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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 SEPTEMBER 30, 2006


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  

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  

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  

000-32503

  PSEG ENERGY HOLDINGS L.L.C.
(A New Jersey Limited Liability Company)
80 Park Plaza—T20
Newark, New Jersey 07102-4194
973 430-7000
http://www.pseg.com
      42-1544079  


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  £

Public Service Electric and Gas Company

  Large accelerated filer  £   Accelerated filer  £   Non-accelerated filer  S

PSEG Power LLC

  Large accelerated filer  £   Accelerated filer  £   Non-accelerated filer  S

PSEG Energy Holdings L.L.C.

  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 October 31, 2006, Public Service Enterprise Group Incorporated had outstanding 252,203,353 shares of its sole class of Common Stock, without par value.

As of October 31, 2006, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record by Public Service Enterprise Group Incorporated.

PSEG Power LLC and PSEG Energy Holdings L.L.C. are wholly owned subsidiaries of Public Service Enterprise Group Incorporated and meet the conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q and are filing their respective Quarterly Reports on Form 10-Q with the reduced disclosure format authorized by General Instruction H.




TABLE OF CONTENTS

         

 

 

 

 

  Page

FORWARD-LOOKING STATEMENTS

      ii  

PART I. FINANCIAL INFORMATION

   

Item 1.

 

Financial Statements

 

 

 Public Service Enterprise Group Incorporated

      1  

 

 Public Service Electric and Gas Company

      5  

 

 

 PSEG Power LLC

      9  

 

 PSEG Energy Holdings L.L.C.

      13  

 

 

Notes to Condensed Consolidated Financial Statements

 

 Note 1. Organization and Basis of Presentation

      17  

 

 

 Note 2. Recent Accounting Standards

      19  

 

 Note 3. Discontinued Operations, Dispositions and Acquisitions

      22  

 

 

 Note 4. Earnings Per Share (EPS)

      24  

 

 Note 5. Commitments and Contingent Liabilities

      25  

 

 

 Note 6. Financial Risk Management Activities

      39  

 

 Note 7. Comprehensive Income (Loss), Net of Tax

      42  

 

 

 Note 8. Changes in Capitalization

      43  

 

 Note 9. Other Income and Deductions

      44  

 

 

 Note 10. Income Taxes

      46  

 

 Note 11. Financial Information by Business Segments

      47  

 

 

 Note 12. Stock-Based Compensation

      48  

 

 Note 13. Related-Party Transactions

      52  

 

 

 Note 14. Guarantees of Debt

      55  

 

 Note 15. Subsequent Events

      57  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

      58  

 

Termination of Merger Agreement

      58  

 

 

Overview of 2006 and Future Outlook

      58  

 

Results of Operations

      63  

 

 

Liquidity and Capital Resources

      72  

 

Capital Requirements

      78  

 

 

Off-Balance Sheet Arrangements

      78  

 

Accounting Matters

      78  

Item 3.

 

Qualitative and Quantitative Disclosures About Market Risk

      79  

Item 4.

 

Controls and Procedures

      83  

PART II. OTHER INFORMATION

   

Item 1.

 

Legal Proceedings

      84  

Item 5.

 

Other Information

      85  

Item 6.

 

Exhibits

      94  

Signatures

      95  

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. Public Service Enterprise Group Incorporated (PSEG), Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG Energy Holdings L.L.C. (Energy Holdings) undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following review should not be construed as a complete list of factors that could affect forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements discussed above, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following:

 

      regulatory issues that significantly impact operations;

 

 

 

 

ability to attain satisfactory regulatory results;

 

 

 

 

operating performance or cash flow from investments falling below projected levels;

 

 

 

 

credit, commodity, interest rate, counterparty and other financial market risks;

 

 

 

 

liquidity and the ability to access capital and maintain adequate credit ratings;

 

 

 

 

adverse or unanticipated weather conditions that significantly impact costs and/or operations, including generation;

 

 

 

 

ability to implement successful succession planning, attract and retain management and other key employees;

 

 

 

 

changes in the electric industry, including changes to power pools;

 

 

 

 

changes in energy policies and regulation;

 

 

 

 

changes in demand;

 

 

 

 

changes in the number of market participants and the risk profiles of such participants;

 

 

 

 

availability of power transmission facilities that impact the ability to deliver output to customers;

 

 

 

 

growth in costs and expenses;

 

 

 

 

environmental regulations that significantly impact operations;

 

 

 

 

changes in rates of return on overall debt and equity markets that could adversely impact the value of pension and other postretirement benefits assets and liabilities and the Nuclear Decommissioning Trust Funds;

 

 

 

 

changes in political conditions, recession, acts of war or terrorism;

 

 

 

 

changes in technology that make generation, transmission and/or distribution assets less competitive;

 

 

 

 

continued availability of insurance coverage at commercially reasonable rates;

 

 

 

 

involvement in lawsuits, including liability claims and commercial disputes;

 

 

 

 

acquisitions, divestitures, mergers, restructurings or strategic initiatives that change PSEG’s, PSE&G’s, Power’s and Energy Holdings’ strategy or structure;

 

 

 

 

business combinations among competitors and major customers;

 

 

 

 

general economic conditions, including inflation or deflation;

 

 

 

 

changes in tax laws and regulations;

 

 

 

 

changes to accounting standards or accounting principles generally accepted in the U.S., which may require adjustments to financial statements;

ii


 

 

 

 

ability to recover investments or service debt as a result of any of the risks or uncertainties mentioned herein;

PSEG, PSE&G and Energy Holdings

 

      ability to obtain adequate and timely rate relief;

PSEG, Power and Energy Holdings

 

      inability to effectively manage portfolios of electric generation assets, gas supply contracts and electric and gas supply obligations;

 

 

 

 

inability to meet generation operating performance expectations;

 

 

 

 

energy transmission constraints or lack thereof;

 

 

 

 

adverse changes in the market for energy, capacity, natural gas, emissions credits, congestion credits and other commodity prices, especially during significant price movements for natural gas and power;

 

 

 

 

adverse market developments or changes in market rules, including delays or impediments to implementation of reasonable capacity markets;

 

 

 

 

surplus of energy capacity and excess supply;

 

 

 

 

substantial competition in the domestic and worldwide energy markets;

 

 

 

 

margin posting requirements, especially during significant price movements for natural gas and power;

 

 

 

 

availability of fuel and timely transportation at reasonable prices;

 

 

 

 

effects on competitive position of actions involving competitors or major customers;

 

 

 

 

changes in product or sourcing mix;

 

 

 

 

delays, cost escalations or unsuccessful construction and development;

 

 

 

 

delay in market rules;

PSEG and Power

 

      changes in regulation and safety and security measures at nuclear facilities;

 

 

 

 

ability to maintain nuclear operating performance at projected levels;

PSEG and Energy Holdings

 

      changes in foreign currency exchange rates;

 

 

 

 

deterioration in the credit of lessees and their ability to adequately service lease rentals;

 

 

 

 

ability to realize tax benefits;

 

 

 

 

changes in political regimes in foreign countries; and

 

 

 

 

international developments negatively impacting business.

Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and PSEG, PSE&G, Power and Energy Holdings 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, PSEG, PSE&G, Power and Energy Holdings or their respective business prospects, financial condition or results of operations. Undue reliance should not be placed on these forward-looking statements in making any investment decision. Each of PSEG, PSE&G, Power and Energy Holdings expressly disclaims 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. In making any investment decision regarding PSEG’s, PSE&G’s, Power’s and Energy Holdings’ securities, PSEG, PSE&G, Power and Energy Holdings are not making, and you should not infer, any representation about the likely existence of any particular future set of facts or circumstances. The forward-looking statements contained in this report are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

iii


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                 

 

  For the Quarters Ended
September 30,
  For the Nine Months Ended
September 30,
  2006   2005   2006   2005

 

  (Millions)

 

  (Unaudited)

OPERATING REVENUES

    $   3,392       $   3,324       $   9,516       $   8,940  

OPERATING EXPENSES

               

Energy Costs

      1,809         1,979         5,400         5,144  

Operation and Maintenance

      541         537         1,705         1,661  

Write-down of Project Investments

                      263          

Depreciation and Amortization

      234         204         645         562  

Taxes Other Than Income Taxes

      32         34         100         105  

 

               

Total Operating Expenses

      2,616         2,754         8,113         7,472  

 

               

Income from Equity Method Investments

      30         30         93         90  

 

               

OPERATING INCOME

      806         600         1,496         1,558  

Other Income

      51         92         153         169  

Other Deductions

      (44 )         (31 )         (91 )         (66 )  

Interest Expense

      (209 )         (208 )         (617 )         (606 )  

Preferred Stock Dividends

      (1 )         (1 )         (3 )         (3 )  

 

               

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

      603         452         938         1,052  

Income Tax Expense

      (229 )         (183 )         (379 )         (412 )  

 

               

INCOME FROM CONTINUING OPERATIONS

      374         269         559         640  

(Loss) Income from Discontinued Operations, including Gain (Loss) on Disposal, net of tax expense (benefit) of $0, $0, $142, and ($138) for the quarter and nine months ended 2006 and 2005, respectively

              (16 )         227         (184 )  

 

               

NET INCOME

    $   374       $   253       $   786       $   456  

 

               

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS):

               

BASIC

      251,747         239,034         251,471         238,696  

 

               

DILUTED

      252,329         244,286         252,161         243,212  

 

               

EARNINGS PER SHARE:

               

BASIC

               

INCOME FROM CONTINUING OPERATIONS

    $   1.48       $   1.12       $   2.22       $   2.68  

NET INCOME

    $   1.48       $   1.06       $   3.12       $   1.91  

 

               

DILUTED

               

INCOME FROM CONTINUING OPERATIONS

    $   1.48       $   1.10       $   2.22       $   2.63  

NET INCOME

    $   1.48       $   1.03       $   3.12       $   1.87  

 

               

DIVIDENDS PAID PER SHARE OF COMMON STOCK

    $   0.57       $   0.56       $   1.71       $   1.68  

 

               

See Notes to Condensed Consolidated Financial Statements.

1


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

ASSETS

       

CURRENT ASSETS

       

Cash and Cash Equivalents

    $   292       $   288  

Accounts Receivable, net of allowances of $45 and $44 in 2006 and 2005, respectively

      1,337         1,936  

Unbilled Revenues

      222         394  

Fuel

      853         812  

Materials and Supplies

      311         277  

Energy Trading Contracts

      62         327  

Prepayments

      224         129  

Restricted Funds

      98         76  

Derivative Contracts

      37         50  

Assets of Discontinued Operations

              498  

Assets Held for Sale

      21          

Other

      37         41  

 

       

Total Current Assets

      3,494         4,828  

 

       

PROPERTY, PLANT AND EQUIPMENT

      19,634         18,896  

Less: Accumulated Depreciation and Amortization

      (5,950 )         (5,560 )  

 

       

Net Property, Plant and Equipment

      13,684         13,336  

 

       

NONCURRENT ASSETS

       

Regulatory Assets

      5,028         5,053  

Long-Term Investments

      3,890         4,077  

Nuclear Decommissioning Trust (NDT) Funds

      1,191         1,133  

Other Special Funds

      569         559  

Goodwill and Other Intangibles

      597         608  

Energy Trading Contracts

      19         42  

Derivative Contracts

      59          

Other

      183         177  

 

       

Total Noncurrent Assets

      11,536         11,649  

 

       

TOTAL ASSETS

    $   28,714       $   29,813  

 

       

See Notes to Condensed Consolidated Financial Statements.

2


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS

             

 

  September 30,
2006
  December 31,
2005
   

 

  (Millions)
(Unaudited)
   

LIABILITIES AND CAPITALIZATION

           

CURRENT LIABILITIES

           

Long-Term Debt Due Within One Year

    $   672       $   1,536      

Commercial Paper and Loans

      555         100      

Accounts Payable

      806         1,154      

Derivative Contracts

      186         425      

Energy Trading Contracts

      237         200      

Accrued Interest

      191         152      

Accrued Taxes

      112         141      

Clean Energy Program

      114         96      

Liabilities of Discontinued Operations

              436      

Other

      430         515      

 

           

Total Current Liabilities

      3,303         4,755      

 

           

NONCURRENT LIABILITIES

           

Deferred Income Taxes and Investment Tax Credits (ITC)

      4,646         4,248      

Regulatory Liabilities

      668         720      

Asset Retirement Obligations

      618         585      

Other Postretirement Benefit (OPEB) Costs

      632         597      

Clean Energy Program

      160         233      

Environmental Costs

      396         420      

Derivative Contracts

      214         637      

Energy Trading Contracts

      40         19      

Other

      263         218      

 

           

Total Noncurrent Liabilities

      7,637         7,677      

 

           

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

           

CAPITALIZATION

           

LONG-TERM DEBT

           

Long-Term Debt

      7,436         7,849      

Securitization Debt

      1,758         1,879      

Project Level, Non-Recourse Debt

      855         891      

Debt Supporting Trust Preferred Securities

      660         660      

 

           

Total Long-Term Debt

      10,709         11,279      

 

           

SUBSIDIARIES’ PREFERRED SECURITIES

           

Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2006 and 2005—795,234 shares

      80         80      

 

           

COMMON STOCKHOLDERS’ EQUITY

           

Common Stock, no par, authorized 500,000,000 shares; issued; 2006—266,123,571 shares; 2005—265,332,746 shares

      4,644         4,618      

Treasury Stock, at cost; 2006—14,024,505 shares; 2005—14,169,560 shares

      (527 )         (532 )      

Retained Earnings

      2,901         2,545      

Accumulated Other Comprehensive Loss

      (33 )         (609 )      

 

           

Total Common Stockholders’ Equity

      6,985         6,022      

 

           

Total Capitalization

      17,774         17,381      

 

           

TOTAL LIABILITIES AND CAPITALIZATION

    $   28,714       $   29,813      

 

           

See Notes to Condensed Consolidated Financial Statements.

3


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

         

 

  For The Nine Months Ended
September 30,
  2006   2005

 

  (Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net Income

    $   786       $   456  

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

       

(Gain) Loss on Disposal of Discontinued Operations, net of tax

      (228 )         178  

Gain on Disposition of Property, Plant and Equipment

      (1 )         (5 )  

Write-Down of Project Investments

              22  

Depreciation and Amortization

      645         572  

Amortization of Nuclear Fuel

      73         69  

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

      (5 )         155  

Non-Cash Employee Benefit Plan Costs

      178         175  

Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes

      32         9  

Loss (Gain) on Sale of Investments

      255         (50 )  

Undistributed Earnings from Affiliates

      (45 )         (40 )  

Foreign Currency Transaction Loss (Gain)

      4         (1 )  

Unrealized (Gains) Losses on Energy Contracts and Other Derivatives

      (47 )         4  

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

      112         75  

Under Recovery of Societal Benefits Charge (SBC)

      (89 )         (94 )  

Net Realized Gains and Income from NDT Funds

      (54 )         (94 )  

Other Non-Cash Charges

      25         26  

Net Change in Certain Current Assets and Liabilities

      73         (439 )  

Employee Benefit Plan Funding and Related Payments

      (127 )         (159 )  

Proceeds from the Withdrawal of Partnership Interests and Other Distributions

      7         63  

Other

      (150 )         (19 )  

 

       

Net Cash Provided By Operating Activities

      1,444         903  

 

       

CASH FLOWS FROM INVESTING ACTIVITIES

       

Additions to Property, Plant and Equipment

      (748 )         (751 )  

Proceeds from Collection of Notes Receivable

              132  

Proceeds from Sale of Discontinued Operations

      494         220  

Proceeds from Sale of Property, Plant and Equipment

      3         6  

Proceeds from the Sale of Investments and Return of Capital from Partnerships

      186         26  

Proceeds from NDT Funds Sales

      1,056         2,751  

Investment in NDT Funds

      (1,069 )         (2,769 )  

Restricted Funds

      (22 )         (47 )  

NDT Funds Interest and Dividends

      29         25  

Other

      18         13  

 

       

Net Cash Used In Investing Activities

      (53 )         (394 )  

 

       

CASH FLOWS FROM FINANCING ACTIVITIES

       

Net Change in Commercial Paper and Loans

      452         (267 )  

Issuance of Long-Term Debt

              728  

Issuance of Non-Recourse Debt

              4  

Issuance of Common Stock

      56         55  

Redemptions of Long-Term Debt

      (1,246 )         (230 )  

Repayment of Non-Recourse Debt

      (37 )         (20 )  

Redemption of Debt Underlying Trust Securities

      (154 )          

Cash Dividends Paid on Common Stock

      (430 )         (401 )  

Other

      (26 )         (42 )  

 

       

Net Cash Used In Financing Activities

      (1,385 )         (173 )  

 

       

Effect of Exchange Rate Change

      (2 )         1  

 

       

Net Increase in Cash and Cash Equivalents

      4         337  

Cash and Cash Equivalents at Beginning of Period

      288         263  

 

       

Cash and Cash Equivalents at End of Period

    $   292       $   600  

 

       

Supplemental Disclosure of Cash Flow Information:

       

Income Taxes Paid

    $   312       $   102  

Interest Paid, Net of Amounts Capitalized

    $   510       $   618  

See Notes to Condensed Consolidated Financial Statements.

4


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                 

 

  For The Quarters Ended
September 30,
  For The Nine Months Ended
September 30,
  2006   2005   2006   2005

 

  (Millions)
(Unaudited)

OPERATING REVENUES

    $   2,017       $   1,934       $   5,901       $   5,559  

OPERATING EXPENSES

               

Energy Costs

      1,296         1,195         3,872         3,472  

Operation and Maintenance

      278         276         855         839  

Depreciation and Amortization

      174         155         476         418  

Taxes Other Than Income Taxes

      32         35         100         106  

 

               

Total Operating Expenses

      1,780         1,661         5,303         4,835  

 

               

OPERATING INCOME

      237         273         598         724  

Other Income

      6         3         18         7  

Other Deductions

              (1 )         (2 )         (2 )  

Interest Expense

      (86 )         (86 )         (254 )         (256 )  

 

               

INCOME BEFORE INCOME TAXES

      157         189         360         473  

Income Tax Expense

      (69 )         (74 )         (160 )         (191 )  

 

               

NET INCOME

      88         115         200         282  

Preferred Stock Dividends

      (1 )         (1 )         (3 )         (3 )  

 

               

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

    $   87       $   114       $   197       $   279  

 

               

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

5


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

ASSETS

       

CURRENT ASSETS

       

Cash and Cash Equivalents

    $   76       $   159  

Accounts Receivable, net of allowances of $42 in 2006 and $41 in 2005

      770         959  

Unbilled Revenues

      222         394  

Materials and Supplies

      49         49  

Prepayments

      151         49  

Restricted Funds

      15         14  

Other

      33         32  

 

       

Total Current Assets

      1,316         1,656  

 

       

PROPERTY, PLANT AND EQUIPMENT

      11,023         10,636  

Less: Accumulated Depreciation and Amortization

      (3,827 )         (3,627 )  

 

       

Net Property, Plant and Equipment

      7,196         7,009  

 

       

NONCURRENT ASSETS

       

Regulatory Assets

      5,028         5,053  

Long-Term Investments

      147         144  

Other Special Funds

      310         315  

Other

      117         114  

 

       

Total Noncurrent Assets

      5,602         5,626  

 

       

TOTAL ASSETS

    $   14,114       $   14,291  

 

       

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

6


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

LIABILITIES AND CAPITALIZATION

       

CURRENT LIABILITIES

       

Long-Term Debt Due Within One Year

    $   282       $   485  

Commercial Paper and Loans

      327          

Accounts Payable

      290         286  

Accounts Payable—Affiliated Companies, net

      403         391  

Accrued Interest

      41         59  

Clean Energy Program

      114         96  

Derivative Contracts

      9         6  

Other

      269         370  

 

       

Total Current Liabilities

      1,735         1,693  

 

       

NONCURRENT LIABILITIES

       

Deferred Income Taxes and ITC

      2,523         2,608  

Other Postretirement Benefit (OPEB) Costs

      586         561  

Regulatory Liabilities

      668         720  

Clean Energy Program

      160         233  

Environmental Costs

      341         365  

Asset Retirement Obligations

      218         210  

Derivative Contracts

      23         6  

Other

      27         27  

 

       

Total Noncurrent Liabilities

      4,546         4,730  

 

       

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

       

CAPITALIZATION

       

LONG-TERM DEBT

       

Long-Term Debt

      2,754         2,866  

Securitization Debt

      1,758         1,879  

 

       

Total Long-Term Debt

      4,512         4,745  

 

       

PREFERRED SECURITIES

       

Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2006 and 2005—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

      1,197         1,000  

Accumulated Other Comprehensive Loss

      (4 )         (5 )  

 

       

Total Common Stockholder’s Equity

      3,241         3,043  

 

       

Total Capitalization

      7,833         7,868  

 

       

TOTAL LIABILITIES AND CAPITALIZATION

    $   14,114       $   14,291  

 

       

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

7


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

         

 

  For The Nine Months Ended
September 30,
  2006   2005

 

  (Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net Income

    $   200       $   282  

Adjustments to Reconcile Net Income to Net Cash Flows from

       

Operating Activities:

       

Depreciation and Amortization

      476         418  

Provision for Deferred Income Taxes and ITC

      (69 )         (77 )  

Non-Cash Employee Benefit Plan Costs

      127         124  

Non-Cash Interest Expense

      14         13  

Employee Benefit Plan Funding and Related Payments

      (81 )         (104 )  

Over Recovery of Electric Energy Costs (BGS and NTC)

      39         81  

Over (Under) Recovery of Gas Costs

      73         (6 )  

Under Recovery of SBC

      (89 )         (94 )  

Other Non-Cash Charges

      6         3  

Net Changes in Certain Current Assets and Liabilities:

       

Accounts Receivable and Unbilled Revenues

      361         74  

Materials and Supplies

              (7 )  

Prepayments

      (102 )         (91 )  

Accrued Taxes

      (25 )         (21 )  

Accrued Interest

      (18 )         (16 )  

Accounts Payable

      4         70  

Accounts Receivable/Payable-Affiliated Companies, net

      (337 )         (207 )  

Other Current Assets and Liabilities

      (77 )         102  

Other

      (79 )         (80 )  

 

       

Net Cash Provided By Operating Activities

      423         464  

 

       

CASH FLOWS FROM INVESTING ACTIVITIES

       

Additions to Property, Plant and Equipment

      (392 )         (372 )  

Restricted Funds

      (1 )         (3 )  

 

       

Net Cash Used In Investing Activities

      (393 )         (375 )  

 

       

CASH FLOWS FROM FINANCING ACTIVITIES

       

Net Change in Short-Term Debt

      327         80  

Issuance of Long-Term Debt

              250  

Redemption of Securitization Debt

      (115 )         (105 )  

Redemption of Long-Term Debt

      (322 )         (125 )  

Issuance of Securitization Debt

              103  

Deferred Issuance Costs

              (3 )  

Preferred Stock Dividends

      (3 )         (3 )  

 

       

Net Cash (Used In) Provided by Financing Activities

      (113 )         197  

 

       

Net (Decrease) Increase In Cash and Cash Equivalents

      (83 )         286  

Cash and Cash Equivalents at Beginning of Period

      159         6  

 

       

Cash and Cash Equivalents at End of Period

    $   76       $   292  

 

       

Supplemental Disclosure of Cash Flow Information:

       

Income Taxes Paid

    $   187       $   249  

Interest Paid, Net of Amounts Capitalized

    $   251       $   250  

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

8


PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                 

 

  For The Quarters
Ended
September 30,
  For The Nine Months
Ended
September 30,
  2006   2005   2006   2005

 

  (Millions)
(Unaudited)

OPERATING REVENUES

    $   1,489       $   1,444       $   4,591       $   4,234  

OPERATING EXPENSES

               

Energy Costs

      830         983         2,992         2,941  

Operation and Maintenance

      222         223         721         685  

Depreciation and Amortization

      41         34         116         96  

 

               

Total Operating Expenses

      1,093         1,240         3,829         3,722  

 

               

OPERATING INCOME

      396         204         762         512  

Other Income

      38         74         113         135  

Other Deductions

      (27 )         (13 )         (60 )         (33 )  

Interest Expense

      (47 )         (32 )         (131 )         (86 )  

 

               

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

      360         233         684         528  

Income Tax Expense

      (155 )         (101 )         (290 )         (225 )  

 

               

INCOME FROM CONTINUING OPERATIONS

      205         132         394         303  

Loss from Discontinued Operations, net of tax benefit of $4 and $13 for the quarter and nine months ended 2005, respectively

              (6 )                 (19 )  

Loss on Disposal of Discontinued Operations, net of tax benefit of $0 and $123 for the quarter and nine months ended 2005, respectively

              (1 )                 (178 )  

 

               

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

    $   205       $   125       $   394       $   106  

 

               

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

9


PSEG POWER LLC
CONDENSED CONSOLIDATED BALANCE SHEETS

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

ASSETS

       

CURRENT ASSETS

       

Cash and Cash Equivalents

    $   5       $   8  

Accounts Receivable

      450         862  

Accounts Receivable—Affiliated Companies, net

      335         288  

Fuel

      852         812  

Materials and Supplies

      218         201  

Energy Trading Contracts

      62         327  

Derivative Contracts

      15         50  

Other

      35         27  

 

       

Total Current Assets

      1,972         2,575  

 

       

PROPERTY, PLANT AND EQUIPMENT

      6,694         6,457  

Less: Accumulated Depreciation and Amortization

      (1,698 )         (1,577 )  

 

       

Net Property, Plant and Equipment

      4,996         4,880  

 

       

NONCURRENT ASSETS

       

Deferred Income Taxes and Investment Tax Credits (ITC)

              70  

Nuclear Decommissioning Trust (NDT) Funds

      1,191         1,133  

Goodwill and Other Intangibles

      62         63  

Other Special Funds

      155         143  

Energy Trading Contracts

      19         42  

Derivative Contracts

      25          

Other

      53         39  

 

       

Total Noncurrent Assets

      1,505         1,490  

 

       

TOTAL ASSETS

    $   8,473       $   8,945  

 

       

LIABILITIES AND MEMBER’S EQUITY

       

CURRENT LIABILITIES

       

Long-Term Debt Due Within One Year

    $         $   500  

Accounts Payable

      403         745  

Short-Term Loan from Affiliate

      68         202  

Energy Trading Contracts

      237         200  

Derivative Contracts

      165         403  

Accrued Interest

      81         41  

Other

      83         86  

 

       

Total Current Liabilities

      1,037         2,177  

 

       

NONCURRENT LIABILITIES

       

Deferred Income Taxes and Investment Tax Credits (ITC)

      271          

Asset Retirement Obligations

      398         373  

Energy Trading Contracts

      40         19  

Derivative Contracts

      167         597  

Environmental Costs

      55         55  

Other

      74         70  

 

       

Total Noncurrent Liabilities

      1,005         1,114  

 

       

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

       

LONG-TERM DEBT

       

Total Long-Term Debt

      2,817         2,817  

 

       

MEMBER’S EQUITY

       

Contributed Capital

      2,000         2,000  

Basis Adjustment

      (986 )         (986 )  

Retained Earnings

      2,704         2,310  

Accumulated Other Comprehensive Loss

      (104 )         (487 )  

 

       

Total Member’s Equity

      3,614         2,837  

 

       

TOTAL LIABILITIES AND MEMBER’S EQUITY

    $   8,473       $   8,945  

 

       

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

10


PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

         

 

  For The Nine Months Ended
September 30,

 

  2006   2005

 

  (Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net Income

    $   394       $   106  

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

       

Loss on Disposal of Discontinued operations, net of tax

              178  

Gain on Disposition of Property, Plant and Equipment

      (1 )         (5 )  

Depreciation and Amortization

      116         96  

Amortization of Nuclear Fuel

      73         69  

Interest Accretion on Asset Retirement Obligations

      25         21  

Provision for Deferred Income Taxes and ITC

      74         239  

Unrealized Losses (Gains) on Energy Contracts and Other Derivatives

      2         (2 )  

Non-Cash Employee Benefit Plan Costs

      35         34  

Net Realized Gains and Income from NDT Funds

      (54 )         (94 )  

Net Change in Certain Current Assets and Liabilities:

       

Fuel, Materials and Supplies

      (57 )         (187 )  

Accounts Receivable

      412         (89 )  

Accounts Payable

      (325 )         (348 )  

Accounts Receivable/Payable—Affiliated Companies, net

      303         177  

Accrued Interest Payable

      39          

Other Current Assets and Liabilities

      25         61  

Employee Benefit Plan Funding and Related Payments

      (34 )         (35 )  

Other

      (107 )         55  

 

       

Net Cash Provided By Operating Activities

      920         276  

 

       

CASH FLOWS FROM INVESTING ACTIVITIES

       

Additions to Property, Plant and Equipment

      (316 )         (345 )  

Sales of Property, Plant and Equipment

      1         226  

Proceeds from NDT Funds Sales

      1,056         2,751  

NDT Funds Interest and Dividends

      29         25  

Investment in NDT Funds

      (1,069 )         (2,769 )  

Short-Term Loan—Affiliated Company, net

              (62 )  

Other

      10         5  

 

       

Net Cash Used In Investing Activities

      (289 )         (169 )  

 

       

CASH FLOWS FROM FINANCING ACTIVITIES

       

Redemption of Long-Term Debt

      (500 )          

Short-Term Loan—Affiliated Company, net

      (134 )         (98 )  

 

       

Net Cash Used In Financing Activities

      (634 )         (98 )  

 

       

Net (Decrease) Increase in Cash and Cash Equivalents

      (3 )         9  

Cash and Cash Equivalents at Beginning of Period

      8         10  

 

       

Cash and Cash Equivalents at End of Period

    $   5       $   19  

 

       

Supplemental Disclosure of Cash Flow Information:

       

Income Taxes Paid

    $   200       $   9  

Interest Paid, Net of Amounts Capitalized

    $   92       $   62  

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

11


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PSEG ENERGY HOLDINGS L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                 

 

  For The Quarters
Ended
September 30,
  For The Nine Months
Ended
September 30,

 

  2006   2005   2006   2005

 

  (Millions)
(Unaudited)

OPERATING REVENUES

               

Electric Generation and Distribution Revenues

    $   358       $   280       $   939       $   728  

Income from Leveraged and Operating Leases

      38         44         115         136  

Other

      5         10         26         53  

 

               

Total Operating Revenues

      401         334         1,080         917  

 

               

OPERATING EXPENSES

               

Energy Costs

      195         184         583         484  

Operation and Maintenance

      49         41         150         151  

Write-down of Project Investments

                      263          

Depreciation and Amortization

      14         10         38         35  

 

               

Total Operating Expenses

      258         235         1,034         670  

 

               

Income from Equity Method Investments

      30         30         93         90  

 

               

OPERATING INCOME

      173         129         139         337  

Other Income

      14         5         33         18  

Other Deductions

      (16 )         (3 )         (27 )         (17 )  

Interest Expense

      (50 )         (56 )         (151 )         (168 )  

 

               

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST

      121         75         (6 )         170  

Income Tax (Expense) Benefit

      (20 )         (27 )         31         (42 )  

Minority Interests in Earnings of Subsidiaries

                      (1 )         (1 )  

 

               

INCOME FROM CONTINUING OPERATIONS

      101         48         24         127  

(Loss) Income from Discontinued Operations, net of tax benefit (expense) of $0, $(4), $0 and $2 for the quarter and nine months ended 2006 and 2005, respectively

              (9 )         (1 )         13  

Gain on Disposal of Discontinued Operations, net of tax expense of $142 for the nine months ended 2006

                      228          

 

               

NET INCOME

      101         39         251         140  

Preference Units Distributions

                              (3 )  

 

               

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

    $   101       $   39       $   251       $   137  

 

               

See disclosures regarding PSEG Energy Holdings L.L.C.
included in the Notes to Condensed Consolidated Financial Statements.

13


PSEG ENERGY HOLDINGS L.L.C.
CONDENSED CONSOLIDATED BALANCE SHEETS

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

ASSETS

       

CURRENT ASSETS

       

Cash and Cash Equivalents

    $   102       $   68  

Accounts Receivable:

       

Trade—net of allowances of $4 and $3 in 2006 and 2005, respectively

      103         101  

Other Accounts Receivable

      12         14  

Affiliated Companies

      2          

Notes Receivable:

       

Affiliated Companies

      374         409  

Other

              5  

Inventory

      45         27  

Restricted Funds

      83         62  

Assets of Discontinued Operations

              498  

Assets Held for Sale

      21          

Derivative Contracts

      21          

Other

      10         7  

 

       

Total Current Assets

      773         1,191  

 

       

PROPERTY, PLANT AND EQUIPMENT

      1,674         1,560  

Less: Accumulated Depreciation and Amortization

      (290 )         (237 )  

 

       

Net Property, Plant and Equipment

      1,384         1,323  

 

       

NONCURRENT ASSETS

       

Leveraged Leases, net

      2,779         2,720  

Corporate Joint Ventures and Partnership Interests

      920         1,180  

Goodwill and Other Intangibles

      531         540  

Derivative Contracts

      34         3  

Other

      104         98  

 

       

Total Noncurrent Assets

      4,368         4,541  

 

       

TOTAL ASSETS

    $   6,525       $   7,055  

 

       

See disclosures regarding PSEG Energy Holdings L.L.C.
included in the Notes to Condensed Consolidated Financial Statements.

14


PSEG ENERGY HOLDINGS L.L.C.
CONDENSED CONSOLIDATED BALANCE SHEETS

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

LIABILITIES AND MEMBER’S EQUITY

       

CURRENT LIABILITIES

       

Long-Term Debt Due Within One Year

    $   341       $   348  

Accounts Payable:

       

Trade

      53         50  

Affiliated Companies

      76         11  

Derivative Contracts

      8         13  

Accrued Interest

      48         42  

Liabilities of Discontinued Operations

              436  

Other

      73         83  

 

       

Total Current Liabilities

      599         983  

 

       

NONCURRENT LIABILITIES

       

Deferred Income Taxes and Investment and Energy Tax Credits

      1,839         1,705  

Derivative Contracts

      18         27  

Other

      103         66  

 

       

Total Noncurrent Liabilities

      1,960         1,798  

 

       

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

       

MINORITY INTERESTS

      24         15  

 

       

LONG-TERM DEBT

       

Project Level, Non-Recourse Debt

      855         891  

Senior Notes

      1,149         1,448  

 

       

Total Long-Term Debt

      2,004         2,339  

 

       

MEMBER’S EQUITY

       

Ordinary Unit

      1,288         1,713  

Retained Earnings

      568         317  

Accumulated Other Comprehensive Income (Loss)

      82         (110 )  

 

       

Total Member’s Equity

      1,938         1,920  

 

       

TOTAL LIABILITIES AND MEMBER’S EQUITY

    $   6,525       $   7,055  

 

       

See disclosures regarding PSEG Energy Holdings L.L.C.
included in the Notes to Condensed Consolidated Financial Statements.

15


PSEG ENERGY HOLDINGS L.L.C.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

         

 

  For The Nine Months Ended
September 30,

 

  2006   2005

 

  (Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net Income

    $   251       $   140  

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

       

Depreciation and Amortization

      38         45  

Demand Side Management Amortization

      2         6  

Investment Write-off

              22  

Deferred Income Taxes (Other than Leases)

      (8 )         (7 )  

Leveraged Lease Income, Adjusted for Rents Received and Deferred Income Taxes

      32         9  

Undistributed Earnings from Affiliates

      (45 )         (40 )  

Loss (Gain) on Sale of Investments

      255         (50 )  

Gain on Sale of Discontinued Operations

      (228 )          

Foreign Currency Transaction Loss (Gain)

      4         (1 )  

Change in Fair Value of Derivative Financial Instruments

      (49 )         6  

Other Non-Cash Charges

      3         4  

Net Changes in Certain Current Assets and Liabilities:

       

Accounts Receivable

      (23 )         (3 )  

Inventory

      (15 )         4  

Accounts Payable

      (58 )         18  

Other Current Assets and Liabilities

      (21 )         15  

Proceeds from Withdrawal of Partnership Interests and Other Distributions

      7         63  

Other

      4         (2 )  

 

       

Net Cash Provided By Operating Activities

      149         229  

 

       

CASH FLOWS FROM INVESTING ACTIVITIES

       

Additions to Property, Plant and Equipment

      (37 )         (26 )  

Proceeds from Sale of Discontinued Operations

      494          

Proceeds from the Sale of Investments

      186         26  

Short-Term Loan Receivable—Affiliated Company, net

      34         54  

Restricted Funds

      (21 )         (44 )  

Proceeds from Collection of Notes Receivable

              137  

Additions to other assets

      (5 )         (11 )  

Other

      8         9  

 

       

Net Cash Provided By Investing Activities

      659         145  

 

       

CASH FLOWS FROM FINANCING ACTIVITIES

       

Proceeds from Non-Recourse Long-Term Debt

              4  

Repayment of Non-Recourse Long-Term Debt

      (37 )         (20 )  

Repayment of Senior Notes

      (309 )          

Return of Capital Contributed

      (425 )         (100 )  

Redemptions Preference Units

              (184 )  

Cash Distributions Paid on Preference Units

              (3 )  

Other

      (1 )         (6 )  

 

       

Net Cash Used In Financing Activities

      (772 )         (309 )  

 

       

Effect of Exchange Rate Change

      (2 )         1  

 

       

Net Increase In Cash and Cash Equivalents

      34         66  

Cash and Cash Equivalents at Beginning of Period

      68         183  

 

       

Cash and Cash Equivalents at End of Period

    $   102       $   249  

 

       

Supplemental Disclosure of Cash Flow Information:

       

Income Taxes (Received) Paid

    $   (86 )       $   4  

Interest Paid, Net of Amounts Capitalized

    $   108       $   203  

See disclosures regarding PSEG Energy Holdings L.L.C.
included in the Notes to Condensed Consolidated Financial Statements.

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

This combined Form 10-Q is separately filed by Public Service Enterprise Group Incorporated (PSEG), Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG Energy Holdings L.L.C. (Energy Holdings). Information contained herein relating to any individual company is filed by such company on its own behalf. PSE&G, Power and Energy Holdings 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: PSE&G, Power, Energy Holdings and PSEG Services Corporation (Services).

As previously disclosed, on December 20, 2004, PSEG entered into an agreement and plan of merger (Merger Agreement) with Exelon Corporation (Exelon) providing for a merger of PSEG with and into Exelon (Merger). On September 14, 2006, PSEG received from Exelon a formal notice of termination of the Merger under the provisions of the Merger Agreement.

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 BPU and the Federal Energy Regulatory Commission (FERC).

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

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 FERC and Nuclear is also subject to regulation by the Nuclear Regulatory Commission (NRC).

Energy Holdings

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

Services

Services provides management and administrative services to PSEG and its subsidiaries. These include accounting, legal, communications, human resources, information technology, treasury and

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

financial services, investor relations, stockholder services, real estate, environmental, health and safety, insurance, risk management, tax, library, records and information services, security, corporate secretarial and certain planning, budgeting and forecasting services. Services charges PSEG and its subsidiaries for the cost of work performed and services provided pursuant to the terms and conditions of intercompany service agreements.

Basis of Presentation

PSEG, PSE&G, Power and Energy Holdings

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, PSE&G’s, Power’s and Energy Holdings’ respective Annual Reports on Form 10-K for the year ended December 31, 2005 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006.

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, 2005.

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. In September 2006, PSEG contributed $50 million to its pension plans and $12 million to its OPEB plans. PSEG does not anticipate making any further contributions to the plans in 2006. 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.

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

                                 

 

  Pension Benefits   OPEB   Pension Benefits   OPEB
  Quarters Ended
September 30,
  Quarters Ended
September 30,
  Nine Months Ended
September 30,
  Nine Months Ended
September 30,
  2006   2005   2006   2005   2006   2005   2006   2005

 

  (Millions)

Components of Net Periodic Benefit Costs:

                               

Service Cost

    $   22       $   22       $   4       $   4       $   65       $   67       $   13       $   13  

Interest Cost

      53         52         17         16         158         155         51         46  

Expected Return on Plan Assets

      (65 )         (62 )         (2 )         (2 )         (199 )         (187 )         (8 )         (7 )  

Amortization of Net

                               

Transition Obligation

                      7         7                         21         21  

Prior Service Cost

      3         4         4         3         8         12         10         6  

Loss

      14         12         2                 41         35         6         2  

 

                               

Net Periodic Benefit Costs

      27         28         32         28         73         82         93         81  

Effect of Regulatory Asset

                      4         5                         14         15  

 

                               

Total Benefit Costs

    $   27       $   28       $   36       $   33       $   73       $   82       $   107       $   96  

 

                               

PSE&G, Power, Energy Holdings and Services

Pension costs and OPEB costs for PSE&G, Power, Energy Holdings and Services are detailed as follows:

                                 

 

  Pension Benefits   OPEB   Pension Benefits   OPEB
  Quarters Ended
September 30,
  Quarters Ended
September 30,
  Nine Months Ended
September 30,
  Nine Months Ended
September 30,
  2006   2005   2006   2005   2006   2005   2006   2005

 

  (Millions)

PSE&G

    $   14       $   14       $   31       $   29       $   37       $   41       $   91       $   84  

Power

      8         8         4         3         22         24         12         9  

Energy Holdings

      1         1                         2         2                  

Services

      4         5         1         1         12         15         4         3  

 

                               

Total Benefit Costs

    $   27       $   28       $   36       $   33       $   73       $   82       $   107       $   96  

 

                               

Note 2. Recent Accounting Standards

The following accounting standards were issued by the Financial Accounting Standards Board (FASB), or the SEC but have not yet been adopted by PSEG.

Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158)

PSEG, PSE&G, Power and Energy Holdings

In September 2006, the FASB issued SFAS 158, which requires companies to record the under or over funded positions of defined benefit pension and OPEB plans on the balance sheet. For under funded plans, the liability would be equal to the difference between the plan’s benefit obligation and the fair value of plan assets. For defined benefit pension plans, the benefit obligation is the projected benefit obligation. For OPEB plans, the benefit obligation is the accumulated postretirement benefit obligation. In addition, the statement requires that the total unrecognized costs for defined benefit pension and OPEB plans be recorded as an after-tax charge to Accumulated Other Comprehensive Income (OCI), a separate component of Stockholder’s Equity. However, for PSE&G, because the amortization of the unrecognized costs is being collected from customers, the accumulated

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

unrecognized costs at adoption will be recorded as a Regulatory Asset. The unrecognized costs represent actuarial gains or losses, prior service costs and transition obligations arising from the adoption of the current pension and OPEB accounting standards, which have not been expensed.

Current accounting guidance requires that unrecognized costs be presented in a footnote to the financial statements as part of a reconciliation of a plan’s funded status to amounts recorded in the financial statements. The unrecognized costs are amortized as a component of net periodic pension or OPEB expense. Under the new standard, for Power and Energy Holdings, the charge to OCI will be amortized and recorded as net periodic pension cost on the Statement of Operations. For PSE&G, the Regulatory Asset will be amortized and recorded as net periodic pension cost on the Statement of Operations.

SFAS 158 is effective for fiscal periods ending after December 15, 2006 and will cause changes to the balance sheet at December 31, 2006 as described above. Assuming a year-end discount rate of 6.25% and an asset return rate of 8.75%, PSEG expects its aggregate under funded status at December 31, 2006 for both its defined benefit pension plans and its OPEB plans will be approximately $1.4 billion. This amount would be recorded in Non-current liabilities on the Balance Sheet. The aggregate unrecognized costs are projected to be approximately $1.1 billion. Of this amount, approximately $700 million relates to PSE&G and will be recorded as an increase in regulatory assets. The balance of approximately $400 million will be recorded, net of deferred taxes of approximately $150 million, as a charge to OCI. PSEG, PSE&G, Power and Energy Holdings continue to evaluate the impact of this statement, which is expected to have a material impact on PSEG’s, PSE&G’s and Power’s respective financial positions. SFAS 158 is not expected to have a material impact on Energy Holding’s financial position.

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

PSEG, PSE&G, Power and Energy Holdings

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. While this statement does not require any new fair value measurements, the application of this statement will change current practice for some fair value measurements.

This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. PSEG, PSE&G, Power and Energy Holdings are evaluating the impact of this new accounting pronouncement.

FIN 48, “Accounting for Uncertainty in Income Taxes ‑ an Interpretation of FASB Statement 109” (FIN 48)

PSEG, PSE&G, Power and Energy Holdings

In July 2006, the FASB issued FIN 48, which prescribes a model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Under FIN 48, the financial statements will reflect expected future tax consequences of such positions presuming the tax authorities’ full knowledge of the position and all relevant facts. FIN 48 will require an entity to recognize the benefit of tax positions when it is “more likely-than-not” that the position is sustainable based on the merits of the

20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

position. FIN 48 also addresses the accrual of interest and penalties related to tax uncertainties and the classification of liabilities on the balance sheet.

FIN 48 is effective as of the beginning of fiscal years that start after December 15, 2006. A company will record the change in net assets that result from the application of FIN 48 as an adjustment to Retained Earnings. PSEG, PSE&G, Power and Energy Holdings are evaluating this guidance, which could have a material impact on their respective earnings and financial position.

FSP No. FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2)

PSEG and Energy Holdings

In July 2006, the FASB issued FSP 13-2, which addresses how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the accounting by a lessor for that lease. The FSP amends SFAS No. 13, “Accounting for Leases,” stating that a change in the timing of the above referenced cash flows must be reviewed at least annually. If a change in timing has occurred, or is projected to occur, the rate of return and the allocation of income to positive investment years must be recalculated from the inception of the lease.

The guidance in this FSP shall be applied to fiscal years beginning after December 15, 2006. The cumulative effect of applying the provisions of this FSP shall be reported as an adjustment to the beginning balance of retained earnings as of the beginning of the period in which this FSP is adopted. PSEG and Energy Holdings are evaluating this guidance, which could have a material impact on their respective earnings and financial positions.

The following new accounting standards were adopted by PSEG during 2006.

SFAS No. 123R, “Share-Based Payment, revised 2004” (SFAS 123R)

PSEG

Effective January 1, 2006, PSEG adopted SFAS 123R, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). SFAS 123R focuses primarily on accounting for share-based awards to employees in exchange for services, and it requires entities to recognize compensation expense for these awards. The cost for equity-based awards is expensed based on their grant date fair value, and liability awards are expensed based on their fair value, which is re- measured each reporting period. The pro forma disclosure previously permitted under SFAS 123 is no longer an alternative to financial statement recognition.

Prior to January 1, 2006, PSEG accounted for stock-based awards under the intrinsic value method of APB 25. In accordance with APB 25, PSEG did not record compensation expense related to its stock option grants because the strike price was equal to the fair value of the underlying stock on the grant date; however, it did record compensation expense over the requisite service period for restricted stock grants and performance unit awards.

SFAS 123R is applicable to all of PSEG’s outstanding unvested share-based payment awards as of January 1, 2006 and all prospective awards using the modified prospective method. Accordingly, the financial results for prior periods were not retroactively adjusted to reflect the effects of SFAS 123R. The compensation expense recorded as a result of adopting SFAS 123R was not material. For additional information, see Note 12. Stock-Based Compensation.

21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 3. Discontinued Operations, Dispositions and Acquisitions

Discontinued Operations

Power

Waterford Generation Facility (Waterford)

In September 2005, Power completed the sale of its electric generation facility located in Waterford, Ohio to a subsidiary of American Electric Power Company, Inc. In May 2005, Power recognized an estimated loss on disposal of $177 million, net of tax benefit of $123 million. In the third quarter of 2005, Power completed the sale of Waterford and recognized an additional loss on disposal of $1 million, net of tax. The proceeds of the sale, together with the anticipated reduction in tax liability, were approximately $320 million and were used to retire debt at Power.

Waterford’s operating results for the quarter and nine months ended September 30, 2005, which were reclassified to Discontinued Operations, are summarized below:

         

 

  Quarter Ended
September 30,
2005
  Nine Months
Ended
September 30,
2005

 

  (Millions)

Operating Revenues

    $   13       $   18  

Loss Before Income Taxes

    $   10       $   32  

Net Loss

    $   6       $   19  

Energy Holdings

Elektrocieplownia Chorzow Elcho Sp. Z o.o. (Elcho) and Elektrownia Skawina SA (Skawina)

On January 31, 2006, Global entered into an agreement with CEZ a.s. to sell its interest in two coal-fired plants in Poland, Elcho and Skawina. The sale was completed on May 29, 2006. Proceeds, net of transaction costs, were $476 million, resulting in a gain of $228 million net of tax expense of $142 million. This gain is included in Discontinued Operations. The 2006 operating results for Global’s assets in Poland have been reclassified to Discontinued Operations.

Elcho’s and Skawina’s operating results for the quarter ended September 30, 2005 and nine months ended September 30, 2006 and 2005 are summarized below:

                         

 

  Quarter Ended
September 30,
  Nine Months Ended September 30,
  2005   2006   2005
  Elcho   Skawina   Elcho   Skawina   Elcho   Skawina

 

  (Millions)

Operating Revenues

    $   21       $   25       $   39       $   44       $   78       $   91  

(Loss) Income Before Income Taxes

    $   (8 )       $   (1 )       $   (3 )       $   2       $   12       $   2  

Net (Loss) Income

    $   (9 )       $   (1 )       $   (2 )       $   1       $   11       $   2  

22


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The carrying amounts of the assets of Elcho and Skawina as of December 31, 2005 are summarized in the following table:

         

 

  As of
December 31,
2005

 

  Elcho   Skawina

 

  (Millions)

Current Assets

    $   41       $   27  

Noncurrent Assets

      319         111  

 

       

Total Assets of Discontinued Operations

    $   360       $   138  

 

       

Current Liabilities

    $   27       $   24  

Noncurrent Liabilities

      336         49  

 

       

Total Liabilities of Discontinued Operations

    $   363       $   73  

 

       

Elcho’s and Skawina’s total non-recourse debt amounted to $287 million and $26 million, respectively, as of December 31, 2005.

Dispositions

Energy Holdings

Rio Grande Energia (RGE)

On May 10, 2006, Global entered into an agreement with Companhia Paulista de Force Luz (CPFL) to sell its 32% ownership interest in RGE, a Brazilian electric distribution company. The transaction closed on June 23, 2006 and gross proceeds of $185 million were received. The transaction resulted in an after-tax loss of $178 million, primarily related to the devaluation of the Brazilian Real subsequent to Global’s acquisition of its interests in RGE in 1997.

Solar Electric Generating Systems (SEGS) Projects

In January 2005, Resources and Global sold their minority limited partner interests in three SEGS projects for proceeds of approximately $7 million, resulting in an after-tax gain of $4 million.

Dhofar Power Company S.A.O.C. (Dhofar Power)

In April 2005, Global sold a 35% interest in Dhofar Power through a public offering on the Omani Stock Exchange, as required under the Concession Agreement, reducing Global’s ownership in Dhofar Power from 81% to 46%. Net proceeds from the sale approximated $25 million, resulting in an after-tax gain of approximately $1 million. Following the sale, Global’s investment in Dhofar Power has been accounted for under the equity method.

On May 15, 2006, Global signed an agreement to sell its remaining 46% interest in Dhofar Power to Oman Technical Partners Ltd. (Oman), a consortium formed by The GCC Energy Fund of Dubai, Darbat Power of Oman and Malakoff Berhad of Malaysia; therefore, Energy Holdings reclassified the investment to Assets Held for Sale on the Condensed Consolidated Balance Sheet. The sale, which is contingent upon obtaining consents from Dhofar Power’s lenders and receiving no objections from the Government of Oman, is expected to close in the fourth quarter of 2006 and generate proceeds of approximately $33 million, which is the approximate book value of the investment.

Meiya Power Company Limited (MPC)

In January and April 2005, Global received payments of approximately $38 million and $99 million, respectively, representing the full payment of the receivable relating to the sale of its 50% equity interest in MPC in December 2004.

23


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Resources

In January 2005, a KKR Fund, in which Resources had invested, sold its investment in KinderCare Learning Centers, Inc. and Resources received proceeds of approximately $17 million, resulting in an after-tax gain of approximately $1 million.

On October 16, 2006, Resources entered into an agreement under which Puget Sound Energy, Inc. will purchase Whitehorn Units Nos. 2 and 3 from Resources on the current lease expiration date of February 2, 2009 for a cash price of approximately $23 million. This transaction is expected to produce incremental after-tax income and cash flow for Resources of approximately $3 million and $17 million respectively, at such time.

Acquisitions

Energy Holdings

Prisma 2000 S.p.A. (Prisma)

In May 2006, Global forgave the guarantees of its partner in the Prisma investment of certain loans Global had made to Prisma and converted such loans totaling $38 million into additional equity in Prisma, thereby increasing its ownership interest from 50% to 85% and giving Global voting control of the project. As a result, Energy Holdings began consolidating this investment in May 2006 and reclassified the investment balance to Property, Plant and Equipment of approximately $62 million, Long-Term Investments of approximately $13 million, Capital Lease Obligations of approximately $40 million and certain other assets and liabilities on Energy Holdings’ Condensed Consolidated Balance Sheet. Although the purchase price allocation has not been finalized due to the recent acquisition, Energy Holdings recorded certain immaterial purchase accounting adjustments to reflect the plant, contracts and investment in Biomasse Italia S.p.A. (Biomasse) at fair value. The consolidation of Prisma is expected to add approximately $45 million of annual revenue to Energy Holdings’ financial statements, and the additional ownership interest is expected to result in a modest increase to Energy Holdings’ earnings.

Prisma indirectly owns and operates three biomass generation plants in Italy through its ownership of 100% of San Marco Bioenergie S.p.A., which owns a 20 MW plant, and 50% of Biomasse, a partnership with Api Holding S.p.A., which owns two plants totaling 60 MW. Global records Prisma’s investment in Biomasse as an equity method investment due to Global’s approximate 43% indirect ownership in Biomasse. The output of the plants is sold under power purchase agreements with the Italian national grid (CIP contracts), which include a premium for the renewable energy output. These contracts expire from 2009 through 2012.

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 under PSEG’s stock option plans, upon payment of performance units and upon conversion of Participating Units.

24


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table shows the effect of these stock options, performance units and Participating Units on the weighted average number of shares outstanding used in calculating diluted EPS:

                                 

 

 

  Quarters Ended September 30,   Nine Months Ended September 30,
  2006   2005   2006   2005
  Basic   Diluted   Basic   Diluted   Basic   Diluted   Basic   Diluted

EPS Numerator:

                               

Earnings (Millions)

                               

Continuing Operations

    $   374       $   374       $   269       $   269       $   559       $   559       $   640       $   640  

Discontinued Operations

                      (16 )         (16 )         227         227         (184 )         (184 )  

 

                               

Net Income

    $   374       $   374       $   253       $   253       $   786       $   786       $   456       $   456  

 

                               

EPS Denominator (Thousands):

                               

Weighted Average Common Shares Outstanding

      251,747         251,747         239,034         239,034         251,471         251,471         238,696         238,696  

Effect of Stock Options

              490                 1,052                 599                 1,044  

Effect of Stock Performance Units

              92                 36                 91                 36  

Effect of Participating Units

                              4,164                                 3,436  

 

                               

Total Shares

      251,747         252,329         239,034         244,286         251,471         252,161         238,696         243,212  

 

                               

Earnings Per Share:

                               

Continuing Operations

    $   1.48       $   1.48       $   1.12       $   1.10       $   2.22       $   2.22       $   2.68       $   2.63  

Discontinued Operations

                      (0.06 )         (0.07 )         0.90         0.90         (0.77 )         (0.76 )  

 

                               

Net Income

    $   1.48       $   1.48       $   1.06       $   1.03       $   3.12       $   3.12       $   1.91       $   1.87  

 

                               

No stock options had an antidilutive effect for the quarters and nine months ended September 30, 2006 and 2005.

Dividend payments on common stock for the quarters ended September 30, 2006 and 2005 were $0.57 and $0.56 per share, respectively, and totaled approximately $144 million and $134 million, respectively. Dividend payments on common stock for the nine months ended September 30, 2006 and 2005 were $1.71 and $1.68 per share, respectively, and totaled approximately $430 million and $401 million, respectively.

Note 5. Commitments and Contingent Liabilities

Guaranteed Obligations

Power

Power has unconditionally guaranteed payments by its subsidiaries, ER&T and PSEG Power New York Inc. (Power New York) in commodity-related transactions in the ordinary course of business. These payment guarantees are provided to counterparties in order to obtain credit under physical and financial agreements for gas, power, pipeline capacity, transportation, oil, electricity and related commodities and services. These payment guarantees support the current exposure, interest and other costs on sums due and payable by ER&T and Power New York. Under these agreements, guarantees offered for trading and marketing 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 September 30, 2006 and December 31, 2005 was approximately $1.4 billion and $1.6 billion, respectively. In order for Power to incur a liability for the face value of the outstanding guarantees, ER&T and Power New York would have to fully utilize the credit granted to it 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. The current exposure consists of the net of accounts

25


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

receivable and accounts payable and the forward value on open positions, less any margins posted. The current exposure from such liabilities was $304 million and $549 million as of September 30, 2006 and December 31, 2005, respectively.

Power is subject to collateral calls related to commodity contracts that are bilateral and are 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 that are entered into in the normal course of business. As of September 30, 2006, Power had posted margin of approximately $59 million, including approximately $49 million in the form of letters of credit, and received margin of approximately $67 million, including approximately $65 million in the form of letters of credit, to satisfy collateral obligations and support various contractual and environmental obligations. As of December 31, 2005, Power had posted margin of approximately $1.2 billion, including approximately $1 billion in the form of letters of credit, and received margin of approximately $168 million, including approximately $115 million in the form of letters of credit.

Collateral obligations may be posted in the form of cash or letters of credit. Assuming no changes in forward energy prices and positions, Power’s collateral requirements can be expected to decline over time as its contracts expire.

Power also routinely enters into exchange-traded futures and options transactions for electricity and natural gas as part of its operations. Generally, such future 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 September 30, 2006 and December 31, 2005, Power had deposited margin of approximately $171 million and $176 million, respectively, related to exchange-traded transactions that are margined and monitored separately from physical trading activity.

In the event of a deterioration of Power’s credit rating to below investment grade, which represents a two level downgrade from its current ratings, many of these agreements allow the counterparty to demand that ER&T provide further performance assurance, generally in the form of a letter of credit or cash. As of September 30, 2006, 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 approximately $509 million. Power believes that it has sufficient liquidity to post such collateral, if necessary.

26


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Energy Holdings

Energy Holdings and/or Global have guaranteed certain obligations of their subsidiaries or affiliates, including the successful completion, performance or other obligations related to certain projects. The guaranteed obligations as of September 30, 2006 and December 31, 2005 are as follows:

                     

 

              As of

Subsidiaries/Affiliates

  Location   Description   Expiration
Date
  September 30,
2006
  December 31,
2005

 

              (Millions)

Skawina (a)

  Poland   Equity commitment   August 2007  
$  6
 
$    9

PSEG Global Funding II LLC

  Delaware   Contingent guarantee related to debt service obligations associated with Chilquinta Energia S.A. (Chilquinta)   April 2011  
25
 
25

Prisma

  Italy   Leasing agreement guarantee   N/A  
19
 
20

Texas Independent Energy L.P. (TIE) - Guadalupe

  Guadalupe   Interest Rate Swap Guarantee   December 2009  
21
 
33

Elcho (b)

  Poland   Debt Service Reserve Backup   October 2006  
 
32

PSEG Energy Technologies Asset Management Company LLC

  New Jersey   Performance guarantee   N/A  
3
 
6

Other

  Various   Various   N/A  
   10
 
     13

Total Contingent Obligations

             
$84
 
   $138


 

 

(a)       Sold in May 2006. The guaranteed amount has been indemnified by the purchaser, CEZ a.s. For further information, see Note 3. Discontinued Operations, Dispositions and Acquisitions.

 

(b)

 

 

 

Global’s obligation was terminated as a result of the sale.

In September 2003, Energy Holdings completed the sale of PSEG Energy Technologies Inc. (Energy Technologies) and nearly all of its assets. However, Energy Holdings retained certain outstanding construction and warranty obligations related to ongoing construction projects previously performed by Energy Technologies. These construction obligations have performance bonds issued by insurance companies for which exposure is adequately supported by the outstanding letters of credit shown in the table above for PSEG Energy Technologies Asset Management Company LLC. As of September 30, 2006, there were $14 million of such bonds outstanding related to uncompleted construction projects and other obligations. These performance bonds are not included in the $84 million of guaranteed obligations above.

Environmental Matters

PSEG, PSE&G and Power

Hazardous Substances

The New Jersey Department of Environmental Protection (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. These regulations may substantially increase the costs of environmental investigations and necessary remediation, particularly at sites situated on surface water bodies. PSE&G, Power and respective predecessor companies own or owned and/or operate or operated certain facilities situated on surface water bodies, certain of which are currently the subject of remedial activities. The financial impact of these regulations is not currently estimable. However, neither PSE&G nor Power anticipates that compliance with these regulations will have a material adverse effect on their respective financial positions, results of operations or net cash flows.

27


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 PSE&G and Power, 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 approximately $20 million, of which it would seek to recover $10 million from the PRPs, including PSE&G and Power. Power has provided notice to insurers concerning this potential claim.

Also, 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 New Jersey Spill Compensation and Control 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.

PSE&G and Power have indicated to both the EPA and NJDEP that they are willing to work with the agencies in an effort to resolve their respective claims and, along with approximately 61 other PRPs, have entered into an agreement with the EPA or have indicated their intention to enter an agreement that provides for sharing the costs of the $20 million study between the government organizations and the PRPs. The EPA recently has notified the PRPs that the cost of the study will greatly exceed the $20 million initially estimated and offered to the PRPs the opportunity to conduct the study themselves rather than reimburse the government for the additional costs it incurs. The PRP group is considering the offer and has engaged in discussions with the EPA. Whether the PRP group, or some number of the PRPs, agree to assume responsibility for the study will depend upon many factors, including a revised estimated cost of the study, the number of parties who agree to participate and the manner in which the parties divide the costs among themselves. PSEG, PSE&G and Power cannot predict what further actions, if any, or the costs or the timing thereof, that may be required with respect to the Passaic River or natural resource damages. 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 requiring some level of remedial action. In addition, the NJDEP has announced initiatives to accelerate the investigation and subsequent remediation of the riverbeds underlying surface water bodies that have been impacted by hazardous substances from adjoining sites. Specifically, in 2005, the NJDEP initiated a program on the Delaware River aimed at identifying the 10 most significant sites for cleanup. One of the sites identified is a former MGP facility located in Camden, New Jersey. The Remediation Program is periodically reviewed and the estimated costs are revised by

28


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

PSE&G based on regulatory requirements, experience with the program and available remediation technologies. Since the inception of the Remediation Program in 1988 through September 30, 2006, PSE&G had expenditures of approximately $366 million.

During the fourth quarter of 2005, PSE&G refined the detailed site estimates. The cost of remediating all sites to completion, as well as the anticipated costs to address MGP-related material discovered in two rivers adjacent to former MGP sites, could range between $751 million and $796 million. No amount within the range was considered to be most likely. Therefore, $385 million was accrued as of September 30, 2006, which represents the difference between the low end of the total program cost estimate of $751 million and the total incurred costs through September 30, 2006 of $366 million. Of this amount, approximately $44 million was recorded in Other Current Liabilities and $341 million was reflected in Other Noncurrent Liabilities. The costs associated with the MGP Remediation Program have historically been recovered through the SBC charges to PSE&G ratepayers. As such, a $385 million Regulatory Asset was recorded. PSE&G anticipates spending $44 million in 2006, $45 million in 2007 and an average of $36 million per year through 2016 to remediate MGP-related environmental conditions.

Power

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

The PSD/NSR regulations, promulgated under the Clean Air Act (CAA), 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 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 approximately $27,500 for each day of continued violation.

The EPA and the NJDEP issued a demand in March 2000 under the CAA requiring information to assess whether projects completed since 1978 at the Hudson and Mercer coal-burning units were implemented in accordance with applicable PSD/NSR regulations. Power completed its response to requests for information and, in January 2002, reached an agreement with the NJDEP and the EPA to resolve allegations of noncompliance with PSD/NSR regulations. Under that agreement, over the course of 10 years, Power agreed to install advanced air pollution controls to reduce emissions of Sulfur Dioxide (SO2), Nitrogen Oxide (NOx), particulate matter and mercury from the coal-burning units at the Mercer and Hudson generating stations to ensure compliance with PSD/NSR. The cost of the program was approximately $112 million for selective catalytic reduction systems (SCRs) which have been installed at Mercer, as well as additional capital expenditures of approximately $400 million to $500 million at Hudson and $150 million to $250 million at Mercer for other pollution control equipment to be installed between December 31, 2006 and December 31, 2012. Power has spent over $6 million on supplemental environmental projects and paid a $1.4 million civil penalty. The agreement resolving the NSR allegations concerning the Hudson and Mercer coal-fired units also resolved a dispute over Bergen 2 regarding the applicability of PSD requirements and allowed construction of the unit to be completed and operations to commence.

Power has notified the EPA and the NJDEP that it is evaluating the continued operation of the Hudson coal unit in light of changes in the energy and capacity markets, increases in the cost of pollution control equipment and other necessary modifications to the unit. Power will be unable to complete the installation of the pollution control equipment at Hudson by the December 31, 2006 deadline. Power has proposed to the NJDEP and the EPA an alternate pollution reduction plan to permit Hudson to continue to operate on coal beyond December 31, 2006. The proposal would require Power to compensate for emission reductions contemplated under the 2002 agreement through other emission control technology, operational measures and the retirement of emission allowances until the originally specified controls are installed on Hudson or the unit is shutdown. Discussions relating to this issue are ongoing. Power believes that the unit will likely continue to operate after December 31, 2006;

29


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

however, no assurances can be given. Power provided notice to PJM, pursuant to the requirements of its tariff, that Power may be required to deactivate Hudson Unit 2 if an agreement is not reached with environmental regulators. The additional capital expenditures referenced above are incremental to the capital expenditure forecast included in the Annual Report on Form 10-K for the year ended December 31, 2005.

As a result of ongoing discussions, Power has increased its environmental reserves by approximately $15 million to account for potential civil penalties and other costs. PSEG and Power recorded the charge in Other Deductions on their respective Condensed Consolidated Statements of Operations.

Mercury Regulation

New Jersey and Connecticut have adopted standards for the reduction of emissions of mercury from coal-fired electric generating units. The Connecticut legislation requires 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 effective in July 2008. The regulations in New Jersey require coal-fired electric generating units in New Jersey to meet certain emissions limits or reduce emissions by 90% by December 15, 2007. 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. Power has a multi-pollutant reduction agreement with the NJDEP as a result of a consent decree that resolved issues arising out of the PSD and the NSR air pollution control programs at the Hudson, Mercer and Bergen facilities. The estimated costs of technology believed to be capable of meeting these emissions limits at Power’s coal-fired unit in Connecticut and at its Mercer Station are included in Power’s capital expenditures forecast. Total estimated costs for each project are between $150 million and $200 million.

On September 12, 2006, Connecticut released proposed revisions to mercury regulations that encompass “Permit Requirements for Mercury Emissions from Coal-Fired Electric Generating Units”. Power is evaluating these proposed revisions; however, it cannot predict the impact of these proposed revisions.

New Jersey Industrial Site Recovery Act (ISRA)

In the second quarter of 1999, a study was conducted pursuant to ISRA and potential environmental liabilities related to subsurface contamination at certain generating stations were identified. Power had a $51 million liability as of September 30, 2006 and December 31, 2005 related to these obligations, which is included in Other Noncurrent Liabilities on Power’s Condensed Consolidated Balance Sheets and Environmental Costs on 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 Nuclear Generating Station (Salem), which expired in July 2006, allowing for the continued operation of Salem with its existing cooling water system. A renewal application prepared in accordance with the new Phase II 316(b) rule was filed with the NJDEP that allows the station to continue operating under its existing NJPDES permit until a new permit is issued. Power believes that its application to renew Salem’s NJPDES permit demonstrates that the station meets the Phase II 316(b) rule’s performance standards for reduction of impingement mortality and entrainment through the station’s existing cooling water intake technology and operations plus implemented restoration measures. Power believes that the application further demonstrates that the station meets the Phase II 316(b) rule’s site-specific determination standards without the benefits of restoration. If the NJDEP were to require the installation of technologies at the Salem facility to reduce cooling water

30


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

intake flow commensurate with closed-cycle cooling as a result of an unfavorable decision in the litigation that has been filed challenging the Phase II 316(b) rule or otherwise, Power estimates that the costs associated with cooling towers for Salem are approximately $1 billion, of which Power’s share would be approximately $575 million. These costs are not included in Power’s currently forecasted capital expenditures.

Energy Holdings

Prisma

As previously disclosed, Global became a majority owner of Prisma in May 2006. During the third quarter of 2006, Global became aware of an investigation concerning certain allegations of violations with respect to air emissions at Prisma’s 20 MW San Marco biomass generating facility. Such alleged violations appear to consist primarily of the failure to appropriately monitor and report emissions and exceeding certain air emission limits. Global is conducting an investigation of the allegations, including the scope and timing of the potential violations, and is cooperating with Italian authorities in their investigation. Global believes that the plant is currently monitoring and reporting emissions in accordance with applicable regulations. In the event that future operations are not in compliance with air emissions regulations and associated prescribed limits, Italian law may permit the local prosecutor to close the plant to prevent any such future violations. If the alleged environmental violations have occurred, financial penalties could be assessed, operating restrictions on the plant could be implemented by the prosecutor and/or the regulators, including closure, the impact of which could be material to Energy Holdings’ results of operations, financial position and cash flows. Global expects to complete its investigation of the allegations in the fourth quarter of 2006 and discuss the appropriate remedies, if any, with the authorities.

New Generation and Development

Power

Power has contracts with outside parties to purchase upgraded turbines for Salem Units 1 and 2 and to purchase upgraded turbines and complete a power uprate for Hope Creek to modestly increase its generating capacity. Phase II of the Salem Unit 2 turbine replacement is currently scheduled for 2008 concurrent with steam generator replacement and is anticipated to increase capacity by 26 MW. Phase II of the Hope Creek turbine replacement is expected to be completed in 2007 along with the thermal power uprate and is expected to add approximately 125 MW. Power’s expenditures to date approximate $217 million (including Interest Capitalized During Construction (IDC) of $20 million) with an aggregate estimated share of total costs for these projects of $244 million (including IDC of $24 million). Timing, costs and results of these projects are dependent on timely completion of work, timely approval from the NRC and various other factors.

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.

Energy Holdings

Electroandes S.A. (Electroandes)

A 35 MW expansion project of an existing hydro station at Electroandes, a generating facility in Peru, is under review. Construction has been indefinitely postponed as the project is being re-evaluated. No construction funds have been disbursed on the project thus far and capital expenditures related to this project have been removed from Energy Holdings’ forecast.

31


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

Power

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 below. In addition to the BGS-related contracts, Power has entered into firm supply contracts with EDCs in Pennsylvania and Connecticut, as well as other firm sales and trading positions and commitments.

PSE&G and Power

PSE&G is required to obtain all electric supply requirements for customers that do not purchase electric supply from third-party suppliers through the annual New Jersey BGS auctions. The BGS auction process is a statewide process in which all of the New Jersey EDCs participate. The BGS auctions are “descending clock” auctions, where the EDCs accept offers for the amount of electric supply bidders are willing to offer with higher prices at the beginning of the auction. The auction proceeds when the amount of supply bid exceeds what is needed. The offer price is subsequently lowered and the process continues in a series of steps. When the amount of supply bid by the prospective suppliers matches the EDCs’ electric supply needs, the auction ends. The BPU renders a decision whether or not to accept the auction results within two business days of its conclusion.

PSE&G enters into the Supplier Master Agreement (SMA) with the winners of these BGS auctions within three business days of 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 (LSE) including capacity, energy, ancillary services, transmission and any other services required by PJM. BGS suppliers assume any migration risk and must satisfy New Jersey’s renewable portfolio standards.

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

                 

 

  Term Ending

 

  May 2006(a)   May 2007(b)   May 2008(c)   May 2009(d)

 

Term

  34 months   36 months   36 months   36 months

Load (MW)

      2,900         2,840         2,840         2,882  

$ per kWh

    $   0.05560       $   0.05515       $   0.06541       $   0.10251  


 

 

(a)       Prices set in the February 2003 BGS auction.

 

(b)

 

 

 

Prices set in the February 2004 BGS auction.

 

(c)

 

 

 

Prices set in the February 2005 BGS auction.

 

(d)

 

 

 

Prices set in the February 2006 BGS auction, which became effective on June 1, 2006.

PSE&G entered into a full requirements contract through 2007 with Power to meet the supply requirements of PSE&G’s gas customers. Power has entered into hedges for a portion of its 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 13. Related-Party Transactions.

32


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Minimum Fuel Purchase Requirements

Power

Power purchases coal for certain of its fossil generation stations through various long-term commitments. The total minimum purchase requirements included in these commitments amount to approximately $634 million through 2012.

Power has various multi-year requirements-based purchase commitments that average approximately $89 million per year to meet Salem’s and Hope Creek’s nuclear fuel needs, of which Power’s share is approximately $64 million per year through 2010. Power has been advised by the co-owner and operator of Peach Bottom, Exelon Generation LLC (Exelon Generation), that it has similar purchase contracts to satisfy the fuel requirements for Peach Bottom through 2010, of which Power’s share is approximately $31 million per year.

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 September 30, 2006, the total minimum requirements under these contracts were approximately $1.2 billion through 2016.

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

Energy Holdings

TIE

The Guadalupe and Odessa plants of TIE, an indirect, wholly owned subsidiary of Energy Holdings, have entered into gas supply agreements for their anticipated fuel requirements to satisfy obligations under their forward energy sales contracts. As of September 30, 2006, the Guadalupe and Odessa plants, which total approximately 2,000 MW of capacity, had forward energy sales contracts in place, which support the majority of their margin expectations for the balance of 2006. The plants had fuel purchase commitments totaling $63 million to fully support these contracts. TIE has also entered into an agreement to sell approximately 19% of its aggregate capacity for 2007 through 2010.

Chilquinta

Energy Holdings has a 50% indirect ownership interest in Chilquinta Energia (Chilquinta) which owns a Chilean natural gas distribution company, Energas. Energas has various long-term commitments for natural gas and for firm transportation contracts with Metrogas and Electrogas, Chilean gas distribution/transport companies, which were entered into to support anticipated sales to its customers.

Due to current natural gas restrictions imposed by Metrogas, Energas may have contracted pipeline transport capacity in excess of available gas. Such transport capacity contracts, which are non- recourse to Energy Holdings, have an estimated maximum commitment of up to $22 million pre-tax over the next fifteen years (considering Energy Holdings’ ownership percentage in Energas).

Energas continues to review anticipated natural gas supply levels and its transport capacity contracts relative to its projected customer needs. Energas is also attempting to identify additional sources of gas, including liquified natural gas (LNG), and is working to mitigate any potential impact through both legal and commercial means. These factors will be considered as the future business direction of Energas is assessed.

Operating Services Contract (OSC)

Power

Nuclear has entered into an OSC with Exelon Generation, a subsidiary of Exelon, which commenced on January 17, 2005, relating to the operation of the Hope Creek and Salem nuclear

33


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

generating stations. The OSC requires Exelon Generation to provide a chief nuclear officer and other key personnel to oversee daily plant operations at the Hope Creek and Salem nuclear generating stations and to implement the Exelon Generation operating model, which defines practices that Exelon Generation has used to manage the operations of its own nuclear facilities. Nuclear continues as the license holder with exclusive legal authority to operate and maintain the plants, retains responsibility for management oversight and has full authority with respect to the marketing of its share of the output from the facilities. Exelon Generation is entitled to receive reimbursement of its costs in discharging its obligations, an annual operating services fee of $3 million and incentive fees up to $12 million annually based on attainment of goals relating to safety, capacity factor and operation and maintenance expenses. The OSC is in full force and effect and currently terminates in January 2007. PSEG has provided notice to Exelon that it is electing to continue the OSC for two years during which time it will move into a transition phase. PSEG has the right to extend the transition phase of the OSC for an additional year if it so elects.

PSEG is considering various long-term alternatives, ranging from rebuilding its stand-alone nuclear capabilities to long-term Exelon operations that could be accompanied by a swap of nuclear capacity. PSEG expects to define a long-term strategy well before the two-year period is completed.

Maintenance Agreement

Power

Power entered into a long-term contractual services agreement with a vendor in September 2003 to provide the outage and service needs for certain of Power’s fossil generating units at market rates. The contract covers approximately 25 years and could result in annual payments ranging from approximately $10 million to $50 million for services, parts and materials rendered.

Nuclear Fuel Disposal

Power

Under the Nuclear Waste Policy Act of 1982, as amended (NWPA), the Federal government has entered into contracts with the operators of nuclear power plants for transportation and ultimate disposal of spent nuclear fuel. To pay for this service, nuclear plant owners are required to contribute to a Nuclear Waste Fund at a rate of one mil ($0.001) per kWh of nuclear generation, subject to such escalation as may be required to assure full cost recovery by the Federal government. Under the NWPA, the U.S. Department of Energy (DOE) was required to begin taking possession of the spent nuclear fuel by no later than 1998. The DOE has announced that it does not expect a facility for such purpose to be available earlier than 2017.

Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be stored in reactor facility storage pools or in independent spent fuel storage installations located at reactors or away-from- reactor sites for at least 30 years beyond the licensed life for reactor operation (which may include the term of a revised or renewed license). Adequate spent fuel storage capacity is estimated to be available through 2011 for Salem 1, 2015 for Salem 2 and 2007 for Hope Creek. Power has commenced construction of an on-site storage facility that will satisfy the spent fuel storage needs of both Salem and Hope Creek through the end of their current respective license lives. Exelon Generation has advised Power that it has a licensed and operational on-site storage facility at Peach Bottom that will satisfy Peach Bottom’s spent fuel storage requirements until at least 2014.

Exelon Generation had previously advised Power that it had signed an agreement with the DOE, applicable to Peach Bottom, under which Exelon Generation would be reimbursed for costs incurred resulting from the DOE’s delay in accepting spent nuclear fuel for permanent storage. Under this agreement, Power’s portion of Peach Bottom’s Nuclear Waste Fund fees was reduced by approximately

34


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

$18 million through August 31, 2002, at which point credits were fully utilized and covered the cost of Exelon Generation’s on-site storage facility. In September 2002, the U.S. Court of Appeals for the Eleventh Circuit issued an opinion upholding a petition seeking to set aside the receipt of these credits by Exelon Generation. On August 14, 2003, Exelon Generation received a letter from the DOE demanding repayment of previously received credits from the Nuclear Waste Fund. The letter also demanded a total of approximately $1.5 million of accrued interest. In August 2004, Exelon Generation advised Nuclear that it reached a settlement with the U.S. Department of Justice, under which Exelon Generation would be reimbursed for costs associated with the storage of spent nuclear fuel at the Peach Bottom facility, a portion of which would be paid to Nuclear as a co-owner of Peach Bottom. Future costs incurred resulting from the DOE delays in accepting spent fuel will be reimbursed annually until the DOE fulfills its obligation to accept spent nuclear fuel. In addition, Exelon Generation and Nuclear are required to reimburse the DOE for the previously received credits from the Nuclear Waste Fund, plus lost earnings. Under this settlement, Power received approximately $27 million for its share of previously incurred storage costs for Peach Bottom, $22 million of which was used for the required reimbursement to the Nuclear Waste Fund. Exelon Generation paid Power approximately $5.4 million for its portion of the spent fuel storage costs reimbursed by the DOE in 2005 for costs incurred between October 1, 2003 and June 30, 2005.

In September 2001, Power filed a complaint in the U.S. Court of Federal Claims seeking damages for Salem and Hope Creek caused by the DOE not taking possession of spent nuclear fuel in 1998. On October 14, 2004, an order to show cause was issued regarding whether the U.S. Court of Federal Claims has jurisdiction over the matter. Power responded to this order in November 2004. On January 31, 2005, the Court dismissed the breach-of-contract claims of Power and three other utilities. Power moved for reconsideration in the U.S. Court of Federal Claims and jointly petitioned for permission to appeal the January 31, 2005 order to the U.S. Court of Appeals for the Federal Circuit. On September 29, 2006, the U.S. Court of Appeals for the Federal Circuit reversed the adverse U.S. Court of Federal Claims jurisdicational ruling. Power is seeking reinstatement of claims in the U.S. Court of Federal Claims. No assurances can be given as to any damage recovery or the ultimate availability of a disposal facility.

Spent Fuel Pool

Power

The spent fuel pool at each Salem unit has an installed leakage collection system. This system was found to be obstructed at Salem Unit 1. Power developed a solution to maintain the design function of the leakage collection system at Salem Unit 1 and investigated the existence of any structural degradation that might have been caused by the obstruction. The concrete and reinforcing steel laboratory tests results were completed in March 2006. Test results that have been collected as part of the ongoing testing indicate that no repairs are anticipated. The NRC issued Information Notice 2004-05 in March 2004 concerning this emerging industry issue and Power cannot predict what further actions the NRC may take on this matter.

Elevated concentrations of tritium in the shallow groundwater at Salem Unit 1 were detected in early 2003. This information was reported to the NJDEP and the NRC, as required. Power conducted a comprehensive investigation in accordance with NJDEP site remediation regulations to determine the source and extent of the tritium in the groundwater. Power is conducting remedial actions to address the contamination in accordance with a remedial action workplan approved by the NJDEP in November 2004. The remedial actions are expected to be ongoing for several years. The costs necessary to address this on-site groundwater contamination issue are not expected to be material.

35


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Investment Tax Credits (ITC)

PSEG and PSE&G

As of June 1999, the Internal Revenue Service (IRS) had issued several private letter rulings (PLRs) that concluded that the refunding of excess deferred tax and ITC balances to utility customers was permitted only over the related assets’ regulatory lives, which were terminated upon New Jersey’s electric industry deregulation. Based on this fact, PSEG and PSE&G reversed the deferred tax and ITC liability relating to PSE&G’s generation assets that were transferred to Power, and recorded a $235 million reduction of the extraordinary charge in 1999 due to the restructuring of the utility industry in New Jersey. PSE&G was directed by the BPU to seek a PLR from the IRS to determine if the ITC included in the impairment write-down of generation assets could be credited to customers without violating the tax normalization rules of the Internal Revenue Code. PSE&G filed a PLR request with the IRS in 2002.

On December 21, 2005, the U.S. Department of the Treasury (Treasury) proposed new regulations for comment addressing the normalization of ITC, replacing regulations originally proposed in 2003. The new proposed regulations, if finalized, would not permit retroactive application. Accordingly, the IRS’s conclusions in the above referenced PLRs would continue to remain in effect for all industry deregulations prior to December 21, 2005.

On April 26, 2006, the BPU issued an order to PSE&G revoking its previous instruction and directing PSE&G to withdraw its request for a PLR by April 27, 2006. The BPU asserted that the Treasury’s proposed regulation project was the more appropriate authority to rely upon in deciding the ITC issue.

On May 1, 2006, PSE&G filed a motion for reconsideration with the BPU requesting that it modify its April 26, 2006 order to PSE&G to withdraw the PLR request. On May 5, 2006, the BPU denied PSE&G’s motion for reconsideration and reiterated its order to withdraw the PLR request. On May 8, 2006, PSE&G filed a petition with the Appellate Court of New Jersey challenging the BPU’s order to withdraw the PLR.

On May 11, 2006, the IRS issued a PLR to PSE&G. The PLR concluded that none of the generation ITC could be passed to utility customers without violating the normalization rules. While the holding in the PLR is a favorable development for PSE&G, the outstanding Treasury regulation project could overturn the holding in the PLR if the Treasury were to alter the position set out in the December 21, 2005 proposed regulations. The issue cannot be fully resolved until the final Treasury regulations are issued.

On May 16, 2006, the BPU voted in favor of a special investigation and hearing before the BPU concerning PSE&G’s actions leading up to receiving the PLR, specifically its failure to abide by the BPU order to withdraw the request. An order detailing such special investigation has not yet been issued and no investigation has begun.

On October 13, 2006, the Appellate Division of the Superior Court of New Jersey granted PSE&G’s motion to dismiss PSE&G’s appeal of the BPU’s order to withdraw the PLR since PSE&G has already received the PLR. The court also determined that if the BPU seeks to take future action against PSE&G based on the alleged violation of its order, PSE&G can restart the appeal.

BPU Deferral Audit

PSEG and PSE&G

The BPU Energy and Audit Division conducts periodic audits of utilities’ deferred balances. A draft Deferral Audit—Phase II report relating to PSE&G for the 12-month period ended July 31, 2003 was released by the consultant to the BPU in April 2005. The draft report addresses PSE&G’s SBC, Market Transition Charge (MTC) and Non-Utility Generation (NUG) deferred balances. The BPU released the report on May 13, 2005.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

While the consultant to the BPU found that PSE&G’s 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 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 approximately $114 million. PSE&G and the BPU Staff are continuing discussions to resolve these questions and, if a resolution cannot be achieved, a BPU proceeding may be instituted to consider the issues raised. While PSE&G believes the MTC methodology it used was fully litigated and resolved, without exception, by the BPU and other intervening parties in its previous electric base rate case, deferral audit and deferral proceeding that were approved by the BPU in its order on April 22, 2004, and that such order is non-appealable, PSE&G cannot predict the impact of the outcome of any such 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 liability for the funding requirement has been recorded at the discounted present value. The costs associated with this program will be recovered from PSE&G ratepayers through the SBC over a period of four years and, therefore, a Regulatory Asset was also recorded. The liability for the funding requirement as of September 30, 2006 and December 31, 2005 was $274 million and $329 million, respectively.

Leveraged Lease Investments

PSEG and Energy Holdings

Resources faces risks with regard to the creditworthiness of certain lessees that collectively comprise a substantial portion of its investment portfolio. Resources also faces risks related to potential changes in the current accounting and tax treatment of certain investments in leveraged leases.

From 1996 through 2002, PSEG, through its indirect wholly owned subsidiary, Resources, entered into a number of leveraged lease transactions in the ordinary course of business. Certain of these transactions are similar to a type that the IRS subsequently announced its intention to challenge, and PSEG understands that similar transactions entered into by other companies have been the subject of review and challenge by the IRS. As of each of September 30, 2006 and December 31, 2005, Resources’ total gross investment in such transactions was approximately $1.5 billion. The IRS is presently reviewing the tax returns of PSEG and its subsidiaries for tax years 1997 through 2003, when Resources entered into the transactions.

On September 27, 2005, the IRS proposed to disallow PSEG’s deductions associated with certain of these leveraged leases which have been designated by the IRS as “listed transactions.” On July 8, 2006, the IRS proposed to disallow deductions associated with another group of these leveraged leases. The IRS may propose additional disallowances in the future. If deductions associated with these lease transactions entered into by PSEG are successfully challenged by the IRS, it could have a material adverse impact on PSEG’s and Energy Holdings’ financial position, results of operations and net cash flows and could impact future returns on these transactions. PSEG believes that its tax position related to these transactions is proper based on applicable statutes, regulations and case law and believes that it should prevail with respect to any IRS challenge, although no assurances can be given.

If the tax benefits associated with all of the listed lease transactions were completely disallowed by the IRS and sustained on appeal, approximately $741 million of PSEG’s deferred tax liabilities that have been recorded under leveraged lease accounting through September 30, 2006 would become currently payable. In addition, interest of approximately $115 million, after-tax, and penalties could be assessed. Management assessed the probability of various outcomes to this matter and recorded appropriate reserves in accordance with SFAS No. 5 “Accounting for Contingencies.” Management has also prepared various sensitivity analyses regarding potential payment obligations, including scenarios

37


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

that consider the current position of the IRS regarding these types of listed transactions, and believes that Energy Holdings has the financial capacity to meet such potential obligations, if required.

The FASB recently issued additional guidance for leveraged leases. See Note 2. Recent Accounting Standards for additional information.

Restructuring Charge

Power

In June 2005, Power implemented a plan to reduce its Nuclear workforce by approximately 200 positions. The plan included voluntary and involuntary separations offered to both represented and non- represented employees. The major cost associated with the restructuring relates to payments to the employees who were terminated. Power’s $14 million share of the estimated total cost was recorded in 2005, approximately $12 million of which had been paid as of September 30, 2006.

Retention Program

PSEG, PSE&G, Power and Energy Holdings

The Retention Program, effective as of December 20, 2004, provided for payments to be made to certain key employees of PSEG who remained employed from the date of execution of the Merger Agreement through the date that would have been 90 days after the consummation of the Merger. The amount of a participant’s retention was between 40% and 150% of the participant’s annual base salary. PSEG paid the first installment, equal to half of a participant’s total retention payment, in December 2005. The final installment payments, which were contingent on successful completion of the Merger, will not be made.

Other

Energy Holdings

Electroandes

In July 2005, Electroandes received a notice from Superintendencia Nacional de Administracion Tributaria (SUNAT), the governing tax authority in Peru, claiming past due taxes for 2002 totaling approximately $2 million related to certain interest deductions. Electroandes has taken similar interest deductions subsequent to 2002. The total cumulative estimated potential amount for past due taxes, including associated interest and penalties, is approximately $8 million through September 30, 2006. Electroandes believes it has valid legal defenses to these claims, and has filed an appeal with SUNAT to which it has not yet received a response; however, no assurances can be given regarding the outcome of this matter.

Dhofar Power

Since commencing operations in Oman in May 2003, Dhofar Power has experienced a number of unplanned service interruptions, which resulted from a combination of force majeure events and breaches of general warranties of the contractors that installed equipment at Dhofar Power. Dhofar Power and the Government of Oman have been in a dispute regarding the applicability and extent of any penalties under Dhofar Power’s Concession Agreement arising from these service interruptions. On July 14, 2005, the expert engaged by the parties recommended no penalties be assessed for the 2003 service interruptions and agreed with Dhofar Power’s interpretation of the Concession Agreement with respect to the criteria to be utilized in assessing penalties. The Government of Oman has exercised its right to appeal the expert’s determination to a full arbitration panel. Penalties have also been assessed for service interruptions for subsequent years, which may be addressed in the same arbitration. While Dhofar Power believes this matter will be favorably resolved, no assurances can be given.

38


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Dhofar Power and the Government of Oman are also in disagreement on the basis of the calculation of certain monthly allowances to be paid to compensate Dhofar Power for the capital investment costs associated with the enhancements and extensions of the transmission and distribution system in Salalah. On August 24, 2005, the expert engaged by the parties found in favor of Dhofar Power with respect to the criteria to be used in determining the monthly allowances. In the view of Dhofar Power, the Government of Oman has failed to timely exercise its right to appeal the expert’s determination to a full arbitration panel. The Government of Oman has now paid all sums previously due, totaling approximately $1 million, and is continuing to make payments on the basis of Dhofar Power’s calculations, but has not agreed that it is obligated to continue to pay Dhofar Power on the basis recognized by the expert. Dhofar Power will seek to enforce the expert’s determination that it is entitled to approximately $1 million annually through December 2018 and believes that this matter will be favorably resolved in 2006, although no assurances can be given.

Note 6. Financial Risk Management Activities

PSEG, PSE&G, Power and Energy Holdings

The operations of PSEG, PSE&G, Power and Energy Holdings 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, PSE&G, Power and Energy Holdings 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, PSE&G, Power and Energy Holdings 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, PSE&G, Power and Energy Holdings uses derivative instruments as risk management tools consistent with its respective business plan and prudent business practices.

Derivative Instruments and Hedging Activities

Power

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.

Energy Trading Contracts (ETCs)

Power

Power actively trades energy and energy-related products, including electricity, natural gas, electric capacity, firm transmission rights (FTRs), coal, oil and emissions 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 marks to market its derivative ETCs in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS 133), with changes in fair value charged to the Condensed 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

39


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

and forward prices, as applicable, to interpolate certain prices. The effect of using such modeling techniques is not material to Power’s financial results.

Commodity Contracts

Power

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

Cash Flow Hedges

Power uses forward sale and purchase contracts, swaps and FTR contracts to hedge forecasted energy sales from its generation stations and to hedge related load obligations. Power also enters into swaps and futures transactions to hedge the price of fuel to meet its fuel purchase requirements. These derivative transactions are designated and effective as cash flow hedges under SFAS 133. As of September 30, 2006, the fair value of these hedges was $(292) million. These hedges, along with realized losses on hedges of $20 million retained in Accumulated Other Comprehensive Loss (OCL), resulted in a $(183) million after-tax impact on OCL. As of December 31, 2005, the fair value of these hedges was $(951) million. These hedges, along with realized gains on hedges of $11 million retained in OCL, resulted in a $(558) million after-tax impact on OCL. During the 12 months ending September 30, 2007, $102 million (after-tax) of net unrealized and realized losses on these commodity derivatives is expected to be reclassified to earnings. Approximately $90 million of after-tax unrealized losses on these commodity derivatives in OCL is expected to be reclassified to earnings for the 12 months ending September 30, 2008. Ineffectiveness associated with these hedges, as defined in SFAS 133, was immaterial at September 30, 2006. The expiration date of the longest-dated cash flow hedge is in 2009.

Other Derivatives

Power also enters into certain other contracts that are derivatives, but do not qualify for hedge accounting under SFAS 133. Most of these contracts are used for fuel purchases for generation requirements and for electricity purchases for contractual sales obligations. Therefore, the changes in fair market value of these derivative contracts are recorded in Energy Costs or Operating Revenues, as appropriate, on the Condensed Consolidated Statements of Operations. The net fair value of these instruments as of September 30, 2006 was $3 million. The net fair value of these instruments as of December 31, 2005 was not material.

Energy Holdings

Other Derivatives

TIE enters into electricity forward and capacity sale contracts to sell its 2,000 MW capacity for portions of the current calendar year and into the daily spot market. TIE 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 TIE, these contracts are, based on their terms, derivatives that do not meet the specific accounting criteria in SFAS 133 to qualify for the normal purchases and normal sales exception, or to be designated as a hedge for accounting purposes. As a result, these contracts must be recorded at fair value. The net fair value of the open positions was approximately $53 million and $(7) million as of September 30, 2006 and December 31, 2005, respectively.

40


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Interest Rates

PSEG, PSE&G, Power and Energy Holdings

PSEG, PSE&G, Power and Energy Holdings 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 September 30, 2006 and December 31, 2005, the fair value of the hedge was $(9) million and $(10) million, respectively.

Cash Flow Hedges

PSEG, PSE&G and Energy Holdings

PSEG, PSE&G and Energy Holdings 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 Income (Loss). As of September 30, 2006, the fair value of these cash flow hedges was $(6) million, primarily at PSE&G. As of December 31, 2005, the fair value of these cash flow hedges was $(17) million, including $(11) million and $(6) million at PSE&G and Energy Holdings, respectively. The $(5) million and $(11) million at PSE&G as of September 30, 2006 and December 31, 2005, respectively, is not included in OCL, as it is deferred as a Regulatory Asset and is expected to be recovered from PSE&G’s customers. During the 12 months ending September 30, 2007, $2 million of unrealized losses (net of taxes) on interest rate derivatives in Accumulated Other Comprehensive Income (Loss) is expected to be reclassified to earnings at PSEG and Energy Holdings. As of September 30, 2006, there was essentially no hedge ineffectiveness associated with these hedges. The fair value amounts above as of December 31, 2005 do not include approximately $(60) million for the cash flow hedges at Elcho, which had been reclassified into Discontinued Operations.

Other Derivatives

Energy Holdings

As of September 30, 2006, Energy Holdings had no cross-currency interest rate swaps where changes in fair values of such swaps are recorded in Income from Equity Method Investments on the Condensed Consolidated Statements of Operations. The fair values of these swaps at December 31, 2005 totaled approximately $(2) million.

Foreign Currencies

Energy Holdings

Global is exposed to foreign currency risk and other foreign operations risk that arise from investments in foreign subsidiaries and affiliates. A key component of its risks is that some of its foreign subsidiaries and affiliates have functional currencies other than the consolidated reporting currency, the U.S. Dollar. Additionally, Global and certain of its foreign subsidiaries and affiliates have entered into monetary obligations and maintain receipts/receivables in U.S. Dollars or currencies other than their own functional currencies. Global, a U.S. Dollar functional currency entity, is primarily exposed to

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

changes in the Euro, the Peruvian Nuevo Sol and the Chilean Peso. Changes in valuation of these currencies can impact the value of Global’s investments. Global has attempted to limit potential foreign exchange exposure by entering into revenue contracts that adjust for changes in foreign exchange rates. Global also uses foreign currency forward, swap and option agreements to manage risk related to certain foreign currency fluctuations.

As of September 30, 2006, due to the strengthening of the Chilean Peso relative to the U.S. Dollar, the net cumulative foreign currency revaluations have increased the total amount of Global’s Member’s Equity by $115 million.

In November and December 2005, Energy Holdings purchased foreign currency options in order to hedge the majority of its 2006 expected earnings denominated in Brazilian Real, Chilean Pesos and Peruvian Nuevo Soles. These options are not considered hedges for accounting purposes under SFAS 133 and, as a result, changes in their fair value are recorded directly to earnings. Energy Holdings terminated its remaining Brazilian Real options on June 28, 2006 following its sale of RGE. The fair value of the options outstanding at September 30, 2006 was immaterial. At December 31, 2005, the fair value of the options was approximately $2 million.

Hedges of Net Investments in Foreign Operations

Energy Holdings

In March 2004 and April 2004, Energy Holdings entered into four cross-currency interest rate swap agreements. The swaps are designed to hedge the net investment in a foreign subsidiary associated with the exposure to the U.S. Dollar to Chilean Peso exchange rate. The fair value of the cross-currency swaps was $(25) million and $(33) million as of September 30, 2006 and December 31, 2005, respectively. The change in fair value is recorded net of tax in Cumulative Translation Adjustment within Accumulated Other Comprehensive Income (Loss). As a result, Energy Holdings’ Member’s Equity was reduced by $22 million as of September 30, 2006.

Note 7. Comprehensive Income (Loss), Net of Tax

                     

 

  PSE&G   Power (A)   Energy
Holdings (B)
  Other (C)   Consolidated
Total

 

  (Millions)

For the Quarter Ended September 30, 2006:

                   

Net Income (Loss)

    $   88       $   205       $   101       $   (20 )       $   374  

Other Comprehensive Income

      1         204         1                 206  

 

                   

Comprehensive Income (Loss)

    $   89       $   409       $   102       $   (20 )       $   580  

 

                   

For the Quarter Ended September 30, 2005:

                   

Net Income (Loss)

    $   115       $   125       $   39       $   (26 )       $   253  

Other Comprehensive (Loss) Income

              (291 )         101         (7 )         (197 )  

 

                   

Comprehensive Income (Loss)

    $   115       $   (166 )       $   140       $   (33 )       $   56  

 

                   

For the Nine Months Ended September 30, 2006:

                   

Net Income (Loss)

    $   200       $   394       $   251       $   (59 )       $   786  

Other Comprehensive Income

      1         383         192                 576  

 

                   

Comprehensive Income (Loss)

    $   201       $   777       $   443       $   (59 )       $   1,362  

 

                   

For the Nine Months Ended September 30, 2005:

                   

Net Income (Loss)

    $   282       $   106       $   140       $   (72 )       $   456  

Other Comprehensive (Loss) Income

              (395 )         81         (2 )         (316 )  

 

                   

Comprehensive Income (Loss)

    $   282       $   (289 )       $   221       $   (74 )       $   140  

 

                   


 

 

(A)       Changes at Power primarily relate to SFAS 133 unrealized losses on derivative contracts that qualify for hedge accounting and unrealized gains and losses on Nuclear Decommissioning Trust (NDT) Funds.

42


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

(B)

 

 

 

Changes at Energy Holdings primarily relate to the realization of losses on Brazilian currency as a result of the sale of RGE and unrealized gains and losses on various derivative transactions.

 

(C)

 

 

 

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

Note 8. Changes in Capitalization

PSEG

On September 1, 2006, PSEG began using treasury stock to settle the exercise of stock options. Previously, PSEG had purchased shares on the open market to meet the exercise of stock options. Through September 30, 2006, PSEG issued approximately 121,067 shares of its treasury stock in connection with settling the stock options for approximately $5 million.

During the nine months ended September 30, 2006, PSEG issued approximately 790,825 shares of its common stock under its Dividend Reinvestment Program and Employee Stock Purchase Program for approximately $51 million.

In February 2006, PSEG redeemed $154 million of its Subordinated Debentures underlying $150 million of Enterprise Capital Trust II, Floating Rate Capital Securities and its common equity investment in the trust.

PSE&G

On June 23, 2006, PSE&G repaid at maturity $174 million of its Floating Rate Series A First and Refunding Mortgage Bonds.

On March 1, 2006, PSE&G repaid at maturity $148 million of its 6.75% Series UU First and Refunding Mortgage Bonds.

In September 2006, June 2006 and March 2006, Transition Funding repaid approximately $41 million, $35 million and $36 million, respectively, of its transition bonds.

In June 2006, Transition Funding II repaid approximately $3 million of its transition bonds.

Power

In April 2006, Power repaid at maturity $500 million of its 6.875% Senior Notes.

Energy Holdings

In January 2006, Energy Holdings redeemed $309 million of its 7.75% Senior Notes due in 2007.

On February 17, 2006, the maturity of the Odessa‑Ector Power Partners, L.P (Odessa) debt was extended to December 31, 2009. Interest on the debt is based on a spread (currently 2.25%) above LIBOR. On September 29, 2006, an interest rate swap took effect, which converts the floating LIBOR interest rate on approximately 80% of Odessa’s debt to a fixed rate of 5.4275% through December 31, 2009.

On October 23, 2006, Energy Holdings redeemed $300 million of its $507 million outstanding 8.625% Senior Notes due in 2008. Additionally, on September 20, 2006, Energy Holdings made a cash distribution to PSEG of $425 million in the form of a return of capital.

During the first nine months of 2006, Energy Holdings’ repaid approximately $37 million of non-recourse debt, of which $30 million was paid by Global, primarily related to Sociedad Austral de Electricidad S.A. and TIE, $5 million by Resources and $2 million by EGDC.

43


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 9. Other Income and Deductions

                     

 

  PSE&G   Power   Energy
Holdings
  Other (A)   Consolidated
Total

 

  (Millions)

Other Income:

                   

For the Quarter Ended September 30, 2006:

                   

Interest and Dividend Income

    $   3       $   3       $   12       $   (7 )       $   11  

Disposition of Property

              1                         1  

NDT Fund Realized Gains

              20                         20  

NDT Interest and Dividend Income

              10                         10  

Other

      3         4         2                 9  

 

                   

Total Other Income

    $   6       $   38       $   14       $   (7 )       $   51  

 

                   

For the Quarter Ended September 30, 2005:

                   

Interest and Dividend Income

    $   2       $   1       $   1       $   2       $   6  

Disposition of Property

              5                         5  

Gain on Investments

                              8         8  

NDT Fund Realized Gains

              60                         60  

NDT Interest and Dividend Income

              8                         8  

Foreign Currency Gains

                      4                 4  

Other

      1                                 1    

 

                   

Total Other Income

    $   3