3B2 EDGAR HTML -- c53412_preflight.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008

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
(A New Jersey Corporation)
80 Park Plaza, P.O. Box 1171
Newark, New Jersey 07101-1171
973 430-7000
http://www.pseg.com

 

22-2625848

000-49614

 

PSEG POWER LLC
(A Delaware Limited Liability Company)
80 Park Plaza—T25
Newark, New Jersey 07102-4194
973 430-7000
http://www.pseg.com

 

22-3663480

001-00973

 

PUBLIC SERVICE ELECTRIC AND GAS COMPANY
(A New Jersey Corporation)
80 Park Plaza, P.O. Box 570
Newark, New Jersey 07101-0570
973 430-7000
http://www.pseg.com

 

22-1212800


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 S No £

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

Public Service Enterprise Group Incorporated

 

Large accelerated filer S

 

Accelerated filer £

 

Non-accelerated filer £

PSEG Power LLC

 

Large accelerated filer £

 

Accelerated filer £

 

Non-accelerated filer S

Public Service Electric and Gas Company

 

Large accelerated filer £

 

Accelerated filer £

 

Non-accelerated filer S

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

As of April 30, 2008, Public Service Enterprise Group Incorporated had outstanding 508,505,013 shares of its sole class of Common Stock, without par value.

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

As of April 30, 2008, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record by Public Service Enterprise Group Incorporated.




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

 

 

 

8

 

 

Notes to Condensed Consolidated Financial Statements

   

 

 

Note 1. Organization and Basis of Presentation

 

 

 

12

 

 

Note 2. Recent Accounting Standards

 

 

 

13

 

 

 

Note 3. Discontinued Operations

 

 

 

16

 

 

Note 4. Earnings Per Share

 

 

 

17

 

 

 

Note 5. Commitments and Contingent Liabilities

 

 

 

17

 

 

Note 6. Financial Risk Management Activities

 

 

 

27

 

 

 

Note 7. Comprehensive Income, Net of Tax

 

 

 

30

 

 

Note 8. Changes in Capitalization

 

 

 

30

 

 

 

Note 9. Other Income and Deductions

 

 

 

31

 

 

Note 10. Pension and Other Postretirement Benefits (OPEB)

 

 

 

32

 

 

 

Note 11. Income Taxes

 

 

 

33

 

 

Note 12. Financial Information by Business Segments

 

 

 

34

 

 

 

Note 13. Fair Value Measurements

 

 

 

35

 

 

Note 14. Related-Party Transactions

 

 

 

38

 

 

 

Note 15. Guarantees of Debt

 

 

 

40

 

Item 2.

 

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

 

 

 

42

 

 

 

Overview of 2008

 

 

 

43

 

 

Future Outlook

 

 

 

44

 

 

 

Results of Operations

 

 

 

47

 

 

Liquidity and Capital Resources

 

 

 

53

 

 

 

Capital Requirements

 

 

 

56

 

 

Accounting Matters

 

 

 

57

 

Item 3.

 

Qualitative and Quantitative Disclosures About Market Risk

 

 

 

57

 

Item 4.

 

Controls and Procedures

 

 

 

62

 

PART II. OTHER INFORMATION

   

Item 1.

 

Legal Proceedings

 

 

 

63

 

Item 1A.

 

Risk Factors

 

 

 

63

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

 

 

64

 

Item 5.

 

Other Information

 

 

 

65

 

Item 6.

 

Exhibits

 

 

 

70

 

 

 

Signatures

 

 

 

71

 

i


FORWARD-LOOKING STATEMENTS

Certain of the matters discussed in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such statements are based on management’s beliefs as well as assumptions made by and information currently available to management. When used herein, the words “anticipate,” “intend,” “estimate,” “believe,” “expect,” “plan,” “hypothetical,” “potential,” “forecast,” “project,” variations of such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Other factors that could cause actual results to differ materially from those contemplated in any forward-looking statements made by us herein are discussed in Item 1. Financial Statements—Note 5. 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, policies and regulation, including market rules that may adversely affect our operating results.

 

 

 

 

Any inability of our energy transmission and distribution businesses to obtain adequate and timely rate relief and/or regulatory approvals from federal and/or state regulators.

 

 

 

 

Changes in federal and/or state environmental regulations that could increase our costs or limit operations of our generating units.

 

 

 

 

Changes in nuclear regulation and/or developments in the nuclear power industry generally, that could limit operations of our nuclear generating units.

 

 

 

 

Actions or activities at one of our nuclear units that might adversely affect our ability to continue to operate that unit or other units at the same site.

 

 

 

 

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

 

 

 

 

Any deterioration in our credit quality.

 

 

 

 

Any inability to realize anticipated tax benefits or retain tax credits.

 

 

 

 

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

 

 

 

 

Delays or cost escalations in our construction and development activities.

 

 

 

 

Adverse capital market performance of our decommissioning and defined benefit plan trust funds.

 

 

 

 

Changes in technology and/or increased customer conservation.

All of the forward-looking statements made in this report are qualified by these cautionary statements and we cannot assure you that the results or developments anticipated by management will be realized, or even if realized, will have the expected consequences to, or effects on, us or our business prospects, financial condition or results of operations. Readers are cautioned not to place undue reliance on these forward-looking statements in making any investment decision. Forward-looking statements made in this report only apply as of the date of this report. Except as may be required by the federal securities laws, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to these forward-looking statements to reflect events or circumstances that occur or arise or are anticipated to occur or arise after the date hereof. The forward-looking statements contained in this report are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

ii


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

For The Quarters Ended
March 31,

 

2008

 

2007

 

 

(Millions)
(Unaudited)

OPERATING REVENUES

 

 

$

 

3,803

   

 

$

 

3,508

 

OPERATING EXPENSES

 

 

 

 

Energy Costs

 

 

 

2,124

   

 

 

1,977

 

Operation and Maintenance

 

 

 

631

   

 

 

595

 

Depreciation and Amortization

 

 

 

194

   

 

 

192

 

Taxes Other Than Income Taxes

 

 

 

43

   

 

 

43

 

 

 

 

 

 

Total Operating Expenses

 

 

 

2,992

   

 

 

2,807

 

 

 

 

 

 

Income from Equity Method Investments

 

 

 

12

   

 

 

27

 

 

 

 

 

 

OPERATING INCOME

 

 

 

823

   

 

 

728

 

Other Income

 

 

 

93

   

 

 

72

 

Other Deductions

 

 

 

(94

)

 

 

 

 

(36

)

 

Interest Expense

 

 

 

(153

)

 

 

 

 

(182

)

 

Preferred Stock Dividends

 

 

 

(1

)

 

 

 

 

(1

)

 

 

 

 

 

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

 

 

 

668

   

 

 

581

 

Income Tax Expense

 

 

 

(234

)

 

 

 

 

(260

)

 

 

 

 

 

 

INCOME FROM CONTINUING OPERATIONS

 

 

 

434

   

 

 

321

 

Income from Discontinued Operations, net of tax (expense) benefit of ($6) and $1

 

 

 

14

   

 

 

8

 

 

 

 

 

 

NET INCOME

 

 

$

 

448

   

 

$

 

329

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS):

 

 

 

 

BASIC

 

 

 

508,490

   

 

 

505,784

 

 

 

 

 

 

DILUTED

 

 

 

510,107

   

 

 

506,711

 

 

 

 

 

 

EARNINGS PER SHARE:

 

 

 

 

BASIC

 

 

 

 

INCOME FROM CONTINUING OPERATIONS

 

 

$

 

0.85

   

 

$

 

0.63

 

NET INCOME

 

 

$

 

0.88

   

 

$

 

0.65

 

 

 

 

 

 

DILUTED

 

 

 

 

INCOME FROM CONTINUING OPERATIONS

 

 

$

 

0.85

   

 

$

 

0.63

 

NET INCOME

 

 

$

 

0.88

   

 

$

 

0.65

 

 

 

 

 

 

DIVIDENDS PAID PER SHARE OF COMMON STOCK

 

 

$

 

0.3225

   

 

$

 

0.2925

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

1


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

March 31,
2008

 

December 31,
2007

 

 

(Millions)
(Unaudited)

ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and Cash Equivalents

 

 

$

 

251

   

 

$

 

381

 

Accounts Receivable, net of allowances of $52 and $46 in 2008 and 2007, respectively

 

 

 

1,709

   

 

 

1,552

 

Unbilled Revenues

 

 

 

307

   

 

 

353

 

Fuel

 

 

 

390

   

 

 

793

 

Materials and Supplies

 

 

 

296

   

 

 

296

 

Prepayments

 

 

 

54

   

 

 

91

 

Restricted Funds

 

 

 

95

   

 

 

114

 

Derivative Contracts

 

 

 

189

   

 

 

65

 

Assets of Discontinued Operations

 

 

 

1,394

   

 

 

1,162

 

Other

 

 

 

36

   

 

 

29

 

 

 

 

 

 

Total Current Assets

 

 

 

4,721

   

 

 

4,836

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

19,571

   

 

 

19,310

 

Less: Accumulated Depreciation and Amortization

 

 

 

(6,121

)

 

 

 

 

(6,035

)

 

 

 

 

 

 

Net Property, Plant and Equipment

 

 

 

13,450

   

 

 

13,275

 

 

 

 

 

 

NONCURRENT ASSETS

 

 

 

 

Regulatory Assets

 

 

 

4,919

   

 

 

5,165

 

Long-Term Investments

 

 

 

3,205

   

 

 

3,246

 

Nuclear Decommissioning Trust (NDT) Funds

 

 

 

1,209

   

 

 

1,276

 

Other Special Funds

 

 

 

143

   

 

 

164

 

Goodwill and Other Intangibles

 

 

 

59

   

 

 

64

 

Derivative Contracts

 

 

 

56

   

 

 

52

 

Other

 

 

 

206

   

 

 

221

 

 

 

 

 

 

Total Noncurrent Assets

 

 

 

9,797

   

 

 

10,188

 

 

 

 

 

 

TOTAL ASSETS

 

 

$

 

27,968

   

 

$

 

28,299

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

2


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

March 31,
2008

 

December 31,
2007

 

 

(Millions)
(Unaudited)

LIABILITIES AND CAPITALIZATION

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Long-Term Debt Due Within One Year

 

 

$

 

607

   

 

$

 

1,123

 

Commercial Paper and Loans

 

 

 

128

   

 

 

65

 

Accounts Payable

 

 

 

993

   

 

 

1,093

 

Derivative Contracts

 

 

 

450

   

 

 

324

 

Accrued Interest

 

 

 

154

   

 

 

113

 

Accrued Taxes

 

 

 

318

   

 

 

204

 

Deferred Income Taxes

 

 

 

141

   

 

 

106

 

Clean Energy Program

 

 

 

121

   

 

 

135

 

Liabilities of Discontinued Operations

 

 

 

648

   

 

 

520

 

Other

 

 

 

605

   

 

 

537

 

 

 

 

 

 

Total Current Liabilities

 

 

 

4,165

   

 

 

4,220

 

 

 

 

 

 

NONCURRENT LIABILITIES

 

 

 

 

Deferred Income Taxes and Investment Tax Credits (ITC)

 

 

 

4,234

   

 

 

4,454

 

Regulatory Liabilities

 

 

 

453

   

 

 

419

 

Asset Retirement Obligations

 

 

 

551

   

 

 

542

 

Other Postretirement Benefit (OPEB) Costs

 

 

 

1,007

   

 

 

1,003

 

Accrued Pension Costs

 

 

 

213

   

 

 

203

 

Clean Energy Program

 

 

 

   

 

 

14

 

Environmental Costs

 

 

 

646

   

 

 

649

 

Derivative Contracts

 

 

 

305

   

 

 

198

 

Long-Term Accrued Taxes

 

 

 

431

   

 

 

423

 

Other

 

 

 

123

   

 

 

133

 

 

 

 

 

 

Total Noncurrent Liabilities

 

 

 

7,963

   

 

 

8,038

 

 

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

 

 

 

 

CAPITALIZATION

 

 

 

 

LONG-TERM DEBT

 

 

 

 

Long-Term Debt

 

 

 

6,588

   

 

 

6,783

 

Securitization Debt

 

 

 

1,487

   

 

 

1,530

 

Project Level, Non-Recourse Debt

 

 

 

339

   

 

 

349

 

 

 

 

 

 

Total Long-Term Debt

 

 

 

8,414

   

 

 

8,662

 

 

 

 

 

 

SUBSIDIARIES’ PREFERRED SECURITIES

 

 

 

 

Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2008 and 2007—795,234 shares

 

 

 

80

   

 

 

80

 

 

 

 

 

 

COMMON STOCKHOLDERS’ EQUITY

 

 

 

 

Common Stock, no par, authorized 1,000,000,000 shares; issued; 2008—533,556,660 shares; 2007—533,556,660 shares

 

 

 

4,742

   

 

 

4,732

 

Treasury Stock, at cost; 2008—25,034,528 shares; 2007—25,033,656 shares

 

 

 

(483

)

 

 

 

 

(478

)

 

Retained Earnings

 

 

 

3,523

   

 

 

3,261

 

Accumulated Other Comprehensive Loss

 

 

 

(436

)

 

 

 

 

(216

)

 

 

 

 

 

 

Total Common Stockholders’ Equity

 

 

 

7,346

   

 

 

7,299

 

 

 

 

 

 

Total Capitalization

 

 

 

15,840

   

 

 

16,041

 

 

 

 

 

 

TOTAL LIABILITIES AND CAPITALIZATION

 

 

$

 

27,968

   

 

$

 

28,299

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

3


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

For The Three Months
Ended
March 31,

 

2008

 

2007

 

 

(Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net Income

 

 

$

 

448

   

 

$

 

329

 

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

 

 

 

 

Depreciation and Amortization

 

 

 

193

   

 

 

196

 

Amortization of Nuclear Fuel

 

 

 

24

   

 

 

25

 

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

 

 

 

2

   

 

 

(13

)

 

Non-Cash Employee Benefit Plan Costs

 

 

 

42

   

 

 

46

 

Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes

 

 

 

(26

)

 

 

 

 

(15

)

 

Gain on Sale of Investments

 

 

 

   

 

 

(16

)

 

Undistributed Earnings from Affiliates

 

 

 

(21

)

 

 

 

 

32

 

Foreign Currency Transaction Loss

 

 

 

   

 

 

1

 

Unrealized (Gains) Losses on Energy Contracts and Other Derivatives

 

 

 

(20

)

 

 

 

 

34

 

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

 

 

 

(38

)

 

 

 

 

(47

)

 

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

 

 

 

31

   

 

 

(1

)

 

Cost of Removal

 

 

 

(9

)

 

 

 

 

(8

)

 

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

 

 

 

8

   

 

 

(19

)

 

Net Change in Certain Current Assets and Liabilities

 

 

 

400

   

 

 

440

 

Employee Benefit Plan Funding and Related Payments

 

 

 

(24

)

 

 

 

 

(21

)

 

Investment Income and Dividend Distributions from Partnerships

 

 

 

   

 

 

11

 

Other

 

 

 

33

   

 

 

(26

)

 

 

 

 

 

 

Net Cash Provided By Operating Activities

 

 

 

1,043

   

 

 

948

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Additions to Property, Plant and Equipment

 

 

 

(323

)

 

 

 

 

(275

)

 

Proceeds from the Sale of Investments and Capital Leases

 

 

 

40

   

 

 

7

 

Proceeds from NDT Funds Sales

 

 

 

623

   

 

 

501

 

Investment in NDT Funds

 

 

 

(631

)

 

 

 

 

(511

)

 

Restricted Funds

 

 

 

21

   

 

 

34

 

NDT Funds Interest and Dividends

 

 

 

11

   

 

 

12

 

Other

 

 

 

(3

)

 

 

 

 

(1

)

 

 

 

 

 

 

Net Cash Used In Investing Activities

 

 

 

(262

)

 

 

 

 

(233

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Net Change in Commercial Paper and Loans

 

 

 

63

   

 

 

(104

)

 

Issuance of Long-Term Debt

 

 

 

300

   

 

 

 

Issuance of Common Stock

 

 

 

   

 

 

33

 

Redemptions of Long-Term Debt

 

 

 

(1,013

)

 

 

 

 

(113

)

 

Repayment of Non-Recourse Debt

 

 

 

(13

)

 

 

 

 

(16

)

 

Redemption of Securitization Debt

 

 

 

(40

)

 

 

 

 

(38

)

 

Premium Paid on Early Extinguishment of Debt

 

 

 

(48

)

 

 

 

 

 

Cash Dividends Paid on Common Stock

 

 

 

(164

)

 

 

 

 

(148

)

 

Other

 

 

 

4

   

 

 

5

 

 

 

 

 

 

Net Cash Used In Financing Activities

 

 

 

(911

)

 

 

 

 

(381

)

 

 

 

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

 

 

 

(130

)

 

 

 

 

334

 

Cash and Cash Equivalents at Beginning of Period

 

 

 

381

   

 

 

106

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 

 

$

 

251

   

 

$

 

440

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

Income Taxes Paid

 

 

$

 

133

   

 

$

 

85

 

Interest Paid, Net of Amounts Capitalized

 

 

$

 

91

   

 

$

 

126

 

See Notes to Condensed Consolidated Financial Statements.

4


PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

For The Quarters Ended
March 31,

 

2008

 

2007

 

 

(Millions)
(Unaudited)

OPERATING REVENUES

 

 

$

 

2,375

   

 

$

 

2,149

 

OPERATING EXPENSES

 

 

 

 

Energy Costs

 

 

 

1,589

   

 

 

1,488

 

Operation and Maintenance

 

 

 

239

   

 

 

238

 

Depreciation and Amortization

 

 

 

38

   

 

 

34

 

 

 

 

 

 

Total Operating Expenses

 

 

 

1,866

   

 

 

1,760

 

 

 

 

 

 

OPERATING INCOME

 

 

 

509

   

 

 

389

 

Other Income

 

 

 

86

   

 

 

51

 

Other Deductions

 

 

 

(91

)

 

 

 

 

(29

)

 

Interest Expense

 

 

 

(42

)

 

 

 

 

(37

)

 

 

 

 

 

 

INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES

 

 

 

462

   

 

 

374

 

Income Tax Expense

 

 

 

(187

)

 

 

 

 

(155

)

 

 

 

 

 

 

INCOME FROM CONTINUING OPERATIONS

 

 

 

275

   

 

 

219

 

Loss from Discontinued Operations, net of tax benefit of $4

 

 

 

   

 

 

(6

)

 

 

 

 

 

 

EARNINGS AVAILABLE TO PUBLIC SERVICE
ENTERPRISE GROUP INCORPORATED

 

 

$

 

275

   

 

$

 

213

 

 

 

 

 

 

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

5


PSEG POWER LLC
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

March 31,
2008

 

December 31,
2007

 

 

(Millions)
(Unaudited)

ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and Cash Equivalents

 

 

$

 

9

   

 

$

 

11

 

Accounts Receivable

 

 

 

469

   

 

 

533

 

Accounts Receivable—Affiliated Companies, net

 

 

 

47

   

 

 

441

 

Short-Term Loan to Affiliate

 

 

 

407

   

 

 

 

Fuel

 

 

 

387

   

 

 

791

 

Materials and Supplies

 

 

 

219

   

 

 

220

 

Energy Contracts

 

 

 

165

   

 

 

46

 

Restricted Funds

 

 

 

43

   

 

 

50

 

Prepayments

 

 

 

31

   

 

 

26

 

Other

 

 

 

33

   

 

 

31

 

 

 

 

 

 

Total Current Assets

 

 

 

1,810

   

 

 

2,149

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

6,667

   

 

 

6,565

 

Less: Accumulated Depreciation and Amortization

 

 

 

(1,830

)

 

 

 

 

(1,814

)

 

 

 

 

 

 

Net Property, Plant and Equipment

 

 

 

4,837

   

 

 

4,751

 

 

 

 

 

 

NONCURRENT ASSETS

 

 

 

 

Deferred Income Taxes and Investment Tax Credits (ITC)

 

 

 

2

   

 

 

 

Nuclear Decommissioning Trust (NDT) Funds

 

 

 

1,209

   

 

 

1,276

 

Goodwill

 

 

 

16

   

 

 

16

 

Other Intangibles

 

 

 

36

   

 

 

35

 

Other Special Funds

 

 

 

28

   

 

 

45

 

Energy Contracts

 

 

 

9

   

 

 

7

 

Other

 

 

 

57

   

 

 

57

 

 

 

 

 

 

Total Noncurrent Assets

 

 

 

1,357

   

 

 

1,436

 

 

 

 

 

 

TOTAL ASSETS

 

 

$

 

8,004

   

 

$

 

8,336

 

 

 

 

 

 

LIABILITIES AND MEMBER’S EQUITY

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Accounts Payable

 

 

$

 

615

   

 

$

 

648

 

Short-Term Loan from Affiliate

 

 

 

   

 

 

238

 

Energy Contracts

 

 

 

384

   

 

 

300

 

Accrued Interest

 

 

 

81

   

 

 

34

 

Other

 

 

 

124

   

 

 

118

 

 

 

 

 

 

Total Current Liabilities

 

 

 

1,204

   

 

 

1,338

 

 

 

 

 

 

NONCURRENT LIABILITIES

 

 

 

 

Deferred Income Taxes and Investment Tax Credits (ITC)

 

 

 

   

 

 

176

 

Asset Retirement Obligations

 

 

 

315

   

 

 

309

 

Other Postretirement Benefit (OPEB) Costs

 

 

 

132

   

 

 

129

 

Energy Contracts

 

 

 

246

   

 

 

158

 

Accrued Pension Costs

 

 

 

71

   

 

 

70

 

Environmental Costs

 

 

 

55

   

 

 

55

 

Long-Term Accrued Taxes

 

 

 

28

   

 

 

26

 

Other

 

 

 

12

   

 

 

12

 

 

 

 

 

 

Total Noncurrent Liabilities

 

 

 

859

   

 

 

935

 

 

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

 

 

 

 

LONG-TERM DEBT

 

 

 

 

Total Long-Term Debt

 

 

 

2,902

   

 

 

2,902

 

 

 

 

 

 

MEMBER’S EQUITY

 

 

 

 

Contributed Capital

 

 

 

2,000

   

 

 

2,000

 

Basis Adjustment

 

 

 

(986

)

 

 

 

 

(986

)

 

Retained Earnings

 

 

 

2,588

   

 

 

2,438

 

Accumulated Other Comprehensive Loss

 

 

 

(563

)

 

 

 

 

(291

)

 

 

 

 

 

 

Total Member’s Equity

 

 

 

3,039

   

 

 

3,161

 

 

 

 

 

 

TOTAL LIABILITIES AND MEMBER’S EQUITY

 

 

$

 

8,004

   

 

$

 

8,336

 

 

 

 

 

 

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

6


PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

For The Three Months
Ended
March 31,

 

2008

 

2007

 

 

(Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net Income

 

 

$

 

275

   

 

$

 

213

 

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

 

 

 

 

Depreciation and Amortization

 

 

 

38

   

 

 

34

 

Amortization of Nuclear Fuel

 

 

 

24

   

 

 

25

 

Interest Accretion on Asset Retirement Obligations

 

 

 

6

   

 

 

6

 

Provision for Deferred Income Taxes and ITC

 

 

 

19

   

 

 

26

 

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

 

 

 

(23

)

 

 

 

 

4

 

Non-Cash Employee Benefit Plan Costs

 

 

 

6

   

 

 

7

 

Net Realized Losses (Gains) and Income from NDT Funds

 

 

 

8

   

 

 

(19

)

 

Net Change in Working Capital:

 

 

 

 

Fuel, Materials and Supplies

 

 

 

405

   

 

 

490

 

Accounts Receivable

 

 

 

(58

)

 

 

 

 

(105

)

 

Accounts Payable

 

 

 

(12

)

 

 

 

 

57

 

Accounts Receivable/Payable-Affiliated Companies, net

 

 

 

189

   

 

 

72

 

Accrued Interest Payable

 

 

 

47

   

 

 

46

 

Other Current Assets and Liabilities

 

 

 

(3

)

 

 

 

 

4

 

Employee Benefit Plan Funding and Related Payments

 

 

 

   

 

 

(1

)

 

Other

 

 

 

17

   

 

 

(35

)

 

 

 

 

 

 

Net Cash Provided By Operating Activities

 

 

 

938

   

 

 

824

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Additions to Property, Plant and Equipment

 

 

 

(174

)

 

 

 

 

(126

)

 

Short-Term Loan—Affiliated Company, net

 

 

 

(407

)

 

 

 

 

(525

)

 

Proceeds from NDT Funds Sales

 

 

 

623

   

 

 

501

 

NDT Funds Interest and Dividends

 

 

 

11

   

 

 

12

 

Investment in NDT Funds

 

 

 

(631

)

 

 

 

 

(511

)

 

Restricted Funds

 

 

 

7

   

 

 

 

Other

 

 

 

(6

)

 

 

 

 

(2

)

 

 

 

 

 

 

Net Cash Used In Investing Activities

 

 

 

(577

)

 

 

 

 

(651

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Cash Dividend Paid

 

 

 

(125

)

 

 

 

 

(125

)

 

Short-Term Loan—Affiliated Company, net

 

 

 

(238

)

 

 

 

 

(54

)

 

 

 

 

 

 

Net Cash Used In Financing Activities

 

 

 

(363

)

 

 

 

 

(179

)

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

 

 

(2

)

 

 

 

 

(6

)

 

Cash and Cash Equivalents at Beginning of Period

 

 

 

11

   

 

 

13

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 

 

$

 

9

   

 

$

 

7

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

Income Taxes Paid

 

 

$

 

19

   

 

$

 

24

 

Interest Paid, Net of Amounts Capitalized

 

 

$

 

3

   

 

$

 

3

 

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

7


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

For The Quarters
Ended
March 31,

 

2008

 

2007

 

 

(Millions)
(Unaudited)

OPERATING REVENUES

 

 

$

 

2,618

   

 

$

 

2,486

 

OPERATING EXPENSES

 

 

 

 

Energy Costs

 

 

 

1,793

   

 

 

1,665

 

Operation and Maintenance

 

 

 

360

   

 

 

325

 

Depreciation and Amortization

 

 

 

143

   

 

 

145

 

Taxes Other Than Income Taxes

 

 

 

43

   

 

 

43

 

 

 

 

 

 

Total Operating Expenses

 

 

 

2,339

   

 

 

2,178

 

 

 

 

 

 

OPERATING INCOME

 

 

 

279

   

 

 

308

 

Other Income

 

 

 

5

   

 

 

5

 

Other Deductions

 

 

 

(1

)

 

 

 

 

(1

)

 

Interest Expense

 

 

 

(81

)

 

 

 

 

(81

)

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

 

 

202

   

 

 

231

 

Income Tax Expense

 

 

 

(65

)

 

 

 

 

(99

)

 

 

 

 

 

 

NET INCOME

 

 

 

137

   

 

 

132

 

Preferred Stock Dividends

 

 

 

(1

)

 

 

 

 

(1

)

 

 

 

 

 

 

EARNINGS AVAILABLE TO PUBLIC
SERVICE ENTERPRISE GROUP INCORPORATED

 

 

$

 

136

   

 

$

 

131

 

 

 

 

 

 

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

8


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

March 31,
2008

 

December 31,
2007

 

 

(Millions)
(Unaudited)

ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and Cash Equivalents

 

 

$

 

68

   

 

$

 

32

 

Accounts Receivable, net of allowances of $52 in 2008 and $45 in 2007

 

 

 

1,171

   

 

 

995

 

Unbilled Revenues

 

 

 

307

   

 

 

353

 

Materials and Supplies

 

 

 

59

   

 

 

53

 

Prepayments

 

 

 

7

   

 

 

57

 

Restricted Funds

 

 

 

10

   

 

 

7

 

Derivative Contracts

 

 

 

1

   

 

 

1

 

Deferred Income Taxes

 

 

 

47

   

 

 

44

 

 

 

 

 

 

Total Current Assets

 

 

 

1,670

   

 

 

1,542

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

11,678

   

 

 

11,531

 

Less: Accumulated Depreciation and Amortization

 

 

 

(3,980

)

 

 

 

 

(3,920

)

 

 

 

 

 

 

Net Property, Plant and Equipment

 

 

 

7,698

   

 

 

7,611

 

 

 

 

 

 

NONCURRENT ASSETS

 

 

 

 

Regulatory Assets

 

 

 

4,919

   

 

 

5,165

 

Long-Term Investments

 

 

 

154

   

 

 

153

 

Other Special Funds

 

 

 

48

   

 

 

57

 

Other

 

 

 

100

   

 

 

109

 

 

 

 

 

 

Total Noncurrent Assets

 

 

 

5,221

   

 

 

5,484

 

 

 

 

 

 

TOTAL ASSETS

 

 

$

 

14,589

   

 

$

 

14,637

 

 

 

 

 

 

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

9


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

March 31,
2008

 

December 31,
2007

 

 

(Millions)
(Unaudited)

LIABILITIES AND CAPITALIZATION

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Long-Term Debt Due Within One Year

 

 

$

 

524

   

 

$

 

429

 

Commercial Paper and Loans

 

 

 

128

   

 

 

65

 

Accounts Payable

 

 

 

287

   

 

 

325

 

Accounts Payable—Affiliated Companies, net

 

 

 

297

   

 

 

559

 

Accrued Interest

 

 

 

53

   

 

 

56

 

Accrued Taxes

 

 

 

67

   

 

 

29

 

Clean Energy Program

 

 

 

121

   

 

 

135

 

Derivative Contracts

 

 

 

25

   

 

 

20

 

Other

 

 

 

422

   

 

 

318

 

 

 

 

 

 

Total Current Liabilities

 

 

 

1,924

   

 

 

1,936

 

 

 

 

 

 

NONCURRENT LIABILITIES

 

 

 

 

Deferred Income Taxes and ITC

 

 

 

2,442

   

 

 

2,440

 

Other Postretirement Benefit (OPEB) Costs

 

 

 

820

   

 

 

821

 

Accrued Pension Costs

 

 

 

64

   

 

 

63

 

Regulatory Liabilities

 

 

 

453

   

 

 

419

 

Clean Energy Program

 

 

 

   

 

 

14

 

Environmental Costs

 

 

 

591

   

 

 

594

 

Asset Retirement Obligations

 

 

 

234

   

 

 

231

 

Derivative Contracts

 

 

 

53

   

 

 

36

 

Long-Term Accrued Taxes

 

 

 

100

   

 

 

75

 

Other

 

 

 

9

   

 

 

9

 

 

 

 

 

 

Total Noncurrent Liabilities

 

 

 

4,766

   

 

 

4,702

 

 

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

 

 

 

 

CAPITALIZATION

 

 

 

 

LONG-TERM DEBT

 

 

 

 

Long-Term Debt

 

 

 

2,909

   

 

 

3,102

 

Securitization Debt

 

 

 

1,487

   

 

 

1,530

 

 

 

 

 

 

Total Long-Term Debt

 

 

 

4,396

   

 

 

4,632

 

 

 

 

 

 

PREFERRED SECURITIES

 

 

 

 

Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2008 and 2007—795,234 shares

 

 

 

80

   

 

 

80

 

 

 

 

 

 

COMMON STOCKHOLDER’S EQUITY

 

 

 

 

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

 

 

 

892

   

 

 

892

 

Contributed Capital

 

 

 

170

   

 

 

170

 

Basis Adjustment

 

 

 

986

   

 

 

986

 

Retained Earnings

 

 

 

1,373

   

 

 

1,237

 

Accumulated Other Comprehensive Income

 

 

 

2

   

 

 

2

 

 

 

 

 

 

Total Common Stockholder’s Equity

 

 

 

3,423

   

 

 

3,287

 

 

 

 

 

 

Total Capitalization

 

 

 

7,899

   

 

 

7,999

 

 

 

 

 

 

TOTAL LIABILITIES AND CAPITALIZATION

 

 

$

 

14,589

   

 

$

 

14,637

 

 

 

 

 

 

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

10


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

For The Three Months Ended
March 31,

 

2008

 

2007

 

 

(Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net Income

 

 

$

 

137

   

 

$

 

132

 

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

 

 

 

 

Depreciation and Amortization

 

 

 

143

   

 

 

145

 

Provision for Deferred Income Taxes and ITC

 

 

 

(13

)

 

 

 

 

(24

)

 

Non-Cash Employee Benefit Plan Costs

 

 

 

33

   

 

 

35

 

Non-Cash Interest Expense

 

 

 

1

   

 

 

1

 

Cost of Removal

 

 

 

(9

)

 

 

 

 

(8

)

 

Employee Benefit Plan Funding and Related Payments

 

 

 

(19

)

 

 

 

 

(16

)

 

Over Recovery of Electric Energy Costs (BGS and NTC)

 

 

 

15

   

 

 

4

 

Under Recovery of Gas Costs

 

 

 

(53

)

 

 

 

 

(51

)

 

Over (Under) Recovery of SBC

 

 

 

31

   

 

 

(1

)

 

Other Non-Cash Charges

 

 

 

(1

)

 

 

 

 

(1

)

 

Net Changes in Certain Current Assets and Liabilities:

 

 

 

 

Accounts Receivable and Unbilled Revenues

 

 

 

(130

)

 

 

 

 

(269

)

 

Materials and Supplies

 

 

 

(6

)

 

 

 

 

(7

)

 

Prepayments

 

 

 

50

   

 

 

(4

)

 

Accrued Taxes

 

 

 

37

   

 

 

41

 

Accrued Interest

 

 

 

(3

)

 

 

 

 

(11

)

 

Accounts Payable

 

 

 

(38

)

 

 

 

 

7

 

Accounts Receivable/Payable-Affiliated Companies, net

 

 

 

(20

)

 

 

 

 

59

 

Other Current Assets and Liabilities

 

 

 

98

   

 

 

27

 

Other

 

 

 

8

   

 

 

2

 

 

 

 

 

 

Net Cash Provided By Operating Activities

 

 

 

261

   

 

 

61

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Additions to Property, Plant and Equipment

 

 

 

(145

)

 

 

 

 

(130

)

 

 

 

 

 

 

Net Cash Used In Investing Activities

 

 

 

(145

)

 

 

 

 

(130

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Net Change in Short-Term Debt

 

 

 

63

   

 

 

238

 

Issuance of Long-Term Debt

 

 

 

300

   

 

 

 

Redemption of Long-Term Debt

 

 

 

(401

)

 

 

 

 

(113

)

 

Redemption of Securitization Debt

 

 

 

(40

)

 

 

 

 

(38

)

 

Deferred Issuance Costs

 

 

 

(1

)

 

 

 

 

 

Preferred Stock Dividends

 

 

 

(1

)

 

 

 

 

(1

)

 

 

 

 

 

 

Net Cash (Used In) Provided By Financing Activities

 

 

 

(80

)

 

 

 

 

86

 

 

 

 

 

 

Net Increase In Cash and Cash Equivalents

 

 

 

36

   

 

 

17

 

Cash and Cash Equivalents at Beginning of Period

 

 

 

32

   

 

 

28

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 

 

$

 

68

   

 

$

 

45

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

Income Taxes Paid

 

 

$

 

   

 

$

 

49

 

Interest Paid, Net of Amounts Capitalized

 

 

$

 

81

   

 

$

 

88

 

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

11


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 contained herein relating to any individual company is filed by such company on its own behalf. Power and PSE&G each make representations only as to itself and make no representations as to any other company.

Note 1. Organization and Basis of Presentation

Organization

PSEG

PSEG has four principal direct wholly owned subsidiaries: Power, PSE&G, PSEG Energy Holdings L.L.C. (Energy Holdings) and PSEG Services Corporation (Services).

Power

Power is a multi-regional, wholesale energy supply company that integrates its generating asset operations and gas supply commitments with its wholesale energy, fuel supply, energy trading and marketing and risk management function through three principal direct wholly owned subsidiaries: PSEG Nuclear LLC (Nuclear), PSEG Fossil LLC (Fossil) and PSEG Energy Resources & Trade LLC (ER&T). Nuclear and Fossil own and operate generation and generation-related facilities. ER&T is responsible for the day-to-day management of Power’s portfolio. Fossil, Nuclear and ER&T are subject to regulation by the Federal Energy Regulatory Commission (FERC) and Nuclear is also subject to regulation by the Nuclear Regulatory Commission (NRC).

PSE&G

PSE&G is an operating public utility engaged principally in the transmission of electric energy and distribution of electric energy and natural gas in certain areas of New Jersey. PSE&G is subject to regulation by the New Jersey Board of Public Utilities (BPU) and the FERC.

PSE&G Transition Funding LLC (Transition Funding) and PSE&G Transition Funding II LLC (Transition Funding II), are wholly owned, bankruptcy-remote subsidiaries of PSE&G that purchased certain transition properties from PSE&G and issued transition bonds secured by such properties. The transition properties consist principally of the statutory rights to receive electricity consumption-based per kilowatt-hour (kWh) charges from PSE&G electric distribution customers, which represent irrevocable rights to receive amounts sufficient to recover certain of PSE&G’s transition costs related to deregulation, as approved by the BPU.

Energy Holdings

Energy Holdings has two principal direct wholly owned subsidiaries: PSEG Global L.L.C. (Global), which primarily owns and operates domestic and international projects engaged in the generation of energy and PSEG Resources L.L.C. (Resources), which has invested primarily in energy-related leveraged leases. Energy Holdings also owns Enterprise Group Development Corporation (EGDC), a commercial real estate property management business.

Global has reduced its international risk by monetizing the majority of its international investments. In December 2007, Global announced that it intends to sell its largest remaining international investment in the SAESA Group. For additional information, see Note 3. Discontinued Operations. Global is also continuing to explore options for its other remaining international investments in Italy, Venezuela and India, which had a total book asset value of approximately $123 million as of March 31, 2008.

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Services

Services provides management and administrative and general services to PSEG and its subsidiaries. These include accounting, treasury, financial risk management, law, tax, planning, information technology, investor relations and certain other services. Services charges PSEG and its subsidiaries for the cost of work performed and services provided pursuant to an intercompany service agreement.

Basis of Presentation

PSEG, Power and PSE&G

The respective financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for 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 PSEG’s, Power’s and PSE&G’s respective Annual Reports on Form 10-K for the year ended December 31, 2007.

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, 2007.

Reclassifications

PSEG and Power

Certain reclassifications have been made to the prior period financial statements to conform to the 2008 presentation. In accordance with a new policy established in the first quarter of 2008, Power has adjusted its Condensed Consolidated Balance Sheet as of December 31, 2007 to net the fair value of cash collateral receivables and payables with the corresponding net derivative balances. See Note 2. Recent Accounting Standards for additional information. In addition, operating results for the SAESA Group and Electroandes S.A. (Electroandes) were reclassified to Income from Discontinued Operations on the Condensed Consolidated Statement of Operations of PSEG for the first quarter of 2007. See Note 3. Discontinued Operations.

Note 2. Recent Accounting Standards

The following accounting standards were issued by the Financial Accounting Standards Board (FASB), but have not yet been adopted by PSEG, Power and PSE&G.

Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007), “Business Combinations” (SFAS 141(R))

PSEG, Power and PSE&G

In December 2007, the FASB issued SFAS 141(R) which replaces SFAS No. 141 “Business Combinations.” SFAS 141(R) will change financial accounting and reporting of business combination transactions. It is based on the principle that all the assets acquired and the liabilities assumed in a business combination should be measured at their acquisition date fair values, with limited exceptions. This standard applies to all transactions and events in which an entity obtains control of one or more businesses of an acquiree. The standard also expands the definition of a business. A transaction formerly recorded as an asset acquisition may qualify as a business combination under SFAS 141(R). It also requires that acquisition-related costs and certain restructuring costs be recognized separately from the business combination.

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

SFAS 141(R) is effective for all business combinations with an acquisition date on or after the beginning of fiscal years commencing on or after December 15, 2008. Earlier adoption is prohibited. SFAS 141(R) is required to be adopted concurrently with SFAS 160. PSEG, Power and PSE&G will adopt SFAS 141(R) effective January 1, 2009. Accordingly, all business combinations for which the acquisition date is on or after January 1, 2009 will be accounted for under this new guidance. PSEG, Power and PSE&G do not anticipate a material impact to their respective financial statements upon adoption.

SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin (ARB) No. 51” (SFAS 160)

PSEG, Power and PSE&G

In December 2007, the FASB issued SFAS 160 which significantly changes the financial reporting relationship between a parent and non-controlling interests (i.e. minority interests). SFAS 160 requires all entities to report minority interests in subsidiaries as a separate component of equity in the consolidated financial statements. Accordingly, the amount of net income attributable to the noncontrolling interest is required to be included in consolidated net income on the face of the income statement. Further, SFAS 160 requires that the transactions between a parent and noncontrolling interests should be treated as equity. However, if a subsidiary is deconsolidated, a parent is required to recognize a gain or loss.

SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 160 will be applied prospectively, except for presentation and disclosure requirements which are required to be applied retrospectively. PSEG, Power and PSE&G will adopt SFAS 160 effective January 1, 2009. PSEG, Power and PSE&G do not anticipate a material impact to their respective financial statements upon adoption.

SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (SFAS 161)

PSEG, Power and PSE&G

In March 2008, the FASB issued SFAS 161 which expands derivative disclosures by requiring an entity to disclose: i) an understanding of how and why an entity uses derivatives, ii) an understanding of how derivatives and related hedged items are accounted for and iii) transparency into the overall impact of derivatives on an entity’s financial statements.

SFAS 161 is effective for fiscal years beginning on or after November 15, 2008. Earlier adoption is encouraged. PSEG, Power and PSE&G are currently analyzing the requirements of SFAS 161 and will adopt the standard on January 1, 2009. As SFAS 161 provides only disclosure requirements, PSEG, Power and PSE&G do not anticipate a material impact to their respective financial statements.

The following new accounting standards were adopted by PSEG, Power and PSE&G during 2008.

SFAS No. 157, “Fair Value Measurements” (SFAS 157)

PSEG, Power and PSE&G

In September 2006, the FASB issued SFAS 157 which provides a single definition of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Prior to SFAS 157, guidance for applying fair value was incorporated into several accounting pronouncements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources (observable inputs) and those based on an entity’s own assumptions (unobservable inputs). Under SFAS 157, fair value measurements are disclosed by level within that hierarchy, with the highest priority being quoted prices in active markets.

SFAS 157 also nullifies the guidance in footnote 3 of Emerging Issues Task Force (EITF) Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

in Energy Trading and Risk Management Activities” (EITF 02-3). The guidance in footnote 3 applied to derivative (and other) instruments measured at fair value at initial recognition under SFAS 133. That guidance precluded immediate recognition in earnings of an unrealized gain or loss, measured as the difference between the transaction price and the fair value of the instrument at initial recognition, if the fair value of the instrument was determined using significant unobservable inputs. Under this guidance, an entity could not recognize an unrealized gain or loss at inception of a derivative instrument unless the fair value of that instrument was obtained from a quoted market price in an active market or was otherwise evidenced by comparison to other observable current market transactions or based on a valuation technique incorporating observable market data. SFAS 157 requires that the principles of fair value measurement should be applied for derivatives and other financial instruments at initial recognition and in all subsequent periods. At December 31, 2007, PSEG had a deferred inception loss of $34 million (pre-tax) related to Global’s Texas generation facilities. In accordance with the provisions of SFAS 157, PSEG recorded a cumulative effect adjustment of $22 million (after-tax) to January 1, 2008 Retained Earnings associated with the implementation of SFAS 157.

PSEG, Power and PSE&G adopted SFAS 157 (except for non-financial assets and liabilities as described in FASB Staff Position (FSP) FAS 157-2) effective January 1, 2008. In February 2008, the FASB issued FSP FAS 157-2 to partially defer the effective date of SFAS 157 for certain nonfinancial assets and nonfinancial liabilities. In February 2008, the FASB also issued FSP FAS 157-1 to exclude leasing transactions from SFAS 157’s scope.

For additional information, see Note 13. Fair Value Measurements.

SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159)

PSEG, Power and PSE&G

In February 2007, the FASB issued SFAS 159, which permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity would report unrealized gains and losses in earnings at each subsequent reporting date on items for which the fair value option has been elected. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The decision whether to elect the fair value option is applied instrument by instrument, with a few exceptions. The decision is irrevocable and it is required to be applied only to entire instruments and not to portions of instruments.

The statement requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities; and (b) between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Upon implementation, an entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of Retained Earnings.

PSEG, Power and PSE&G adopted SFAS 159 effective January 1, 2008; however, to date, PSEG, Power and PSE&G have not elected to measure any of their respective assets or liabilities at fair value under this standard.

FSP FIN 39-1, “An amendment of FASB Interpretation No. 39” (FSP FIN 39-1)

PSEG and Power

In April 2007, the FASB issued FSP FIN 39-1, which amends FIN 39, “Offsetting of Amounts Related to Certain Contracts” to permit an entity to offset cash collateral paid or received against fair value amounts recognized for derivative instruments held with the same counterparty under the same master netting arrangement.

PSEG and Power adopted the FSP effective January 1, 2008. In accordance with the provisions of FIN 39-1, PSEG and Power established a policy of netting fair value cash collateral receivables and payables with the corresponding net derivative balances. The adoption of FSP FIN 39-1 resulted in PSEG and Power

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

offsetting cash collateral receivables of $209 million against net derivative positions as of March 31, 2008. Amounts in prior period statements have been retroactively adjusted, as required under the FSP.

Note 3. Discontinued Operations

Power

On May 16, 2007, Power completed the sale of Lawrenceburg, a 1,096-megawatt (MW), gas-fired combined cycle electric generating plant located in Lawrenceburg, Indiana, to AEP Generating Company, a subsidiary of American Electric Power Company, Inc. (AEP) for a sale price of $325 million.

Lawrenceburg’s operating results for the quarter ended March 31, 2007, which are included in Discontinued Operations, are summarized below:

 

 

 

 

 

Quarter Ended
March 31,
2007

 

 

(Millions)

Operating Revenues

 

 

$

 

 

Loss Before Income Taxes

 

 

$

 

(10

)

 

Net Loss

 

 

$

 

(6

)

 

Energy Holdings

SAESA Group

On December 18, 2007, Global announced that it intends to sell its investment in the SAESA Group. The SAESA Group consists of four distribution companies, one transmission company and a generation facility located in Chile.

SAESA Group’s operating results for the quarters ended March 31, 2008 and 2007, which are included in Discontinued Operations, are summarized below:

 

 

 

 

 

 

 

Quarters Ended
March 31,

 

2008

 

2007

 

 

(Millions)

Operating Revenues

 

 

$

 

186

   

 

$

 

94

 

Income Before Income Taxes

 

 

$

 

20

   

 

$

 

16

 

Net Income

 

 

$

 

14

   

 

$

 

14

 

The carrying amounts of SAESA Group’s assets as of March 31, 2008 and December 31, 2007 are summarized in the following table:

 

 

 

 

 

 

 

As of
March 31,
2008

 

As of
December 31,
2007

 

 

(Millions)

Current Assets

 

 

$

 

264

   

 

$

 

191

 

Noncurrent Assets

 

 

 

1,130

   

 

 

971

 

 

 

 

 

 

Total Assets of Discontinued Operations

 

 

$

 

1,394

   

 

$

 

1,162

 

 

 

 

 

 

Current Liabilities

 

 

$

 

206

   

 

$

 

130

 

Noncurrent Liabilities

 

 

 

442

   

 

 

390

 

 

 

 

 

 

Total Liabilities of Discontinued Operations

 

 

$

 

648

   

 

$

 

520

 

 

 

 

 

 

Electroandes

On September 19, 2007, Global entered into an agreement for the sale of Electroandes, a hydro-electric generation and transmission company in Peru that owns and operates four hydro-generation plants with total capacity of 180 MW and 437 miles of electric transmission lines.

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The sale was completed on October 17, 2007 for a total purchase price of $390 million, including the assumption of approximately $108 million of debt.

Electroandes’ operating results for the quarter ended March 31, 2007, which are included in Discontinued Operations, are summarized below:

 

 

 

 

 

Quarter Ended
March 31,
2007

 

 

(Millions)

Operating Revenues

 

 

$

 

11

 

Income Before Income Taxes

 

 

$

 

1

 

Net Income

 

 

$

 

 

Note 4. Earnings Per Share (EPS)

PSEG

Diluted EPS is calculated by dividing Net Income by the weighted average number of shares of common stock outstanding, including shares issuable upon exercise of stock options outstanding or vesting of restricted stock awards granted under PSEG’s stock compensation plans and upon payment of performance units or restricted stock units. The following table shows the effect of these stock options, restricted stock awards, performance units and restricted stock units on the weighted average number of shares outstanding used in calculating diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

Quarters Ended March 31,

 

2008

 

2007

 

Basic

 

Diluted

 

Basic

 

Diluted

EPS Numerator:

 

 

 

 

 

 

 

 

Earnings (Millions)

 

 

 

 

 

 

 

 

Continuing Operations

 

 

$

 

434

   

 

$

 

434

   

 

$

 

321

   

 

$

 

321

 

Discontinued Operations

 

 

 

14

   

 

 

14

   

 

 

8

   

 

 

8

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

$

 

448

   

 

$

 

448

   

 

$

 

329

   

 

$

 

329

 

 

 

 

 

 

 

 

 

 

EPS Denominator (Thousands):

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding

 

 

 

508,490

   

 

 

508,490

   

 

 

505,784

   

 

 

505,784

 

Effect of Stock Options

 

 

 

   

 

 

539

   

 

 

   

 

 

780

 

Effect of Stock Performance Units

 

 

 

   

 

 

965

   

 

 

   

 

 

147

 

Effect of Restricted Stock

 

 

 

   

 

 

19

   

 

 

   

 

 

 

Effect of Restricted Stock Units

 

 

 

   

 

 

94

   

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Total Shares

 

 

 

508,490

   

 

 

510,107

   

 

 

505,784

   

 

 

506,711

 

 

 

 

 

 

 

 

 

 

EPS:

 

 

 

 

 

 

 

 

Continuing Operations

 

 

$

 

0.85

   

 

$

 

0.85

   

 

$

 

0.63

   

 

$

 

0.63

 

Discontinued Operations

 

 

 

0.03

   

 

 

0.03

   

 

 

0.02

   

 

 

0.02

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

$

 

0.88

   

 

$

 

0.88

   

 

$

 

0.65

   

 

$

 

0.65

 

 

 

 

 

 

 

 

 

 

Dividend payments on common stock for the quarter ended March 31, 2008 were $0.3225 per share and totaled $164 million. Dividend payments on common stock for the quarter ended March 31, 2007 were $0.2925 per share and totaled $148 million.

Note 5. Commitments and Contingent Liabilities

Guaranteed Obligations

Power

Power contracts for electricity, natural gas, oil, coal, pipeline capacity, transportation and emission allowances and engages in risk management activities through ER&T. These activities primarily involve the

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

purchase and sale of energy and related products under transportation, physical, financial and forward contracts at fixed and variable prices. These transactions are executed with numerous counterparties and brokers. Counterparties and brokers may require guarantees, cash or cash-related instruments to be deposited on these transactions as described below.

Power has unconditionally guaranteed payments by its subsidiaries, ER&T and PSEG Power New York Inc. (Power New York) in commodity-related transactions to support current exposure, interest and other costs on sums due and payable in the ordinary course of business. These payment guarantees are provided to counterparties in order to obtain credit. Under these agreements, guarantees cover lines of credit between entities and are often reciprocal in nature. The exposure between counterparties can move in either direction. The face value of the guarantees outstanding as of March 31, 2008 and December 31, 2007 was $1.5 billion.

In order for Power to incur a liability for the face value of the outstanding guarantees, ER&T and Power New York would have to fully utilize the credit granted to them by every counterparty to whom Power has provided a guarantee and all of ER&T’s and Power New York’s contracts would have to be “out-of-the-money” (if the contracts are terminated, Power would owe money to the counterparties). The probability of all contracts at ER&T and Power New York being simultaneously “out-of-the-money” is highly unlikely due to offsetting positions within the portfolio. For this reason, the current exposure at any point in time is a more meaningful representation of the potential liability to Power under these guarantees if ER&T and/or Power New York were to default. This current exposure consists of the net of accounts receivable and accounts payable and the forward value on open positions, less any margins posted. The current exposure from such liabilities was $530 million and $521 million as of March 31, 2008 and December 31, 2007, respectively.

Power is subject to counterparty collateral calls related to commodity contracts and is subject to certain creditworthiness standards as guarantor under performance guarantees for ER&T’s agreements. Changes in commodity prices, including fuel, emissions allowances and electricity, can have a material impact on margin requirements under such contracts. As of March 31, 2008 and December 31, 2007, Power had the following margin posted and received to satisfy collateral obligations, which were primarily in the form of letters of credit:

 

 

 

 

 

 

 

As of
March 31,
2008

 

As of
December 31,
2007

 

 

(Millions)

Margin Posted

 

 

$

 

582

   

 

$

 

188

 

Margin Received

 

 

$

 

29

   

 

$

 

44

 

Power also routinely enters into futures and options transactions for electricity and natural gas as part of its operations. Generally, such futures contracts require a deposit of cash margin, the amount of which is subject to change based on market movement and in accordance with exchange rules. As of March 31, 2008 and December 31, 2007, Power had deposited margin of $234 million and $168 million, respectively.

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 that ER&T provide further performance assurance. Transactions that are margined and monitored separately from physical trading activity may not be subject to change in the event of a downgrade to Power’s rating. As of March 31, 2008, if Power were to lose its investment grade rating and, assuming all counterparties to which ER&T is “out-of-the-money” were contractually entitled to demand, and demanded, performance assurance, ER&T could be required to post additional collateral in an amount equal to $957 million. Power believes that it has the ability to post such collateral, if necessary.

In addition to amounts discussed above, Power had posted $37 million in letters of credit as of March 31, 2008 and December 31, 2007 to support various other contractual and environmental obligations.

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Environmental Matters

PSEG, Power and PSE&G

Passaic River

The U.S. Environmental Protection Agency (EPA) has determined that a six-mile stretch of the Passaic River in the area of Newark, New Jersey is a “facility” within the meaning of that term under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA).

PSE&G and certain of its predecessors conducted industrial operations at properties adjacent to the Passaic River facility. The operations included one operating electric generating station (Essex Site), one former generating station and four former manufactured gas plants (MGPs). PSE&G’s costs to clean up former MGPs are recoverable from utility customers through the Societal Benefits Clause (SBC). PSE&G has sold the site of the former generating station and obtained releases and indemnities for liabilities arising out of the site in connection with the sale. The Essex Site was transferred to Power in August 2000. Power assumed any environmental liabilities of PSE&G associated with the electric generating stations that PSE&G transferred to it, including the Essex Site.

In 2003, the EPA notified 41 potentially responsible parties (PRPs), including Power and PSE&G, that it was expanding its assessment of the Passaic River Study Area to the entire 17-mile tidal reach of the lower Passaic River. The EPA further indicated, with respect to PSE&G, that it believed that hazardous substances had been released from the Essex Site and a former MGP located in Harrison, New Jersey (Harrison Site), which also includes facilities for PSE&G’s ongoing gas operations. The EPA estimated that its study would require five to eight years to complete and would cost $20 million, of which it would seek to recover $10 million from the PRPs, including Power and PSE&G.

In 2006, the EPA notified the PRPs that the cost of its study will greatly exceed the $20 million initially estimated and after discussion, 70 (now 73) PRPs, including Power and PSE&G, have agreed to assume responsibility for the study pursuant to an Administrative Order on Consent and to divide the associated costs among themselves according to a mutually agreed-upon formula. The PRP group is presently executing the study. The percentage allocable to Power and PSE&G varies depending on the number of PRPs who have agreed to divide the costs but it currently approximates 6%, approximately 80% of which is attributable to PSE&G’s former MGPs and approximately 20% to Power’s generating station. Power has provided notice to insurers concerning this potential claim.

In June 2007, the EPA announced a draft Focused Feasibility Study (FFS) that proposes six options with estimated costs ranging from $900 million to $2.3 billion to address contamination cleanup in the lower eight miles of the Passaic River in addition to a “No Action” alternative. The work contemplated by the FFS is not subject to the Administrative Order on Consent or the cost sharing agreement. The EPA is reviewing comments received on the draft FFS.

CERCLA and the New Jersey Spill Compensation and Control Act (Spill Act) authorize federal and state trustees for natural resources to assess damages against persons who have discharged a hazardous substance, causing an injury to natural resources. Pursuant to the Spill Act, the New Jersey Department of Environmental Protection (NJDEP) requires persons conducting remediation to characterize injuries to natural resources and to address those injuries through restoration or damages. The NJDEP has regulations in effect concerning site investigation and remediation that require an ecological evaluation of potential damages to natural resources in connection with an environmental investigation of contaminated sites. In 2003, PSEG, PSE&G and 56 other PRPs received a Directive and Notice to Insurers from the NJDEP that directed the PRPs to arrange for a natural resource damage assessment and interim compensatory restoration of natural resource injuries along the lower Passaic River and its tributaries pursuant to the Spill Act. The NJDEP alleged in the Directive that it had determined that hazardous substances had been discharged from the Essex Site and the Harrison Site. The NJDEP announced that it had estimated the cost of interim natural resource injury restoration activities along the lower Passaic River to approximate $950 million. On August 2, 2007, the National Oceanic and Atmospheric Administration of the United States Department of Commerce sent a letter to PSE&G and other companies identified as PRPs notifying them that it intended to perform an

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

assessment of injuries to natural resources and inviting the PRPs to participate. The PRPs have not agreed to participate in either of these natural resource damage initiatives.

PSEG cannot predict what further actions, if any, or the costs or the timing thereof, that may be required with respect to the Passaic River. However, such costs could be material.

Newark Bay Study Area

The EPA sent PSEG and 11 other entities notices that the EPA considered each of the entities to be a PRP with respect to contamination in the Newark Bay Study Area, which it defined as Newark Bay and portions of the Hackensack River, the Arthur Kill and the Kill Van Kull. The notice letter requested that the PRPs participate and fund the EPA-approved study in the Newark Bay Study Area and encouraged the PRPs to contact Occidental Chemical Corporation (OCC) to discuss participating in the Remedial Investigation/Feasibility Study (RI/FS) that OCC is conducting in the Newark Bay Study Area. The EPA considers the Newark Bay Study Area, along with the Passaic River Study Area, to be part of the Diamond Alkali Superfund Site. The notice states the EPA’s belief that hazardous substances were released from sites owned by PSEG and located on the Hackensack River. The sites included two operating electric generating stations (Hudson and Kearny sites), and one former MGP. PSE&G’s costs to clean up former MGPs are recoverable from utility customers through the SBC. The Hudson and Kearny sites were transferred to Power in August 2000. Power assumed any environmental liabilities of PSE&G associated with the electric generating stations that PSE&G transferred to it, including the Hudson and Kearny sites. Power has provided notice to insurers concerning this potential claim. PSEG cannot predict what further actions, if any, or the costs or the timing thereof, that may be required with respect to the Newark Bay Study Area. However, such costs could be material.

Other

On June 29, 2007, the State of New Jersey filed multiple lawsuits against parties, including PSE&G, who were alleged to be responsible for injuries to natural resources in New Jersey. Included in these lawsuits was a claim against PSE&G and others arising out of PSE&G’s former Camden Coke facility, and a claim against PSE&G and others arising out of the Global Landfill matter. PSE&G has responded to the complaint in the natural resource damages case arising out of the former Camden Coke site and is in the process of remediating that site under its MGP program, discussed below. The time for PSE&G to answer the complaint in the natural resource damages case arising out of the Global Landfill matter has been delayed until June 2008 to allow the parties to negotiate an order that would resolve the natural resource damages claim. In March 2008, Power executed an Amended Consent Decree, which obligates the settling parties (including PSE&G) to implement remediation of the Global Landfill site and resolves the natural resource damages claim. PSEG, Power and PSE&G cannot predict what further actions, if any, or the costs or the timing thereof, that may be required with respect to the Passaic River, Newark Bay or other natural resource damages claims; however, such costs could be material.

PSE&G

MGP Remediation Program

PSE&G is currently working with the NJDEP under a program to assess, investigate and remediate environmental conditions at PSE&G’s former MGP sites (Remediation Program). To date, 38 sites have been identified as sites requiring some level of remedial action. In addition, the NJDEP has announced initiatives to accelerate the investigation and subsequent remediation of the riverbeds underlying surface water bodies that have been impacted by hazardous substances from adjoining sites. In 2005, the NJDEP initiated a program on the Delaware River aimed at identifying the 10 most significant sites for cleanup. One of the sites identified is PSE&G’s former Camden Coke facility located in Camden. The Remediation Program is periodically reviewed, and the estimated costs are revised by PSE&G based on regulatory requirements, experience with the program and available remediation technologies.

During the fourth quarter of 2007, PSE&G refined the detailed site estimates. Based on that review, the remaining cost of remediating all sites to completion, as well as the anticipated costs to address MGP-related material discovered in three rivers adjacent to two former MGP sites, could range between $639 million and

20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

$812 million through 2021. Since no amount within the range was considered to be most likely, PSE&G increased its accrual to $639 million as the low end of the range as of December 31, 2007. As of March 31, 2008, PSE&G’s remaining accrual was $636 million, which represents the low end of the range less $3 million of costs incurred in 2008. Of this amount, $45 million was recorded in Other Current Liabilities and $591 million was reflected in Other Noncurrent Liabilities. The costs associated with the MGP Remediation Program have historically been recovered through the SBC charges to PSE&G ratepayers. As such, PSE&G has a Regulatory Asset recorded which is equivalent to the accrued liability.

Power

Prevention of Significant Deterioration (PSD)/New Source Review (NSR)

The PSD/NSR regulations, promulgated under the Clean Air Act, require major sources of certain air pollutants to obtain permits, install pollution control technology and obtain offsets, in some circumstances, when those sources undergo a “major modification,” as defined in the regulations. The federal government may order companies that are not in compliance with the PSD/NSR regulations to install the best available control technology at the affected plants and to pay monetary penalties of up to $27,500 for each day of continued violation.

On November 30, 2006, Power reached an agreement with the EPA and the NJDEP to achieve emissions reductions targets consistent with an earlier consent decree that resolved allegations of non- compliance with PSD/NSR programs at Power’s Mercer, Hudson and Bergen generating stations. Under this agreement and the consent decree, Power is required to undertake a number of technology projects, plant modifications and operating procedure changes at Hudson and Mercer designed to meet targeted reductions in emissions of sulfur dioxide, nitrogen oxide (NOx), particulate matter and mercury.

Pursuant to this program, Power has installed selective catalytic reductions at Mercer at a cost of $122 million. The cost of implementing the balance of the agreement is estimated at $475 million to $525 million for Mercer, to be completed by May 2010, and $700 million to $750 million for Hudson, to be completed by the end of 2010. Fossil also purchased and retired emissions allowances by July 31, 2007, paid a $6 million civil penalty and has agreed to contribute $3 million for programs to reduce particulate emissions from diesel engines in New Jersey. In March 2007, Fossil entered into an engineering, procurement and construction contract with a third party contractor to complete all back-end technology requirements for the Mercer station, as referenced above. Fossil signed a contract for construction management related to the Hudson back-end technology construction in July 2007.

Mercury Regulation

In March 2005, the EPA established a New Source Performance Standard limit for nickel emissions from oil-fired electric generating units, and a cap-and-trade program for mercury emissions from coal-fired electric generating units, with a first phase cap of 38 tons per year (tpy) in 2010 and a second phase cap of 15 tpy in 2018 (the ‘Clean Air Mercury Rule’). The United States Court of Appeals for the District of Columbia Circuit issued a decision on February 8, 2008 rejecting the EPA’s mercury emissions program. As a result of this decision, the EPA is required to develop emissions standards for mercury and nickel emissions that do not rely on a cap-and-trade program. The full impact, if any, of this development is uncertain until the EPA issues the new emissions standards. Compliance with the new mercury standards, however, is not expected to have a material impact on Power’s operations in New Jersey and Connecticut given the stringent mercury control requirements applicable in those states, as described below.

New Jersey and Connecticut had adopted standards for the reduction of emissions of mercury from coal-fired electric generating units. The regulations in New Jersey required the units to meet certain emissions limits or reduce emissions by 90% by December 15, 2007, unless a one-year extension was granted by NJDEP.

Under the New Jersey regulations, companies that are parties to multi-pollutant reduction agreements are permitted to postpone such reductions on half of their coal-fired electric generating capacity until December 15, 2012. With respect to Power’s New Jersey facilities, half of the reductions that were required

21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

by December 15, 2007 are expected to be achieved through the installation of carbon injection technology at both Mercer Units, which was completed in January 2007. Because there is some uncertainty as to whether the system can consistently achieve the required reductions, Power has applied for and received from NJDEP approval of a one-year extension through a facility-specific control plan that includes the installation of baghouses at the Mercer Units in 2008. Installation is scheduled to be completed by the end of 2008. At its Hudson plant, Power anticipates compliance consisting of the installation of a baghouse by the end of 2010.

The mercury control technologies are also part of Power’s multi-pollutant reduction agreement, which resulted from earlier agreements that resolved issues arising out of the PSD/NSR air pollution control programs discussed above.

Mercury emissions control standards effective in July 2008 in Connecticut require coal-fired power plants in Connecticut to achieve either an emissions limit or a 90% mercury removal efficiency through technology installed to control mercury emissions. Power anticipates compliance at its Bridgeport Harbor Station resulting from the installation of a baghouse which was placed in operation in January 2008.

In February 2007, Pennsylvania finalized its “state-specific” requirements to reduce mercury emissions from coal-fired electric generating units. The Keystone and Conemaugh generating stations will be positioned by 2010 to meet Phase I of the Pennsylvania mercury rule by benefiting from reductions realized from the installation of controls for compliance with SO2 and NOx reductions. Phase 2 of the mercury rule will be addressed after a full evaluation of Phase 1 reductions.

Some uncertainty exists regarding the feasibility of achieving the reductions in mercury emissions required by the New Jersey regulations and Connecticut statute. However, the estimated costs of technology believed to be capable of meeting these emissions limits at Power’s coal-fired units in Connecticut, New Jersey and Pennsylvania have been incurred or are included in Power’s capital expenditure forecast. Total estimated costs for each project are between $150 million and $200 million. The costs for Mercer and Hudson are included in the cost estimates referred to in the PSD/NSR discussion above.

Emission Fees

Section 185 of the Clean Air Act requires states (or in the absence of state action, the EPA) in severe and extreme non-attainment areas to adopt a penalty fee for major stationary sources if the area fails to attain the one-hour ozone National Ambient Air Quality Standard (NAAQS) set by the EPA. In June 2007, the U.S. Court of Appeals for the District of Columbia Circuit ruled against the EPA, which had sought to vacate imposition of fees for NOx emissions as part of the one-hour standard for ozone attainment implementation. Power operates electric generation stations, major stationary sources, in the New Jersey-Connecticut severe non-attainment area that failed to meet the required NAAQS. Neither EPA nor the states in the non-attainment areas in which Power operates have completed the process for imposing fees in compliance with the court ruling; however, preliminary analysis suggests that penalty fees will be approximately $6 million annually. This analysis could change if the EPA or the states issue additional guidance addressing the imposition of fees, or if Power is able to reduce its emissions of NOx in the future below the statutory threshold through the installation of control technologies at one or more of Power’s generation stations.

New Jersey Industrial Site Recovery Act (ISRA)

Potential environmental liabilities related to subsurface contamination at certain generating stations have been identified. In the second quarter of 1999, in anticipation of the transfer of PSE&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 as of each of March 31, 2008 and December 31, 2007 related to these obligations, which is included in Environmental Costs on Power’s and PSEG’s Condensed Consolidated Balance Sheets.

Permit Renewals

In June 2001, the NJDEP issued a renewed New Jersey Pollutant Discharge Elimination System (NJPDES) permit for Salem, expiring in July 2006, allowing for the continued operation of Salem with its

22


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

existing cooling water intake system. A renewal application prepared in accordance with the Federal Water Pollution Control Act (FWPCA) Section 316(b) and the Phase II 316(b) rule was filed in January 2006 with the NJDEP, which allows the station to continue operating under its existing NJPDES permit until a new permit is issued. Power’s application to renew Salem’s NJPDES permit demonstrates that the station satisfies FWPCA Section 316(b) and meets the Phase II 316(b) rule’s performance standards for reduction of impingement and entrainment through the station’s existing cooling water intake technology and operations plus implemented restoration measures. The application further demonstrates that even without the benefits of restoration, the station meets the Phase II 316(b) rule’s site-specific determination standards, both on a comparison of the costs and benefits of new intake technology as well as a comparison of the costs to implement the technology at the facility to the cost estimates prepared by the EPA.

On January 25, 2007, the U.S. Court of Appeals for the Second Circuit issued its decision in litigation of the Phase II 316(b) regulations brought by several environmental groups, the Attorneys General of six Northeastern states, including New Jersey, the Utility Water Act Group and several of its members, including Power. The court remanded major portions of the regulations and determined that Section 316(b) of the FWPCA does not support the use of restoration and the site-specific cost-benefit test. The court instructed the EPA to reconsider the definition of “best technology available” without comparing the costs of the best performing technology to its benefits. Prior to this decision, Power had used restoration and/or a site-specific cost-benefit test in applications it had filed to renew the permits at its once-through cooled plants, including Salem, Hudson and Mercer.

In May 2007, Power and other industry petitioners filed with the Second Circuit Court a request for a rehearing, which was denied. The parties, including Power, requested U.S. Supreme Court review of the matter. On April 14, 2008, the U.S. Supreme Court granted the request of industry petitioners, including Power, to review the question of whether Section 316(b) of the FWPCA allows EPA to compare costs with benefits in determining the “best technology available” for minimizing adverse environmental impact at cooling water intake structures. Oral argument will occur in the Court’s 2008- 2009 term, which begins in October 2008. It is anticipated that the Court will render a decision during that term.

Although the rule applies to all of Power’s electric generating units that use surface waters for once-through cooling purposes, the impact of the rule and the decision of the Second Circuit Court cannot be determined at this time for all of Power’s facilities. Depending on the final decision of the U.S. Supreme Court, and subsequent actions by the EPA to promulgate a revised rule, the Second Circuit’s decision could have a material impact on Power’s ability to renew its New Jersey and Connecticut permits at its larger once-through cooled plants, including Salem, Hudson, Mercer, Bridgeport and, possibly, Sewaren and New Haven, without making significant upgrades to their existing intake structures and cooling systems. If the NJDEP and the Connecticut Department of Environmental Protection were to require installation of closed-cycle cooling or its equivalent at these once-through cooled facilities, the related costs and impacts would be material to Power and would require economic review to determine whether to continue operations.

For example, Power’s application to renew its Salem permit, filed in February 2006 with the NJDEP, estimated the costs associated with cooling towers for Salem to be approximately $1 billion, of which Power’s share would be approximately $575 million. Potential costs associated with any closed-cycle cooling requirements are not included in Power’s currently forecasted capital expenditures.

New Generation and Development

Power

Power plans to modestly increase its generating capacity at Hope Creek and Salem Unit 2 in 2008. Phase I of the Hope Creek turbine replacement project increased the capacity of the unit by 10 MW in 2005, and Phase II, which is expected to add approximately 125 MW of capacity, is expected to be completed and in operation in the second quarter of 2008. Phase I of the Salem Unit 2 turbine upgrade increased Power’s share of the capacity by 14 MW in 2003. Phase II is currently scheduled to be completed and in operation in the second quarter of 2008, concurrent with steam generator replacement and is anticipated to increase Power’s share of the capacity by an additional 15 MW. As of March 31, 2008, Power’s expenditures for these projects

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

were $203 million (including IDC of $24 million) with an aggregate estimated share of total costs for these projects of $216 million (including IDC of $28 million).

Completion of the projects discussed above within the estimated time frames and cost estimates cannot be assured. Construction delays, cost increases and various other factors could result in changes in the operational dates or ultimate costs to complete.

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

Power and PSE&G

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

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

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

 

 

 

 

 

 

 

 

 

 

 

Auction Year

 

2005

 

2006

 

2007

 

2008

36 Month Terms Ending

 

 

 

May 2008

   

 

 

May 2009

   

 

 

May 2010

   

 

 

May 2011(a

)

 

Load (MW)

 

 

 

2,840

   

 

 

2,882

   

 

 

2,758

   

 

 

2,840

 

$ per kWh

 

 

$

 

0.06541

   

 

$

 

0.10251

   

 

$

 

0.09888

   

 

$

 

0.1115

 


 

 

(a)

 

 

 

Prices set in the February 2008 BGS Auction are effective on June 1, 2008 when the 2005 Auction Year agreements expire.

PSE&G has a full requirements contract with Power to meet the gas supply requirements of PSE&G’s gas customers. The contract extends through March 31, 2012, and year-to-year thereafter. Power has entered into hedges for a portion of these anticipated BGSS obligations, as permitted by the BPU. The BPU permits recovery of the cost of gas hedging up to 115 billion cubic feet or approximately 80% of PSE&G’s residential gas supply annually through the BGSS tariff. For additional information, see Note 14. Related-Party Transactions.

The BPU is currently conducting an audit of the gas procurement practices of all four New Jersey gas utilities, including PSE&G. The outcome of this proceeding cannot be predicted.

Minimum Fuel Purchase Requirements

Power

Coal

Power purchases coal and oil for certain of its fossil generation stations through various long-term commitments. As of March 31, 2008, the total minimum purchase requirements included in these commitments amount to approximately $1.1 billion through 2012.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Uranium

Power has several long-term purchase contracts for the supply of nuclear fuel for the Salem and Hope Creek nuclear generating stations. Power has inventory and commitments to purchase sufficient quantities of uranium concentrates to meet 100% of its total estimated requirements through 2011 and approximately 60% of its estimated requirements for 2012. Additionally, Power has commitments for uranium hexafluoride to meet 100% of its estimated requirements for 2011 and 92% for 2012. These commitments, based on current market prices, which have increased substantially over the past two to three years, total $422 million ($285 million Power’s estimated share). Power’s policy is to maintain certain levels of concentrates and uranium hexafluoride in inventory and to make periodic purchases to support such levels. As such, the commitments referred to above include estimated quantities to be purchased that are in excess of contractual minimum quantities.

Power also has commitments that provide 100% of its uranium enrichment requirements through 2011 and 35% for 2012, totaling $285 million ($191 million Power’s estimated share).

Power has commitments that provide 100% of the fabrication of fuel assemblies for reloads required through 2011 for Salem and through 2012 for Hope Creek that total $121 million ($88 million Power’s estimated share). Exelon Generation has informed Power that the Peach Bottom plant has inventory and commitments to purchase sufficient quantities of uranium (concentrates and uranium hexafluoride) to meet 100% of its total estimated requirements through 2010. Additionally, Exelon Generation has commitments covering approximately 100% of its estimated requirements for 2011 and 47% for 2012.

Natural Gas

In addition to its fuel requirements, Power has entered into various multi-year contracts for firm transportation and storage capacity for natural gas, primarily to meet its gas supply obligations to PSE&G. As of March 31, 2008, the total minimum requirements under these contracts were approximately $1 billion through 2012.

These purchase obligations are consistent with Power’s strategy to enter into contracts for its fuel supply in comparable volumes to its sales contracts.

Global’s Texas generation facilities have entered into gas supply agreements for their anticipated fuel requirements to satisfy obligations under their forward energy sales contracts. As of March 31, 2008, the plants had fuel purchase commitments totaling $83 million to support all of their contracted energy sales.

Regulatory Proceedings

PSEG and PSE&G

Electric Discount and Energy Competition Act (Competition Act)

On April 23, 2007, PSE&G and Transition Funding were served with a copy of a purported class action complaint (Complaint) in New Jersey Superior Court challenging the constitutional validity of certain provisions of New Jersey’s 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. Notice of the filing of the Complaint was also provided to New Jersey’s Attorney General. Under New Jersey law, the Competition Act, enacted in 1999, is presumed constitutional. On July 9, 2007, the same plaintiff filed an amended Complaint to also seek injunctive relief from continued collection of related taxes as well as recovery of such taxes previously collected. On July 30, 2007, PSE&G filed a motion to dismiss the amended Complaint, or, in the alternative, for summary judgment. On October 10, 2007, PSE&G’s and Transition Funding’s motion to dismiss the Amended Complaint was granted. On November 21, 2007, the plaintiff filed a notice of appeal with the Appellate Division of the New Jersey Superior Court. Briefing of the appeal has been completed.

On July 9, 2007, the same plaintiff also filed a petition with the BPU requesting review and adjustment to PSE&G’s recovery of the same charges. On September 30, 2007, PSE&G filed a motion with the BPU to dismiss the petition. PSE&G’s motion to dismiss the BPU petition is pending.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Investment Tax Credits (ITC)

The Internal Revenue Service (IRS) has issued several private letter rulings (PLRs) that concluded that the refunding of excess deferred tax and ITC balances to utility customers was permitted only over the related assets’ regulatory lives, which for PSE&G, was terminated upon New Jersey’s electric industry deregulation in 1999. Based on this fact, in 1999, PSE&G reversed the deferred tax and ITC liability relating to the generation assets that were transferred to Power, and recorded a $235 million reduction of the extraordinary charge due to such restructuring of the industry in New Jersey. In May 2006, the IRS issued a PLR to PSE&G, which concluded that none of the generation ITC could be passed to utility customers without violating its normalization rules. On March 19, 2008, the Treasury issued final regulations that confirmed that none of the generation-related ITC could be passed to utility customers without violating the normalization rules. PSE&G has advised the BPU of these regulations and awaits the BPU’s determination on this matter. While the issuance of the regulations is a favorable development for PSE&G, no assurance can be given as to final outcome of this issue.

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 by the consultant to the BPU in April 2005. The draft report addresses the SBC, Market Transition Charge (MTC) and Non-Utility Generation deferred balances. The BPU released the report on May 13, 2005.

While the consultant to the BPU found that the Phase II deferral balances complied in all material respects with the BPU Orders regarding such deferrals, the consultant noted that the BPU Staff had raised certain questions with respect to the reconciliation method PSE&G had employed in calculating the overrecovery of its MTC and other charges during the Phase I and Phase II four-year transition period. The amount in dispute is $114 million, which if required to be refunded to customers with interest through March 2008, would be $128 million.

At PSE&G’s request, the matter was transmitted to the Office of Administrative Law for the development of an evidentiary record and an initial decision. The BPU granted the request on February 7, 2007. On May 25, 2007, PSE&G filed a motion for Summary Judgment requesting dismissal of the matter. On September 28, 2007, the Administrative Law Judge issued an initial decision denying PSE&G’s motion to dismiss the matter and ordering the filing of testimony and evidentiary hearings. Hearing dates have been established for July 2008. The BPU Staff and New Jersey Division of Rate Counsel have both asserted in briefs that the disputed amount be refunded to customers.

While PSE&G believes the MTC methodology it used was fully litigated and resolved by the prior BPU Orders in its previous electric base rate case, deferral audit and deferral proceedings, PSE&G cannot predict the outcome of this proceeding.

New Jersey Clean Energy Program

The BPU has approved a funding requirement for each New Jersey utility applicable to its Renewable Energy and Energy Efficiency programs for the years 2005 to 2008. The sum of PSE&G’s electric and gas funding requirement was $28 million and $37 million for the three months ended March 31, 2008 and 2007, respectively. The remaining liability has been recorded with an offsetting Regulatory Asset, since the costs associated with this program are expected to be recovered from PSE&G ratepayers through the SBC. The liability for the funding requirement as of March 31, 2008 and December 31, 2007 was $121 million and $149 million, respectively.

Energy Holdings

Leveraged Lease Investments

On November 16, 2006, the IRS issued its Revenue Agent’s Report for tax years 1997 through 2000, which disallowed all deductions associated with certain lease transactions that are similar to a type that the

26


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

IRS publicly announced its intention to challenge. In addition, the IRS imposed a 20% penalty for substantial understatement of tax liability. In February 2007, PSEG filed a protest of these findings with the Office of Appeals of the IRS.

On April 9, 2008, the IRS issued its Revenue Agent’s Report for tax years 2001 through 2003, which disallowed all deductions associated with lease transactions similar to those disallowed in its 1997 through 2000 Report. As in its prior report, the IRS imposed a 20% penalty. PSEG is presently preparing a protest to this report which will be filed with the Office of Appeals of the IRS.

As of March 31, 2008 and December 31, 2007, Resources’ total gross investment in such transactions was $1.5 billion.

PSEG has been in discussions with the Office of Appeals of the IRS concerning the deductions that have been disallowed. The outcome of such discussions cannot be predicted.

There are several tax cases involving other taxpayers with similar leverage lease investments that are pending. To date, two of these cases have been decided at the trial court level, both in favor of the government. An appeal of one of these decisions was recently affirmed. The other cases are in earlier stages. Based on these developments and its ongoing discussions with the IRS, PSEG anticipates that, absent reaching an agreement with the IRS to resolve this issue, a decision to proceed to litigation may occur in 2008. It is also reasonably possible that a re-measurement of unrecognized tax benefits related to these lease transactions will occur during the next 12 months. Such re-measurement could result in a material charge to earnings and a corresponding material impact to the Condensed Consolidated Balance Sheet; however, such impacts cannot be estimated at this time.

If all deductions associated with these lease transactions are successfully challenged by the IRS, it could have a material adverse impact on PSEG’s Condensed Consolidated Financial Statements and could impact future returns on these transactions. PSEG believes that its tax position related to these transactions is proper based on applicable statutes, regulations and case law.

If the IRS’ disallowance of tax benefits associated with all of these lease transactions were sustained, $904 million of PSEG’s deferred tax liabilities that have been recorded under leveraged lease accounting through March 31, 2008 would become currently payable. In addition, as of March 31, 2008 interest of $195 million, after-tax, and penalties of $173 million may become payable, with potential additional interest and penalties of $15 million continuing to accrue quarterly. PSEG’s management has assessed the probability of various outcomes to this matter and recorded the tax effect to be realized in accordance with FIN 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109” (FIN 48). In December 2007, PSEG deposited $100 million with the IRS to defray potential interest costs associated with this disputed tax liability. In the event PSEG is successful in its defense of its position, the deposit is fully refundable with interest.

Note 6. Financial Risk Management Activities

The operations of PSEG, Power and PSE&G are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices that could affect their results of operations and financial conditions. PSEG, Power and PSE&G manage exposure to these market risks through their regular operating and financing activities and, when deemed appropriate, hedge these risks through the use of derivative financial instruments. PSEG, Power and PSE&G use the term ‘hedge’ to mean a strategy designed to manage risks of volatility in prices or rate movements on certain assets, liabilities or anticipated transactions and by creating a relationship in which gains or losses on derivative instruments are expected to counterbalance the gains or losses on the assets, liabilities or anticipated transactions exposed to such market risks. Each of PSEG, Power and PSE&G uses derivative instruments as risk management tools consistent with its respective business plan and prudent business practices.

27


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Derivative Instruments and Hedging Activities

Energy Contracts

Power

Power actively trades energy and energy-related products, including electricity, natural gas, electric capacity, firm transmission rights (FTRs), coal, oil and emission allowances in the spot, forward and futures markets, primarily in PJM, but also in the surrounding region, which extends from Maine to the Carolinas and the Atlantic Coast to Indiana, and natural gas in the producing region.

Power maintains a strategy of entering into positions to optimize the value of its portfolio and reduce earnings volatility of generation assets, gas supply contracts and its electric and gas supply obligations. Power engages in physical and financial transactions in the electricity wholesale markets and executes an overall risk management strategy seeking to mitigate the effects of adverse movements in the fuel and electricity markets. These contracts also involve financial transactions including swaps, options and futures. There have been significant increases in commodity prices over the last year. The resultant changes in market values for energy and related contracts that qualify for hedge accounting have resulted in significant increases to Accumulated Other Comprehensive Loss. For additional information, see Note 5. Commitments and Contingent Liabilities. For contracts not qualifying for hedge accounting, Power marks its derivative energy contracts to market in accordance with SFAS 133, with changes in fair value charged to the Consolidated Statements of Operations. Wherever possible, fair values for these contracts are obtained from quoted market sources. For contracts where no quoted market exists, modeling techniques are employed using assumptions reflective of current market rates, yield curves and forward prices, as applicable, to interpolate certain prices. The effect of using such modeling techniques is not material to Power’s financial results.

The availability and price of energy commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market conditions, transmission availability and other events. Power manages its risk of fluctuations of energy price and availability through derivative instruments, such as forward purchase or sale contracts, swaps, options, futures and FTRs.

Cash Flow Hedges

Power uses forward sale and purchase contracts, swaps and FTR contracts to hedge forecasted energy sales from its generation stations and to hedge related load obligations. Power also enters into swaps and futures transactions to hedge the price of fuel to meet its fuel purchase requirements. These derivative transactions are designated and effective as cash flow hedges under SFAS 133. As of March 31, 2008, the fair value of these hedges was $(811) million. These hedges resulted in a $(493) million after-tax impact on Accumulated Other Comprehensive Loss. As of December 31, 2007, the fair value of these hedges was $(427) million. These hedges, along with realized losses on hedges of $(4) million retained in Accumulated Other Comprehensive Loss, resulted in a $(250) million after-tax impact on Accumulated Other Comprehensive Loss. During the 12 months ending March 31, 2009, $(295) million of after-tax unrealized losses on these commodity derivatives is expected to be reclassified to earnings with another $(143) million of after-tax unrealized losses to be reclassified to earnings for the 12 months ending March 31, 2010. Ineffectiveness associated with these hedges, as defined in SFAS 133, was a gain of $4 million at March 31, 2008. The expiration date of the longest dated cash flow hedge is in 2011.

Other Derivatives

Power also enters into certain other contracts that are derivatives, but do not qualify for cash flow hedge accounting under SFAS 133. Most of these contracts are used for fuel purchases for generation requirements and for electricity purchases for contractual sales obligations and a portion is used in Power’s Nuclear Decommissioning Trust Funds (NDT). Therefore, the changes in fair market value of these derivative contracts are recorded in Energy Costs, Operating Revenues, Other Income or Other Deductions, as appropriate, on the Consolidated Statements of Operations. The net fair value of these instruments was $(4) million and $(10) million as of March 31, 2008 and December 31, 2007, respectively.

28


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Energy Holdings

Other Derivatives

PSEG Texas enters into electricity forward and capacity sales contracts to sell a portion of its 2,000 MW capacity with the balance sold into the daily spot market. PSEG Texas also enters into gas purchase contracts to specifically match the generation requirements to support the electricity forward sales contracts. Although these contracts fix the amount of revenue, fuel costs and cash flows, and thereby provide financial stability to PSEG Texas, these contracts are, based on their terms, derivatives that do not meet the specific accounting criteria in SFAS 133 to qualify for the normal purchases and normal sales exception, or to be designated as a hedge for accounting purposes. As a result, these contracts must be recorded at fair value through the Consolidated Statements of Operations. The net fair value of the open positions was $32 million and $63 million as of March 31, 2008 and December 31, 2007, respectively.

In March 2008, in connection with the sale of SAESA, Energy Holdings purchased two options to sell Chilean Pesos and receive U.S. Dollars at strike prices of 475 and 480 Chilean Pesos to the U.S. Dollar for a combined notional amount of $100 million. These are four month options which will protect the expected sales proceeds of SAESA from a devaluation of the Chilean Peso prior to the anticipated sale. The fair value of the option contracts was $1 million at March 31, 2008. Subsequent to March 31, 2008, Energy Holdings entered into four additional options at strike prices between 470 and 480 Chilean Pesos to the U.S. Dollar for an additional notional amount of $200 million.

Interest Rates

PSEG, Power and PSE&G

PSEG, Power and PSE&G are subject to the risk of fluctuating interest rates in the normal course of business. PSEG’s policy is to manage interest rate risk through the use of fixed and floating rate debt and interest rate derivatives.

Fair Value Hedges

PSEG and Power

In March 2004, Power issued $250 million of 3.75% Senior Notes due April 2009. PSEG used an interest rate swap to convert Power’s fixed-rate debt into variable-rate debt. The interest rate swap is designated and effective as a fair value hedge. The fair value changes of the interest rate swap are fully offset by the fair value changes in the underlying debt. As of March 31, 2008 and December 31, 2007, the fair value of the hedge was less than $1 million and $(3) million, respectively.

Cash Flow Hedges

PSEG and PSE&G

PSEG and PSE&G use interest rate swaps and other interest rate derivatives to manage their exposures to the variability of cash flows, primarily related to variable-rate debt instruments. The interest rate derivatives used are designated and effective as cash flow hedges. Except for PSE&G’s cash flow hedges, the fair value changes of these derivatives are initially recorded in Accumulated Other Comprehensive Loss. As of March 31, 2008, the fair value of these cash flow hedges was $(5) million and $(13) million at PSE&G and Energy Holdings, respectively. As of December 31, 2007, the fair value of these cash flow hedges was $(4) million and $(7) million at PSE&G and Energy Holdings, respectively. The $(5) million and $(4) million at PSE&G as of March 31, 2008 and December 31, 2007, is not included in Accumulated Other Comprehensive Loss, as it is deferred as a Regulatory Asset and is expected to be recovered from PSE&G’s customers. During the next 12 months, $(6) million of unrealized losses (net of taxes) on interest rate derivatives in Accumulated Other Comprehensive Loss is expected to be reclassified at PSEG. As of March 31, 2008, there was no hedge ineffectiveness associated with these hedges.

29


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 7. Comprehensive Income, Net of Tax

 

 

 

 

 

 

 

 

 

 

 

Power (A)

 

PSE&G

 

Other (B)

 

Consolidated
Total

 

 

(Millions)

For the Quarter Ended March 31, 2008:

 

 

 

 

 

 

 

 

Net Income

 

 

$

 

275

   

 

$

 

137

   

 

$

 

36

   

 

$

 

448

 

Other Comprehensive (Loss) Income

 

 

 

(272

)

 

 

 

 

   

 

 

52

   

 

 

(220

)

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

 

$

 

3

   

 

$

 

137

   

 

$

 

88

   

 

$

 

228

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended March 31, 2007:

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

$

 

213

   

 

$

 

132

   

 

$

 

(16

)

 

 

 

$

 

329

 

Other Comprehensive Loss

 

 

 

(155

)

 

 

 

 

   

 

 

(9

)

 

 

 

 

(164

)

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

 

$

 

58

   

 

$

 

132

   

 

$

 

(25

)

 

 

 

$

 

165

 

 

 

 

 

 

 

 

 

 


 

 

(A)

 

 

 

Changes at Power primarily relate to changes in SFAS 133 unrealized gains and losses on derivative contracts that qualify for hedge accounting in 2008 and 2007, as detailed below.

 

(B)

 

 

 

Other consists of activity at PSEG (as parent company), Energy Holdings, Services and intercompany eliminations. Changes for 2008 and 2007 primarily relate to foreign currency translation adjustments at Global, as detailed below.

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of
December 31,
2007

 

Power

 

PSE&G

 

Other

 

Balance as of
March 31,
2008

 

 

(Millions)

For the Quarter Ended March 31, 2008:

 

 

 

 

 

 

 

 

 

 

Derivative Contracts

 

 

$

 

(259

)

 

 

 

$

 

(242

)

 

 

 

$

 

   

 

$

 

(4

)

 

 

 

$

 

(505

)

 

Pension and OPEB Plans

 

 

 

(167

)

 

 

 

 

   

 

 

   

 

 

   

 

 

(167

)

 

Currency Translation Adjustment

 

 

 

107

   

 

 

   

 

 

   

 

 

56

   

 

 

163

 

NDT Funds

 

 

 

97

   

 

 

(30

)

 

 

 

 

   

 

 

   

 

 

67

 

Other

 

 

 

6

   

 

 

   

 

 

   

 

 

   

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

(216

)

 

 

 

$

 

(272

)

 

 

 

$

 

   

 

$

 

52

   

 

$

 

(436

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of
December 31,
2006

 

Power

 

PSE&G

 

Other

 

Balance as of
March 31,
2007

 

 

(Millions)

For the Quarter Ended March 31, 2007:

 

 

 

 

 

 

 

 

 

 

Derivative Contracts

 

 

$

 

(114

)

 

 

 

$

 

(158

)

 

 

 

$

 

   

 

$

 

   

 

$

 

(272

)

 

Pension and OPEB Plans

 

 

 

(214

)

 

 

 

 

2

   

 

 

   

 

 

   

 

 

(212

)

 

Currency Translation Adjustment

 

 

 

110

   

 

 

   

 

 

   

 

 

(9

)

 

 

 

 

101

 

NDT Funds

 

 

 

108

   

 

 

1

   

 

 

   

 

 

   

 

 

109

 

Other

 

 

 

2

   

 

 

   

 

 

   

 

 

   

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

(108

)

 

 

 

$

 

(155

)

 

 

 

$

 

   

 

$

 

(9

)

 

 

 

$

 

(272

)

 

 

 

 

 

 

 

 

 

 

 

 

Note 8. Changes in Capitalization

Power

In March 2008, Power paid a cash dividend to PSEG of $125 million.

30


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

PSE&G

In May 2008, PSE&G redeemed its outstanding $157 million of 6.375% First and Refunding Mortgage Bonds Remarketable Series YY Due 2023 Mandatorily Tendered 2008. PSE&G paid approximately $32 million in cash to settle the remarketing option held by the remarketing dealer.

In April 2008, PSE&G issued $400 million of 5.30% Medium-Term Notes, Series E due May 1, 2018.

In March 2008, PSE&G issued $300 million of Floating Rate (3-month Libor + 0.875%) Bonds due 2010.

As of December 31, 2007, PSE&G had $494 million of variable rate pollution control bonds outstanding which serviced and secured a like amount of insured tax-exempt variable rate bonds of the Pollution Control Authority of Salem County (Salem County Authority). Through April 2008, PSE&G purchased $494 million of the Salem County Authority bonds which were either being held by the broker/dealer or tendered by bondholders upon conversion of the bonds to a weekly interest rate mode. These purchases were recorded as a reduction to PSE&G’s Long-Term Debt included on its Condensed Consolidated Balance Sheets. PSE&G intends to hold these bonds until they can be remarketed or refinanced.

For the quarter ended March 31, 2008, Transition Funding repaid $40 million of its transition bonds.

Energy Holdings

In March 2008, Energy Holdings repurchased $5 million of the $530 million then outstanding 8.50% Senior Notes due 2011.

In February 2008, Energy Holdings repaid at maturity $207 million of its 8.625% Senior Notes.

In January 2008, Energy Holdings redeemed its outstanding $400 million of 10% Senior Notes due 2009.

During the first three months of 2008, Energy Holdings’ subsidiaries repaid $13 million of non-recourse debt, primarily related to Global’s Texas generation facilities.

Note 9. Other Income and Deductions

 

 

 

 

 

 

 

 

 

 

 

Power

 

PSE&G

 

Other (A)

 

Consolidated
Total

 

 

(Millions)

Other Income:

 

 

 

 

 

 

 

 

For the Quarter Ended March 31, 2008:

 

 

 

 

 

 

 

 

Interest and Dividend Income

 

 

$

 

2

   

 

$

 

2

   

 

$

 

9

   

 

$

 

13

 

NDT Fund Realized Gains

 

 

 

75

   

 

 

   

 

 

   

 

 

75

 

NDT Interest and Dividend Income

 

 

 

8

   

 

 

   

 

 

   

 

 

8

 

Other

 

 

 

1

   

 

 

3

   

 

 

(7

)

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

Total Other Income

 

 

$

 

86

   

 

$

 

5

   

 

$

 

2

   

 

$

 

93

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended March 31, 2007:

 

 

 

 

 

 

 

 

Interest and Dividend Income

 

 

$

 

5

   

 

$

 

3

   

 

$

 

3

   

 

$

 

11

 

NDT Fund Realized Gains

 

 

 

34

   

 

 

   

 

 

   

 

 

34

 

NDT Interest and Dividend Income

 

 

 

12

   

 

 

   

 

 

   

 

 

12

 

Change in Derivative Fair Value

 

 

 

   

 

 

   

 

 

1

   

 

 

1

 

Arbitration Award (Konya-Ilgin)

 

 

 

   

 

 

   

 

 

9

   

 

 

9

 

Other

 

 

 

   

 

 

2

   

 

 

3

   

 

 

5

 

 

 

 

 

 

 

 

 

 

Total Other Income

 

 

$

 

51

   

 

$

 

5

   

 

$

 

16

   

 

$

 

72

 

 

 

 

 

 

 

 

 

 

31


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

Power

 

PSE&G

 

Other (A)

 

Consolidated
Total

 

 

(Millions)

Other Deductions:

 

 

 

 

 

 

 

 

For the Quarter Ended March 31, 2008:

 

 

 

 

 

 

 

 

Donations

 

 

$

 

   

 

$

 

1

   

 

$

 

   

 

$

 

1

 

NDT Fund Realized Losses and Expenses

 

 

 

53

   

 

 

   

 

 

   

 

 

53

 

Loss on Early Extinguishment of Debt

 

 

 

   

 

 

   

 

 

2

   

 

 

2

 

Other-Than-Temporary Impairment of Investments

 

 

 

38

   

 

 

   

 

 

   

 

 

38

 

 

 

 

 

 

 

 

 

 

Total Other Deductions

 

 

$

 

91

   

 

$

 

1

   

 

$

 

2

   

 

$

 

94

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended March 31, 2007:

 

 

 

 

 

 

 

 

Donations

 

 

$

 

   

 

$

 

1

   

 

$

 

5

   

 

$

 

6

 

NDT Fund Realized Losses and Expenses

 

 

 

17

   

 

 

   

 

 

   

 

 

17

 

Foreign Currency Losses

 

 

 

   

 

 

   

 

 

1

   

 

 

1

 

Loss on Disposition of Assets

 

 

 

1

   

 

 

   

 

 

   

 

 

1

 

Other-Than-Temporary Impairment of Investments

 

 

 

10

   

 

 

   

 

 

   

 

 

10

 

Other

 

 

 

1

   

 

 

   

 

 

   

 

 

1

 

 

 

 

 

 

 

 

 

 

Total Other Deductions

 

 

$

 

29

   

 

$

 

1

   

 

$

 

6

   

 

$

 

36

 

 

 

 

 

 

 

 

 

 


 

 

(A)

 

 

 

Other primarily consists of activity at PSEG (parent company), Energy Holdings, Services and intercompany eliminations.

Note 10. Pension and Other Postretirement Benefits (OPEB)

PSEG

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.

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

OPEB

 

Quarters Ended
March 31,

 

Quarters Ended
March 31,

 

2008

 

2007

 

2008

 

2007

 

 

(Millions)

Components of Net Periodic Benefit Costs:

 

 

 

 

 

 

 

 

Service Cost

 

 

$

 

19

   

 

$

 

21

   

 

$

 

4

   

 

$

 

4

 

Interest Cost

 

 

 

57

   

 

 

54

   

 

 

18

   

 

 

18

 

Expected Return on Plan Assets

 

 

 

(72

)

 

 

 

 

(72

)

 

 

 

 

(4

)

 

 

 

 

(4

)

 

Amortization of Net

 

 

 

 

 

 

 

 

Transition Obligation

 

 

 

   

 

 

   

 

 

7

   

 

 

7

 

Prior Service Cost

 

 

 

2

   

 

 

3

   

 

 

3

   

 

 

3

 

Loss

 

 

 

3

   

 

 

5

   

 

 

   

 

 

2

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Cost

 

 

 

9

   

 

 

11

   

 

 

28

   

 

 

30

 

Effect of Regulatory Asset

 

 

 

   

 

 

   

 

 

5

   

 

 

5

 

 

 

 

 

 

 

 

 

 

Total Benefit Costs

 

 

$

 

9

   

 

$

 

11

   

 

$

 

33

   

 

$

 

35

 

 

 

 

 

 

 

 

 

 

32


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

PSEG, Power and PSE&G

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

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

OPEB

 

Quarters Ended
March 31,

 

Quarters Ended
March 31,

 

2008

 

2007

 

2008

 

2007

 

 

(Millions)

Power

 

 

$

 

3

   

 

$

 

3

   

 

$

 

3

   

 

$

 

4

 

PSE&G

 

 

 

4

   

 

 

5

   

 

 

29

   

 

 

30

 

Other

 

 

 

2

   

 

 

3

   

 

 

1

   

 

 

1

 

 

 

 

 

 

 

 

 

 

Total PSEG Consolidated Benefit Costs

 

 

$

 

9

   

 

$

 

11

   

 

$

 

33

   

 

$

 

35

 

 

 

 

 

 

 

 

 

 

Note 11. Income Taxes

An analysis of the tax provision expense is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Power

 

PSE&G

 

Other (A)

 

Consolidated
Total

 

 

 

 

(Millions)

 

 

For the Quarter Ended March 31, 2008:

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

 

$

 

462

   

 

$

 

202

   

 

$

 

4

   

 

$

 

668

   

 

 

 

 

 

 

 

 

 

 

 

 

Tax Computed at the Statutory Rate

 

 

$

 

162

   

 

$

 

70

   

 

$

 

2

   

 

$

 

234

   

 

Increase (Decrease) Attributable to Flow Through of Certain Tax Adjustments:

 

 

 

 

 

 

 

 

 

 

State Income Taxes after Federal Benefit

 

 

 

29

   

 

 

15

   

 

 

(2

)

 

 

 

 

42

   

 

Uncertain Tax Positions

 

 

 

1

   

 

 

(20

)

 

 

 

 

(17

)

 

 

 

 

(36

)

 

 

 

Other

 

 

 

(5

)

 

 

 

 

   

 

 

(1

)

 

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Income Tax Expense (Benefit)

 

 

$

 

187

   

 

$

 

65

   

 

$

 

(18

)

 

 

 

$

 

234

   

 

 

 

 

 

 

 

 

 

 

 

 

Effective Income Tax Rate

 

 

 

40.5

%

 

 

 

 

32.2

%

 

 

 

 

N/A

   

 

 

35.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended March 31, 2007:

 

 

 

 

 

 

 

 

 

 

Income (Loss) Before Income Taxes

 

 

$

 

374

   

 

$

 

231

   

 

$

 

(24

)

 

 

 

$

 

581

   

 

 

 

 

 

 

 

 

 

 

 

 

Tax Computed at the Statutory Rate

 

 

$

 

131

   

 

$

 

81

   

 

$

 

(8

)

 

 

 

$

 

204

   

 

Increase (Decrease) Attributable to Flow Through of Certain Tax Adjustments:

 

 

 

 

 

 

 

 

 

 

State Income Taxes after Federal Benefit

 

 

 

23

   

 

 

16

   

 

 

(3

)

 

 

 

 

36

   

 

Foreign Operations

 

 

 

   

 

 

   

 

 

12

   

 

 

12

   

 

Uncertain Tax Positions

 

 

 

1

   

 

 

   

 

 

5

   

 

 

6

   

 

Other

 

 

 

   

 

 

2

   

 

 

   

 

 

2

   

 

 

 

 

 

 

 

 

 

 

 

 

Total Income Tax Expense

 

 

$

 

155

   

 

$

 

99

   

 

$

 

6

   

 

$

 

260

   

 

 

 

 

 

 

 

 

 

 

 

 

Effective Income Tax Rate

 

 

 

41.4

%

 

 

 

 

42.9

%

 

 

 

 

N/A

   

 

 

44.8

%

 

 

 


 

 

(A)

 

 

 

PSEG’s other activities include amounts applicable to PSEG (as parent corporation) that primarily relate to financing and certain administrative and general costs and amounts applicable to Energy Holdings (as parent company) that reflect interim period distortion due to asset sales and other one-time adjustments.

Each of PSEG, Power and PSE&G provide deferred taxes at the enacted statutory tax rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate-making purposes. Management believes that it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to PSE&G customers will be recovered from PSE&G’s customers in the future. Accordingly, an offsetting regulatory asset was established. As of March 31, 2008, PSE&G had a regulatory asset of $421 million representing the tax costs expected to be recovered through rates based upon established regulatory practices, which permit recovery of current taxes payable. This amount was determined using the enacted federal income tax rate of 35% and state income tax rate of 9%.

33


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

PSEG and its subsidiaries adopted FIN 48 effective January 1, 2007, which prescribes a model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return.

On December 17, 2007, PSEG made a tax deposit with the IRS in the amount of $100 million to defray interest costs associated with disputed tax assessments associated with certain lease investments (see Note 5. Commitments and Contingent Liabilities). The $100 million deposit is fully refundable and is recorded as a reduction to the Unrecognized Tax Benefit liability on PSEG’s Consolidated Balance Sheet.

Based on decisions in two court cases involving lease investments by other taxpayers as described in Note 5. Commitments and Contingent Liabilities, it is reasonably possible that a re-measurement of unrecognized tax benefits will occur during the next 12 months. Such re-measurement could result in a material charge to earnings and a corresponding material impact to PSEG’s Consolidated Balance Sheet; however, such impacts cannot be estimated at this time.

It is reasonably possible that approximately $(67) million of unrecognized tax benefits at PSEG associated with a change in accounting method for federal income tax purposes, including $(38) million at PSE&G, will be settled within 12 months due to agreement with the IRS’ position with respect to these items. The change in method related to the adoption of the Simplified Service cost method of capitalizing indirect costs.

Note 12. Financial Information by Business Segments

Information related to the segments of PSEG and its subsidiaries is detailed below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Power

 

PSE&G

 

Resources

 

Global

 

Other (A)

 

Consolidated

 

 

(Millions)

For the Quarter Ended March 31, 2008:

 

 

 

 

 

 

 

 

 

 

Total Operating Revenues

 

 

$

 

2,375

   

 

$

 

2,618

   

 

$

 

31

   

 

$

 

108

   

 

$

 

(1,329

)

 

 

 

$

 

3,803

 

Income (Loss) From Continuing Operations

 

 

 

275

   

 

 

137

   

 

 

14

   

 

 

14

   

 

 

(6

)

 

 

 

 

434

 

Income from Discontinued Operations, net of tax

 

 

 

   

 

 

   

 

 

   

 

 

14

   

 

 

   

 

 

14

 

Net Income (Loss)

 

 

 

275

   

 

 

137

   

 

 

14

   

 

 

28

   

 

 

(6

)

 

 

 

 

448

 

Preferred Securities Dividends

 

 

 

   

 

 

(1

)

 

 

 

 

   

 

 

   

 

 

1

   

 

 

 

Segment Earnings (Loss)

 

 

 

275

   

 

 

136

   

 

 

14

   

 

 

28

   

 

 

(5

)

 

 

 

 

448

 

Gross Additions to Long-Lived Assets

 

 

 

174

   

 

 

145

   

 

 

   

 

 

2

   

 

 

2

   

 

 

323

 

As of March 31, 2008:

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

$

 

8,004

   

 

$

 

14,589

   

 

$

 

2,959

   

 

$

 

2,521

   

 

$

 

(105

)

 

 

 

$

 

27,968

 

Investments in Equity Method Subsidiaries

 

 

$

 

17

   

 

$

 

   

 

$

 

   

 

$

 

214

   

 

$

 

   

 

$

 

231

 

For the Quarter Ended March 31, 2007:

 

 

 

 

 

 

 

 

 

 

Total Operating Revenues

 

 

$

 

2,149

   

 

$

 

2,486

   

 

$

 

44

   

 

$

 

102

   

 

$

 

(1,273

)

 

 

 

$

 

3,508

 

Income (Loss) From Continuing Operations

 

 

 

219

   

 

 

132

   

 

 

17

   

 

 

(27

)

 

 

 

 

(20

)

 

 

 

 

321

 

(Loss) Income from Discontinued Operations, net of tax

 

 

 

(6

)

 

 

 

 

   

 

 

   

 

 

14

   

 

 

   

 

 

8

 

Net Income (Loss)

 

 

 

213

   

 

 

132

   

 

 

17

   

 

 

(13

)

 

 

 

 

(20

)

 

 

 

 

329

 

Preferred Securities Dividends

 

 

 

   

 

 

(1

)

 

 

 

 

   

 

 

   

 

 

1

   

 

 

 

Segment Earnings (Loss)

 

 

 

213

   

 

 

131

   

 

 

17

   

 

 

(13

)

 

 

 

 

(19

)

 

 

 

 

329

 

Gross Additions to Long-Lived Assets

 

 

 

126

   

 

 

130

   

 

 

   

 

 

16

   

 

 

3

   

 

 

275

 

As of December 31, 2007:

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

$

 

8,336

   

 

$

 

14,637

   

 

$

 

2,992

   

 

$

 

2,334

   

 

$

 

   

 

$

 

28,299

 

Investments in Equity Method Subsidiaries

 

 

$

 

14

   

 

$

 

   

 

$

 

   

 

$

 

208

   

 

$

 

   

 

$

 

222

 

34


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 

 

 

(A)

 

 

 

PSEG’s other activities include amounts applicable to PSEG (as parent corporation) and Energy Holdings (as parent company) and EGDC and intercompany eliminations, primarily relating to intercompany transactions between Power and PSE&G. No gains or losses are recorded on any intercompany transactions; rather, all intercompany transactions are at cost or, in the case of the BGS and BGSS contracts between Power and PSE&G, at rates prescribed by the BPU. For a further discussion of the intercompany transactions between Power and PSE&G, see Note 14. Related-Party Transactions. The net losses primarily relate to financing and certain administrative and general costs at PSEG, as parent corporation.

Note 13. Fair Value Measurements

PSEG, Power and PSE&G

Effective January 1, 2008, PSEG, Power and PSE&G adopted SFAS 157 except for non-financial assets and liabilities as described in FSP FAS 157-2 and discussed in Note 2. Recent Accounting Standards. SFAS 157 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. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy that 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, exchange traded derivatives and certain U.S. government treasury 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, are based on the best information available and might include an entity’s own data. 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 FTRs, other longer term capacity and transportation contracts and certain commingled securities.

In addition to establishing a measurement framework, SFAS 157 nullifies the guidance of EITF 02-3, 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. Under EITF 02-3, PSEG Texas had a deferred inception loss of $34 million, pre-tax, at December 31, 2007 related to a five-year capacity contract at its generation facilities, which was being amortized at $11 million per year through 2010. In accordance with the provisions of SFAS 157, PSEG Texas recorded a cumulative effect adjustment of $22 million after-tax to January 1, 2008 Retained Earnings associated with the implementation of SFAS 157.

35


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents information about PSEG’s, Power’s, and PSE&G’s respective assets and liabilities measured at fair value on a recurring basis at March 31, 2008, including the fair value measurements and the levels of inputs used in determining those fair values. Amounts shown for PSEG include the amounts shown for Power and PSE&G.

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring Fair Value Measurements as of March 31, 2008

Description

 

Total at
March 31,
2008

 

Cash
Collateral
Netting (F)

 

Quoted Market Prices
for Identical Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

 

(Millions)

PSEG

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Derivative Contracts:

 

 

 

 

 

 

 

 

 

 

Energy Trading Contracts (A)

 

 

$

 

173

   

 

$

 

   

 

$

 

   

 

$

 

160

   

 

$

 

13

 

Commodity Hedges (A)

 

 

$

 

1

   

 

$

 

   

 

$

 

   

 

$

 

   

 

$

 

1

 

Other Commodity Contracts (B)

 

 

$

 

69

   

 

$

 

   

 

$

 

   

 

$

 

6

   

 

$

 

63

 

Foreign Currency Contract (C)

 

 

$

 

1

   

 

$

 

   

 

$

 

   

 

$

 

1

   

 

$

 

 

NDT Funds (D)

 

 

$

 

1,281

   

 

$

 

   

 

$

 

684

   

 

$

 

570

   

 

$

 

27

 

Rabbi Trusts (D)

 

 

$

 

138

   

 

$

 

   

 

$

 

14

   

 

$

 

110

   

 

$

 

14

 

Other Long-Term Investments (E)

 

 

$

 

3

   

 

$

 

   

 

$

 

4

   

 

$

 

(1

)

 

 

 

$

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Derivative Contracts:

 

 

 

 

 

 

 

 

 

 

Energy Trading Contracts (A)

 

 

$

 

25

   

 

$

 

(2

)

 

 

 

$

 

   

 

$

 

23

   

 

$

 

4

 

Commodity Hedges (A)

 

 

$

 

605

   

 

$

 

(207

)

 

 

 

$

 

   

 

$

 

812

   

 

$

 

 

Other Commodity Contracts (B)

 

 

$

 

108

   

 

$

 

   

 

$

 

   

 

$

 

35

   

 

$

 

73

 

Interest Rate Swaps (C)

 

 

$

 

17

   

 

$

 

   

 

$

 

   

 

$

 

17

   

 

$

 

 

Power

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Derivative Contracts:

 

 

 

 

 

 

 

 

 

 

Energy Trading Contracts (A)

 

 

$

 

173

   

 

$

 

   

 

$

 

   

 

$

 

160

   

 

$

 

13

 

Commodity Hedges (A)

 

 

$

 

1

   

 

$

 

   

 

$

 

   

 

$

 

   

 

$

 

1

 

NDT Funds (D)

 

 

$

 

1,281

   

 

$

 

   

 

$

 

684

   

 

$

 

570

   

 

$

 

27

 

Rabbi Trusts (D)

 

 

$

 

28

   

 

$

 

   

 

$

 

3

   

 

$

 

22

   

 

$

 

3

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Derivative Contracts:

 

 

 

 

 

 

 

 

 

 

Energy Trading Contracts (A)

 

 

$

 

25

   

 

$

 

(2

)

 

 

 

$

 

   

 

$

 

23

   

 

$

 

4

 

Commodity Hedges (A)

 

 

$

 

605

   

 

$

 

(207

)

 

 

 

$

 

   

 

$

 

812

   

 

$

 

 

PSE&G

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Derivative Contracts:

 

 

 

 

 

 

 

 

 

 

Other Commodity Contracts (B)

 

 

$

 

2

   

 

$

 

   

 

$

 

   

 

$

 

   

 

$

 

2

 

Rabbi Trusts (D)

 

 

$

 

48

   

 

$

 

   

 

$

 

5

   

 

$

 

38

   

 

$

 

5

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Other Commodity Contracts (B)

 

 

$

 

73

   

 

$

 

   

 

$

 

   

 

$

 

   

 

$

 

73

 

Interest Rate Swap (C)

 

 

$

 

5

   

 

$

 

   

 

$

 

   

 

$

 

5

   

 

$

 

 


 

 

(A)

 

 

 

Whenever possible, fair values for energy trading and commodity hedge contracts are obtained from quoted market sources in active markets. When this pricing is unavailable, contracts are valued using broker or dealer quotes or auction prices. For contracts where no observable market exists, modeling techniques are employed using assumptions reflective of current market rates, yield curves and forward prices, as applicable, to interpolate certain prices.

 

(B)

 

 

 

Other commodity contracts primarily include more complex agreements for which limited pricing information is available. These contracts are valued using modeling techniques and assumptions reflective of contractual terms, current market rates, forward price curves, discount rates and risk factors, as applicable.

36


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

(C)

 

 

 

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

 

(D)

 

 

 

The NDT Funds and the Rabbi Trusts maintain investments in various equity and fixed income securities classified as “available for sale” under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These securities are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. All fair value measurements for the fund securities are provided by the trustees of these funds. Most equity securities are priced utilizing the principal market close price or in some cases midpoint, bid or ask price (primarily Level 1). Fixed income securities are priced using an evaluated pricing approach or the most recent exchange or quoted bid (primarily Level 2). Short-term investments are valued based upon internal matrices using observable market prices or market parameters such as time-to- maturity, coupon rate, quality rating and current yield (primarily Level 2). Certain commingled cash equivalents included in temporary investment funds are measured with significant unobservable inputs and internal assumptions (primarily Level 3). The NDT Funds exclude net receivables/payables of $72 million related to pending security sales/purchases.

 

(E)

 

 

 

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

 

(F)

 

 

 

Cash collateral netting represents collateral amounts netted against derivative assets and liabilities as permitted under FIN 39-1. For further discussion, see Note 2. Recent Accounting Standards.

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

Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis

 

 

 

 

 

 

 

 

 

 

 

Description

 

Balance at
January 1,
2008

 

Total Gains or (Losses)
Realized/Unrealized

 

Purchases and
(Sales)

 

Balance at
March 31,
2008

 

Included in
Income (A)

 

Included in
Regulatory Assets
/Liabilities (B)

 

 

(Millions)

PSEG Derivative Assets

 

 

$

 

44

   

 

$

 

23

   

 

$

 

(1

)

 

 

 

$

 

11

   

 

$

 

77

 

PSEG Derivative Liabilities

 

 

$

 

(49

)

 

 

 

$

 

(7

)

 

 

 

$

 

(21

)

 

 

 

$

 

   

 

$

 

(77

)

 

PSEG NDT Funds

 

 

$

 

27

   

 

$

 

(1

)

 

 

 

$

 

   

 

$

 

1

   

 

$

 

27

 

PSEG Rabbi Trust Funds

 

 

$

 

16

   

 

$

 

   

 

$

 

   

 

$

 

(2

)

 

 

 

$

 

14

 

Power Derivative Assets

 

 

$

 

13

   

 

$

 

(10

)

 

 

 

$

 

   

 

$

 

11

   

 

$

 

14

 

Power Derivative Liabilities

 

 

$

 

3

   

 

$

 

(7

)

 

 

 

$

 

   

 

$

 

   

 

$

 

(4

)

 

Power NDT Funds

 

 

$

 

27

   

 

$

 

(1

)

 

 

 

$

 

   

 

$

 

1

   

 

$

 

27

 

Power Rabbi Trust Funds

 

 

$

 

3

   

 

$

 

   

 

$

 

   

 

$

 

   

 

$

 

3

 

PSE&G Derivative Assets

 

 

$

 

3

   

 

$

 

   

 

$

 

(1

)

 

 

 

 

   

 

$

 

2

 

PSE&G Derivative Liabilities

 

 

$

 

(52

)

 

 

 

$

 

   

 

$

 

(21

)

 

 

 

$

 

   

 

$

 

(73

)

 

PSE&G Rabbi Trust Funds

 

 

$

 

6

   

 

$

 

   

 

$

 

   

 

$

 

(1

)

 

 

 

$

 

5

 


 

 

(A)

 

 

 

PSEG’s gains and losses are mainly attributable to changes in derivative assets and liabilities of which $23 million is included in Operating Revenues and ($7) million is included in Other Comprehensive Income. Of the $23 million in Operating Revenues, $33 million (unrealized) is at PSEG Texas and $(10) million (($5) unrealized) is at Power. The ($7) million included in Other Comprehensive Income is at Power.

 

(B)

 

 

 

Mainly includes losses on PSE&G’s derivative contracts that are not included in either earnings or Other Comprehensive Income, as they are deferred as a regulatory asset and are expected to be recovered from PSE&G’s customers.

37


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

As of March 31, 2008, PSEG carried approximately $1 billion of net assets that are measured at fair value on a recurring basis, of which approximately $40 million are measured using unobservable inputs and classified as level 3 within the fair value hierarchy. These Level 3 net assets represent less than 1% of PSEG’s total assets and there were no significant transfers in or out of Level 3 during the quarter ended March 31, 2008. The overall impact of gains and losses associated with Level 3 assets and liabilities was immaterial to PSEG’s Condensed Consolidated Financial Statements for the quarter.

Note 14. Related-Party Transactions

The majority of the following discussion relates to intercompany transactions. These transactions were properly recognized on each company’s stand-alone financial statements and were eliminated during the consolidation process in accordance with GAAP when preparing PSEG’s Condensed Consolidated Financial Statements.

BGS and BGSS Contracts

Power and PSE&G

PSE&G has entered into a requirements contract with Power under which Power provides the gas supply services needed to meet PSE&G’s BGSS and other contractual requirements through March 2012 and year-to-year thereafter.

Power has also entered into contracts to supply energy, capacity and ancillary services to PSE&G through the BGS auction process.

The amounts which Power charged to PSE&G for BGS and BGSS are presented below:

 

 

 

 

 

 

 

Power’s Billings for
the Quarters Ended
March 31,

 

2008

 

2007

 

 

(Millions)

BGS

 

 

$

 

272

   

 

$

 

218

 

BGSS

 

 

$

 

1,050

   

 

$

 

1,049

 

As of March 31, 2008 and December 31, 2007, Power had net receivables from PSE&G of $398 million and $451 million, respectively, primarily related to the BGS and BGSS contracts.

In addition, as of March 31, 2008, PSE&G had a receivable from Power of $150 million and as of December 31, 2007, PSE&G had a payable to Power of $55 million related to gas supply hedges Power entered into for BGSS.

Services

Power and PSE&G

Services provides and bills administrative services to Power and PSE&G. In addition, Power and PSE&G have other payables to Services, including amounts related to certain common costs, such as pension and OPEB costs, which Services pays on behalf of each of the operating companies. The billings for administrative services and payables are presented below:

 

 

 

 

 

 

 

 

 

 

 

Services’ Billings for the
Quarters Ended
March 31,

 

Payable to Services as of

 

March 31,
2008

 

December 31,
2007

 

2008

 

2007

 

 

(Millions)

Power

 

 

$

 

41

   

 

$

 

33

   

 

$

 

21

   

 

$

 

18

 

PSE&G

 

 

$

 

65

   

 

$

 

49

   

 

$

 

39

   

 

$

 

32

 

38


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

These transactions were properly recognized on each company’s stand-alone financial statements and were eliminated when preparing PSEG’s Condensed Consolidated Financial Statements. PSEG, Power and PSE&G believe that the costs of services provided by Services approximate market value for such services.

Tax Sharing Agreements

PSEG, Power and PSE&G

Power and PSE&G had payables to PSEG related to taxes as follows:

 

 

 

 

 

 

 

Payable to PSEG as of

 

March 31,
2008

 

December 31,
2007

 

 

(Millions)

Power

 

 

$

 

189

   

 

$

 

43

 

PSE&G

 

 

$

 

67

   

 

$

 

5

 

In addition to these tax payable amounts, as of March 31, 2008 and December 31, 2007, Power had a $9 million and an $8 million current receivable, respectively, from PSEG related to unrecognized tax positions. As of March 31, 2008, PSE&G had a $53 million current receivable from PSEG and as of December 31, 2007 PSE&G had a $3 million current tax payable to PSEG for unrecognized tax positions. PSEG and its subsidiaries adopted FIN 48 effective January 1, 2007, which prescribes a model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return.

Affiliate Loans and Advances

PSEG and Power

As of March 31, 2008, Power had a demand note receivable of $407 million due from PSEG. As of December 31, 2007, Power had a demand note payable to PSEG of $238 million for short-term funding needs.

PSE&G and Services

As of each of March 31, 2008 and December 31, 2007, PSE&G had advanced working capital to Services of $33 million. This amount is included in Other Noncurrent Assets on PSE&G’s Condensed Consolidated Balance Sheets.

Power and Services

As of each of March 31, 2008 and December 31, 2007, Power had advanced working capital to Services of $17 million. This amount is included in Other Noncurrent Assets on Power’s Condensed Consolidated Balance Sheets.

Other

PSEG and Power

As of December 31, 2007, Power had net receivables from PSEG of $5 million related to amounts that PSEG had collected on Power’s behalf.

PSEG and PSE&G

As of March 31, 2008 and December 31, 2007, PSE&G had net receivables from PSEG of $5 million and $11 million, respectively, related to amounts that PSEG had collected on PSE&G’s behalf.

39


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Power and Global

Effective January 1, 2008, Fossil assumed control of the management of Global’s operations located in Texas. Power’s receivable for management fees from Global was immaterial as of March 31, 2008.

Note 15. Guarantees of Debt

Power

Each series of Power’s Senior Notes and Pollution Control Notes is fully and unconditionally and jointly and severally guaranteed by Fossil, Nuclear and ER&T. The following table presents condensed financial information for the guarantor subsidiaries, as well as Power’s non-guarantor subsidiaries.

 

 

 

 

 

 

 

 

 

 

 

 

 

Power

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Consolidating
Adjustments

 

Consolidated
Total

 

 

(Millions)

For the Quarter Ended March 31, 2008:

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

 

$

 

   

 

$

 

2,627

   

 

$

 

27

   

 

$

 

(279

)

 

 

 

$

 

2,375

 

Operating Expenses

 

 

 

2

   

 

 

2,117

   

 

 

27

   

 

 

(280

)

 

 

 

 

1,866

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

(2

)

 

 

 

 

510

   

 

 

   

 

 

1

   

 

 

509

 

Equity Earnings (Losses) of Subsidiaries

 

 

 

281

   

 

 

(10

)

 

 

 

 

   

 

 

(271

)

 

 

 

 

 

Other Income

 

 

 

39

   

 

 

101

   

 

 

   

 

 

(54

)

 

 

 

 

86

 

Other Deductions

 

 

 

   

 

 

(91

)

 

 

 

 

   

 

 

   

 

 

(91

)

 

Interest Expense

 

 

 

(53

)

 

 

 

 

(28

)

 

 

 

 

(15

)

 

 

 

 

54

   

 

 

(42

)

 

Income Taxes

 

 

 

10

   

 

 

(201

)

 

 

 

 

5

   

 

 

(1

)

 

 

 

 

(187

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

$

 

275

   

 

$

 

281

   

 

$

 

(10

)

 

 

 

$

 

(271

)

 

 

 

$

 

275

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended March 31, 2008:

 

 

 

 

 

 

 

 

 

 

Net Cash (Used In) Provided By Operating Activities

 

 

$

 

(848

)

 

 

 

$

 

856

   

 

$

 

(26

)

 

 

 

$

 

956

   

 

$

 

938

 

Net Cash Provided By (Used In) Investing Activities

 

 

$

 

973

   

 

$

 

(806

)

 

 

 

$

 

(2

)

 

 

 

$

 

(742

)

 

 

 

$

 

(577

)

 

Net Cash (Used In) Provided By Financing Activities

 

 

$

 

(125

)

 

 

 

$

 

(52

)

 

 

 

$

 

28

   

 

$

 

(214

)

 

 

 

$

 

(363

)

 

For the Quarter Ended March 31, 2007:

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

 

$

 

   

 

$

 

2,401

   

 

$

 

27

   

 

$

 

(279

)

 

 

 

$

 

2,149

 

Operating Expenses

 

 

 

   

 

 

2,014

   

 

 

24

   

 

 

(278

)

 

 

 

 

1,760

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

   

 

 

387

   

 

 

3

   

 

 

(1

)

 

 

 

 

389

 

Equity Earnings (Losses) of Subsidiaries

 

 

 

217

   

 

 

(12

)

 

 

 

 

   

 

 

(205

)

 

 

 

 

 

Other Income

 

 

 

49

   

 

 

66

   

 

 

   

 

 

(64

)

 

 

 

 

51

 

Other Deductions

 

 

 

   

 

 

(29

)

 

 

 

 

   

 

 

   

 

 

(29

)

 

Interest Expense

 

 

 

(54

)

 

 

 

 

(35

)

 

 

 

 

(11

)

 

 

 

 

63

   

 

 

(37

)

 

Income Taxes

 

 

 

1

   

 

 

(160

)

 

 

 

 

3

   

 

 

1

   

 

 

(155

)

 

Loss from Discontinued Operations, net of tax

 

 

 

   

 

 

   

 

 

(6

)

 

 

 

 

   

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

$

 

213

   

 

$

 

217

   

 

$

 

(11

)

 

 

 

$

 

(206

)

 

 

 

$

 

213

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended March 31, 2007:

 

 

 

 

 

 

 

 

 

 

Net Cash Provided By (Used In) Operating Activities

 

 

$

 

61

   

 

$

 

801

   

 

$

 

(17

)

 

 

 

$

 

(21

)

 

 

 

$

 

824

 

Net Cash Provided By (Used In) Investing Activities

 

 

$

 

64

   

 

$

 

114

   

 

$

 

(14

)

 

 

 

$

 

(815

)

 

 

 

$

 

(651

)

 

Net Cash (Used In) Provided By Financing Activities

 

 

$

 

(125

)

 

 

 

$

 

(921

)

 

 

 

$

 

31

   

 

$

 

836

   

 

$

 

(179

)

 

40


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

Power

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Consolidating
Adjustments

 

Consolidated
Total

 

 

(Millions)

As of March 31, 2008:

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

$

 

2,630

   

 

$

 

3,974

   

 

$

 

366

   

 

$

 

(5,160

)

 

 

 

$

 

1,810

 

Property, Plant and Equipment, net

 

 

 

149

   

 

 

3,760

   

 

 

927

   

 

 

1

   

 

 

4,837

 

Investment in Subsidiaries

 

 

 

3,397

   

 

 

159

   

 

 

   

 

 

(3,556

)

 

 

 

 

 

Noncurrent Assets

 

 

 

138

   

 

 

1,604

   

 

 

30

   

 

 

(415

)

 

 

 

 

1,357

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

$

 

6,314

   

 

$

 

9,497

   

 

$

 

1,323

   

 

$

 

(9,130

)

 

 

 

$

 

8,004

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

$

 

134

   

 

$

 

5,166

   

 

$

 

1,064

   

 

$

 

(5,160

)

 

 

 

$

 

1,204

 

Noncurrent Liabilities

 

 

 

239

   

 

 

935

   

 

 

100

   

 

 

(415

)

 

 

 

 

859

 

Long-Term Debt

 

 

 

2,902

   

 

 

   

 

 

   

 

 

   

 

 

2,902

 

Member’s Equity

 

 

 

3,039

   

 

 

3,396

   

 

 

159

   

 

 

(3,555

)

 

 

 

 

3,039

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Member’s Equity

 

 

$

 

6,314

   

 

$

 

9,497

   

 

$

 

1,323

   

 

$

 

(9,130

)

 

 

 

$

 

8,004

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007:

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

$

 

2,553

   

 

$

 

3,541

   

 

$

 

360

   

 

$

 

(4,305

)

 

 

 

$

 

2,149

 

Property, Plant and Equipment, net

 

 

 

149

   

 

 

3,669

   

 

 

934

   

 

 

(1

)

 

 

 

 

4,751

 

Investment in Subsidiaries

 

 

 

3,538

   

 

 

168

   

 

 

   

 

 

(3,706

)

 

 

 

 

 

Noncurrent Assets

 

 

 

156

   

 

 

1,505

   

 

 

30

   

 

 

(255

)

 

 

 

 

1,436

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

$

 

6,396

   

 

$

 

8,883

   

 

$

 

1,324

   

 

$

 

(8,267

)

 

 

 

$

 

8,336

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

$

 

99

   

 

$

 

4,487

   

 

$

 

1,057

   

 

$

 

(4,305

)

 

 

 

$

 

1,338

 

Noncurrent Liabilities

 

 

 

234

   

 

 

858

   

 

 

98

   

 

 

(255

)

 

 

 

 

935

 

Long-Term Debt

 

 

 

2,902

   

 

 

   

 

 

   

 

 

   

 

 

2,902

 

Member’s Equity

 

 

 

3,161

   

 

 

3,538

   

 

 

169

   

 

 

(3,707

)

 

 

 

 

3,161

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Member’s Equity

 

 

$

 

6,396

   

 

$

 

8,883

   

 

$

 

1,324

   

 

$

 

(8,267

)

 

 

 

$

 

8,336

 

 

 

 

 

 

 

 

 

 

 

 

41


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

PSEG, Power and PSE&G

This combined MD&A is separately filed by Public Service Enterprise Group Incorporated (PSEG), PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G). Information contained herein relating to any individual company is filed by such company on its own behalf. Power and PSE&G each make representations only as to itself and make no representations whatsoever as to any other company.

The following discussion relates to the markets in which PSEG and its subsidiaries compete, the corporate strategy for the conduct of PSEG’s businesses within these markets, significant events that have occurred during the first quarter of 2008 and the future outlook for Power, PSE&G and PSEG Energy Holdings L.L.C. (Energy Holdings), as well as the key factors that will drive the future performance of these businesses. This discussion includes significant changes in or additions to information reported in the 2007 Annual Report on Form 10-K and refers to the Condensed Consolidated Financial Statements (Statements) and the related Notes to Condensed Consolidated Financial Statements (Notes). This information should be read in conjunction with such Statements, Notes and the 2007 Annual Report on Form 10-K (Form 10-K).

PSEG’s business consists of four reportable segments, which are Power, PSE&G and the two direct subsidiaries of Energy Holdings: PSEG Global L.L.C. (Global) and PSEG Resources L.L.C. (Resources).

Power

Power is an electric generation and wholesale energy marketing and trading company that is focused on a generation market in the Northeast and Mid Atlantic U.S. Through its subsidiaries, Power seeks to produce low-cost energy through efficient operations of its nuclear, coal and gas-fired generation facilities. Power seeks to balance this generation production with its fuel requirements and supply obligations through energy portfolio management. In addition to the electric generation business, Power’s revenues include gas supply sales under the Basic Gas Supply Service (BGSS) contract with PSE&G.

As a merchant generator, Power’s profit is derived from selling under contract or on the spot market a range of diverse products such as energy, capacity, emissions credits, congestion credits and a series of energy-related products that the system operator uses to optimize the operation of the energy grid, known as ancillary services. Accordingly, the availability of Power’s diverse fleet of generation units to produce these products, as well as the prices of commodities such as electricity, gas, nuclear fuel, coal and emissions, can have a material effect on Power’s profitability. In recent years, the prices at which transactions are entered into for future delivery of these products, as evidenced through the market for forward contracts at points such as PJM Interconnection L.L.C. (PJM) West, have escalated considerably over historical prices. Broad market price increases such as these have had a positive effect on Power’s results. Historically, Power’s nuclear and coal-fired facilities have produced over 50% and 25% of Power’s production, respectively. With the vast majority of its power sourced from these lower-cost units, the rise in electric prices has yielded higher margins for Power. Over a longer-term horizon, if these higher prices are sustained at levels reflective of what the current forward markets indicate, Power would have an attractive environment in which to contract for the sale of its anticipated output, allowing for potentially sustained higher profitability than recognized in prior years. However, its prices also increase the cost of replacement power, thereby placing risk on Power to operate the generating units to produce these products. Further, changes in the operation of Power’s generating facilities, fuel and capacity prices, expected contract prices, capacity factors or other assumptions could materially affect its ability to meet earnings targets and/or liquidity requirements.

Power seeks to mitigate volatility in its results by contracting in advance for a significant portion of its anticipated electric output, capacity and fuel needs. Power believes this contracting strategy increases stability of earnings and cash flow.

Power seeks to sell a portion of its anticipated low-cost nuclear and coal-fired generation over a multi-year forward horizon, normally over a period of two to four years. Power also contracts for the future delivery of nuclear fuel and coal to support its contracted sales. Power’s estimated fuel needs are subject to change based upon the level of its operations as well as upon market demands for and the price of coal, both