ 3,827   

OPERATING EXPENSES

       

Energy Costs

    687        627        2,018        2,158   

Operation and Maintenance

    269        281        554        555   

Depreciation and Amortization

    48        53        96        104   
                               

Total Operating Expenses

    1,004        961        2,668        2,817   
                               

OPERATING INCOME

    354        402        993        1,010   

Other Income

    43        86        82        156   

Other Deductions

    (13     (44     (27     (94

Other-Than-Temporary Impairments

    (5     0        (6     (60

Interest Expense

    (42     (39     (82     (88
                               

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

    337        405        960        924   

Income Tax (Expense) Benefit

    (133     (159     (392     (363
                               

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

  $ 204      $ 246      $ 568      $ 561   
                               

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

 

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PSEG POWER LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

    

June 30,
      2010      

   

December 31,
        2009        

 

ASSETS

    

CURRENT ASSETS

    

Cash and Cash Equivalents

   $ 8      $ 64   

Accounts Receivable

     425        425   

Accounts Receivable—Affiliated Companies, net

     326        459   

Short-Term Loan to Affiliate

     276        0   

Fuel

     677        806   

Materials and Supplies, net

     281        290   

Derivative Contracts

     246        231   

Prepayments

     56        64   

Other

     0        3   
                

Total Current Assets

     2,295        2,342   
                

PROPERTY, PLANT AND EQUIPMENT

     8,836        8,579   

Less: Accumulated Depreciation and Amortization

     (2,333     (2,194
                

Net Property, Plant and Equipment

     6,503        6,385   
                

NONCURRENT ASSETS

    

Nuclear Decommissioning Trust (NDT) Funds

     1,175        1,199   

Goodwill

     16        16   

Other Intangibles

     125        114   

Other Special Funds

     30        30   

Derivative Contracts

     103        118   

Long-Term Accrued Taxes

     5        39   

Other

     87        90   
                

Total Noncurrent Assets

     1,541        1,606   
                

TOTAL ASSETS

   $ 10,339      $ 10,333   
                
    

LIABILITIES AND MEMBER’S EQUITY

    

CURRENT LIABILITIES

    

Long-Term Debt Due Within One Year

   $ 650      $ 0   

Accounts Payable

     486        622   

Short-Term Loan from Affiliate

     0        194   

Derivative Contracts

     119        201   

Accrued Interest

     41        43   

Other

     109        163   
                

Total Current Liabilities

     1,405        1,223   
                

NONCURRENT LIABILITIES

    

Deferred Income Taxes and Investment Tax Credits (ITC)

     679        644   

Asset Retirement Obligations

     234        226   

Other Postretirement Benefit (OPEB) Costs

     163        158   

Derivative Contracts

     31        26   

Accrued Pension Costs

     224        344   

Environmental Costs

     51        52   

Other

     87        72   
                

Total Noncurrent Liabilities

     1,469        1,522   
                

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)

    

LONG-TERM DEBT

    

Total Long-Term Debt

     2,804        3,121   
                

MEMBER’S EQUITY

    

Contributed Capital

     2,028        2,028   

Basis Adjustment

     (986     (986

Retained Earnings

     3,705        3,486   

Accumulated Other Comprehensive Loss

     (86     (61
                

Total Member’s Equity

     4,661        4,467   
                

TOTAL LIABILITIES AND MEMBER’S EQUITY

   $ 10,339      $ 10,333   
                

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

 

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PSEG POWER LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions

(Unaudited)

 

     For the Six Months Ended
June 30,
 
    

2010

   

2009

 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Income

   $ 568      $ 561   

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

    

Depreciation and Amortization

     96        104   

Amortization of Nuclear Fuel

     68        57   

Provision for Deferred Income Taxes and ITC

     83        79   

Net Realized and Unrealized (Gains) Losses on Energy Contracts and Other Derivatives

     2        (71

Non-Cash Employee Benefit Plan Costs

     36        39   

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

     (48     (3

Impairment of Emissions Allowances

     15        0   

Net Change in Certain Current Assets and Liabilities:

    

Fuel, Materials and Supplies

     138        190   

Margin Deposit Asset

     (8     (60

Margin Deposit Liability

     (68     114   

Accounts Receivable

     (18     288   

Accounts Payable

     (50     (190

Accounts Receivable/Payable-Affiliated Companies, net

     118        250   

Other Current Assets and Liabilities

     (56     (49

Employee Benefit Plan Funding and Related Payments

     (130     (111

Other

     8        (13
                

Net Cash Provided By (Used In) Operating Activities

     754        1,185   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Additions to Property, Plant and Equipment

     (328     (429

Proceeds from NDT Funds Sales

     426        1,475   

Investment in NDT Funds

     (439     (1,491

Short-Term Loan—Affiliated Company, net

     (276     (87

Restricted Funds

     2        107   

Other

     20        16   
                

Net Cash Provided By (Used In) Investing Activities

     (595     (409
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Issuance of Long-Term Debt

     594        209   

Contributed Capital

     0        223   

Cash Dividend Paid

     (350     (680

Redemption of Long-Term Debt

     (248     (250

Redemption of Non-Recourse Long-Term Debt

     0        (280

Short-Term Loan—Affiliated Company, net

     (194     0   

Cash Payment for Debt Exchange

     (13     0   

Other

     (4     0   
                

Net Cash Provided By (Used In) Financing Activities

     (215     (778
                

Net Increase (Decrease) in Cash and Cash Equivalents

     (56     (2

Cash and Cash Equivalents at Beginning of Period

     64        40   
                

Cash and Cash Equivalents at End of Period

   $ 8      $ 38   
                

Supplemental Disclosure of Cash Flow Information:

    

Income Taxes Paid (Received)

   $ 404      $ 312   

Interest Paid, Net of Amounts Capitalized

   $ 78      $ 85   

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

 

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PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Millions

(Unaudited)

 

     For the Three Months
Ended June 30,
     For The Six Months
Ended June 30,
 
    

2010

    

2009

    

2010

    

2009

 
OPERATING REVENUES    $ 1,536       $ 1,643       $ 3,980       $ 4,378   
OPERATING EXPENSES            

Energy Costs

     917         979         2,457         2,838   

Operation and Maintenance

     343         344         757         739   

Depreciation and Amortization

     177         144         354         293   

Taxes Other Than Income Taxes

     28         26         70         70   
                                   

Total Operating Expenses

     1,465         1,493         3,638         3,940   
                                   
OPERATING INCOME      71         150         342         438   

Other Income

     3         4         8         5   

Other Deductions

     0         (1      (1      (2

Interest Expense

     (80      (80      (157      (159
                                   
INCOME (LOSS) BEFORE INCOME TAXES      (6      73         192         282   

Income Tax (Expense) Benefit

     9         (29      (71      (114
                                   
NET INCOME      3         44         121         168   

Preferred Stock Dividends

     0         (1      (1      (2
                                   

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

   $ 3       $ 43       $ 120       $ 166   
                                   

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

 

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PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

     June 30,     December 31,  
    

2010

   

2009

 
ASSETS     
CURRENT ASSETS     

Cash and Cash Equivalents

   $ 19      $ 240   

Accounts Receivable, net of allowances of $65 in 2010 and $78 in 2009, respectively

     808        800   

Unbilled Revenues

     313        411   

Materials and Supplies

     85        70   

Prepayments

     340        86   

Deferred Income Taxes

     46        52   

Other

     19        3   
                

Total Current Assets

     1,630        1,662   
                
PROPERTY, PLANT AND EQUIPMENT      13,436        12,933   

Less: Accumulated Depreciation and Amortization

     (4,283     (4,187
                

Net Property, Plant and Equipment

     9,153        8,746   
                
NONCURRENT ASSETS     

Regulatory Assets

     4,220        4,402   

Regulatory Assets of Variable Interest Entities (VIEs)

     1,257        1,367   

Long-Term Investments

     218        204   

Other Special Funds

     52        51   

Derivative Contracts

     45        5   

Restricted Cash of VIEs

     21        17   

Other

     86        79   
                

Total Noncurrent Assets

     5,899        6,125   
                

TOTAL ASSETS

   $ 16,682      $ 16,533   
                

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

 

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PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

     June 30,    December 31,
    

2010

  

2009

LIABILITIES AND CAPITALIZATION

     

CURRENT LIABILITIES

     

Long-Term Debt Due Within One Year

   $ 0    $ 300

Securitization Debt of VIEs Due Within One Year

     202      198

Commercial Paper and Loans

     223      0

Accounts Payable

     415      337

Accounts Payable —Affiliated Companies, net

     239      496

Accrued Interest

     62      56

Accrued Taxes

     3      4

Clean Energy Program

     181      166

Obligation to Return Cash Collateral

     95      95

Other

     192      210
             

Total Current Liabilities

     1,612      1,862
             

NONCURRENT LIABILITIES

     

Deferred Income Taxes and ITC

     2,759      2,710

Other Postretirement Benefit (OPEB) Costs

     873      887

Accrued Pension Costs

     333      565

Regulatory Liabilities

     524      397

Regulatory Liabilities of VIEs

     8      7

Clean Energy Program

     305      400

Environmental Costs

     650      652

Asset Retirement Obligations

     218      211

Long-Term Accrued Taxes

     113      96

Other

     27      29
             

Total Noncurrent Liabilities

     5,810      5,954
             

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 7)

     

CAPITALIZATION

     

LONG-TERM DEBT

     

Long-Term Debt

     3,869      3,271

Securitization Debt of VIEs

     1,049      1,145
             

Total Long-Term Debt

     4,918      4,416
             

Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 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

     2,038      1,918

Accumulated Other Comprehensive Income

     6      5
             

Total Stockholder’s Equity

     4,342      4,221
             

Total Capitalization

     9,260      8,717
             

TOTAL LIABILITIES AND CAPITALIZATION

   $ 16,682    $ 16,533
             

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

 

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PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions

(Unaudited)

 

     For The Six Months
Ended June 30,
 
    

2010

   

2009

 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Income

   $ 121      $ 168   

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

    

Depreciation and Amortization

     354        293   

Provision for Deferred Income Taxes and ITC

     (29     51   

Non-Cash Employee Benefit Plan Costs

     108        118   

Cost of Removal

     (32     (23

Market Transition Charge (MTC) Refund

     122        0   

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

     (34     (45

Over (Under) Recovery of Gas Costs

     32        53   

Over (Under) Recovery of SBC

     1        47   

Net Changes in Certain Current Assets and Liabilities:

    

Accounts Receivable and Unbilled Revenues

     90        184   

Materials and Supplies

     (15     (8

Prepayments

     (254     (346

Accounts Payable

     52        (9

Accounts Receivable/Payable-Affiliated Companies, net

     (220     (316

Other Current Assets and Liabilities

     (10     (1

Employee Benefit Plan Funding and Related Payments

     (287     (255

Other

     (20     (6
                

Net Cash Provided By (Used In) Operating Activities

     (21     (95
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Additions to Property, Plant and Equipment

     (530     (379

Solar Loan Investments

     (11     (9

Restricted Funds

     (4     0   
                

Net Cash Provided By (Used In) Investing Activities

     (545     (388
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net Change in Short-Term Debt

     223        314   

Issuance of Long-Term Debt

     600        0   

Redemption of Long-Term Debt

     (300     (60

Redemption of Securitization Debt

     (91     (87

Redemption of Preferred Securities

     (80     0   

Contributed Capital

     0        250   

Deferred Issuance Costs

     (6     0   

Preferred Stock Dividends

     (1     (2
                

Net Cash Provided By (Used In) Financing Activities

     345        415   
                

Net Increase (Decrease) In Cash and Cash Equivalents

     (221     (68

Cash and Cash Equivalents at Beginning of Period

     240        91   
                

Cash and Cash Equivalents at End of Period

   $ 19      $ 23   
                

Supplemental Disclosure of Cash Flow Information:

    

Income Taxes Paid (Received)

   $ 82      $ 41   

Interest Paid, Net of Amounts Capitalized

   $ 153      $ 153   

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

 

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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 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.

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.

 

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Table of Contents

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 and six months ended June 30, 2009 increased by $62 million and $152 million, respectively. Power’s Net Income for the three months and six months ended June  30, 2009 decreased by $11 million and $14 million, respectively.

Note 2. Recent Accounting Standards

New Standards Adopted during 2010

During 2010, we have adopted the following new accounting standards. The new standards 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 VIEs

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.

We adopted the standard on January 1, 2010 and there was no impact on our financial statements upon initial adoption, other than presentation. In accordance with the guidance, we continually assess the primary beneficiaries of VIEs for which we have a variable interest. 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.

We adopted the standard on January 1, 2010. We disclose the fair value instruments by appropriate classes, as required by this standard, and we do not have any transfers between Levels 1 and 2. See Note 10. Fair Value Measurements for further information.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

New Accounting Standards Issued But Not Yet Adopted

Disclosures about Credit Quality of Financing Receivables and Allowance for Credit Losses

This accounting standard update has been issued to provide greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables by requiring:

 

 

quantitative and qualitative information about the credit quality of financing receivables,

 

 

description of accounting policies and methodology used to estimate the allowance for credit losses, and

 

 

an analysis of financing receivables on “nonaccrual” or “past due” status.

We will adopt this new guidance effective December 31, 2010 and expect to enhance disclosure related to leveraged lease receivables.

Note 3. Variable Interest Entities

VIEs for which PSE&G is the Primary Beneficiary

PSE&G is the primary beneficiary of 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 their respective obligations. 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 June 30, 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 or Transition Funding II during the first half 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 VIE

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 six months of 2010 or at any time during 2009, we have not been required to make any payments. PSE&G is not subject to any risk of loss.

VIE for which Energy Holdings is the Primary Beneficiary

Energy Holdings has a variable interest 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 June 30, 2010, $7 million had been extended in the form of a note receivable.

 

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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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
June 30,
   As of
December 31,
    

2010

  

2009

     Millions

Current Assets

   $ 2    $ 1

Noncurrent Assets

   $ 8    $ 8

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

Dispositions

Leveraged Leases

During the first six months of 2010, Energy Holdings sold its interest in three leveraged leases, including two international leases for which the Internal Revenue Service (IRS) has indicated its intention to disallow certain tax deductions taken in prior years.

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

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
    

2010

  

2009

  

2010

  

2009

     Millions
Proceeds from Sales    $ 55    $ 320    $ 161    $ 460

Gain (Loss) on the Sales, after-tax

   $ 4    $ 23    $ 12    $ 35

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

GWF Energy LLC (GWF Energy)

In May 2009, Energy Holdings entered into a Memorandum of Understanding under which it will sell, in two separate transactions, its 60% ownership interest in GWF Energy, an equity method investment, for a total purchase price of $70 million. As a result, Energy Holdings recorded an after-tax impairment charge of $3 million.

Energy Holdings completed the first stage of the sale in June 2009, selling a 10.1% interest in GWF Energy for approximately $7 million. The sale of Energy Holdings’ remaining 49.9% interest is expected to close in the third quarter of 2010.

PPN Power Generating Company Limited (PPN)

In May 2009, Energy Holdings sold its 20% ownership interest in PPN, which owns and operates a 330 MW generation facility in India for approximately book value.

 

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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Other

In May 2009, Energy Holdings sold its 6.5% interest in the Midland Cogeneration Venture LP for an after-tax gain of $2 million.

Note 5. Available-for-Sale Securities

Nuclear Decommissioning Trust (NDT) Funds

Power maintains an external master NDT 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 June 30, 2010
    

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

   

Estimated

Fair
Value

     Millions
Equity Securities    $ 487    $ 116    $ (21   $ 582
                            

Debt Securities

          

Government Obligations

     304      10      (1     313

Other Debt Securities

     234      13      (2     245
                            
Total Debt Securities      538      23      (3     558
Other Securities      35      0      0        35
                            
Total Available-for-Sale Securities    $ 1,060    $ 139    $ (24   $ 1,175
                            

 

     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
                            

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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 June 30, 2010   As of December 31, 2009  
    Less Than 12     Greater Than 12   Less Than 12     Greater Than 12  
    Months     Months   Months     Months  
   

Fair

Value

 

Gross

Unrealized

Losses

   

Fair

Value

 

Gross

Unrealized

Losses

 

Fair

Value

 

Gross

Unrealized

Losses

   

Fair

Value

 

Gross

Unrealized

Losses

 

Equity Securities(A)

  $ 178   $ (21   $ 0   $ 0   $ 61   $ (5   $ 0   $ 0   
                                                     
Debt Securities                

Government Obligations(B)

    26     (1     10     0     78     (2     15     (1

Other Debt Securities(C)

    41     (2     0     0     59     (3     0     0   
                                                     

Total Debt Securities

    67     (3     10     0     137     (5     15     (1
                                                     
Other Securities     1     0        0     0     1     (1     0     0   
                                                     

Total Available-for-Sale Securities

  $ 246   $ (24   $ 10   $ 0   $ 199   $ (11   $ 15   $ (1
                                                     

 

(A) Equity Securities—Investments in marketable equity securities within the NDT funds 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 June 30, 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 June 30, 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 for less than their amortized cost. 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 June 30, 2010.

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

 

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
    

    2010    

   

    2009    

   

    2010    

   

    2009    

 
     Millions   

Proceeds from Sales

   $ 245      $ 917      $ 426      $ 1,475   
                                
Net Realized Gains (Losses):         

Gross Realized Gains

   $ 32      $ 82      $ 60      $ 127   

Gross Realized Losses

     (11     (65     (23     (111
                                

Net Realized Gains

   $ 21      $ 17      $ 37      $ 16   
                                

Net realized gains disclosed in the above table were recognized in Other Income and Other Deductions on Power’s Condensed Consolidated Statements of Operations. Net unrealized gains of $57 million (after-tax)

 

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(UNAUDITED)

 

were recognized in Accumulated Other Comprehensive Loss on Power’s Condensed Consolidated Balance Sheet as of June 30, 2010.

The available-for-sale debt securities held as of June 30, 2010 had the following maturities:

 

Time Frame

  

Fair Value

     Millions

Less than one year

   $ 6

1 - 5 years

     124

6 - 10 years

     155

11 - 15 years

     65

16 - 20 years

     8
Over 20 years      200
      
   $ 558
      

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 Accumulated Other Comprehensive Income (OCI). In 2010, other-than-temporary impairments of $6 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 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.”

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 June 30, 2010
    

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Estimated

Fair

Value

     Millions

Equity Securities

   $ 9    $ 4    $ 0    $ 13

Debt Securities

     101      23      0      124

Other Securities

     16      0      0      16
                           
Total PSEG Available-for-Sale Securities    $ 126    $ 27    $ 0    $ 153
                           

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(UNAUDITED)

 

     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 six months ended June 30, 2010 and 2009, proceeds from sales, realized gains and realized losses related to 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

June 30,

2010

  

As of

December 31,

2009

     
     Millions

Power

   $ 30    $ 30

PSE&G

     52      51

Other

     71      68
             

Total PSEG Available-for-Sale Securities

   $ 153    $ 149
             

Note 6. Pension and Other Postretirement Employee Benefits (OPEB)

PSEG sponsors several qualified and nonqualified pension plans and OPEB 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 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.

 

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

 

 

    

Pension Benefits
Three Months
Ended

June 30,

    OPEB
Three Months
Ended
June 30,
    Pension Benefits
Six Months
Ended
June 30,
   

OPEB
Six Months

Ended
June 30,

 
    

2010

   

2009

   

2010

   

2009

   

2010

   

2009

   

2010

   

2009

 
     Millions  

Components of Net Periodic Benefit Cost:

                

Service Cost

   $ 22      $ 19      $ 4      $ 3      $ 44      $ 38      $ 8      $ 6   

Interest Cost

     57        59        18        18        115        118        36        36   

Expected Return on Plan Assets

     (66     (54     (3     (3     (133     (108     (7     (6

Amortization of Net

                

Transition Obligation

     0        0        7        7        0        0        14        14   

Prior Service Cost

     0        2        3        3        0        4        6        7   

Actuarial Loss

     31        28        2        (1     61        56        4        (2
                                                                

Net Periodic Benefit Cost

   $ 44      $ 54      $ 31      $ 27      $ 87      $ 108      $ 61      $ 55   

Effect of Regulatory Asset

     0        0        5        5        0        0        10        10   
                                                                

Total Benefit Costs, Including Effect of Regulatory Asset

   $ 44      $ 54      $ 36      $ 32      $ 87      $ 108      $ 71      $ 65   
                                                                

 

 

    Pension Benefits
Three Months Ended
June 30,
  OPEB
Three Months Ended
June 30,
  Pension Benefits
Six Months Ended
June 30,
  OPEB
Six Months Ended
June 30,
   

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

    Millions

Power

  $ 14   $ 17   $ 5   $ 3   $ 27   $ 33   $ 9   $ 6

PSE&G

    24     30     30     29     48     60     60     58

Other

    6     7     1     0     12     15     2     1
                                               

Total Benefit Costs

  $ 44   $ 54   $ 36   $ 32   $ 87   $ 108   $ 71   $ 65
                                               

During the six months ended June 30, 2010, PSEG contributed its planned contributions for the year 2010 of $415 million and $11 million into its pension and postretirement healthcare plans, respectively.

 

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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.

 

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(UNAUDITED)

 

The face value of outstanding guarantees, current exposure and margin positions as of June 30, 2010 and December 31, 2009 are shown below:

 

 

    

As of
June 30,

2010

   

As of
December 31,

2009

 
    
     Millions  

Face Value of Outstanding Guarantees

   $ 1,925      $ 1,783   

Exposure under Current Guarantees

   $ 375      $ 403   

Letters of Credit Margin Posted

   $ 149      $ 122   

Letters of Credit Margin Received

   $ 129      $ 123   

Cash Deposited and Received

    

Counterparty Cash Margin Deposited

   $ 2      $ 0   

Counterparty Cash Margin Received

     (24     (90

Net Broker Balance Received

     (24     (31

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

    

Additional Collateral that could be Required

   $ 880      $ 986   

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

   $ 2,537      $ 2,368   

Additional Amounts Posted:

    

Other Letters of Credit

   $ 95      $ 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 and the operations of hundreds of other companies along the Passaic and Hackensack rivers 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.

 

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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, currently 69 members, 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. The estimated costs range from $1.3 billion to $3.7 billion. The work contemplated by the study is not subject to the cost sharing agreement discussed above. A revised focused feasibility study may be released in 2011.

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. PSEG’s answers to the complaint were filed in June 2010. 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 immaterial 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 is continuing 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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.

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 ten 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 on its Condensed Consolidated Balance Sheet as of June 30, 2009. Subsequent expenditures reduced the liability to $685 million as of June 30, 2010. Of this amount, $35 million was recorded in Other Current Liabilities and $650 million was reflected as Environmental Costs in Noncurrent Liabilities. PSE&G has recorded a $685 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 $867 million has been spent on both projects as of June 30, 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 completed 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.

 

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(UNAUDITED)

 

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 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 level 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. In December 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 has 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.

 

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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 was included in Environmental Costs on Power’s and PSEG’s Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009.

Permit Renewals

Pursuant to the Federal Water Pollution Control Act (FWPCA), New Jersey Pollutant Discharge Elimination System (NJPDES) permits expire within five 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 NJPDES 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, the 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

 

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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.

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. These costs have not been updated. 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 including California and New York. It is unknown how these policies will ultimately impact 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 June 30, 2010 were $29 million and are expected to continue through 2012.

Power has begun expenditures in pursuit of additional output through an extended power uprate of its co-owned Peach Bottom nuclear units. 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. Total expenditures through June 30, 2010 were $8 million and are expected to continue through 2016.

 

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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 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 June 30, 2010 were $15 million, which are included in Property, Plant and Equipment on the Condensed Consolidated Balance Sheets of PSEG and Power.

PJM Interconnection L.L.C. (PJM)

Power plans to construct gas fired peaking facilities at its Kearny site. Capacity in the amount of 178 MW was bid into and cleared the PJM Reliability Pricing Model (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. In addition, capacity in the amount of 89 MW was bid into and cleared the PJM RPM base residual capacity auction for the 2013-2014 period. Final approval has been received, and the project is expected to be in service by June 2013. Power estimates the cost of these generating units to be $250 million to $300 million. Total capitalized expenditures through June 30, 2010 were $9 million which are included in Property, Plant and Equipment on Power’s and PSEG’s Condensed Consolidated Balance Sheets.

PSE&G—Solar

As part of the BPU-approved Solar 4 All Program, PSE&G is installing up to 40MW of solar generation on existing utility poles within its service territory. PSE&G has entered into an agreement to purchase solar units for this program. PSE&G’s commitments under this agreement are contingent upon, among other things, the availability of suitable utility poles for installation of the units. PSE&G’s remaining 2010 expenditures for these solar units are anticipated to be approximately $33 million, with additional purchases made on a quarterly basis during the remaining two-year term of the purchase agreement.

In January 2010, PSE&G announced that it had 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 has started on the Trenton and Edison projects, which are expected to be commercially operational in the fourth quarter of 2010. Construction on the Linden and Hamilton projects are expected to start later in the third quarter of 2010 following receipt of necessary approvals.

Solar Source

Energy Holdings has developed a solar project in western New Jersey and has acquired two additional solar projects in Florida and Ohio, which together have a total capacity of approximately 29 MW. The western New Jersey and Ohio projects are complete and the Florida project is expected to be completed in the third quarter of 2010. Energy Holdings issued guarantees to cover the construction costs of the Florida and Ohio projects and as of June 30, 2010 has $12 million of future payment obligations related to construction milestones to be achieved in the near future. By the end of the third quarter 2010, it is expected that these payment obligations will be zero. The total investment for the three projects is expected to 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

 

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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.

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 became effective on June 1, 2010 when the 2007 BGS auction agreements expired.

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. Current plans call for Power to hedge on behalf of PSE&G approximately 70 billion cubic feet or 50% of its residential gas supply annual requirements.

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.

 

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As of June 30, 2010, the total minimum purchase requirements included in these commitments were as follows:

 

 

Fuel Type

  

Commitments
through 2014

  

Power’s Share

     Millions

Nuclear Fuel

     

Uranium

   $ 640    $ 382

Enrichment

   $ 576    $ 359

Fabrication

   $ 215    $ 138

Natural Gas

   $ 803    $ 803

Coal/Oil

   $ 757    $ 757

Included in the $757 million commitment for coal and oil above is $523 million related to a certain coal contract under which Power can cancel contractual deliveries at minimal cost. There have been no cancellations in 2010.

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 specifications. 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. In June 2010, the BPU granted PSE&G’s motion to dismiss.

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.

 

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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.

In September 2009, the BPU rejected the ALJ’s initial decision and elected to maintain jurisdiction over the matter. In June 2010, the BPU approved a settlement agreement resolving the MTC issue. Under the agreement, PSE&G will refund $122 million to electric customers over a two-year period through a new component of the NUG charge. As a result, during the second quarter of 2010, PSE&G recorded a pre-tax charge of $122 million, which is included in Operating Revenues and the corresponding Regulatory Liability.

Retail Gas Transportation Rates

In July 2010, as part of PSE&G’s gas base rate proceeding, the BPU ordered a supplemental and expedited review of certain issues related to the gas transportation rate that PSE&G charges to Power, including:

 

 

whether the current rate charged to Power should be changed prospectively,

 

 

whether any retroactive relief is warranted with respect to these charges to Power since 2002,

 

 

whether the SBC and other clause charges are applicable, and

 

 

whether the Transportation Service Gas-Nonfirm (TSG-NF) rate should apply to Power and other electric generation customers in PSE&G’s service territory.

In the event that the BPU were to find that the rate charged to Power was not proper and order refunds, the results could be material. PSE&G believes such refunds would constitute retroactive ratemaking and be prohibited under applicable law. However, the outcome of the regulatory proceeding cannot be predicted. In July, a complaint was filed by an independent power generator against Power at FERC related to the gas transportation rate. The complaint asserts that the existing rate charged to Power violates FERC’s affiliate rules and Power’s market-based rate authority. The complaint requests, among other things, that Power’s market-based rate authority be revoked. While Power views revocation of its market-based rate authority as unlikely, it is not possible to predict the outcome of this proceeding. PSEG believes that the rates charged to Power were and continue to be lawful and appropriate, and intends to assert this position vigorously.

Consolidated Tax Adjustments

Another generic proceeding regarding consolidated tax adjustments is expected to begin later in 2010, pending our filing of a petition within 60 days of the BPU’s issuance of the final base rate case order on July 9, 2010. New Jersey is one of five states that make consolidated tax adjustments. These adjustments are intended to share tax benefits realized by non-regulated subsidiaries with utility customers under certain circumstances. The generic proceeding will address the appropriateness of the adjustment and the methodology and mechanics of the calculation. The policy adopted by the BPU will influence the non-regulated investments made by PSEG in the future.

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 billion for all years. PSE&G’s share is $705 million. PSE&G has recorded a discounted liability of $486 million as of June 30, 2010. Of this amount, $181 million was recorded as a current liability and $305 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.

 

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Leveraged Lease Investments

The IRS has issued reports with respect to its audits of PSEG’s consolidated 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 15 of these leasing transactions since December 2008 and reduced the related cash tax exposure by $800 million. As of June 30, 2010 and December 31, 2009, PSEG’s total gross investment in such transactions was $232 million and $347 million, respectively.

Cash Impact

As of June 30, 2010, an aggregate of approximately $550 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 $230 million. In the event PSEG is successful in defense of its position, the deposit is fully refundable with interest. 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. 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 $60 million to $80 million of tax would be due for tax positions through June 30, 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. 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. Any potential claims PSEG would make to recover such amounts would include the deposit noted above.

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 $120 million to $140 million.

 

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Note 8. Changes in Capitalization

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

Power

 

 

issued $300 million of 2.50% unsecured Senior Notes due April 2013 in April,

 

 

issued $250 million of 5.125% unsecured Senior Notes due April 2020 in April,

 

 

redeemed $161 million of 6.50% Medium-Term Notes (MTNs) due 2014 in April,

 

 

redeemed $48 million of 6.00% MTNs due 2013 in April,

 

 

exchanged an aggregate principal amount of $195 million of 7.75% Senior Notes due 2011 for $208 million 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.

 

 

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 cash dividends of $350 million to PSEG.

PSE&G

 

 

issued $300 million of 2.70% MTNs, Series G due May 2015 in May,

 

 

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% MTNs, Series G due March 2040 in March,

 

 

paid $86 million of Transition Funding’s securitization debt, and

 

 

paid $5 million of Transition Funding II’s securitization debt.

Energy Holdings

 

 

paid $2 million of nonrecourse project debt.

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.

 

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Commodity Prices

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

Cash Flow Hedges

Power uses forward sale and purchase contracts, swaps, 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 June 30, 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
June 30,
2010
   As of
December 31,
2009
     Millions

Fair Value of Cash Flow Hedges

   $ 293    $ 286

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

   $ 180    $ 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 June 30, 2011 and June 30, 2012 are $124 million and $56 million, respectively. Ineffectiveness associated with these hedges was $(2) million at June 30, 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 June 30, 2010 and December 31, 2009 was $32 million and $8 million, respectively.

 

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(UNAUDITED)

 

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.

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 June 30, 2010 and December 31, 2009, the fair value of all the underlying hedges was $38 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 June 30, 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 June 30, 2010 and December 31, 2009. The Accumulated Other Comprehensive Loss related to interest rate derivatives designated as cash flow hedges was $(3) million and $(4) million as of each of June 30, 2010 and December 31, 2009, respectively.

Fair Values of Derivative Instruments

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

 

 

Balance Sheet Location

  As of June 30, 2010  
  Power     PSE&G   PSEG   Consolidated  
  Cash Flow
Hedges
    Non Hedges     Netting
(A)
    Total
Power
    Non Hedges   Fair Value
Hedges
  Total
Derivatives
 
  Energy-
Related
Contracts
    Energy-
Related
Contracts
        Energy-
Related
Contracts
  Interest
Rate
Swaps
 
    Millions   

Derivative Contracts

             

Current Assets

  $ 318      $ 1,180      $ (1,252   $ 246      $ 6   $ 17   $ 269   

Noncurrent Assets

  $ 195      $ 263      $ (355   $ 103      $ 45   $ 21   $ 169   
                                                   

Total Mark-to-Market Derivative Assets

  $ 513      $ 1,443      $ (1,607   $ 349      $ 51   $ 38   $ 438   
                                                   

Derivative Contracts

             

Current Liabilities

  $ (122   $ (1,185   $ 1,188      $ (119   $ 0   $ 0   $ (119

Noncurrent Liabilities

  $ (98   $ (252   $ 319      $ (31   $ 0   $ 0   $ (31
                                                   

Total Mark-to-Market Derivative (Liabilities)

  $ (220   $ (1,437   $ 1,507      $ (150   $ 0   $ 0   $ (150
                                                   

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

  $ 293      $ 6      $ (100   $ 199      $ 51   $ 38   $ 288   
                                                   

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(UNAUDITED)

 

 

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

Balance Sheet Location

  Energy-
Related
Contracts
    Energy-
Related
Contracts
        Energy-
Related
Contracts
  Interest
Rate
Swaps
   
    Millions  

Derivative Contracts

             

Current Assets

  $ 357      $ 1,083      $ (1,209   $ 231      $ 1   $ 11      $ 243   

Noncurrent Assets

  $ 321      $ 255      $ (458   $ 118      $ 5   $ 0        123   
                                                     

Total Mark-to-Market Derivative Assets

  $ 678      $ 1,338      $ (1,667   $ 349      $ 6   $ 11      $ 366   
                                                     

Derivative Contracts

             

Current Liabilities

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

Noncurrent Liabilities

  $ (173   $ (235   $ 382      $ (26   $ 0   $ (14     (40
                                                     

Total Mark-to-Market Derivative (Liabilities)

  $ (392   $ (1,359   $ 1,524      $ (227   $ 0   $ (14   $ (241
                                                     

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

  $ 286      $ (21   $ (143   $ 122      $ 6   $ (3   $ 125   
                                                     

 

(A) Represents the netting of fair value balances with the same counterparty and the application of collateral. As of June 30, 2010 and December 31, 2009, net cash collateral received of $100 million and $143 million, respectively, was netted against the corresponding net derivative contract positions. Of the $100 million as of June 30, 2010, cash collateral of $(132) million and $(67) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $68 million and $31 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.

The aggregate fair value of derivative contracts in a liability position as of June 30, 2010 that contain triggers for additional collateral was $531 million. This potential additional collateral is included in the $880 million discussed in Note 7. Commitments and Contingent Liabilities.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following shows the effect on the Condensed Consolidated Statements of Operations and Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended June 30, 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 June 30,
        Three Months
Ended June 30,
        Three Months
Ended June  30,
 
    2010         2009             2010         2009             2010         2009    
    Millions  

PSEG(A)

               

Energy-Related Contracts

  $ (99   $ 121      Operating Revenue   $ 42      $ 138      Operating Revenue   $ (1   $ (1
Energy-Related Contracts     3        (15   Energy Costs     (1     (37       0        0   

Interest Rate Swaps

    0        0      Interest Expense     (1     (1       0        0   
                                                   

Total PSEG

  $ (96   $ 106        $ 40      $ 100        $ (1   $ (1
                                                   

PSEG Power

               

Energy-Related Contracts

  $ (99   $ 121      Operating Revenue   $ 42      $ 138      Operating Revenue   $ (1   $ (1
Energy-Related Contracts     3        (15   Energy Costs     (1     (37       0        0   
                                                   
Total Power   $ (96   $ 106        $ 41      $ 101        $ (1   $ (1
                                                   
PSE&G                

Interest Rate Swaps

  $ 0      $ 0      Interest Expense   $ 0      $ (1     $ 0      $ 0   
                                                   
Total PSE&G   $ 0      $ 0        $ 0      $ (1     $ 0      $ 0   
                                                   

38


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the six months ended June 30, 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)
  Six Months
Ended June 30,
        Six Months
Ended June  30,
        Six Months
Ended June  30,
  2010   2009           2010         2009           2010     2009
    Millions
PSEG(A)                

Energy-Related Contracts

  $ 109   $ 503      Operating Revenue   $ 118      $ 294      Operating Revenue   $ (3   $ 7

Energy-Related Contracts

    1     (43   Energy Costs     (2     (63       0        0

Interest Rate Swaps

    0     0      Interest Expense     (1     (5       0        0
                                               
Total PSEG   $ 110   $ 460        $ 115      $ 226        $ (3   $ 7
                                               
PSEG Power                

Energy-Related Contracts

  $ 109   $ 503      Operating Revenue   $ 118      $ 294      Operating Revenue   $ (3   $ 7

Energy-Related Contracts

    1     (43   Energy Costs     (2     (63       0        0

Interest Rate Swaps

    0     0      Interest Expense     0        (4       0        0
                                               
Total Power   $ 110   $ 460        $ 116      $ 227        $ (3   $ 7
                                               
PSE&G                

Interest Rate Swaps

  $ 0   $ 0      Interest Expense   $ 0      $ (1     $ 0      $ 0
                                               
Total PSE&G   $ 0   $ 0        $ 0      $ (1     $ 0      $ 0
                                               

 

(A) Includes amounts for PSEG Parent.

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

 

 

Accumulated Other Comprehensive Income

   Pre-Tax     After-Tax  
     Millions  

Balance as of December 31, 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   
                

Loss Recognized in AOCI (Effective Portion)

   $ (96   $ (57

Less: Gain Reclassified into Income (Effective Portion)

   $ (40   $ (24
                

Balance as of June 30, 2010

   $ 300      $ 177   
                

39


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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 and six months ended June 30, 2010 and 2009:

 

 

Derivatives Not Designated as Hedges

   Location of Pre-tax
Gain (Loss)
Recognized in
Income on Derivatives
   Pre-tax Gain (Loss)
Recognized in Income on Derivatives
 
        Three Months Ended
June 30,
   Six Months Ended
June 30,
 
       

2010

   

2009

  

2010

   

2009

 
          Millions  

PSEG and Power

            

Energy-Related Contracts

   Operating Revenues    $ (79   $ 49    $ 34      $ 180   

Energy-Related Contracts

   Energy Costs      1        1      (18     (85

Interest Rate Swaps

   Interest Expense      0        0      0        (1

Derivatives in NDT Funds

   Other Income      0        6      0        13   
                                  

Total PSEG and Power

      $ (78   $ 56    $ 16      $ 107   
                                  

Power’s derivative contracts reflected in the preceding tables include contracts to hedge the purchase and sale of electricity and the purchase of fuel. Not all of these contracts qualify for hedge accounting. Most of these contracts are marked to market. The tables above do not include contracts for which Power has elected the normal purchase/normal sales exemption, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load.

In addition, PSEG has interest rate swaps designated as fair value hedges. The effect of these hedges for the three months and the six months ended June 30, 2010 was to reduce interest expense by approximately $6 million and $12 million, respectively.

The following reflects the gross volume, on an absolute value basis, of derivatives as of June 30, 2010 and December 31, 2009:

 

 

Type

  

Notional

  

Total

  

PSEG

  

Power

  

PSE&G

          Millions

As of June 30, 2010

              

Natural Gas

   Dth    1,104    0    890    214

Electricity

   MWh    226    0    226    0

Capacity

   MW days    1    0    1    0

Financial Transmission Rights (FTRs)

   MWh    46    0    46    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

40


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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 June 30, 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 June 30, 2010. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of 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.

 

 

     Current    Securities
held as
   Net    Number of
Counterparties
   Net Exposure of
Counterparties
 

Rating

  

Exposure

  

Collateral

  

Exposure

  

>10%

  

>10%

 
     Millions         Millions  

Investment Grade—External Rating

   $ 1,085    $ 91    $ 1,062    $ 2    $ 539 (A) 

Non-Investment Grade—External Rating

     29      0      29      0      0   

Investment Grade—No External Rating

     35      0      35      0      0   

Non-Investment Grade—No External Rating

     4      1      4      0      0   
                                    

Total

   $ 1,153    $ 92    $ 1,130    $ 2    $ 539   
                                    

 

(A) Includes net exposure of $376 million with PSE&G. The remaining net exposure of $163 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 June  30, 2010, Power had 206 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

 

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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, certain full requirements contracts, 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.

 

42


Table of Contents

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 June 30, 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 June 30, 2010

 
           Cash
Collateral
    Quoted Market
Prices for
Identical Assets
   Significant
Other
Observable
Inputs
    Significant
Unobservable
Inputs
 

Description

  

Total

   

Netting(E)

   

(Level 1)

  

(Level 2)

   

(Level 3)

 
     Millions  

PSEG

           

Assets:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ 400      $ (199   $ 0    $ 337      $ 262   

Interest Rate Swaps(B)

   $ 38      $ 0      $ 0    $ 38      $ 0   

NDT Funds:(C)

           

Equity Securities

   $ 582      $ 0      $ 582    $ 0      $ 0   

Debt Securities—Government Obligations

   $ 313      $ 0      $ 0    $ 313      $ 0   

Debt Securities—Other

   $ 245      $ 0      $ 0    $ 245      $ 0   

Other Securities

   $ 35      $ 0      $ 1    $ 28      $ 6   

Rabbi Trusts—Mutual Funds(C)

   $ 153      $ 0      $ 13    $ 124      $ 16   

Other Long-Term Investments(D)

   $ 2      $ 0      $ 2    $ 0      $ 0   

Liabilities:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ (150   $ 99      $ 0    $ (166   $ (83

Power

           

Assets:

           

Derivative Contracts:

           

Energy-Related Contracts(A)

   $ 349      $ (199   $ 0    $ 337      $ 211   

NDT Funds:(C)

           

Equity Securities

   $ 582      $ 0   <