3B2 EDGAR HTML -- c58378_preflight.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2009
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

001-34232

 

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

 

22-3663480

001-00973

 

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

 

22-1212800


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

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

 

 

 

 

 

Public Service Enterprise Group Incorporated

 

 

 

Yes S

   

 

 

No £

 

PSEG Power LLC

 

 

 

Yes £

   

 

 

No £

 

Public Service Electric and Gas Company

 

 

 

Yes £

   

 

 

No £

 

(Cover continued on next page)


(Cover continued from previous page)

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

 

 

 

 

 

 

 

 

 

Public Service Enterprise Group Incorporated

 

Large accelerated filer S

 

Accelerated filer £

 

Non-accelerated filer £

 

Smaller reporting company £

PSEG Power LLC

 

Large accelerated filer £

 

Accelerated filer £

 

Non-accelerated filer S

 

Smaller reporting company £

Public Service Electric
and Gas Company

 

Large accelerated filer £

 

Accelerated filer £

 

Non-accelerated filer S

 

Smaller reporting company £

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

As of July 15, 2009, Public Service Enterprise Group Incorporated had outstanding 505,981,904 shares of its sole class of Common Stock, without par value.

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

As of July 15, 2009, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record by Public Service Enterprise Group Incorporated.




TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

Page

 

 

 

   

FORWARD-LOOKING STATEMENTS

     

ii

 

PART I. FINANCIAL INFORMATION

   

Item 1.

 

Financial Statements

   
   

Public Service Enterprise Group Incorporated

     

1

 

 

 

PSEG Power LLC

 

 

 

5

 
   

Public Service Electric and Gas Company

     

8

 

 

 

Notes to Condensed Consolidated Financial Statements

   
   

Note 1. Organization and Basis of Presentation

     

12

 

 

 

Note 2. Recent Accounting Standards

 

 

 

13

 
   

Note 3. Discontinued Operations and Dispositions

     

16

 

 

 

Note 4. Available-for-Sale Securities

 

 

 

17

 
   

Note 5. Pension and Other Postretirement Benefits (OPEB)

     

22

 

 

 

Note 6. Commitments and Contingent Liabilities

 

 

 

23

 
   

Note 7. Changes in Capitalization

     

34

 

 

 

Note 8. Financial Risk Management Activities

 

 

 

35

 
   

Note 9. Fair Value Measurements

     

42

 

 

 

Note 10. Other Income and Deductions

 

 

 

49

 
   

Note 11. Income Taxes

     

50

 

 

 

Note 12. Comprehensive Income (Loss), Net of Tax

 

 

 

52

 
   

Note 13. Earnings Per Share (EPS)

     

53

 

 

 

Note 14. Financial Information by Business Segments

 

 

 

54

 
   

Note 15. Related-Party Transactions

     

55

 

 

 

Note 16. Guarantees of Debt

 

 

 

57

 

Item 2.

 

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

   

 

 

Overview of 2009 and Future Outlook

 

 

 

60

 
   

Results of Operations

     

64

 

 

 

Liquidity and Capital Resources

 

 

 

73

 
   

Capital Requirements

     

76

 

 

 

Accounting Matters

 

 

 

77

 

Item 3.

 

Qualitative and Quantitative Disclosures About Market Risk

     

77

 

Item 4.

 

Controls and Procedures

 

 

 

80

 

PART II. OTHER INFORMATION

   

Item 1.

 

Legal Proceedings

     

81

 

Item 1A.

 

Risk Factors

 

 

 

81

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     

82

 

Item 5.

 

Other Information

 

 

 

82

 

Item 6.

 

Exhibits

     

85

 

 

 

Signatures

 

 

 

86

 

i


FORWARD-LOOKING STATEMENTS

Certain of the matters discussed in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such statements are based on management’s beliefs as well as assumptions made by and information currently available to management. When used herein, the words “anticipate,” “intend,” “estimate,” “believe,” “expect,” “plan,” “hypothetical,” “potential,” “forecast,” “project,” variations of such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Other factors that could cause actual results to differ materially from those contemplated in any forward-looking statements made by us herein are discussed in Item 1. Financial Statements—Note 6. Commitments and Contingent Liabilities, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other factors discussed in filings we make with the United States Securities and Exchange Commission (SEC). These factors include, but are not limited to:

 

 

 

 

adverse changes in energy industry, law, policies and regulation, including market structures and rules, and reliability standards

 

 

 

 

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

 

 

 

 

changes in federal and/or state environmental requirements that could increase our costs or limit operations of our generating units,

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

any deterioration in our credit quality,

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

delays or cost escalations in our construction and development activities,

 

 

 

 

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

 

 

 

 

changes in technology and/or increased customer conservation.

Additional information concerning these factors is set forth in Part II under Item 1A. Risk Factors.

All of the forward-looking statements made in this report are qualified by these cautionary statements and we cannot assure you that the results or developments anticipated by management will be realized, or even if realized, will have the expected consequences to, or effects on, us or our business prospects, financial condition or results of operations. Readers are cautioned not to place undue reliance on these forward-looking statements in making any investment decision. Forward-looking statements made in this report only apply as of the date of this report. While we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if internal estimates change, unless otherwise required by applicable securities laws.

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

ii


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Millions, except Share Data)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For The Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

2009

 

2008

 

2009

 

2008

OPERATING REVENUES

   

$

 

2,561

     

$

 

2,550

     

$

 

6,482

     

$

 

6,342

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Energy Costs

     

1,067

       

1,535

       

3,135

       

3,654

 

Operation and Maintenance

 

 

 

628

   

 

 

620

   

 

 

1,303

   

 

 

1,247

 

Depreciation and Amortization

     

203

       

191

       

410

       

383

 

Taxes Other Than Income Taxes

 

 

 

26

   

 

 

27

   

 

 

70

   

 

 

70

 

 

 

 

 

 

 

 

 

 

Total Operating Expenses

     

1,924

       

2,373

       

4,918

       

5,354

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

 

637

   

 

 

177

   

 

 

1,564

   

 

 

988

 

Income from Equity Method Investments

     

9

       

7

       

19

       

19

 

Impairment on Equity Method Investments

 

 

 

(8

)

 

 

 

 

   

 

 

(8

)

 

 

 

 

 

Other Income

     

91

       

97

       

162

       

190

 

Other Deductions

 

 

 

(44

)

 

 

 

 

(56

)

 

 

 

 

(99

)

 

 

 

 

(113

)

 

Other Than Temporary Impairments

     

(1

)

       

(32

)

       

(61

)

       

(70

)

 

Interest Expense

 

 

 

(133

)

 

 

 

 

(146

)

 

 

 

 

(278

)

 

 

 

 

(299

)

 

 

 

 

 

 

 

 

 

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     

551

       

47

       

1,299

       

715

 

Income Tax Expense

 

 

 

(240

)

 

 

 

 

(213

)

 

 

 

 

(544

)

 

 

 

 

(446

)

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

     

311

       

(166

)

       

755

       

269

 

Income from Discontinued Operations, net of tax expense of $5 and $13 for the three and six months ended 2008

 

 

 

   

 

 

16

   

 

 

   

 

 

29

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

   

$

 

311

     

$

 

(150

)

     

$

 

755

     

$

 

298

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS):

 

 

 

 

 

 

 

 

BASIC

     

505,990

       

508,491

       

505,988

       

508,491

 

 

 

 

 

 

 

 

 

 

DILUTED

 

 

 

506,936

   

 

 

509,487

   

 

 

506,812

   

 

 

509,483

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

BASIC

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

   

$

 

0.61

     

$

 

(0.32

)

     

$

 

1.49

     

$

 

0.53

 

NET INCOME (LOSS)

 

 

$

 

0.61

   

 

$

 

(0.29

)

 

 

 

$

 

1.49

   

 

$

 

0.59

 

 

 

 

 

 

 

 

 

 

DILUTED

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM CONTINUING OPERATIONS

   

$

 

0.61

     

$

 

(0.32

)

     

$

 

1.49

     

$

 

0.53

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

 

$

 

0.61

   

 

$

 

(0.29

)

 

 

 

$

 

1.49

   

 

$

 

0.59

 

 

 

 

 

 

 

 

 

 

DIVIDENDS PAID PER SHARE OF COMMON STOCK

   

$

 

0.3325

     

$

 

0.3225

     

$

 

0.6650

     

$

 

0.6450

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

1


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS

(Millions)
(Unaudited)

 

 

 

 

 

 

 

June 30,
2009

 

December 31,
2008

ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and Cash Equivalents

   

$

 

393

     

$

 

321

 

Accounts Receivable, net of allowances of $69 and $66 in 2009 and 2008, respectively

 

 

 

1,271

   

 

 

1,398

 

Unbilled Revenues

     

303

       

454

 

Fuel

 

 

 

730

   

 

 

938

 

Materials and Supplies

     

343

       

317

 

Prepayments

 

 

 

465

   

 

 

150

 

Restricted Funds

     

10

       

118

 

Derivative Contracts

 

 

 

259

   

 

 

237

 

Other

     

60

       

66

 

 

 

 

 

 

Total Current Assets

 

 

 

3,834

   

 

 

3,999

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

21,519

   

 

 

20,818

 

Less: Accumulated Depreciation and Amortization

     

(6,620

)

       

(6,385

)

 

 

 

 

 

 

Net Property, Plant and Equipment

 

 

 

14,899

   

 

 

14,433

 

 

 

 

 

 

NONCURRENT ASSETS

 

 

 

 

Regulatory Assets

     

6,022

       

6,352

 

Long-Term Investments

 

 

 

2,309

   

 

 

2,695

 

Nuclear Decommissioning Trust (NDT) Funds

     

1,059

       

970

 

Other Special Funds

 

 

 

140

   

 

 

133

 

Goodwill

     

16

       

16

 

Other Intangibles

 

 

 

108

   

 

 

53

 

Derivative Contracts

     

154

       

160

 

Other

 

 

 

219

   

 

 

238

 

 

 

 

 

 

Total Noncurrent Assets

     

10,027

       

10,617

 

 

 

 

 

 

TOTAL ASSETS

 

 

$

 

28,760

   

 

$

 

29,049

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

2


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS

(Millions)
(Unaudited)

 

 

 

 

 

 

 

June 30,
2009

 

December 31,
2008

LIABILITIES AND CAPITALIZATION

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Long-Term Debt Due Within One Year

   

$

 

746

     

$

 

1,033

 

Commercial Paper and Loans

 

 

 

333

   

 

 

19

 

Accounts Payable

     

941

       

1,227

 

Derivative Contracts

 

 

 

310

   

 

 

356

 

Accrued Interest

     

100

       

99

 

Accrued Taxes

 

 

 

206

   

 

 

8

 

Clean Energy Program

     

159

       

142

 

Obligation to Return Cash Collateral

 

 

 

96

   

 

 

102

 

Other

     

430

       

424

 

 

 

 

 

 

Total Current Liabilities

 

 

 

3,321

   

 

 

3,410

 

 

 

 

 

 

NONCURRENT LIABILITIES

 

 

 

 

Deferred Income Taxes and Investment Tax Credits (ITC)

     

4,046

       

3,865

 

Regulatory Liabilities

 

 

 

396

   

 

 

355

 

Asset Retirement Obligations

     

595

       

576

 

Other Postretirement Benefit (OPEB) Costs

 

 

 

968

   

 

 

975

 

Accrued Pension Costs

     

877

       

1,196

 

Clean Energy Program

 

 

 

451

   

 

 

532

 

Environmental Costs

     

730

       

743

 

Derivative Contracts

 

 

 

106

   

 

 

164

 

Long-Term Accrued Taxes

     

856

       

1,241

 

Other

 

 

 

130

   

 

 

125

 

 

 

 

 

 

Total Noncurrent Liabilities

     

9,155

       

9,772

 

 

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 6)

 

 

 

 

     

 

 

 

 

CAPITALIZATION
LONG-TERM DEBT

 

 

 

 

Long-Term Debt

     

6,515

       

6,621

 

Securitization Debt

 

 

 

1,250

   

 

 

1,342

 

Project Level, Non-Recourse Debt

     

40

       

42

 

 

 

 

 

 

Total Long-Term Debt

 

 

 

7,805

   

 

 

8,005

 

 

 

 

 

 

 

 

 

 

SUBSIDIARY’S PREFERRED STOCK WITHOUT MANDATORY REDEMPTION

     

80

       

80

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

Common Stock, no par, authorized 1,000,000,000 shares; issued, 2009 and 2008—533,556,660 shares

     

4,772

       

4,756

 

Treasury Stock, at cost, 2009—27,571,375 shares;
2008—27,538,762 shares

 

 

 

(587

)

 

 

 

 

(581

)

 

Retained Earnings

     

4,204

       

3,773

 

Accumulated Other Comprehensive Loss

 

 

 

   

 

 

(177

)

 

 

 

 

 

 

Total Common Stockholders’ Equity

     

8,389

       

7,771

 

Noncontrolling Interest—Equity Investments

 

 

 

10

   

 

 

11

 

 

 

 

 

 

Total Capitalization

     

16,284

       

15,867

 

 

 

 

 

 

TOTAL LIABILITIES AND CAPITALIZATION

 

 

$

 

28,760

   

 

$

 

29,049

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

3


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions)
(Unaudited)

 

 

 

 

 

 

 

For the Six Months
Ended June 30,

 

2009

 

2008

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net Income

   

$

 

755

     

$

 

298

 

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

 

 

 

 

Depreciation and Amortization

     

410

       

387

 

Amortization of Nuclear Fuel

 

 

 

57

   

 

 

48

 

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

     

139

       

90

 

Non-Cash Employee Benefit Plan Costs

 

 

 

173

   

 

 

84

 

Lease Transaction Charges, net of tax

     

       

490

 

Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes

 

 

 

(364

)

 

 

 

 

(23

)

 

Gain on Sale of Investments

     

(99

)

       

(1

)

 

Undistributed Earnings from Affiliates

 

 

 

(11

)

 

 

 

 

(37

)

 

Net Realized and Unrealized Gains on Energy Contracts and Other Derivatives

     

(71

)

       

(50

)

 

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

 

 

 

8

   

 

 

(66

)

 

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

     

47

       

(12

)

 

Cost of Removal

 

 

 

(23

)

 

 

 

 

(20

)

 

Net Realized (Gains) Losses and Expense from NDT Funds

     

(3

)

       

5

 

Net Change in Certain Current Assets and Liabilities

 

 

 

307

   

 

 

(585

)

 

Employee Benefit Plan Funding and Related Payments

     

(409

)

       

(30

)

 

Other

 

 

 

(127

)

 

 

 

 

45

 

 

 

 

 

 

Net Cash Provided By Operating Activities

     

789

       

623

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Additions to Property, Plant and Equipment

     

(816

)

       

(739

)

 

Proceeds from the Sale of Capital Leases and Investments

 

 

 

510

   

 

 

41

 

Proceeds from NDT Funds Sales

     

1,475

       

1,257

 

Investment in NDT Funds

 

 

 

(1,491

)

 

 

 

 

(1,271

)

 

Restricted Funds

     

108

       

 

NDT Funds Interest and Dividends

 

 

 

21

   

 

 

24

 

Other

     

(17

)

       

(14

)

 

 

 

 

 

 

Net Cash Used In Investing Activities

 

 

 

(210

)

 

 

 

 

(702

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Net Change in Commercial Paper and Loans

     

314

       

854

 

Issuance of Long-Term Debt

 

 

 

209

   

 

 

700

 

Redemptions of Long-Term Debt

     

(320

)

       

(1,263

)

 

Repayment of Non-Recourse Debt

 

 

 

(283

)

 

 

 

 

(22

)

 

Redemption of Securitization Debt

     

(87

)

       

(82

)

 

Net Premium Paid on Early Extinguishment of Debt

 

 

 

   

 

 

(80

)

 

Cash Dividends Paid on Common Stock

     

(336

)

       

(328

)

 

Other

 

 

 

(4

)

 

 

 

 

3

 

 

 

 

 

 

Net Cash Used In Financing Activities

     

(507

)

       

(218

)

 

 

 

 

 

 

Effect of Exchange Rate Change

 

 

 

   

 

 

1

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     

72

       

(296

)

 

Cash and Cash Equivalents at Beginning of Period

 

 

 

321

   

 

 

380

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

   

$

 

393

     

$

 

84

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

Income Taxes Paid

   

$

 

613

     

$

 

454

 

Interest Paid, Net of Amounts Capitalized

 

 

$

 

254

   

 

$

 

279

 

See Notes to Condensed Consolidated Financial Statements.

4


PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Millions)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

2009

 

2008

 

2009

 

2008

OPERATING REVENUES

   

$

 

1,301

     

$

 

1,623

     

$

 

3,675

     

$

 

3,998

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Energy Costs

     

563

       

867

       

2,025

       

2,456

 

Operation and Maintenance

 

 

 

271

   

 

 

275

   

 

 

529

   

 

 

514

 

Depreciation and Amortization

     

48

       

41

       

95

       

79

 

 

 

 

 

 

 

 

 

 

Total Operating Expenses

 

 

 

882

   

 

 

1,183

   

 

 

2,649

   

 

 

3,049

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

     

419

       

440

       

1,026

       

949

 

Other Income

 

 

 

86

   

 

 

93

   

 

 

156

   

 

 

179

 

Other Deductions

     

(44

)

       

(55

)

       

(94

)

       

(108

)

 

Other Than Temporary Impairments

 

 

 

   

 

 

(32

)

 

 

 

 

(60

)

 

 

 

 

(70

)

 

Interest Expense

     

(39

)

       

(41

)

       

(82

)

       

(83

)

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

 

 

422

   

 

 

405

   

 

 

946

   

 

 

867

 

Income Tax Expense

     

(165

)

       

(165

)

       

(371

)

       

(352

)

 

 

 

 

 

 

 

 

 

 

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

 

 

$

 

257

   

 

$

 

240

   

 

$

 

575

   

 

$

 

515

 

 

 

 

 

 

 

 

 

 

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

5


PSEG POWER LLC
CONDENSED CONSOLIDATED BALANCE SHEETS

(Millions)
(Unaudited)

 

 

 

 

 

 

 

June 30,
2009

 

December 31,
2008

ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and Cash Equivalents

   

$

 

20

     

$

 

20

 

Accounts Receivable

 

 

 

362

   

 

 

472

 

Accounts Receivable—Affiliated Companies, net

     

499

       

732

 

Short-Term Loan to Affiliate

 

 

 

142

   

 

 

 

Fuel

     

730

       

938

 

Materials and Supplies

 

 

 

247

   

 

 

233

 

Derivative Contracts

     

230

       

225

 

Restricted Funds

 

 

 

10

   

 

 

21

 

Prepayments

     

40

       

53

 

Other

 

 

 

2

   

 

 

11

 

 

 

 

 

 

Total Current Assets

     

2,282

       

2,705

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

7,770

   

 

 

7,441

 

Less: Accumulated Depreciation and Amortization

     

(2,068

)

       

(1,960

)

 

 

 

 

 

 

Net Property, Plant and Equipment

 

 

 

5,702

   

 

 

5,481

 

 

 

 

 

 

NONCURRENT ASSETS

 

 

 

 

Nuclear Decommissioning Trust (NDT) Funds

     

1,059

       

970

 

Goodwill

 

 

 

16

   

 

 

16

 

Other Intangibles

     

99

       

43

 

Other Special Funds

 

 

 

28

   

 

 

27

 

Derivative Contracts

     

145

       

143

 

Other

 

 

 

75

   

 

 

74

 

 

 

 

 

 

Total Noncurrent Assets

     

1,422

       

1,273

 

 

 

 

 

 

TOTAL ASSETS

 

 

$

 

9,406

   

 

$

 

9,459

 

 

 

 

 

 

LIABILITIES AND MEMBER’S EQUITY

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Long-Term Debt Due Within One Year

   

$

 

     

$

 

250

 

Accounts Payable

 

 

 

513

   

 

 

752

 

Short-Term Loan from Affiliate

     

       

3

 

Derivative Contracts

 

 

 

300

   

 

 

338

 

Accrued Interest

     

38

       

35

 

Other

 

 

 

159

   

 

 

155

 

 

 

 

 

 

Total Current Liabilities

     

1,010

       

1,533

 

 

 

 

 

 

NONCURRENT LIABILITIES

 

 

 

 

Deferred Income Taxes and Investment Tax Credits (ITC)

     

567

       

335

 

Asset Retirement Obligations

 

 

 

347

   

 

 

334

 

Other Postretirement Benefit (OPEB) Costs

     

124

       

118

 

Derivative Contracts

 

 

 

62

   

 

 

111

 

Accrued Pension Costs

     

277

       

374

 

Environmental Costs

 

 

 

54

   

 

 

54

 

Long-Term Accrued Taxes

     

4

       

16

 

Other

 

 

 

59

   

 

 

47

 

 

 

 

 

 

Total Noncurrent Liabilities

     

1,494

       

1,389

 

 

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 6)

 

 

 

 

LONG-TERM DEBT

 

 

 

 

Total Long-Term Debt

     

2,862

       

2,653

 

 

 

 

 

 

MEMBER’S EQUITY

 

 

 

 

Contributed Capital

     

2,000

       

2,000

 

Basis Adjustment

 

 

 

(986

)

 

 

 

 

(986

)

 

Retained Earnings

     

2,976

       

2,988

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

50

   

 

 

(118

)

 

 

 

 

 

 

Total Member’s Equity

     

4,040

       

3,884

 

 

 

 

 

 

TOTAL LIABILITIES AND MEMBER’S EQUITY

 

 

$

 

9,406

   

 

$

 

9,459

 

 

 

 

 

 

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

6


PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions)
(Unaudited)

 

 

 

 

 

 

 

For the Six Months
Ended June 30,

 

2009

 

2008

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net Income

   

$

 

575

     

$

 

515

 

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

 

 

 

 

Depreciation and Amortization

     

95

       

79

 

Amortization of Nuclear Fuel

 

 

 

57

   

 

 

48

 

Interest Accretion on Asset Retirement Obligations

     

13

       

12

 

Provision for Deferred Income Taxes and ITC

 

 

 

79

   

 

 

70

 

Net Realized and Unrealized Gains on Energy Contracts and Other Derivatives

     

(76

)

       

(68

)

 

Non-Cash Employee Benefit Plan Costs

 

 

 

39

   

 

 

12

 

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

     

(3

)

       

5

 

Net Change in Certain Current Assets and Liabilities:

 

 

 

 

Fuel, Materials and Supplies

     

194

       

(43

)

 

Margin Deposit Asset

 

 

 

(60

)

 

 

 

 

(389

)

 

Margin Deposit Liability

     

114

       

14

 

Accounts Receivable

 

 

 

296

   

 

 

(54

)

 

Accounts Payable

     

(187

)

       

139

 

Accounts Receivable/Payable-Affiliated Companies, net

 

 

 

233

   

 

 

138

 

Accrued Interest Payable

     

3

       

 

Other Current Assets and Liabilities

 

 

 

(42

)

 

 

 

 

(31

)

 

Employee Benefit Plan Funding and Related Payments

     

(111

)

       

(1

)

 

Other

 

 

 

(19

)

 

 

 

 

20

 

 

 

 

 

 

Net Cash Provided By Operating Activities

     

1,200

       

466

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Additions to Property, Plant and Equipment

     

(425

)

       

(384

)

 

Short-Term Loan—Affiliated Company, net

 

 

 

(142

)

 

 

 

 

 

Proceeds from NDT Funds Sales

     

1,475

       

1,257

 

NDT Funds Interest and Dividends

 

 

 

21

   

 

 

24

 

Investment in NDT Funds

     

(1,491

)

       

(1,271

)

 

Restricted Funds

 

 

 

11

   

 

 

13

 

Other

     

(5

)

       

(11

)

 

 

 

 

 

 

Net Cash Used In Investing Activities

 

 

 

(556

)

 

 

 

 

(372

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Issuance of Recourse Long-Term Debt

     

209

       

 

Cash Dividend Paid

 

 

 

(600

)

 

 

 

 

(250

)

 

Redemption of Long-term Debt

     

(250

)

       

 

Short-Term Loan—Affiliated Company, net

 

 

 

(3

)

 

 

 

 

162

 

 

 

 

 

 

Net Cash Used In Financing Activities

     

(644

)

       

(88

)

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

 

 

   

 

 

6

 

Cash and Cash Equivalents at Beginning of Period

     

20

       

11

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 

 

$

 

20

   

 

$

 

17

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

       

Income Taxes Paid

 

 

$

 

312

   

 

$

 

261

 

Interest Paid, Net of Amounts Capitalized

   

$

 

78

     

$

 

80

 

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

7


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Millions)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

2009

 

2008

 

2009

 

2008

OPERATING REVENUES

   

$

 

1,643

     

$

 

1,858

     

$

 

4,378

     

$

 

4,476

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

Energy Costs

     

979

       

1,213

       

2,838

       

3,006

 

Operation and Maintenance

 

 

 

344

   

 

 

320

   

 

 

739

   

 

 

680

 

Depreciation and Amortization

     

144

       

139

       

293

       

282

 

Taxes Other Than Income Taxes

 

 

 

26

   

 

 

27

   

 

 

70

   

 

 

70

 

 

 

 

 

 

 

 

 

 

Total Operating Expenses

     

1,493

       

1,699

       

3,940

       

4,038

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

 

150

   

 

 

159

   

 

 

438

   

 

 

438

 

Other Income

     

4

       

2

       

5

       

7

 

Other Deductions

 

 

 

(1

)

 

 

 

 

   

 

 

(2

)

 

 

 

 

(1

)

 

Interest Expense

     

(80

)

       

(81

)

       

(159

)

       

(162

)

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

 

 

73

   

 

 

80

   

 

 

282

   

 

 

282

 

Income Tax Expense

     

(29

)

       

(28

)

       

(114

)

       

(93

)

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

 

 

44

   

 

 

52

   

 

 

168

   

 

 

189

 

Preferred Stock Dividends

     

(1

)

       

(1

)

       

(2

)

       

(2

)

 

 

 

 

 

 

 

 

 

 

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

 

 

$

 

43

   

 

$

 

51

   

 

$

 

166

   

 

$

 

187

 

 

 

 

 

 

 

 

 

 

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

8


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

(Millions)
(Unaudited)

 

 

 

 

 

 

 

June 30,
2009

 

December 31,
2008

ASSETS

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash and Cash Equivalents

   

$

 

23

     

$

 

91

 

Accounts Receivable, net of allowances of $69 in 2009 and $65 in 2008, respectively

 

 

 

875

   

 

 

909

 

Unbilled Revenues

     

303

       

454

 

Materials and Supplies

 

 

 

69

   

 

 

61

 

Prepayments

     

391

       

45

 

Restricted Funds

 

 

 

   

 

 

1

 

Deferred Income Taxes

     

54

       

52

 

 

 

 

 

 

Total Current Assets

 

 

 

1,715

   

 

 

1,613

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

     

12,623

       

12,258

 

Less: Accumulated Depreciation and Amortization

 

 

 

(4,232

)

 

 

 

 

(4,122

)

 

 

 

 

 

 

Net Property, Plant and Equipment

     

8,391

       

8,136

 

 

 

 

 

 

NONCURRENT ASSETS

 

 

 

 

Regulatory Assets

     

6,022

       

6,352

 

Long-Term Investments

 

 

 

173

   

 

 

158

 

Other Special Funds

     

48

       

46

 

Other

 

 

 

92

   

 

 

101

 

 

 

 

 

 

Total Noncurrent Assets

     

6,335

       

6,657

 

 

 

 

 

 

TOTAL ASSETS

 

 

$

 

16,441

   

 

$

 

16,406

 

 

 

 

 

 

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

9


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

(Millions)
(Unaudited)

 

 

 

 

 

 

 

June 30,
2009

 

December 31,
2008

LIABILITIES AND CAPITALIZATION

CURRENT LIABILITIES

 

 

 

 

Long-Term Debt Due Within One Year

   

$

 

492

     

$

 

248

 

Commercial Paper and Loans

 

 

 

333

   

 

 

19

 

Accounts Payable

     

327

       

336

 

Accounts Payable—Affiliated Companies, net

 

 

 

415

   

 

 

763

 

Accrued Interest

     

56

       

58

 

Accrued Taxes

 

 

 

3

   

 

 

3

 

Clean Energy Program

     

159

       

142

 

Derivative Contracts

 

 

 

10

   

 

 

14

 

Obligation to Return Cash Collateral

     

96

       

102

 

Other

 

 

 

242

   

 

 

227

 

 

 

 

 

 

Total Current Liabilities

     

2,133

       

1,912

 

 

 

 

 

 

NONCURRENT LIABILITIES

 

 

 

 

Deferred Income Taxes and ITC

     

2,591

       

2,533

 

Other Postretirement Benefit (OPEB) Costs

 

 

 

798

   

 

 

813

 

Accrued Pension Costs

     

447

       

634

 

Regulatory Liabilities

 

 

 

396

   

 

 

355

 

Clean Energy Program

     

451

       

532

 

Environmental Costs

 

 

 

676

   

 

 

689

 

Asset Retirement Obligations

     

246

       

240

 

Derivative Contracts

 

 

 

28

   

 

 

53

 

Long-Term Accrued Taxes

     

88

       

82

 

Other

 

 

 

29

   

 

 

31

 

 

 

 

 

 

Total Noncurrent Liabilities

     

5,750

       

5,962

 

 

 

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 6)

 

 

 

 

     

 

 

 

 

CAPITALIZATION

 

 

 

 

LONG-TERM DEBT

 

 

 

 

Long-Term Debt

     

3,164

       

3,463

 

Securitization Debt

 

 

 

1,250

   

 

 

1,342

 

 

 

 

 

 

Total Long-Term Debt

     

4,414

       

4,805

 

 

 

 

 

 

Preferred Stock Without Mandatory Redemption,
$100 par value, 7,500,000 authorized;
issued and outstanding, 2009 and 2008—795,234 shares

 

 

 

80

   

 

 

80

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

Common Stock; 150,000,000 shares authorized;
issued and outstanding, 2009 and 2008—132,450,344 shares

     

892

       

892

 

Contributed Capital

 

 

 

420

   

 

 

170

 

Basis Adjustment

     

986

       

986

 

Retained Earnings

 

 

 

1,763

   

 

 

1,597

 

Accumulated Other Comprehensive Income

     

3

       

2

 

 

 

 

 

 

Total Stockholders’ Equity

 

 

 

4,064

   

 

 

3,647

 

 

 

 

 

 

Total Capitalization

     

8,558

       

8,532

 

 

 

 

 

 

TOTAL LIABILITIES AND CAPITALIZATION

 

 

$

 

16,441

   

 

$

 

16,406

 

 

 

 

 

 

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

10


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

(Millions)
(Unaudited)

 

 

 

 

 

 

 

For The Six Months
Ended June 30,

 

2009

 

2008

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net Income

   

$

 

168

     

$

 

189

 

Adjustments to Reconcile Net Income to Net Cash Flows from

 

 

 

 

Operating Activities:

 

 

 

 

Depreciation and Amortization

     

293

       

282

 

Provision for Deferred Income Taxes and ITC

 

 

 

51

   

 

 

23

 

Non-Cash Employee Benefit Plan Costs

     

118

       

65

 

Cost of Removal

 

 

 

(23

)

 

 

 

 

(20

)

 

Employee Benefit Plan Funding and Related Payments

     

(255

)

       

(28

)

 

Under Recovery of Electric Energy Costs (BGS and NTC)

 

 

 

(45

)

 

 

 

 

(12

)

 

Over (Under) Recovery of Gas Costs

     

53

       

(54

)

 

Over (Under) Recovery of SBC

 

 

 

47

   

 

 

(12

)

 

Net Changes in Certain Current Assets and Liabilities:

       

Accounts Receivable and Unbilled Revenues

 

 

 

184

   

 

 

128

 

Materials and Supplies

     

(8

)

       

(10

)

 

Prepayments

 

 

 

(346

)

 

 

 

 

(304

)

 

Accrued Taxes

     

1

       

(26

)

 

Accounts Payable

 

 

 

(9

)

 

 

 

 

74

 

Accounts Receivable/Payable-Affiliated Companies, net

     

(316

)

       

(191

)

 

Obligation to Return Cash Collateral

 

 

 

(6

)

 

 

 

 

178

 

Other Current Assets and Liabilities

     

4

       

(6

)

 

Other

 

 

 

(6

)

 

 

 

 

6

 

 

 

 

 

 

Net Cash (Used In) Provided By Operating Activities

     

(95

)

       

282

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Additions to Property, Plant and Equipment

     

(379

)

       

(345

)

 

Other

 

 

 

(9

)

 

 

 

 

 

 

 

 

 

 

Net Cash Used In Investing Activities

     

(388

)

       

(345

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Net Change in Short-Term Debt

     

314

       

135

 

Issuance of Long-Term Debt

 

 

 

   

 

 

700

 

Redemption of Long-Term Debt

     

(60

)

       

(651

)

 

Redemption of Securitization Debt

 

 

 

(87

)

 

 

 

 

(82

)

 

Contributed Capital

     

250

       

 

Deferred Issuance Costs

 

 

 

   

 

 

(4

)

 

Premium Paid on Early Retirement of Debt

     

       

(32

)

 

Preferred Stock Dividends

 

 

 

(2

)

 

 

 

 

(2

)

 

 

 

 

 

 

Net Cash Provided By Financing Activities

     

415

       

64

 

 

 

 

 

 

Net (Decrease) Increase In Cash and Cash Equivalents

 

 

 

(68

)

 

 

 

 

1

 

Cash and Cash Equivalents at Beginning of Period

     

91

       

32

 

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 

 

$

 

23

   

 

$

 

33

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

       

Income Taxes Paid

 

 

$

 

41

   

 

$

 

40

 

Interest Paid, Net of Amounts Capitalized

   

$

 

153

     

$

 

153

 

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

11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

Note 1. Organization and Basis of Presentation

Organization

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

 

 

 

 

Power—which is a multi-regional, wholesale energy supply company that integrates its generating asset operations and gas supply commitments with its wholesale energy, fuel supply, energy trading and marketing and risk management function through three principal direct wholly owned subsidiaries. Power’s subsidiaries are subject to regulation by the Federal Energy Regulatory Commission (FERC), the Nuclear Regulatory Commission (NRC) and the states in which they operate.

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

Basis of Presentation

The respective financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) applicable to Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements (Notes) should be read in conjunction with, and update and supplement matters discussed in, PSEG’s, Power’s and PSE&G’s respective Annual Report on Form 10-K for the year ended December 31, 2008 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.

The unaudited condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. The year-end Condensed Consolidated Balance Sheets were derived from the audited Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2008.

Reclassifications

Certain reclassifications were made to the prior period financial statements in accordance with new accounting guidance adopted in 2009. Minority interests of $11 million were reclassified from Other

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Noncurrent Liabilities to Noncontrolling Interests in PSEG’s Condensed Consolidated Balance Sheet as of December 31, 2008.

In addition, other-than-temporary impairments related to Power’s credit losses on available-for-sale debt securities in its Nuclear Decommissioning Trust (NDT) Funds were reclassified from Other Deductions to a separate line caption in the Condensed Consolidated Statement of Operations of PSEG and Power, for the three and six months ended June 30, 2008.

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

Operating results for Bioenergie S.p.A. (Bioenergie) were reclassified to Income (Loss) from Discontinued Operations in the Consolidated Statements of Operations of PSEG for the three and six months ended June 30, 2008. See Note 3. Discontinued Operations and Dispositions.

Income from Equity Method Investments, as well as any impairments or gain/losses on the sale of equity method investments which were reflected in Operating Revenues and Operating Expenses prior to the fourth quarter of 2008, have been reclassified to below Operating Income in the Consolidated Statements of Operations of PSEG for the three and six months ended June 30, 2008 since these equity method investments are no longer an integral part of the business.

Note 2. Recent Accounting Standards

The following is a summary of new accounting guidance adopted in 2009 and guidance issued but not yet adopted that could impact our businesses. The new accounting guidance adopted in 2009 did not have a material impact on our financial statements.

Accounting standards adopted in 2009

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

 

 

 

 

changes financial accounting and reporting of business combination transactions,

 

 

 

 

applies to all transactions and events in which an entity obtains control of one or more businesses of an acquiree,

 

 

 

 

requires all assets acquired and liabilities assumed in a business combination to be measured at their acquisition date fair value, with limited exceptions, and

 

 

 

 

requires acquisition-related costs and certain restructuring costs to be recognized separately from the business combination.

We adopted SFAS 141(R) effective January 1, 2009. Any new business combination transactions will be accounted for under this guidance.

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

 

 

 

 

changes the financial reporting relationship between a parent and non-controlling interests,

 

 

 

 

requires all entities to report non-controlling interests in subsidiaries as a separate component of equity in the consolidated financial statements,

 

 

 

 

requires net income attributable to the non-controlling interest to be shown on the face of the income statement in addition to net income attributable to the controlling interest, and

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

 

 

 

applies prospectively, except for presentation and disclosure requirements, which are applied retrospectively.

We adopted SFAS 160 effective January 1, 2009 and revised the balance sheet and income statement presentations as required by the standard. The income statement impact was immaterial.

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

 

 

 

 

requires an entity to disclose an understanding of:

 

¡

 

 

 

how and why it uses derivatives,

 

¡

 

 

 

how derivatives and related hedged items are accounted for, and

 

¡

 

 

 

the overall impact of derivatives on an entity’s financial statements.

We adopted SFAS 161 effective January 1, 2009. For additional information / disclosures, see Note 8. Financial Risk Management Activities.

SFAS No. 165, “Subsequent Events” (SFAS 165)

 

 

 

 

establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and

 

 

 

 

requires the disclosure of the date through which subsequent events have been evaluated and whether that date is the date on which the financial statements were issued or the date on which the financial statements were available to be issued.

We adopted SFAS 165 effective for our second quarter 2009 reporting. We evaluated any subsequent events through July 31, 2009, which is the date the financial statements were issued.

FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2)

 

 

 

 

revises recognition guidance in determining whether a debt security is other-than-temporarily impaired. A debt security is considered other-than-temporarily impaired in either of the following circumstances if the fair value is less than the amortized cost:

 

¡

 

 

 

An entity has an intent to sell the security, or it is more likely than not that an entity will be required to sell the security prior to the recovery of its amortized cost basis or

 

¡

 

 

 

an entity does not expect to recover the entire amortized cost basis of the security.

 

 

 

 

provides further guidance to determine the amount of impairment to be recorded in earnings (credit-related loss) and/ or Accumulated Other Comprehensive Income/(Loss) (non-credit related loss).

We adopted FSP FAS 115-2 and FAS 124-2 effective April 1, 2009 and recorded a cumulative-effect adjustment to reclassify $12 million of non-credit losses, net-of-tax, from retained earnings to Accumulated Other Comprehensive Income (Loss). The expanded disclosures related to FSP FAS 115-2 and FAS 124-2 are included in Note 4. Available-for-Sale Securities.

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1)

 

 

 

 

requires a publicly traded company to disclose the following information, in the notes to the financial statements:

 

¡

 

 

 

fair value of its financial instruments in interim and annual reporting periods, together with the related carrying amounts,

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

¡

 

 

 

methods and significant assumptions used to estimate the fair value, and

 

¡

 

 

 

changes in methods and significant assumptions, if any.

We adopted FSP FAS 107-1 and APB 28-1 effective April 1, 2009. For additional information / disclosures, see Note 9. Fair Value Measurements.

FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4)

 

 

 

 

provides guidance:

 

¡

 

 

 

to determine if there has been a significant decrease in the volume and level of activity for the asset or liability and

 

¡

 

 

 

to estimate fair values, when transactions or quoted prices are not determinative of fair value.

 

 

 

 

requires management to use judgment to determine whether a market is distressed or not orderly, even if there has been a significant decrease in the volume and level of activity for the asset or liability.

We adopted FSP FAS 157-4 effective April 1, 2009. For additional information / disclosures, see Note 9. Fair Value Measurements.

Accounting standards to be adopted effective for third quarter 2009 reporting

SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (SFAS 168)

 

 

 

 

issued by the FASB in June 2009,

 

 

 

 

the single source of authoritative non-governmental U.S. GAAP other than the SEC rules, regulations, interpretive releases and the SEC staff guidance,

 

 

 

 

does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place, and

 

 

 

 

will not have any impact on our financial condition or results of operations. We are currently evaluating the impact to our financial reporting process which includes providing accounting references in our SEC filings and other documents. We anticipate eliminating specific accounting references and replacing them with more general topical references.

Accounting standard to be adopted effective for 2009 year-end reporting

FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP FAS 132(R)-1)

 

 

 

 

issued by the FASB in December 2008,

 

 

 

 

requires additional disclosures about the fair value of plan assets of a defined benefit pension or other postretirement plan, including:

 

¡

 

 

 

how investment allocation decisions are made by management,

 

¡

 

 

 

major categories of plan assets,

 

¡

 

 

 

significant concentrations of risk within plan assets, and

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

¡

 

 

 

inputs and valuation techniques used to measure the fair value of plan assets and effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period.

We do not anticipate that this guidance will have a material impact on our financial statements.

Accounting standards to be adopted effective January 1, 2010

SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167)

 

 

 

 

issued by the FASB in June 2009,

 

 

 

 

removes the exception from applying consolidation guidance to qualifying special-purpose entities,

 

 

 

 

requires ongoing assessment of the Company’s involvement in the activities of a Variable Interest Entity (VIE), and

 

 

 

 

amends the criteria in determination of a primary beneficiary, such that a primary beneficiary would be an enterprise with

 

¡

 

 

 

the power to direct the activities of a VIE that most significantly impact the economic performance of a VIE and

 

¡

 

 

 

the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

We are currently evaluating the impact of this standard on our financial statements.

Note 3. Discontinued Operations and Dispositions

Discontinued Operations

Bioenergie

In November 2008, Energy Holdings sold its 85% ownership interest in Bioenergie for $40 million. The sale resulted in an after-tax loss of $15 million. Net cash proceeds, after realization of tax benefits, were approximately $70 million.

Bioenergie’s operating results for the quarter and six months ended June 30, 2008, which were reclassified to Discontinued Operations, are summarized below:

 

 

 

 

 

 

 

Three Months Ended
June 30,
2008

 

Six Months Ended
June 30,
2008

 

 

Millions

Operating Revenues

   

$

 

11

     

$

 

22

 

Income Before Income Taxes

 

 

$

 

   

 

$

 

1

 

Net Loss

   

$

 

     

$

 

(1

)

 

SAESA Group

In July 2008, Energy Holdings sold its investment in the SAESA Group for a total of $1.3 billion, including the assumption of $413 million of the consolidated debt of the group. The sale resulted in an after-tax gain of $187 million. Net cash proceeds, after Chilean and U.S. taxes of $269 million, were $612 million.

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

SAESA Group’s operating results for the quarter and six months ended June 30, 2008, which are included in Discontinued Operations, are summarized below:

 

 

 

 

 

 

 

Three Months Ended
June 30,
2008

 

Six Months Ended
June 30,
2008

 

 

Millions

Operating Revenues

   

$

 

156

     

$

 

342

 

Income Before Income Taxes

 

 

$

 

21

   

 

$

 

41

 

 

 

 

 

 

Net Income

   

$

 

16

     

$

 

30

 

Dispositions

GWF Energy LLC (GWF Energy)

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

Energy Holdings completed the first stage of the sale in June 2009, selling a 10.1% interest in GWF Energy for approximately $7 million. The sale of Energy Holdings’ remaining 49.9% interest is subject to certain conditions, including the execution of a new power purchase agreement (PPA) with its customer and the related approval of the PPA by the California Public Utilities Commission.

PPN Power Generating Company Limited (PPN)

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

Leveraged Leases

In the first six months of 2009, Energy Holdings sold its interest in nine leveraged leases with a combined book value of approximately $369 million, including seven international leases for which the IRS has disallowed deductions taken in prior years. Total proceeds for the sales were approximately $460 million and resulted in an after-tax gain of $35 million. Proceeds from these transactions are being used to reduce Energy Holdings’ tax exposure related to these lease investments. For additional information see Note 6. Commitments and Contingent Liabilities.

Other

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

Note 4. Available-for-Sale Securities

NDT Funds

In accordance with NRC regulations, entities owning an interest in nuclear generating facilities are required to determine the costs and funding methods necessary to decommission such facilities upon termination of operation. As a general practice, each nuclear owner places funds in independent external trust accounts it maintains to provide for decommissioning.

Power maintains the external master nuclear decommissioning trust which contains two separate funds: a qualified fund and a non-qualified fund. Section 468A of the Internal Revenue Code limits the amount of

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

money that can be contributed into a qualified fund. In the most recent study of the total cost of decommissioning, Power’s share related to its five nuclear units was estimated at approximately $2.1 billion, including contingencies. The liability for decommissioning recorded on a discounted basis as of June 30, 2009 was approximately $309 million and is included in the Asset Retirement Obligation (ARO). The trust funds are managed by third-party investment advisors who operate under investment guidelines developed by Power’s NDT Investment Committee.

Power classifies investments in the NDT Funds as available-for-sale under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (SFAS 115). The following tables show the fair values and gross unrealized gains and losses for the securities held in the NDT Funds.

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2009

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

 

Millions

Equity Securities

   

$

 

441

     

$

 

88

     

$

 

(2

)

     

$

 

527

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

 

 

 

 

 

 

Government Obligations

     

296

       

4

       

(4

)

       

296

 

Other Debt Securities

 

 

 

212

   

 

 

14

   

 

 

(20

)

 

 

 

 

206

 

 

 

 

 

 

 

 

 

 

Total Debt Securities

     

508

       

18

       

(24

)

       

502

 

 

 

 

 

 

 

 

 

 

Other Securities

 

 

 

30

   

 

 

   

 

 

   

 

 

30

 

 

 

 

 

 

 

 

 

 

Total Available-for-Sale Securities

   

$

 

979

     

$

 

106

     

$

 

(26

)

     

$

 

1,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2008

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

 

Millions

Equity Securities

   

$

 

386

     

$

 

32

     

$

 

(5

)

     

$

 

413

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

 

 

 

 

 

 

Government Obligations

     

192

       

3

       

       

195

 

Other Debt Securities

 

 

 

284

   

 

 

6

   

 

 

   

 

 

290

 

 

 

 

 

 

 

 

 

 

Total Debt Securities

     

476

       

9

       

       

485

 

Other Securities

 

 

 

72

   

 

 

1

   

 

 

(1

)

 

 

 

 

72

 

 

 

 

 

 

 

 

 

 

Total Available-for-Sale Securities

   

$

 

934

     

$

 

42

     

$

 

(6

)

     

$

 

970

 

 

 

 

 

 

 

 

 

 

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table shows the value of securities in the NDT Funds that have been in an unrealized position for less than 12 months, or for 12 months or longer.

 

 

 

 

 

 

 

 

 

 

 

 

 

   

As of
June 30, 2009
Greater Than
12 Months

 

As of
June 30, 2009
Less Than
12 Months

 

As of
December 31, 2008
Less Than
12 Months*

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

 

Millions

Equity Securities (A)

   

$

 

     

$

 

     

$

 

43

     

$

 

(2

)

     

$

 

85

     

$

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities

 

 

 

 

 

 

 

 

 

 

 

 

Government Obligations (B)

     

       

       

148

       

(4

)

       

       

 

Other Debt Securities (C)

 

 

 

57

   

 

 

(13

)

 

 

 

 

86

   

 

 

(7

)

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Debt Securities

     

57

       

(13

)

       

234

       

(11

)

       

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Securities

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Available-for-Sale Securities

   

$

 

57

     

$

 

(13

)

     

$

 

277

     

$

 

(13

)

     

$

 

85

     

$

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

 

 

 

There were no gross unrealized losses as of December 31, 2008 for 12 months or longer.

 

(A)

 

 

 

Equity Securities—Investments in marketable equity securities within the NDT fund are primarily investments in common stocks within a broad range of industries and sectors. The unrealized losses are distributed over several hundred companies with an impairment duration of three months or less and a severity that is generally ten percent or less than cost. The Company does not consider these securities to be other-than-temporarily impaired as of June 30, 2009.

 

(B)

 

 

 

Debt Securities (Government)—Unrealized losses on Power’s NDT investments in US Treasury obligations and Federal Agency mortgage-backed securities were caused by interest rate changes. Since these investments are guaranteed by the US government or an agency of the US government, it is not expected that these securities will settle for less that their amortized cost basis, assuming the Company does not intend to sell nor will they be more likely than not required to sell. The Company does not consider these securities to be other-than-temporarily impaired as of June 30, 2009.

 

(C)

 

 

 

Debt Securities (Corporate)—Power’s investments in corporate bonds are primarily with investment grade securities. It is not expected that these securities would settle at less than their amortized cost. Since the Company does not intend to sell these securities nor will they be more likely than not required to sell, the company does not consider these debt securities to be other-than-temporarily impaired as of June 30, 2009.

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

 

 

 

 

 

 

 

 

 

 

 

Three Months
Ended
June 30, 2009

 

Three Months
Ended
June 30, 2008

 

Six Months
Ended
June 30, 2009

 

Six Months
Ended
June 30, 2008

 

 

Millions

Proceeds from Sales

   

$

 

917

     

$

 

634

     

$

 

1,475

     

$

 

1,257

 

 

 

 

 

 

 

 

 

 

Net Realized Gains (Losses):

 

 

 

 

 

 

 

 

Gross Realized Gains

   

$

 

82

     

$

 

78

     

$

 

127

     

$

 

147

 

Gross Realized Losses

 

 

 

(65

)

 

 

 

 

(51

)

 

 

 

 

(111

)

 

 

 

 

(103

)

 

 

 

 

 

 

 

 

 

 

Net Realized Gains

   

$

 

17

     

$

 

27

     

$

 

16

     

$

 

44

 

 

 

 

 

 

 

 

 

 

Net realized gains disclosed in the above table were recognized in Other Income and Other Deductions in Power’s Consolidated Statement of Operations. Net unrealized gains of $40 million (after-tax) were recognized in Accumulated Other Comprehensive Income in Power’s Consolidated Balance Sheet as of June 30, 2009.

The available-for-sale debt securities held as of June 30, 2009 had the following maturities:

 

 

 

 

$5 million less than one year,

 

 

 

 

$64 million after one through five years,

 

 

 

 

$96 million after five through 10 years, $58 million after 10 through 15 years, and

 

 

 

 

$16 million after 15 through 20 years, and $263 million over 20 years.

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

Power periodically assesses individual securities whose fair value is less than amortized cost to determine whether the investments are considered to be other-than-temporarily impaired. For equity securities, management considers the ability and intent to hold for a reasonable time to permit recovery in addition to the severity and duration of the loss. For fixed income securities, management considers its intent to sell or requirement to sell a security prior to expected recovery. In those cases where a sale is expected, any impairment would be recorded through earnings. For fixed income securities where there is no intent to sell or likely requirement to sell, management evaluates whether credit loss is a component of the impairment. If so, that portion is recorded through earnings while the noncredit loss component is recorded through Other Comprehensive Income (OCI). In 2009, other-than-temporary impairments of $60 million were recognized on securities in the NDT Funds. Any subsequent recoveries in the value of these securities are recognized in OCI. The assessment of fair market value compared to cost is applied on a weighted average basis taking into account various purchase dates and initial cost detail of the securities.

Rabbi Trusts

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

20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

PSEG classifies investments in the Rabbi Trusts as available for sale under SFAS 115. The following tables show the fair values, gross unrealized gains and losses and amortized cost bases for the securities held in the Rabbi Trusts:

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2009

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

 

Millions

Equity Securities

   

$

 

12

     

$

 

     

$

 

(1

)

     

$

 

11

 

Debt Securities

 

 

 

102

   

 

 

13

   

 

 

   

 

 

115

 

Other Securities

     

14

       

       

       

14

 

 

 

 

 

 

 

 

 

 

Total PSEG Available-for-Sale Securities

 

 

$

 

128

   

 

$

 

13

   

 

$

 

(1

)

 

 

 

$

 

140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2008

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

 

Millions

Equity Securities

   

$

 

11

     

$

 

     

$

 

(2

)

     

$

 

9

 

Debt Securities

 

 

 

102

   

 

 

9

   

 

 

(1

)

 

 

 

 

110

 

Other Securities

     

14

       

       

       

14

 

 

 

 

 

 

 

 

 

 

Total PSEG Available-for-Sale Securities

 

 

$

 

127

   

 

$

 

9

   

 

$

 

(3

)

 

 

 

$

 

133

 

 

 

 

 

 

 

 

 

 

The Rabbi Trusts are invested in commingled indexed mutual funds, in which the shares have the characteristics of equity securities. Due to the commingled nature of these funds, PSEG does not have the ability to hold these securities until expected recovery. As a result, any declines in fair market value below cost are recorded as a charge to earnings. In the first half of 2009, other-than-temporary impairments of $1 million were recognized on the investments of the Rabbi Trusts.

 

 

 

 

 

 

 

 

 

 

 

Three Months
Ended
June 30, 2009

 

Three Months
Ended
June 30, 2008

 

Six Months
Ended
June 30, 2009

 

Six Months
Ended
June 30, 2008

 

 

Millions

Proceeds from Sales

   

$

 

2

     

$

 

23

     

$

 

2

     

$

 

23

 

 

 

 

 

 

 

 

 

 

Net Realized Gains (Losses):

 

 

 

 

 

 

 

 

Gross Realized Gains

   

$

 

     

$

 

2

     

$

 

     

$

 

2

 

Gross Realized Losses

 

 

 

   

 

 

   

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Realized Gains (Losses):

   

$

 

     

$

 

2

     

$

 

(1

)

     

$

 

2

 

 

 

 

 

 

 

 

 

 

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

21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The estimated fair value of the Rabbi Trusts related to PSEG, Power and PSE&G are detailed as follows:

 

 

 

 

 

 

 

As of June 30,
2009

 

As of December 31,
2008

 

 

Millions

Power

   

$

 

28

     

$

 

27

 

PSE&G

 

 

 

48

   

 

 

46

 

Other

     

64

       

60

 

 

 

 

 

 

Total PSEG Available-for-Sale Securities

 

 

$

 

140

   

 

$

 

133

 

 

 

 

 

 

Note 5. Pension and OPEB

PSEG sponsors several qualified and nonqualified pension plans and other postretirement benefit plans covering PSEG’s and its participating affiliates’ current and former employees who meet certain eligibility criteria. The following table provides the components of net periodic benefit costs relating to all qualified and nonqualified pension and OPEB plans on an aggregate basis. OPEB costs are presented net of the federal subsidy expected for prescription drugs under the Medicare Prescription Drug Improvement and Modernization Act of 2003.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits
Three Months
Ended
June 30,

 

OPEB
Three Months
Ended
June 30,

 

Pension Benefits
Six Months
Ended
June 30,

 

OPEB
Six Months
Ended
June 30,

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

 

Millions

Components of Net Periodic Benefit Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service Cost

   

$

 

19

     

$

 

20

     

$

 

3

     

$

 

3

     

$

 

38

     

$

 

39

     

$

 

6

     

$

 

7

 

Interest Cost

 

 

 

59

   

 

 

57

   

 

 

18

   

 

 

18

   

 

 

118

   

 

 

114

   

 

 

36

   

 

 

36

 

Expected Return on Plan Assets

     

(54

)

       

(73

)

       

(3

)

       

(3

)

       

(108

)

       

(145

)

       

(6

)

       

(7

)

 

Amortization of Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transition Obligation

     

       

       

7

       

7

       

       

       

14

       

14

 

Prior Service Cost

 

 

 

2

   

 

 

3

   

 

 

3

   

 

 

3

   

 

 

4

   

 

 

5

   

 

 

7

   

 

 

6

 

Actuarial Loss

     

28

       

3

       

(1

)

       

(1

)

       

56

       

6

       

(2

)

       

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Cost

 

 

$

 

54

   

 

$

 

10

   

 

$

 

27

   

 

$

 

27

   

 

$

 

108

   

 

$

 

19

   

 

$

 

55

   

 

$

 

55

 

Effect of Regulatory Asset

     

       

       

5

       

5

       

       

       

10

       

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Benefit Expense, Including Effect of Regulatory Asset

 

 

$

 

54

   

 

$

 

10

   

 

$

 

32

   

 

$

 

32

   

 

$

 

108

   

 

$

 

19

   

 

$

 

65

   

 

$

 

65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension
Three Months
Ended
June 30,

 

OPEB
Three Months
Ended
June 30,

 

Pension
Six Months
Ended
June 30,

 

OPEB
Six Months
Ended
June 30,

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

 

Millions

Power

   

$

 

17

     

$

 

3

     

$

 

3

     

$

 

3

     

$

 

33

     

$

 

6

     

$

 

6

     

$

 

6

 

PSE&G

 

 

 

30

   

 

 

4

   

 

 

29

   

 

 

28

   

 

 

60

   

 

 

8

   

 

 

58

   

 

 

57

 

Other

     

7

       

3

       

       

1

       

15

       

5

       

1

       

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Benefit Costs

 

 

$

 

54

   

 

$

 

10

   

 

$

 

32

   

 

$

 

32

   

 

$

 

108

   

 

$

 

19

   

 

$

 

65

   

 

$

 

65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the six months ended June 30, 2009, PSEG contributed its planned contributions for the year 2009 of $364 million and $11 million into its pension and postretirement healthcare plans, respectively.

Note 6. Commitments and Contingent Liabilities

Guaranteed Obligations

Power has unconditionally guaranteed payments by its subsidiaries in commodity-related transactions to support current exposure, interest and other costs on sums due and payable in the ordinary course of business. These guarantees are provided to counterparties in order to obtain credit. Under these agreements, guarantees cover lines of credit between entities and are often reciprocal in nature. The exposure between counterparties can move in either direction.

In order for Power to incur liability for the face value of the outstanding guarantees, its subsidiaries would have to fully utilize the credit granted to them by every counterparty to whom Power has provided a guarantee and all of the related contracts would have to be “out-of-the-money” (if the contracts are terminated, Power would owe money to the counterparties). The probability of this 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 under these guarantees. This current exposure consists of the net of accounts receivable and accounts payable and the forward value on open positions, less any margins posted.

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

23


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The face value of outstanding guarantees, current exposure and margin positions as of June 30, 2009 and December 31, 2008 are as follows:

 

 

 

 

 

 

 

As of June 30,
2009

 

As of December 31,
2008

 

 

Millions

Face value of outstanding guarantees

   

$

 

1,897

     

$

 

1,856

 

Exposure under current guarantees

 

 

$

 

624

   

 

$

 

585

 

Letters of Credit Margin Posted

   

$

 

153

     

$

 

201

 

Letters of Credit Margin Received

 

 

$

 

148

   

 

$

 

250

 

Net Cash Received

 

 

 

 

Counterparty Cash Margin Deposited

   

$

 

1

     

$

 

3

 

Counterparty Cash Margin (Received)

 

 

 

(194

)

 

 

 

 

(81

)

 

Net Broker Balance (Received) Deposited

     

(14

)

       

(74

)

 

 

 

 

 

 

Total Net Cash Received

 

 

$

 

(207

)

 

 

 

$

 

(152

)

 

 

 

 

 

 

Power nets the fair value of cash collateral receivables and payables with the corresponding net energy contract balances. Of the net cash received, Power has included $227 million and $112 million in its corresponding net derivative contract positions as of June 30, 2009 and December 31, 2008, respectively. The remaining balance of net cash (received) deposited shown above is primarily included in Accounts Payable.

In the event of a deterioration of Power’s credit rating to below investment grade, which would represent a two level downgrade from its current ratings, many of these agreements allow the counterparty to demand further performance assurance. As of June 30, 2009, if Power was to lose its investment grade rating, additional collateral of approximately $1 billion could be required. As of June 30, 2009, there was $2.6 billion of available liquidity that could be used to post collateral under the PSEG and Power credit facilities. On July 24, 2009, Power entered into an additional $350 million syndicated credit facility that expires in July 2011. In addition to amounts in the table above, Power had posted $125 million and $101 million in letters of credit as of June 30, 2009 and December 31, 2008, respectively, to support various other contractual and environmental obligations.

Environmental Matters

Passaic River

The U.S. Environmental Protection Agency (EPA) undertook a study of the Passaic River and determined that a six-mile stretch of the 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). The EPA later expanded the study area to include the entire 17-mile tidal reach of the lower Passaic River.

PSE&G and certain of its predecessors conducted operations at properties in this area on or adjacent to the river. The properties included one operating electric generating station (Essex Site), which was transferred to Power, one former generating station and four former Manufactured Gas Plant (MGP) sites. Power assumed any environmental liabilities of the Essex Site when it was transferred from PSE&G, and PSE&G obtained releases and indemnities for liabilities arising out of the former generating station when the Essex Site was transferred. The costs associated with the MGP Remediation Program have historically been recovered through the Societal Benefits Clause (SBC) charges to PSE&G ratepayers.

The EPA believes that hazardous substances had been released from the Essex Site and one of PSE&G’s former MGP locations (Harrison Site). In 2006, the EPA notified the potentially responsible parties (PRPs) that the cost of its study would greatly exceed the original estimated cost of $20 million. 73 PRPs,

24


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

including Power and PSE&G, agreed to assume responsibility for the study and to divide the associated costs according to a mutually agreed-upon formula. The PRP group is presently executing the study. Approximately five percent of the study costs are attributable to PSE&G’s former MGP sites and approximately one percent to Power’s generating stations. Power has provided notice to insurers concerning this potential claim.

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

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

NJDEP Litigation

In 2005, the New Jersey Department of Environmental Protection (NJDEP) filed suit against a PRP and its related companies in the New Jersey Superior Court seeking damages and reimbursement for costs expended by the State of New Jersey to address the effects of the PRP’s discharge of hazardous substances into the Passaic River. On February 4, 2009, third-party complaints were filed against some 320 third-party defendants, including Power and PSE&G, claiming that each of the third-party defendants is responsible for its proportionate share of the clean-up costs for the hazardous substances they allegedly discharged into the Passaic River. The third-party complaints seek statutory contribution, and contribution under the New Jersey Spill Compensation and Control Act (Spill Act), to recover past and future removal costs and damages.

Natural Resource Damage Claims

In 2003, the NJDEP directed PSEG, PSE&G and 56 other PRPs to arrange for a natural resource damage assessment and interim compensatory restoration of natural resource injuries along the lower Passaic River and its tributaries pursuant to the NJ Spill Act. The NJDEP alleged that hazardous substances had been discharged from the Essex Site and the Harrison Site. The NJDEP estimated the cost of interim natural resource injury restoration activities along the lower Passaic River at approximately $950 million. In 2007, agencies of the United States Department of Commerce and the United States Department of the Interior sent letters to PSE&G and other PRPs inviting participation in an assessment of injuries to natural resources that the agencies intended to perform. In November 2008, PSEG and a number of other PRPs agreed in an interim cooperative assessment agreement to pay an aggregate of $1 million for past costs incurred by the Federal trustees, and certain costs the trustees will incur going forward, and to work with the trustees for a 12-month period to explore whether some or all of the trustees’ claims can be resolved in a cooperative fashion.

Newark Bay Study Area

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

25


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

PSEG, Power and PSE&G cannot predict what further actions, if any, or the costs or the timing thereof, that may be required with respect to the Passaic River, the NJDEP Litigation, the Newark Bay Study Area or with respect to natural resource damages claims; however, such costs could be material.

MGP Remediation Program

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

During the second quarter of 2009, PSE&G updated the estimated cost to remediate all MGP sites to completion and determined that the cost to completion could range between $704 million and $804 million from June 30, 2009 through 2021. Since no amount within the range was considered to be most likely, PSE&G reflected a liability of $704 million on the balance sheet as of June 30, 2009. Of this amount, $28 million was recorded in Other Current Liabilities and $676 million was reflected as Environmental Costs in Noncurrent Liabilities. As such, PSE&G has recorded a $704 million Regulatory Asset with respect to these costs.

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

The PSD/NSR regulations, promulgated under the Clean Air Act, require major sources of certain air pollutants to obtain permits, install pollution control technology and obtain offsets, in some circumstances, when those sources undergo a “major modification,” as defined in the regulations. The federal government may order companies that are not in compliance with the PSD/NSR regulations to install the best available control technology at the affected plants and to pay monetary penalties ranging from $25,000 to $37,500 per day for each violation, depending upon when the alleged violation occurred.

In November 2006, Power reached an agreement with the EPA and the NJDEP to achieve emissions reductions targets at certain of Power’s generating stations. Under this agreement, Power was required to undertake a number of technology projects, plant modifications and operating procedure changes at Hudson and Mercer designed to meet targeted reductions in emissions of sulfur dioxide (SO2), nitrogen oxide (NOx), particulate matter and mercury. Power has installed selective catalytic reduction equipment at Mercer at a cost of $118 million and baghouses were placed in service in December 2008, with costs as of June 30, 2009 of $263 million. All back-end pollution control technology construction is expected to be completed by the end of 2010. The cost of assets to be placed in service in order to implement the balance of the agreement is estimated at $200 million to $250 million for Mercer and $700 million to $750 million for Hudson, with expenditures as of June 30, 2009 of $560 million for both projects.

On January 14, 2009, the EPA issued a notice of violation to Power and the other owners of the Keystone coal-fired plant in Pennsylvania, alleging, among other things, that various capital improvement projects were made at the plant which are considered modifications (or major modifications) causing significant net emission increases of PSD/NSR air pollutants, beginning in 1985 for Keystone Unit 1 and in 1984 for Keystone Unit 2. The notice of violation states that none of these modifications underwent PSD/NSR permitting process prior to being put into service, which the EPA alleges was required under the Clean Air Act. The notice of violation states that the EPA may issue an order requiring compliance with the relevant Clean Air Act provisions and may seek injunctive relief and/or civil penalties. Power owns approximately 23% of the plant. Power cannot predict the outcome of this matter.

26


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Mercury Regulation

In March 2005, the EPA established a New Source Performance Standard limit for nickel emissions from oil-fired electric generating units and a cap-and-trade program for mercury emissions from coal-fired electric generating units. In February 2008, the United States Court of Appeals for the District of Columbia Circuit issued a decision rejecting the EPA’s mercury emissions program and requiring the EPA to develop standards for mercury and nickel emissions that adhere to the Maximum Available Control Technology (MACT) provisions of the Clean Air Act. Although the EPA initially filed a petition with the U.S. Supreme Court to review the lower court’s decision, in February 2009, the EPA withdrew its petition with the U.S. Supreme Court and indicated that it intended to move forward with a rule-making process to develop MACT standards consistent with the Court’s ruling. While certain industry litigants also petitioned the U.S. Supreme Court to review the lower court’s decision, in February 2009, the Supreme Court denied the petition. The full impact to PSEG of these developments is uncertain. It is expected that new MACT requirements will require more stringent control than the cap-and-trade program struck down by the D.C. Circuit Court; however, the costs of compliance with mercury MACT standards will have to be compared with the existing New Jersey and Connecticut mercury-control requirements, as described below.

The estimated costs of technology believed to be capable of meeting these emissions limits at Power’s coal-fired units in New Jersey and Pennsylvania have been incurred or are included in Power’s capital expenditure forecast. Total estimated costs for each project are between $150 million and $200 million.

New Jersey

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

Power achieved the reductions required in 2007 through the installation of carbon injection technology and baghouses at both Mercer units and anticipates compliance with the remaining reductions required by December 2012 through the installation of a baghouse at its Hudson plant by the end of 2010. These mercury-control technologies are part of Power’s multi-pollutant reduction agreement that resolved issues arising out of the PSD/NSR air pollution control programs discussed above.

Pennsylvania

In February 2007, Pennsylvania finalized its “state-specific” requirements to reduce mercury emissions from coal-fired electric generating units. These requirements were more stringent than the EPA’s Clean Air Mercury Rule (vacated by the court in February 2008) but not as stringent as would be required by a MACT process as required under a strict interpretation of the Clean Air Act. In January 2009, the Commonwealth Court of Pennsylvania struck down the state rule, indicating that the rule violated Pennsylvania law because it is inconsistent with the Clean Air Act. The Commonwealth Court’s decision has been appealed to the Supreme Court of Pennsylvania. If the Commonwealth Court’s decision were to be overturned and the above-mentioned requirements are upheld, the Keystone and Conemaugh generating stations would be positioned by 2010 to meet Phase I of the Pennsylvania mercury rule by benefiting from reductions realized from the installation of planned or completed controls for compliance with SO2 and NOx reductions. Power will evaluate Phase II of the Pennsylvania mercury rule after a full evaluation of the Phase I reductions. If the Commonwealth Court’s ruling is sustained and the EPA undertakes a MACT process, it is uncertain at this time whether the Keystone and Conemaugh generating stations will be able to achieve the necessary reductions at these stations with currently planned capital projects.

27


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Connecticut

Mercury emissions control standards were effective in July 2008 and require coal-fired power plants to achieve either an emissions limit or 90% mercury removal efficiency through technology installed to control mercury emissions. The recently installed activated carbon injection and baghouse on Bridgeport Unit 3 has been demonstrated through stack testing to comply with the mercury limits in this rule.

Emission Fees

Section 185 of the Clean Air Act requires states (or in the absence of state action, the EPA), in severe and extreme non-attainment areas, to adopt a penalty fee for major stationary sources if the area fails to attain the one-hour ozone National Ambient Air Quality Standard (NAAQS) set by the EPA. In June 2007, the U.S. Court of Appeals for the District of Columbia Circuit ruled against the EPA, which had sought to vacate imposition of fees for NOx emissions because the one hour standard was superseded by an eight-hour standard. Power operates electric generation stations, major stationary sources, in the New Jersey-Connecticut severe non-attainment area that did not meet the required NAAQS by November 2007. Neither the EPA nor the states in the non-attainment areas in which Power operates have initiated any process for imposing fees in compliance with the court ruling; however, preliminary analysis suggests that penalty fees could be approximately $6 million annually, which Power is currently accruing. This analysis could change if the EPA or the states issue additional guidance addressing the imposition of fees, or if Power is able to reduce its emissions of NOx in the future.

In January 2009, the NJDEP provided notice that it is in the process of assessing fees under Section 185 for 2008 emissions. These fees are expected to be paid in 2010 after the NJDEP determines the need for statutory or regulatory changes.

NOx Reduction

New Jersey

In April 2009, the NJDEP finalized revisions to NOx emission control regulations that impose new NOx emission reduction requirements and limits for New Jersey fossil fuel-fired electric generation units. The rule is expected to have a significant impact on Power’s generation fleet, including the likely retirement of a significant portion of Power’s units by April 30, 2015. The rule is expected to require the retirement of up to 102 combustion turbines (approximately 2,000 MW) and five older New Jersey steam electric generating units (approximately 800 MW). Power has been working with the NJDEP throughout the development of this rulemaking to minimize financial impact and to provide for transitional lead time for it to address the retirement of electric generation units. Power cannot predict the financial impact resulting from compliance with this rulemaking.

Connecticut

Under current Connecticut regulations, Power’s Bridgeport and New Haven facilities utilize Discrete Emission Reduction Credits (DERCs) to comply with certain NOx emission limitations that were incorporated into the facilities’ operating permits. Power’s agreements with the State of Connecticut authorizing the DERC’s expire on May 1, 2010. If not extended, we could potentially be forced to utilize lower NOx-producing fuels, or install NOx emission controls in order to operate the units. Power can not predict the financial impact of such costs, but such costs could be material and could impact the continued viability of these units.

New Jersey Industrial Site Recovery Act (ISRA)

Potential environmental liabilities related to the alleged discharge of hazardous substances at certain generating stations have been identified. In the second quarter of 1999, in anticipation of the transfer of PSE&G’s generation-related assets to Power, a study was conducted pursuant to ISRA, which applied to the

28


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

sale of certain assets. Power had a $50 million liability as of June 30, 2009 and December 31, 2008, respectively, related to these obligations, which is included in Environmental Costs in Power’s and PSEG’s Condensed Consolidated Balance Sheets.

Permit Renewals

In June 2001, the NJDEP issued a renewed New Jersey Pollutant Discharge Elimination System (NJPDES) permit for Salem, expiring in July 2006, allowing for the continued operation of Salem with its existing cooling water intake system. In February 2006, Power filed with the NJDEP a renewal application allowing Salem to continue operating under its existing NJPDES permit until a new permit is issued.

Power prepared its renewal application in accordance with the Federal Water Pollution Control Act’s (FWPCA) Section 316(b) and the Phase II 316(b) rules, which govern cooling water intake structures at large electric generating facilities. Under these rules, Power had historically used restoration and/or a site-specific cost-benefit test in applications it had filed to renew the permits at its once-through cooled plants, including Salem, Hudson and Mercer. The Phase II Rule would also have been applicable to Bridgeport, and possibly, Sewaren and New Haven stations. In addition to the Salem renewal application, permit renewal applications have been submitted to the NJDEP for Hudson, and to the Connecticut Department of Environmental Protection for Bridgeport. A renewal application is expected to be filed for Sewaren later this year.

In January 2007, the U.S. Court of Appeals for the Second Circuit issued a decision in litigation of the Phase II 316(b) regulations brought by several environmental groups, the Attorneys General of six Northeastern states, including New Jersey, Connecticut, and New York, the Utility Water Act Group and several of its members, including Power. In its ruling, the Court:

 

 

 

 

remanded major portions of the regulations and determined that Section 316(b) of the FWPCA does not support the use of restoration and the site-specific cost-benefit test and

 

 

 

 

instructed the EPA to reconsider the definition of “best technology available” without comparing the costs of the best performing technology to its benefits.

On April 1, 2009, the U.S. Supreme Court reversed the Second Circuit’s opinion, concluding that the EPA could rely upon cost-benefit analysis in setting the national performance standards and in providing for cost-benefit variances from those standards as part of the Phase II regulations. The Supreme Court’s decision became effective on April 27, 2009 and the matter was sent back to the Second Circuit for further proceedings consistent with the Supreme Court’s opinion.

It is premature to determine when the Second Circuit will act on this ruling or its ultimate disposition of the case. However, because there were major portions of the Phase II regulations which were originally remanded by the Second Circuit that were not considered by the Supreme Court, the EPA will need to undertake a rulemaking in the future.

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

29


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Stormwater

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

New Generation and Development

Nuclear

Power has approved the expenditure of $192 million for steam path retrofit and related upgrades at Peach Bottom Units 2 and 3. Completion of these upgrades is expected to result in an increase of Power’s share of nominal capacity by 32 MW (14 MW at Unit 3 in 2011 and 18 MW at Unit 2 in 2012). Significant project expenditures began in July 2009 and are expected to continue through 2012.

Connecticut

Power has been selected by the Connecticut Department of Public Utility Control in a regulatory process to build 130 MW of gas-fired peaking capacity. Final approval has been received and construction is expected to commence in June 2011. The project is expected to be in-service by June 2012. Power estimates the cost of these generating units to be $130 million to $140 million. Total capitalized expenditures to date are $12 million, which are included in Other Noncurrent Assets in the Consolidated Balance Sheets of PSEG and Power.

PJM Interconnection L.L.C. (PJM)

Power plans to construct 178 MW of gas-fired peaking capacity at the Kearny site. This capacity was bid into and has cleared the PJM Reliability Pricing Model (RPM) base residual capacity auction for the 2012-2013 period. Final approval has been received and construction is expected to commence in the third quarter of 2011. The project is expected to be in-service by June 2012. Power estimates the cost of these generating units to be $160 million to $200 million. Total capitalized expenditures to date were $7 million which are included in Property, Plant and Equipment in PSEG’s and Power’s Condensed Consolidated Balance Sheets.

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

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

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

30


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

above. In addition to the BGS-related contracts, Power also enters into firm supply contracts with EDCs, as well as other firm sales and commitments.

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

 

 

 

 

 

 

 

 

 

 

 

Auction Year

 

2006

 

2007

 

2008

 

2009

36-Month Terms Ending

 

 

 

May 2009

   

 

 

May 2010

   

 

 

May 2011

   

 

 

May 2012

(a)

 

Load (MW)

 

 

 

2,882

   

 

 

2,758

   

 

 

2,840

   

 

 

2,840

 

$ per kWh

 

 

 

0.10251

   

 

 

0.09888

   

 

 

0.11150

   

 

 

0.10372

 

(a) Prices set in the 2009 BGS auction became effective on June 1, 2009 when
the 2006 BGS auction agreements expired.

 

PSE&G has a full requirements contract with Power to meet the gas supply requirements of PSE&G’s gas customers. The contract extends through March 31, 2012, and year-to-year thereafter. Power has entered into hedges for a portion of these anticipated BGSS obligations, as permitted by the BPU. The BPU permits PSE&G to recover the cost of gas hedging up to 115 billion cubic feet or 80% of its residential gas supply annual requirements through the BGSS tariff. For additional information, see Note 15. Related-Party Transactions.

Minimum Fuel Purchase Requirements

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

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

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

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

As of June 30, 2009, the total minimum purchase requirements included in these commitments are as follows:

 

 

 

 

 

Fuel Type

 

Commitments
through 2013

 

Power’s Share

 

 

Millions

Nuclear Fuel

 

 

 

 

Uranium

   

$

 

671

     

$

 

420

 

Enrichment

 

 

$

 

428

   

 

$

 

242

 

Fabrication

   

$

 

244

     

$

 

151

 

Natural Gas

 

 

$

 

849

   

 

$

 

849

 

Coal/Oil

   

$

 

921

     

$

 

921

 

31


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Included in the $921 million commitment for coal and oil above is $449 million related to a certain coal contract under which Power can cancel contractual deliveries at minimal cost.

Power has entered into gas supply option agreements for the anticipated fuel requirements at the PSEG Texas, LP (PSEG Texas) generation facilities to satisfy obligations under the facilities forward energy sales contracts. As of June 30, 2009, Power’s fuel purchase options totaled $40 million under those agreements, which is not included in the above table.

PSEG Texas also has a contract for low BTU content gas commencing in late 2009 with a term of 15 years and a minimum volume of approximately 13 MMbtu’s per year. The gas must meet an availability and quality specification. PSEG Texas also has the right to cancel delivery of the gas at a minimal cost.

Regulatory Proceedings

Competition Act

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

In July 2007, the plaintiff filed an amended Complaint to also seek injunctive relief from continued collection of related taxes as well as recovery of such taxes previously collected. In July 2007, PSE&G filed a motion to dismiss the amended Complaint, or, in the alternative, for summary judgment. In October 2007, PSE&G’s and Transition Funding’s motion to dismiss the amended Complaint was granted. In November 2007, the plaintiff filed a notice of appeal with the Appellate Division of the New Jersey Superior Court. In February 2009, the New Jersey Appellate Division affirmed the decision of the lower court dismissing the case. On May 13, 2009 the New Jersey Supreme Court denied a request from the plaintiff to review the Appellate Division’s decision.

In July 2007, the same plaintiff also filed a petition with the BPU requesting review and adjustment to PSE&G’s recovery of the same stranded cost charges. In September 2007, PSE&G filed a motion with the BPU to dismiss the petition, which remains pending.

BPU Deferral Audit

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

That report, which addresses SBC, Market Transition Charge (MTC) and non-utility generation (NUG) deferred balances, found that the Phase II deferral balances complied in all material respects with applicable BPU Orders. It also noted that the BPU Staff had raised certain questions with respect to the reconciliation method PSE&G had employed in calculating the overrecovery of its MTC and other charges during the Phase I and Phase II four-year transition period. The matter was referred to the Office of Administrative Law. The amount in dispute is $114 million, which if required to be refunded to customers with interest through June 2009, would be $141 million.

Hearings before an administrative law judge (ALJ) were held in July 2008. In January 2009, the ALJ issued a decision which upheld PSE&G’s central contention that the 2004 BPU Order approving the Phase I settlement resolved the issues being raised by the Staff and Advocate, and that these issues should not be subject to re-litigation in respect of the first three years of the transition period. The ALJ’s decision stated

32


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

that the BPU could elect to convene a separate proceeding to address the fourth and final year reconciliation of MTC recoveries. The amount in dispute with respect to this Phase II period is approximately $50 million.

Exceptions to the ALJ’s decision were filed on February 9, 2009. The BPU may choose to accept, modify or reject the ALJ’s decision in reaching its final decision. On July 23, 2009, we requested oral argument before the BPU. The BPU decision is pending.

New Jersey Clean Energy Program

In the third quarter of 2008, the BPU approved funding requirements for each New Jersey utility applicable to its Renewable Energy and Energy Efficiency programs for the years 2009 to 2012. The aggregate funding amount is $1.2 billion for all years. PSE&G’s share of the $1.2 billion program is $705 million. PSE&G has recorded a discounted liability of $610 million as of June 30, 2009. Of this amount, $159 million was recorded as a current liability and $451 million as a noncurrent liability. The liability has been recorded with an offsetting Regulatory Asset, since the costs associated with this program are expected to be recovered from PSE&G ratepayers through the SBC.

Leveraged Lease Investments

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

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

The IRS has also issued letters to a number of taxpayers with these types of lease transactions containing settlement offers. PSEG has analyzed potential settlements with the IRS and to date has declined to participate.

In order to reduce the cash tax exposure related to these leases, Energy Holdings is pursuing opportunities to terminate international leases with lessees that are willing to meet certain economic thresholds and where the transactions in total will result in a positive or neutral earnings and cash impact. When a lease is terminated, taxes due associated with that lease are paid out of the termination proceeds. In the last twelve months, PSEG has terminated eight of these leasing transactions and reduced the related cash tax exposure by $350 million. As of June 30, 2009 and December 31, 2008, PSEG’s total gross investment in such transactions was $672 million and $1 billion, respectively.

Cash Impact

As of June 30, 2009, an aggregate $950 million would become currently payable if PSEG conceded all deductions taken through that date. PSEG has deposited $320 million with the IRS to defray potential interest costs associated with this disputed tax liability, reducing its potential cash exposure to $630 million. In the event PSEG is successful in defense of its position, the deposit is fully refundable with interest.

As of June 30, 2009, penalties of $150 million would also become payable if the IRS successfully asserted and litigated a case against PSEG. PSEG has not established a reserve for penalties because it believes it has strong defenses to the assertion of penalties under applicable law. Interest and penalty exposure grow at the rate of $9 million per quarter during 2009. If the IRS is successful in a litigated case consistent with the

33


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

positions it has taken in the generic settlement offer proposed, an additional $130 million to $150 million of tax would be due for tax positions through June 30, 2009.

PSEG currently anticipates that it will pay between $120 million and $280 million in tax, interest and penalties for the tax years 1997-2000 during the second half of 2009 and subsequently commence litigation to recover these amounts. Further it is possible that an additional payment of between $220 million and $500 million could be required in late 2009 for tax years 2001-2003 followed by further litigation to recover those taxes. These amounts are in addition to tax deposits already made.

Earnings Impact

As a result of the changes in the timing of projected cash flows related to these leases, in the second quarter of 2008, PSEG recalculated its lease transactions and recorded an after-tax charge of $355 million. This charge was reflected as a reduction in Operating Revenues of $485 million with a partially offsetting reduction in Income Tax Expense of $130 million. This represents PSEG’s view of most of the earnings impact related to these transactions, although a total loss, consistent with the broad settlement offer proposed by the IRS, would result in an additional earnings charge of $100 million to $120 million.

Note 7. Changes in Capitalization

The following capital transactions occurred in the first six months of 2009:

Power

 

 

 

 

converted $44 million of 4.00% Pollution Control Bonds to variable rate demand bonds backed by letters of credit, and

 

 

 

 

established a program for the issuance of up to $500 million of unsecured medium-term notes (MTNs) to retail investors in January. Under this program we

 

¡

 

 

 

issued $161 million of 6.5% MTNs due January 2014 (issued January, callable in one year) and

 

¡

 

 

 

issued $48 million of 6% MTNs due January 2013 (issued January, callable in one year).

 

 

 

 

paid a cash dividend of $600 million to PSEG and

 

 

 

 

paid $250 million of 3.75% Senior Notes at maturity in April.

PSE&G

 

 

 

 

paid $44 million of 8.10% MTNs, Series A at maturity in May,

 

 

 

 

paid $16 million of 8.16% MTNs, Series A at maturity in May,

 

 

 

 

received $250 million equity contribution from PSEG,

 

 

 

 

paid $82 million of Transition Funding’s securitization debt, and

 

 

 

 

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

Energy Holdings

 

 

 

 

redeemed $280 million of floating rate non-recourse project debt due in December 2009 associated with PSEG Texas and

 

 

 

 

repurchased $10 million of its 8.5% Senior Notes due 2011.

34


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 8. Financial Risk Management Activities

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

Commodity Prices

The availability and price of energy commodities are subject to fluctuations due to weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market conditions, transmission availability and other events.

Power and Energy Holdings use physical and financial transactions in the wholesale energy markets to mitigate the effects of adverse movements in fuel and electricity prices. Contracts that do not qualify for hedge accounting are marked to market in accordance with SFAS 133, with changes in fair value recorded in the income statement. The fair value for the majority of these contracts is obtained from quoted market sources. Modeling techniques using assumptions reflective of current market rates, yield curves and forward prices are used to interpolate certain prices when no quoted market exists. The financial effect of using such modeling techniques is not material to PSEG’s or Power’s financial statements.

Cash Flow Hedges

Power uses forward sale and purchase contracts, swaps, futures and firm transmission right contracts to hedge:

 

 

 

 

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

 

 

 

 

the price of fuel to meet its fuel purchase requirements.

Energy Holdings uses forward sale and purchase contracts and swaps to hedge:

 

 

 

 

forecasted energy sales from its Texas generation stations and

 

 

 

 

the price of fuel for one of the Texas generation facilities.

35


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

These derivative transactions are designated and effective as cash flow hedges under SFAS 133. As of June 30, 2009 and December 31, 2008, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with these hedges was as follows:

 

 

 

 

 

 

 

As of June 30,
2009

 

As of December 31,
2008

 

 

Millions

Power

 

 

 

 

Fair Value of Cash Flow Hedges

   

$

 

438

     

$

 

331

*

 

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

 

 

$

 

311

   

 

$

 

176

 

Energy Holdings

 

 

 

 

Fair Value of Cash Flow Hedges

   

$

 

     

$

 

3

 

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

 

 

$

 

3

   

 

$

 

2

 

 

*

 

 

 

Power’s fair value of cash flow hedges of $331 million at December 31, 2008 shown in the table above was corrected from $320 million disclosed in our 2008 Form 10-K.

The expiration date of the longest-dated cash flow hedge at Power is in 2011. Power’s after-tax unrealized gains on these derivatives that are expected to be reclassified to earnings during the 12 months ending June 30, 2010 and June 30, 2011 are $185 million and $87 million, respectively. Ineffectiveness associated with these hedges, as defined in SFAS 133, was $14 million at June 30, 2009.

The expiration date of the longest-dated cash flow hedge for Energy Holdings is in 2009. Therefore, substantially all of the after-tax unrealized gains on its commodity derivatives are expected to be reclassified to earnings during 2009. There was no ineffectiveness associated with these hedges.

Trading Derivatives

In general, the main purpose of Power’s wholesale marketing operation is to optimize the value of the output of the generating facilities via various products and services available in the markets we serve. Power does engage in some trading of electricity and energy-related products where such transactions are not associated with the output or fuel purchase requirements of our facilities. This trading consists mostly of energy supply contracts where we secure sales commitments with the intent to supply the energy services from purchases in the market rather than from our owned generation. Such trading activities represent less than one percent of Power’s revenues.

Other Derivatives

Power and Energy Holdings enter into other contracts that are derivatives, but do not qualify for cash flow hedge accounting.

For Power, most of these contracts are used for fuel purchases for generation requirements and for electricity purchases for contractual sales obligations. Prior to June 2009, some of the derivative contracts were also used in Power’s NDT Funds.

For Energy Holdings, these are electricity forward and capacity sale contracts entered into to sell a portion of the Texas facilities’ capacity and gas purchase contracts to support the electricity forward sales contracts.

36


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Changes in fair market value of these contracts are recorded in earnings. The fair value of these contracts as of June 30, 2009 and December 31, 2008 was as follows:

 

 

 

 

 

 

 

As of June 30,
2009

 

As of December 31,
2008

 

 

Millions

Net Fair Value of Other Derivatives

 

 

 

 

Power

   

$

 

(25

)

     

$

 

67

*

 

Energy Holdings

 

 

$

 

28

   

 

$

 

32

 

 

*

 

 

 

The net fair value of other derivatives related to energy contracts for Power of $67 million at December 31, 2008 in the table above was corrected from $(9) million disclosed in our 2008 Form 10-K.

Interest Rates

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

Fair Value Hedges

In May and June 2009, we entered into three interest rate swaps to convert Power’s $250 million of 5.00% Senior Notes due April 2014 and $300 million of 5.50% Senior Notes due December 2015 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the fair value changes in the underlying debt. As of June 30, 2009, the fair value of the underlying hedges was $(6) million.

Cash Flow Hedges

PSE&G and Energy Holdings use interest rate swaps and other derivatives, which are designated and effective as cash flow hedges to manage their exposure to the variability of cash flows, primarily related to variable-rate debt instruments. As of June 30, 2009, there was no hedge ineffectiveness associated with these hedges. The total fair value of these interest rate derivatives was $(1) million and $(7) million as of June 30, 2009 and December 31, 2008, respectively. The Accumulated Other Comprehensive Loss related to interest rate derivatives designated as cash flow hedges was $(3) million and $(6) million as of June 30, 2009 and December 31, 2008, respectively.

37


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Fair Values of Derivative Instruments

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet
Location

 

As of June 30, 2009

 

Power

 

PSE&G

 

Energy
Holdings

 

Consolidated

 

Cash Flow Hedges

 

Non Hedges

 

Netting (A)

 

Total Power

 

Non Hedges

 

Non Hedges

 

Total
Derivatives (B)

 

Energy-
Related
Contracts

 

Energy-
Related
Contracts

 

Energy-
Related
Contracts

 

Energy-
Related
Contracts

 

 

Millions

Derivative Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

   

$

 

575

     

$

 

737

     

$

 

(1,082

)

     

$

 

230

     

$

 

     

$

 

19

     

$

 

259

 

Noncurrent Assets

 

 

$

 

453

   

 

$

 

195

   

 

$

 

(503

)

 

 

 

$

 

145

   

 

$

 

   

 

$

 

9

   

 

$

 

154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Mark-to-Market

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

$

 

1,028

   

 

$

 

932

   

 

$

 

(1,585

)

 

 

 

$

 

375

   

 

$

 

   

 

$

 

28

   

 

$

 

413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

   

$

 

(139

)

     

$

 

(968

)

     

$

 

807

     

$

 

(300

)

     

$

 

(10

)

     

$

 

     

$

 

(310

)

 

Noncurrent Liabilities

 

 

$

 

(59

)

 

 

 

$

 

(162

)

 

 

 

$

 

159

   

 

$

 

(62

)

 

 

 

$

 

(28

)

 

 

 

$

 

   

 

$

 

(106

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Mark-to-Market

                           

Derivative (Liabilities)

   

$

 

(198

)

     

$

 

(1,130

)

     

$

 

966

     

$

 

(362

)

     

$

 

(38

)

     

$

 

     

$

 

(416

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Mark-to-MarketDerivative Assets (Liabilities)

 

 

$

 

830

   

 

$

 

(198

)

 

 

 

$

 

(619

)

 

 

 

$

 

13

   

 

$

 

(38

)

 

 

 

$

 

28

   

 

$

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Noncurrent Assets

   

$

 

     

$

 

     

$

 

     

$

 

     

$

 

1

     

$

 

     

$

 

1

 

 

(A)

 

 

 

Represents the netting of fair value balances with the same counterparty and the application of collateral in accordance with FSP FIN 39-1. Includes cash collateral of $(221) million and $(150) million netted against current assets and noncurrent assets, respectively. Includes cash collateral of $116 million and $28 million netted against current liabilities and noncurrent liabilities, respectively.

 

(B)

 

 

 

Includes PSEG interest rate swap asset of $10 million and interest rate swap liability of $(16) million recorded in Current Assets-Derivative Contracts and Noncurrent Liability-Derivative Contracts, respectively.

The aggregate fair value of derivative contracts in a liability position as of June 30, 2009 that contain triggers for additional collateral was $729 million. This potential additional collateral is included in the $1 billion discussed in Note 6. Commitments and Contingent Liabilities.

38


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

 

 

 

 

 

 

 

 

 

 

 

Derivatives in SFAS 133
Cash Flow Hedging
Relationships

 

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

 

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

 

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

 

Location of Pre-Tax
Gain (Loss)
Recognized
in Income on
Derivatives
(Ineffective
Portion)

 

Amount of Pre-Tax
Gain (Loss)
Recognized in Income
on Derivatives
(Ineffective Portion)

 

   

 

 

   

 

 

   

 

   

 

 

 

Millions

 

 

 

 

 

   

 

 

   

 

 

   

PSEG

   

 

 

   

 

 

   

Energy-Related Contracts

   

$

 

121

   

Operating Revenue

   

$

 

138

   

Operating Revenue

   

$

 

(1

)

 

Energy-Related Contracts

 

 

 

(15

)

 

 

Energy Costs

 

 

 

(37

)

 

 

 

 

 

 

 

Interest Rate Swaps

     

   

Interest Expense

     

(1

)

           

 

 

 

 

     

 

     

 

Total PSEG

 

 

$

 

106

 

 

 

 

 

$

 

100

 

 

 

 

 

$

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

PSEG Power

   

 

 

   

 

 

   

Energy-Related Contracts

   

$

 

131

   

Operating Revenue

   

$

 

129

   

Operating Revenue

   

$

 

(1

)

 

Energy-Related Contracts

 

 

 

(14

)

 

 

Energy Costs

 

 

 

(29

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Power

   

$

 

117

         

$

 

100

         

$

 

(1

)

 

 

 

 

     

 

     

 

PSE&G

   

 

 

   

 

 

   

Interest Rate Swaps

   

$

 

   

Interest Expense

   

$

 

(1

)

         

$

 

 

 

 

 

     

 

     

 

Total PSE&G

 

 

$

 

 

 

 

 

 

$

 

(1

)

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Holdings

   

 

 

   

 

 

   

Energy-Related Contracts

   

$

 

(10

)

   

Operating Revenue

   

$

 

9

         

$

 

 

Energy-Related Contracts

 

 

 

(1

)

 

 

Energy Costs

 

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Energy Holdings

   

$

 

(11

)

         

$

 

1

         

$

 

 

 

 

 

     

 

     

 

39


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

 

 

 

 

 

 

 

 

 

 

 

Derivatives in SFAS 133
Cash Flow Hedging
Relationships

 

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

 

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

 

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

 

Location of Pre-Tax
Gain (Loss)
Recognized
in Income on
Derivatives
(Ineffective
Portion)

 

Amount of Pre-Tax
Gain (Loss)
Recognized in Income
on Derivatives
(Ineffective Portion)

 

   

 

 

   

 

 

   

 

   

 

 

 

Millions

 

 

 

 

 

   

 

 

   

 

 

   

PSEG

   

 

 

   

 

 

   

Energy-Related Contracts

   

$

 

503

   

Operating Revenue

   

$

 

294

   

Operating Revenue

   

$

 

7

 

Energy-Related Contracts

 

 

 

(43

)

 

 

Energy Costs

 

 

 

(63

)

 

 

 

 

 

 

 

Interest Rate Swaps

     

   

Interest Expense

     

(5

)

           

 

 

 

 

     

 

     

 

Total PSEG

 

 

$

 

460

 

 

 

 

 

$

 

226

 

 

 

 

 

$

 

7

 

 

 

 

 

 

 

 

 

 

 

 

PSEG Power

   

 

 

   

 

 

   

Energy-Related Contracts

   

$

 

485

   

Operating Revenue

   

$

 

271

   

Operating Revenue

   

$

 

7

 

Energy-Related Contracts

 

 

 

(35

)

 

 

Energy Costs

 

 

 

(48

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Power

   

$

 

450

         

$

 

223

         

$

 

7

 

 

 

 

     

 

     

 

PSE&G

   

 

 

   

 

 

   

Interest Rate Swaps

   

$

 

   

Interest Expense

   

$

 

(1

)

         

$

 

 

 

 

 

     

 

     

 

Total PSE&G

 

 

$

 

 

 

 

 

 

$

 

(1

)

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Holdings

   

 

 

   

 

 

   

Energy-Related Contracts

   

$

 

18

   

Operating Revenue

   

$

 

23

         

$

 

 

Energy-Related Contracts

 

 

 

(8

)

 

 

Energy Costs

 

 

 

(15

)

 

 

 

 

 

 

 

Interest Rate Swaps

     

   

Interest Expense

     

(4

)

           

 

 

 

 

     

 

     

 

Total Energy Holdings

 

 

$

 

10

 

 

 

 

 

$

 

4

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

Accumulated Other Comprehensive Income

 

Pre-Tax

 

After-Tax

 

 

Millions

Balance as of December 31, 2008

   

$

 

292

     

$

 

172

 

Gain Recognized in AOCI (Effective Portion)

 

 

 

354

   

 

 

211

 

Less: Gain Reclassified into Income (Effective Portion)

     

(126

)

       

(74

)

 

 

 

 

 

 

Balance as of March 31, 2009

 

 

$

 

520

   

 

$

 

309

 

Gain Recognized in AOCI (Effective Portion)

     

106

       

62

 

Less: Gain Reclassified into Income (Effective Portion)

 

 

 

(100

)

 

 

 

 

(60

)

 

 

 

 

 

 

Balance as of June 30, 2009

   

$

 

526

     

$

 

311

 

 

 

 

 

 

40


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months and six months ended June 30, 2009:

 

 

 

 

 

 

 

Derivatives Not Designated
as Hedges

 

Location of Pre-Tax
Gain (Loss)
Recognized in
Income on Derivatives

 

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

 

Three Months Ended
June 30, 2009

 

Six Months Ended
June 30, 2009

 

 

 

 

Millions

 

Millions

PSEG

 

 

 

 

 

 

Energy-Related Contracts

 

Operating Revenues

   

$

 

49

     

$

 

180

 

Energy-Related Contracts

 

Energy Costs

 

 

 

1

   

 

 

(85

)

 

Interest Rate Swaps

 

Interest Expense

     

       

(1

)

 

Derivatives in NDT Funds

 

Other Income

 

 

 

6

   

 

 

13

 

 

 

 

 

 

 

 

Total PSEG

 

 

   

$

 

56

     

$

 

107

 

 

 

 

 

 

 

 

Power

 

 

 

 

 

 

Energy-Related Contracts

 

Operating Revenue

   

$

 

29

     

$

 

100

 

Energy-Related Contracts

 

Energy Costs

 

 

 

6

   

 

 

(68

)

 

Derivatives in NDT Funds

 

Other Income

     

6

       

13

 

 

 

 

 

 

 

 

Total Power

 

 

 

 

$

 

41

   

 

$

 

45

 

 

 

 

 

 

 

 

Energy Holdings

 

 

 

 

 

 

Energy-Related Contracts

 

Operating Revenue

   

$

 

20

     

$

 

80

 

Energy-Related Contracts

 

Energy Costs

 

 

 

(5

)

 

 

 

 

(17

)

 

Interest Rate Swap

 

Interest Expense

  &n