Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2011

OR

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

SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM          TO         

 

Commission

File Number

  

Registrants, State of Incorporation,

Address, and Telephone Number

  

I.R.S. Employer

Identification No.

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

 

 

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

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

 

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

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

 

Public Service Enterprise Group Incorporated

  Large accelerated filer x   Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company ¨
PSEG Power LLC   Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer x   Smaller reporting company ¨

Public Service Electric and Gas Company

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

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

As of October 14, 2011, Public Service Enterprise Group Incorporated had outstanding 505,904,850 shares of its sole class of Common Stock, without par value.

As of October 14, 2011, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record by Public Service Enterprise Group Incorporated.

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

 

 

 


Table of Contents
         

Page

 

FORWARD-LOOKING STATEMENTS

     ii   

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Public Service Enterprise Group Incorporated

     1   
 

PSEG Power LLC

     5   
 

Public Service Electric and Gas Company

     8   
 

Notes to Condensed Consolidated Financial Statements

     12   
 

Note 1. Organization and Basis of Presentation

     12   
 

Note 2. Recent Accounting Standards

     13   
 

Note 3. Variable Interest Entities (VIEs)

     14   
 

Note 4. Discontinued Operations and Dispositions

     14   
 

Note 5. Financing Receivables

     15   
 

Note 6. Available-for-Sale Securities

     18   
 

Note 7. Pension and Other Postretirement Benefits (OPEB)

     22   
 

Note 8. Commitments and Contingent Liabilities

     23   
 

Note 9. Changes in Capitalization

     34   
 

Note 10. Financial Risk Management Activities

     34   
 

Note 11. Fair Value Measurements

     41   
 

Note 12. Other Income and Deductions

     48   
 

Note 13. Income Taxes

     49   
 

Note 14. Comprehensive Income, Net of Tax

     50   
 

Note 15. Earnings Per Share (EPS)

     52   
 

Note 16. Financial Information by Business Segments

     53   
 

Note 17. Related-Party Transactions

     54   
 

Note 18. Guarantees of Debt

     56   

Item 2.

 

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

     59   
 

Overview of 2011 and Future Outlook

     59   
 

Results of Operations

     66   
 

Liquidity and Capital Resources

     74   
 

Capital Requirements

     77   
 

Accounting Matters

     77   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     78   

Item 4.

 

Controls and Procedures

     79   

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     80   

Item 1A.

 

Risk Factors

     81   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     81   

Item 5.

 

Other Information

     81   

Item 6.

 

Exhibits

     89   
 

Signatures

     91   

 

i


Table of Contents

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 “will,” “anticipate,” “intend,” “estimate,” “believe,” “expect,” “plan,” “should,” “hypothetical,” “potential,” “forecast,” “project,” variations of such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Other factors that could cause actual results to differ materially from those contemplated in any forward-looking statements made by us herein are discussed in Item 1. Financial Statements—Note 8. 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 a potential shift away from competitive markets toward subsidized market mechanisms, transmission planning and cost allocation rules, including rules regarding how transmission is planned and who is permitted to build transmission in the future, and reliability standards,

 

 

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

 

 

changes in federal and state environmental regulations that could increase our costs or limit our operations,

 

 

changes in nuclear regulation and/or general developments in the nuclear power industry, including various impacts from any accidents or incidents experienced at our facilities or by others in the industry, that could limit operations of our nuclear generating units,

 

 

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

 

 

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

 

 

any deterioration in our credit quality or the credit quality of our counterparties, including in our leveraged leases,

 

 

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

 

 

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

 

 

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

 

 

delays in receipt of necessary permits and approvals for our construction and development activities,

 

 

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

 

 

adverse changes in the demand for or price of the capacity and energy that we sell into wholesale electricity markets,

 

 

increase in competition in energy markets in which we compete,

 

 

challenges associated with recruitment and /or retention of a qualified workforce,

 

 

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

 

 

changes in technology and customer usage patterns.

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

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

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

 

ii


Table of Contents

 

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Millions

(Unaudited)

 

     For The Three Months
Ended September 30,
    

For The Nine Months

Ended September 30,

 
    

2011

   

2010

    

2011

   

2010

 

OPERATING REVENUES

   $ 2,620      $ 3,114       $ 8,443      $ 9,048   

OPERATING EXPENSES

         

Energy Costs

     1,167        1,261         3,740        4,021   

Operation and Maintenance

     603        591         1,829        1,862   

Depreciation and Amortization

     263        260         739        716   

Taxes Other Than Income Taxes

     31        31         102        101   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Operating Expenses

     2,064        2,143         6,410        6,700   
  

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING INCOME

     556        971         2,033        2,348   

Income from Equity Method Investments

     1        4         8        12   

Other Income

     45        75         176        165   

Other Deductions

     (11     (9      (39     (37

Other-Than-Temporary Impairments

     (8     (3      (13     (9

Interest Expense

     (117     (120      (361     (356
  

 

 

   

 

 

    

 

 

   

 

 

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     466        918         1,804        2,123   

Income Tax (Expense) Benefit

     (201     (371      (757     (856
  

 

 

   

 

 

    

 

 

   

 

 

 

INCOME FROM CONTINUING OPERATIONS

     265        547         1,047        1,267   

Income (Loss) from Discontinued Operations, including Gain on Disposal, net of tax (expense) benefit of $(15) and $(11) for the three months and $(51) and $(10) for the nine months ended 2011 and 2010, respectively

     29        20         96        15   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 294      $ 567       $ 1,143      $ 1,282   
  

 

 

   

 

 

    

 

 

   

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS):

         

BASIC

     505,909        505,945         505,959        506,001   
  

 

 

   

 

 

    

 

 

   

 

 

 

DILUTED

     506,999        506,968         506,963        507,068   
  

 

 

   

 

 

    

 

 

   

 

 

 

EARNINGS PER SHARE

         

BASIC

         

INCOME FROM CONTINUING OPERATIONS

   $ 0.52      $ 1.08       $ 2.07      $ 2.50   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 0.58      $ 1.12       $ 2.26      $ 2.53   
  

 

 

   

 

 

    

 

 

   

 

 

 

DILUTED

         

INCOME FROM CONTINUING OPERATIONS

   $ 0.52      $ 1.08       $ 2.06      $ 2.50   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 0.58      $ 1.12       $ 2.25      $ 2.53   
  

 

 

   

 

 

    

 

 

   

 

 

 

DIVIDENDS PAID PER SHARE OF COMMON STOCK

   $ 0.3425      $ 0.3425       $ 1.0275      $ 1.0275   
  

 

 

   

 

 

    

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

1


Table of Contents

 

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

     September 30,     December 31,  
    

2011

   

2010

 

ASSETS

    

CURRENT ASSETS

    

Cash and Cash Equivalents

   $ 1,242      $ 280   

Accounts Receivable, net of allowances of $64 and $68 in 2011 and 2010, respectively

     1,164        1,387   

Tax Receivable

     377        689   

Unbilled Revenues

     251        400   

Fuel

     740        666   

Materials and Supplies, net

     365        359   

Prepayments

     416        204   

Derivative Contracts

     113        182   

Assets of Discontinued Operations

     0        564   

Deferred Income Taxes

     96        43   

Regulatory Assets

     86        155   

Other

     120        122   
  

 

 

   

 

 

 

Total Current Assets

     4,970        5,051   
  

 

 

   

 

 

 

PROPERTY, PLANT AND EQUIPMENT

     24,618        23,272   

Less: Accumulated Depreciation and Amortization

     (7,336     (6,882
  

 

 

   

 

 

 

Net Property, Plant and Equipment

     17,282        16,390   
  

 

 

   

 

 

 

NONCURRENT ASSETS

    

Regulatory Assets

     3,354        3,736   

Regulatory Assets of Variable Interest Entities (VIEs)

     968        1,128   

Long-Term Investments

     1,406        1,623   

Nuclear Decommissioning Trust (NDT) Funds

     1,280        1,363   

Other Special Funds

     170        160   

Goodwill

     16        16   

Other Intangibles

     164        136   

Derivative Contracts

     75        79   

Restricted Cash of VIEs

     22        21   

Other

     204        206   
  

 

 

   

 

 

 

Total Noncurrent Assets

     7,659        8,468   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 29,911      $ 29,909   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2


Table of Contents

 

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

     September 30,     December 31,  
    

2011

   

2010

 
LIABILITIES AND CAPITALIZATION     

CURRENT LIABILITIES

    

Long-Term Debt Due Within One Year

   $ 1,275      $ 915   

Securitization Debt of VIEs Due Within One Year

     214        206   

Commercial Paper and Loans

     0        64   

Accounts Payable

     1,144        1,176   

Derivative Contracts

     94        103   

Accrued Interest

     131        108   

Accrued Taxes

     30        49   

Clean Energy Program

     224        195   

Obligation to Return Cash Collateral

     107        104   

Regulatory Liabilities

     161        174   

Liabilities of Discontinued Operations

     0        72   

Other

     312        319   
  

 

 

   

 

 

 

Total Current Liabilities

     3,692        3,485   
  

 

 

   

 

 

 

NONCURRENT LIABILITIES

    

Deferred Income Taxes and Investment Tax Credits (ITC)

     5,652        5,129   

Regulatory Liabilities

     235        285   

Regulatory Liabilities of VIEs

     9        8   

Asset Retirement Obligations

     482        461   

Other Postretirement Benefit (OPEB) Costs

     948        967   

Accrued Pension Costs

     189        788   

Clean Energy Program

     70        235   

Environmental Costs

     651        669   

Derivative Contracts

     31        22   

Long-Term Accrued Taxes

     234        248   

Other

     77        152   
  

 

 

   

 

 

 

Total Noncurrent Liabilities

     8,578        8,964   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 8)

    

CAPITALIZATION

    

LONG-TERM DEBT

    

Long-Term Debt

     6,651        6,834   

Securitization Debt of VIEs

     784        939   

Project Level, Non-Recourse Debt

     45        46   
  

 

 

   

 

 

 

Total Long-Term Debt

     7,480        7,819   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common Stock, no par, authorized 1,000,000,000 shares; issued, 2011 and 2010—533,556,660 shares

     4,818        4,807   

Treasury Stock, at cost, 2011—27,651,927 shares; 2010—27,582,437 shares

     (601     (593

Retained Earnings

     6,198        5,575   

Accumulated Other Comprehensive Loss

     (256     (156
  

 

 

   

 

 

 

Total Common Stockholders’ Equity

     10,159        9,633   

Noncontrolling Interest

     2        8   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     10,161        9,641   
  

 

 

   

 

 

 

Total Capitalization

     17,641        17,460   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND CAPITALIZATION

   $ 29,911      $ 29,909   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions

(Unaudited)

 

     For the Nine Months Ended
September 30,
 
    

2011

   

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Income

   $ 1,143      $ 1,282   

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

    

Gain on Disposal of Discontinued Operations

     (122     0   

Depreciation and Amortization

     745        730   

Amortization of Nuclear Fuel

     114        102   

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

     629        205   

Non-Cash Employee Benefit Plan Costs

     138        236   

Net (Gain) Loss on Lease Investments

     0        (51

Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes

     (16     (391

Leveraged Lease Reserve, net of tax

     170        0   

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

     (14     (42

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

     100        35   

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

     (26     (55

Market Transition Charge Refund

     (47     98   

Cost of Removal

     (43     (47

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

     (110     (73

Realized Gains from Rabbi Trusts

     (5     (31

Net Change in Tax Receivable

     312        0   

Net Change in Certain Current Assets and Liabilities

     (44     (237

Employee Benefit Plan Funding and Related Payments

     (486     (483

Other

     (29     61   
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Operating Activities

     2,409        1,339   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Additions to Property, Plant and Equipment

     (1,479     (1,517

Proceeds from Sale of Discontinued Operations

     687        0   

Proceeds from the Sale of Capital Leases and Investments

     0        427   

Proceeds from Sales of Available-for-Sale Securities

     1,088        886   

Investments in Available-for-Sale Securities

     (1,110     (905

Other

     (13     13   
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Investing Activities

     (827     (1,096
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net Change in Commercial Paper and Loans

     (64     (530

Issuance of Long-Term Debt

     750        1,608   

Redemption of Long-Term Debt

     (606     (548

Repayment of Non-Recourse Debt

     (1     (3

Redemption of Securitization Debt

     (147     (140

Cash Dividends Paid on Common Stock

     (520     (520

Redemption of Preferred Securities

     0        (80

Other

     (32     (48
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Financing Activities

     (620     (261
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     962        (18

Cash and Cash Equivalents at Beginning of Period

     280        350   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 1,242      $ 332   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Income Taxes Paid (Received)

   $ 60      $ 1,080   

Interest Paid, Net of Amounts Capitalized

   $ 341      $ 299   

See Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

 

PSEG POWER LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Millions

(Unaudited)

 

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

2011

    

2010

    

2011

    

2010

 

OPERATING REVENUES

   $ 1,398       $ 1,523       $ 4,650       $ 4,983   

OPERATING EXPENSES

           

Energy Costs

     597         620         2,335         2,483   

Operation and Maintenance

     262         253         810         764   

Depreciation and Amortization

     56         43         166         130   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Operating Expenses

     915         916         3,311         3,377   
  

 

 

    

 

 

    

 

 

    

 

 

 

OPERATING INCOME

     483         607         1,339         1,606   

Other Income

     37         44         156         126   

Other Deductions

     (10      (9      (37      (36

Other-Than-Temporary Impairments

     (8      (2      (10      (8

Interest Expense

     (42      (37      (134      (119
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     460         603         1,314         1,569   

Income Tax (Expense) Benefit

     (187      (239      (539      (632
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME FROM CONTINUING OPERATIONS

     273         364         775         937   

Income (Loss) from Discontinued Operations, including Gain on Disposal, net of tax (expense) benefit of $(15) and $(11) for the three months and $(51) and $(10) for the nine months ended 2011 and 2010, respectively

     29         20         96         15   
  

 

 

    

 

 

    

 

 

    

 

 

 

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

   $ 302       $ 384       $ 871       $ 952   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

5


Table of Contents

PSEG POWER LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

     September 30,     December 31,  
    

2011

   

2010

 

ASSETS

  

CURRENT ASSETS

    

Cash and Cash Equivalents

   $ 14      $ 11   

Accounts Receivable

     432        511   

Accounts Receivable—Affiliated Companies, net

     127        782   

Short-Term Loan to Affiliate

     1,574        398   

Fuel

     740        666   

Materials and Supplies, net

     273        269   

Derivative Contracts

     95        163   

Prepayments

     42        80   

Assets of Discontinued Operations

     0        564   
  

 

 

   

 

 

 

Total Current Assets

     3,297        3,444   
  

 

 

   

 

 

 

PROPERTY, PLANT AND EQUIPMENT

     9,118        8,643   

Less: Accumulated Depreciation and Amortization

     (2,552     (2,301
  

 

 

   

 

 

 

Net Property, Plant and Equipment

     6,566        6,342   
  

 

 

   

 

 

 

NONCURRENT ASSETS

    

Nuclear Decommissioning Trust (NDT) Funds

     1,280        1,363   

Goodwill

     16        16   

Other Intangibles

     164        130   

Other Special Funds

     33        32   

Derivative Contracts

     24        42   

Long-Term Accrued Taxes

     19        16   

Other

     85        67   
  

 

 

   

 

 

 

Total Noncurrent Assets

     1,621        1,666   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 11,484      $ 11,452   
  

 

 

   

 

 

 

LIABILITIES AND MEMBER’S EQUITY

  

CURRENT LIABILITIES

    

Long-Term Debt Due Within One Year

   $ 710      $ 650   

Accounts Payable

     635        643   

Derivative Contracts

     79        91   

Deferred Income Taxes

     8        64   

Accrued Interest

     63        40   

Liabilities of Discontinued Operations

     0        72   

Other

     111        91   
  

 

 

   

 

 

 

Total Current Liabilities

     1,606        1,651   
  

 

 

   

 

 

 

NONCURRENT LIABILITIES

    

Deferred Income Taxes and Investment Tax Credits (ITC)

     1,211        1,146   

Asset Retirement Obligations

     255        242   

Other Postretirement Benefit (OPEB) Costs

     158        151   

Derivative Contracts

     17        22   

Accrued Pension Costs

     75        253   

Environmental Costs

     51        51   

Other

     34        104   
  

 

 

   

 

 

 

Total Noncurrent Liabilities

     1,801        1,969   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 8)

    

LONG-TERM DEBT

    

Total Long-Term Debt

     2,640        2,805   
  

 

 

   

 

 

 

MEMBER’S EQUITY

    

Contributed Capital

     2,028        2,028   

Basis Adjustment

     (986     (986

Retained Earnings

     4,602        4,080   

Accumulated Other Comprehensive Loss

     (207     (95
  

 

 

   

 

 

 

Total Member’s Equity

     5,437        5,027   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND MEMBER’S EQUITY

   $ 11,484      $ 11,452   
  

 

 

   

 

 

 

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

 

6


Table of Contents

PSEG POWER LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions

(Unaudited)

 

     For the Nine Months Ended  
     September 30,  
    

2011

   

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Income

   $     871      $     952   

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

    
    

Gain on Disposal of Discontinued Operations

     (122     0   

Depreciation and Amortization

     173        144   

Amortization of Nuclear Fuel

     114        102   

Provision for Deferred Income Taxes and ITC

     74        145   

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

     (14     (42

Non-Cash Employee Benefit Plan Costs

     33        53   

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

     (110     (73

Net Change in Certain Current Assets and Liabilities:

    

Fuel, Materials and Supplies

     (82     (2

Margin Deposit

     (63     (26

Accounts Receivable

     157        16   

Accounts Payable

     (103     (99

Accounts Receivable/Payable-Affiliated Companies, net

     650        186   

Accrued Interest Payable

     23        41   

Other Current Assets and Liabilities

     48        (42

Employee Benefit Plan Funding and Related Payments

     (127     (131

Other

     (35     32   
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Operating Activities

     1,487        1,256   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Additions to Property, Plant and Equipment

     (530     (579

Proceeds from Sale of Discontinued Operations

     687        0   

Proceeds from Sales of Available-for-Sale Securities

     1,088        759   

Investments in Available-for-Sale Securities

     (1,106     (778

Short-Term Loan—Affiliated Company, net

     (1,176     (309

Other

     19        28   
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Investing Activities

     (1,018     (879
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Issuance of Recourse Long-Term Debt

     500        594   

Cash Dividend Paid

     (350     (550

Redemption of Long-Term Debt

     (606     (248

Short-Term Loan—Affiliated Company, net

     0        (194

Other

     (10     (17
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Financing Activities

     (466     (415
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     3        (38

Cash and Cash Equivalents at Beginning of Period

     11        64   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 14      $ 26   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Income Taxes Paid (Received)

   $ 110      $ 558   

Interest Paid, Net of Amounts Capitalized

   $ 111      $ 85   

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

 

7


Table of Contents

PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Millions

(Unaudited)

 

    

For the Three Months

Ended September 30,

    

For The Nine Months

Ended September 30,

 
    

2011

    

2010

    

2011

    

2010

 

OPERATING REVENUES

   $ 1,841       $ 2,007       $ 5,718       $ 5,987   

OPERATING EXPENSES

           

Energy Costs

     943         1,115         3,124         3,572   

Operation and Maintenance

     342         327         1,014         1,084   

Depreciation and Amortization

     197         209         548         563   

Taxes Other Than Income Taxes

     31         31         102         101   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Operating Expenses

     1,513         1,682         4,788         5,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

OPERATING INCOME

     328         325         930         667   

Other Income

     7         14         16         22   

Other Deductions

     (1      (1      (2      (2

Other-Than-Temporary Impairments

     0         0         (1      0   

Interest Expense

     (77      (82      (234      (239
  

 

 

    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     257         256         709         448   

Income Tax (Expense) Benefit

     (103      (101      (287      (172
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME

     154         155         422         276   

Preferred Stock Dividends

     0         0         0         (1
  

 

 

    

 

 

    

 

 

    

 

 

 

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

   $ 154       $ 155       $ 422       $ 275   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

8


Table of Contents

PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

     September 30,     December 31,  
    

2011

   

2010

 

ASSETS

  

CURRENT ASSETS

    

Cash and Cash Equivalents

   $ 242      $ 245   

Accounts Receivable, net of allowances of $64 in 2011 and $67 in 2010, respectively

     720        832   

Tax Receivable

     21        0   

Accounts Receivable—Affiliated Companies, net

     304        0   

Unbilled Revenues

     251        400   

Materials and Supplies

     91        90   

Prepayments

     320        117   

Regulatory Assets

     86        155   

Other

     35        19   
  

 

 

   

 

 

 

Total Current Assets

     2,070        1,858   
  

 

 

   

 

 

 

PROPERTY, PLANT AND EQUIPMENT

     14,917        14,068   

Less: Accumulated Depreciation and Amortization

     (4,500     (4,326
  

 

 

   

 

 

 

Net Property, Plant and Equipment

     10,417        9,742   
  

 

 

   

 

 

 

NONCURRENT ASSETS

    

Regulatory Assets

     3,354        3,736   

Regulatory Assets of VIEs

     968        1,128   

Long-Term Investments

     258        230   

Other Special Funds

     57        54   

Derivative Contracts

     0        17   

Restricted Cash of VIEs

     22        21   

Other

     89        87   
  

 

 

   

 

 

 

Total Noncurrent Assets

     4,748        5,273   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 17,235      $ 16,873   
  

 

 

   

 

 

 

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

 

9


Table of Contents

PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

Millions

(Unaudited)

 

     September 30,      December 31,  
    

2011

    

2010

 

LIABILITIES AND CAPITALIZATION

  

CURRENT LIABILITIES

     

Long-Term Debt Due Within One Year

   $ 564       $ 264   

Securitization Debt of VIEs Due Within One Year

     214         206   

Accounts Payable

     396         406   

Accounts Payable—Affiliated Companies, net

     0         85   

Accrued Interest

     66         65   

Clean Energy Program

     224         195   

Derivative Contracts

     15         12   

Deferred Income Taxes

     21         19   

Obligation to Return Cash Collateral

     107         104   

Regulatory Liabilities

     161         174   

Other

     190         229   
  

 

 

    

 

 

 

Total Current Liabilities

     1,958         1,759   
  

 

 

    

 

 

 

NONCURRENT LIABILITIES

     

Deferred Income Taxes and ITC

     3,690         3,127   

Other Postretirement Benefit (OPEB) Costs

     743         770   

Accrued Pension Costs

     18         377   

Regulatory Liabilities

     235         285   

Regulatory Liabilities of VIEs

     9         8   

Clean Energy Program

     70         235   

Environmental Costs

     600         617   

Asset Retirement Obligations

     223         216   

Derivative Contracts

     11         0   

Long-Term Accrued Taxes

     54         74   

Other

     21         23   
  

 

 

    

 

 

 

Total Noncurrent Liabilities

     5,674         5,732   
  

 

 

    

 

 

 

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 8)

     

CAPITALIZATION

     

LONG-TERM DEBT

     

Long-Term Debt

     3,971         4,019   

Securitization Debt of VIEs

     784         939   
  

 

 

    

 

 

 

Total Long-Term Debt

     4,755         4,958   
  

 

 

    

 

 

 

STOCKHOLDER’S EQUITY

     

Common Stock; 150,000,000 shares authorized; issued and outstanding, 2011 and 2010—132,450,344 shares

     892         892   

Contributed Capital

     420         420   

Basis Adjustment

     986         986   

Retained Earnings

     2,548         2,126   

Accumulated Other Comprehensive Income

     2         0   
  

 

 

    

 

 

 

Total Stockholder’s Equity

     4,848         4,424   
  

 

 

    

 

 

 

Total Capitalization

     9,603         9,382   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND CAPITALIZATION

   $ 17,235       $ 16,873   
  

 

 

    

 

 

 

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

 

10


Table of Contents

PUBLIC SERVICE ELECTRIC AND GAS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Millions

(Unaudited)

 

    

For The Nine Months Ended

September 30,

 
    

2011

   

2010

 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net Income

   $ 422      $ 276   

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

    

Depreciation and Amortization

     548        563   

Provision for Deferred Income Taxes and ITC

     563        41   

Non-Cash Employee Benefit Plan Costs

     92        162   

Cost of Removal

     (43     (47

Market Transition Charge (MTC) Refund

     (47     98   

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

     100        35   

Over (Under) Recovery of SBC

     (26     (55

Net Changes in Certain Current Assets and Liabilities:

    

Accounts Receivable and Unbilled Revenues

     261        117   

Materials and Supplies

     (1     (17

Prepayments

     (203     (126

Net Change in Tax Receivable

     (21     0   

Accounts Receivable/Payable-Affiliated Companies, net

     (381     (318

Other Current Assets and Liabilities

     (66     19   

Employee Benefit Plan Funding and Related Payments

     (311     (305

Other

     (15     (16
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Operating Activities

     872        427   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Additions to Property, Plant and Equipment

     (939     (871

Proceeds from Sales of Available-for-Sale Securities

     0        54   

Investments in Available-for-Sale Securities

     0        (54

Solar Loan Investments

     (34     (11

Other

     (1     (4
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Investing Activities

     (974     (886
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Issuance of Long-Term Debt

     250        1,014   

Redemption of Long-Term Debt

     0        (300

Redemption of Securitization Debt

     (147     (140

Redemption of Preferred Securities

     0        (80

Common Stock Dividend

     0        (150

Other

     (4     (10
  

 

 

   

 

 

 

Net Cash Provided By (Used In) Financing Activities

     99        334   
  

 

 

   

 

 

 

Net Increase (Decrease) In Cash and Cash Equivalents

     (3     (125

Cash and Cash Equivalents at Beginning of Period

     245        240   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 242      $ 115   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Income Taxes Paid (Received)

   $ (44   $ 182   

Interest Paid, Net of Amounts Capitalized

   $    225      $    213   

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

 

11


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 1. Organization and Basis of Presentation

Organization

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

 

 

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

 

 

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

 

 

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

 

 

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

Basis of Presentation

The respective financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) applicable to Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements (Notes) should be read in conjunction with, and update and supplement matters discussed in the Annual Report on Form 10-K for the year ended December 31, 2010 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2011 and June 30, 2011.

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, 2010.

During 2011, Power sold its two generating facilities located in Texas that were owned and operated by its subsidiary, PSEG Texas. As a result, amounts related to these plants were reclassified as Discontinued Operations in the financial statements. See Note 4. Discontinued Operations and Dispositions for additional information.

 

12


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 2. Recent Accounting Standards

New Standard Adopted during 2011

Revenue Arrangements with Multiple Deliverables

 

 

amends existing guidance for identifying separate deliverables in a revenue-generating transaction where multiple deliverables exist,

 

 

establishes a selling price hierarchy, such as, “vendor-specific objective evidence,” “third-party evidence” and “estimated selling price” for determining the selling price of a deliverable, and

 

 

provides guidance for allocating and recognizing revenue based on separate deliverables.

We adopted this standard, prospectively, effective January 1, 2011, for new and significantly modified revenue arrangements. Upon adoption, there was no material impact on our financial statements and we do not anticipate any changes to the pattern or general timing of revenue recognition for our significant units of account in future periods.

New Accounting Standards Issued But Not Yet Adopted

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards (IFRS)

This accounting standard was issued to update guidance related to fair value measurements and disclosures as a step towards achieving convergence between GAAP and IFRS. The updated guidance

 

 

clarifies intent about application of existing fair value measurements and disclosures,

 

 

changes some requirements for fair value measurements, and

 

 

requires expanded disclosures.

This guidance is effective for interim and annual periods beginning after December 15, 2011. We believe our adoption of the new guidance on January 1, 2012 will not have an impact on our consolidated financial position, results of operations or cash flows; however, it will result in expanded disclosures.

Presentation of Comprehensive Income

This accounting standard was issued on the presentation of comprehensive income as a step towards achieving convergence between GAAP and IFRS. The updated guidance

 

 

allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements, and

 

 

eliminates the current option to report other comprehensive income and its components in the statement of changes in equity.

This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We believe that the adoption of the new guidance on January 1, 2012 will not have an impact on our consolidated financial position, results of operations or cash flows, but will change the presentation of the components of other comprehensive income.

Testing Goodwill for Impairment

This accounting standard was issued to simplify testing for goodwill impairment. The updated guidance allows an entity to first perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. Only if it is concluded that this is the case is it necessary to perform the two-step goodwill impairment test.

 

13


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Earlier adoption is permitted. We believe that if we adopt the new optional guidance, it will not have a material impact on our consolidated financial position, results of operations or cash flows.

Note 3. Variable Interest Entities (VIEs)

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

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

The assets and liabilities of these VIEs are presented separately on the face of the Condensed Consolidated Balance Sheets of PSEG and PSE&G because the Transition Funding and Transition Funding II assets are restricted and can only be used to settle their respective obligations. No Transition Funding or Transition Funding II creditor has any recourse to the general credit of PSE&G in the event the transition charges are not sufficient to cover the bond principal and interest payments of Transition Funding or Transition Funding II, respectively.

PSE&G’s maximum exposure to loss is equal to its equity investment in these VIEs which was $16 million as of September 30, 2011 and December 31, 2010. The risk of actual loss to PSE&G is considered remote. PSE&G did not provide any financial support to Transition Funding or Transition Funding II during the first nine months of 2011 or in 2010. Further, PSE&G does not have any contractual commitments or obligations to provide financial support to Transition Funding or Transition Funding II.

Note 4. Discontinued Operations and Dispositions

Discontinued Operations

Power

In March 2011, Power completed the sale of its 1,000 MW gas-fired Guadalupe generating facility for a total purchase price of $352 million, resulting in an after-tax gain of $54 million.

In July 2011, Power completed the sale of its 1,000 MW gas-fired Odessa generating facility for a total purchase price of $335 million, resulting in an after-tax gain of $25 million. The closing of the Odessa sale completed the Texas asset sale process announced by Power in early 2011.

PSEG Texas’ operating results for the three months and nine months ended September 30, 2011 and 2010, which were reclassified to Discontinued Operations, are summarized below:

 

     Three Months Ended,
September 30,
     Nine Months Ended,
September 30,
 
    

2011

    

2010

    

2011

    

2010

 
     Millions  

Operating Revenues

   $ 20       $ 140       $ 112       $ 341   

Income (Loss ) Before Income Taxes

   $ 6       $ 31       $ 26       $ 25   

Net Income (Loss)

   $ 4       $ 20       $ 17       $ 15   

 

14


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The carrying amounts of PSEG Texas’ assets and liabilities as of December 31, 2010 are summarized in the following table:

 

     As of
December 31,
 
    

2010

 
     Millions  

Current Assets

   $ 28   

Noncurrent Assets

     536   
  

 

 

 

Total Assets of Discontinued Operations

   $ 564   
  

 

 

 

Current Liabilities

   $ 28   

Noncurrent Liabilities

     44   
  

 

 

 

Total Liabilities of Discontinued Operations

   $ 72   
  

 

 

 

Dispositions

Leveraged Leases

During the first nine months of 2010, Energy Holdings sold its interest in five leveraged leases, including four international leases for which the IRS has indicated its intention to disallow certain tax deductions taken in prior years.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
    

2010

    

2010

 
     Millions  

Proceeds from Sales

   $ 204       $ 365   

Gains on Sales, after-tax

   $ 15       $ 27   

Proceeds from the sales of the international leases were used to reduce the tax exposure related to these lease investments. For additional information see Note 8. Commitments and Contingent Liabilities.

Note 5. Financing Receivables

PSE&G

PSE&G sponsors a solar loan program designed to help finance the installation of solar power systems throughout our electric service area. The loans are generally paid back with Solar Renewable Energy Certificates (SRECS) generated from the installed solar electric systems. The following table reflects the outstanding short and long-term loans by class of customer, none of which would be considered “non-performing.”

 

Credit Risk Profile Based on Payment Activity    As of      As of  
     September 30,      December 31,  

Consumer Loans

  

2011

    

2010

 
     Millions  

Commercial/Industrial

   $ 86       $ 62   

Residential

     7         4   
  

 

 

    

 

 

 
   $ 93       $ 66   
  

 

 

    

 

 

 

 

15


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Energy Holdings

Energy Holdings has investments in domestic energy and real estate assets subject primarily to leveraged lease accounting. A leveraged lease is typically comprised of an investment by an equity investor and debt provided by a third party debt investor. The debt is recourse only to the assets subject to lease and is not included on PSEG’s Condensed Consolidated Balance Sheets. As an equity investor, Energy Holdings’ investments in the leases are comprised of the total expected lease receivables on its investments over the lease terms plus the estimated residual values at the end of the lease terms, reduced for any income not yet earned on the leases. This amount is included in Long-Term Investments on PSEG’s Condensed Consolidated Balance Sheets. The more rapid depreciation of the leased property for tax purposes creates tax cash flow that will be repaid to the taxing authority in later periods. As such, the liability for such taxes due is recorded in Deferred Income Taxes on PSEG’s Condensed Consolidated Balance Sheets. The table below shows Energy Holdings’ gross and net lease investment as of September 30, 2011 and December 31, 2010, respectively.

 

     As of
September 30,
    As of
December 31,
 
    

2011

   

2010

 
     Millions  

Lease Receivables (net of Non-Recourse Debt)

   $ 763      $ 896   

Estimated Residual Value of Leased Assets

     684        905   
  

 

 

   

 

 

 
     1,447        1,801   

Unearned and Deferred Income

     (450     (546
  

 

 

   

 

 

 

Gross Investments in Leases

     997        1,255   

Deferred Tax Liabilities

     (804     (899
  

 

 

   

 

 

 

Net Investment in Leases

   $ 193      $ 356   
  

 

 

   

 

 

 

Note: The above table does not include $264 million of Gross Investment in Leases to subsidiaries of Dynegy Incorporated (Dynegy) as of September 30, 2011 as we have fully reserved our Gross Investment in the Dynegy leases.

The corresponding receivables associated with the lease portfolio are reflected below, net of non-recourse debt. The ratings in the table represent the ratings of the entities providing payment assurance to Energy Holdings. “Not Rated” counterparties relate to investments in leases of commercial real estate properties.

 

     Lease Receivables, net of
Non-Recourse Debt
 
     As of
September 30,
     As of
December 31,
 

Counterparties’ Credit Rating (S&P)

  

2011

    

2010

 
     Millions  

AAA - AA

   $ 21       $ 21   

A

     110         112   

BBB - BB

     316         316   

B - B-

     300         430   

Not Rated

     16         17   
  

 

 

    

 

 

 
   $ 763       $ 896   
  

 

 

    

 

 

 

Note: The above table does not include $121 million of lease receivables as of September 30, 2011 related to subsidiaries of Dynegy as we fully reserved our Gross Investments in the Dynegy leases.

 

16


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The “B” and “B-” ratings above represent lease receivables underlying coal fired assets in Illinois and Pennsylvania. As of September 30, 2011, the gross investment in the leases of such assets, net of non-recourse debt, was $550 million ($54 million, net of deferred taxes). A more detailed description of such assets under lease is presented in the table below.

 

Asset

  

Location

   

Gross
Investment

   

%
Owned

   

Total

   

Fuel
Type

 

Counterparties’
S&P Credit

Rating

 

Counterparty

           Millions           MW              

Powerton Station Units 5 and 6

     IL      $ 135        64%        1,538      Coal   B-   Edison Mission Energy

Joliet Station Units 7 and 8

     IL      $ 84        64%        1,044      Coal   B-   Edison Mission Energy

Keystone Station Units 1 and 2

     PA      $ 112        17%        1,711      Coal   B   GenOn REMA, LLC

Conemaugh Station Units 1 and 2

     PA      $ 112        17%        1,711      Coal   B   GenOn REMA, LLC

Shawville Station Units 1, 2, 3 and 4

     PA      $ 107        100%        603      Coal   B   GenOn REMA, LLC

Although all payments of equity rent, debt service and other fees are current, no assurances can be given that all payments in accordance with the lease contracts will continue. Factors which may impact future lease cash flow include, but are not limited to, new environmental legislation and regulation regarding air quality, water and other discharges in the process of generating electricity, market prices for fuel and electricity, overall financial condition of lease counterparties and the quality and condition of assets under lease.

The credit exposure to the lessors is partially mitigated through various credit enhancement mechanisms within the lease transactions. These credit enhancement features vary from lease to lease. Some of the leasing transactions include covenants that restrict the flow of dividends from the lessee to its parent, over-collateralization of the lessee with non-leased assets, historical and forward cash flow coverage tests that prohibit discretionary capital expenditures and dividend payments to the parent/lessee if stated minimum coverage ratios are not met and similar cash flow restrictions if ratings are not maintained at stated levels. These covenants are designed to maintain cash reserves in the transaction entity for the benefit of the non-recourse lenders and the lessor/equity participants in the event of a market downturn or degradation in operating performance of the leased assets. In the event of a default in any of the lease transactions, Energy Holdings would exercise its rights and attempt to seek recovery of its investment. The results of such efforts may not be known for a period of time. A bankruptcy of a lessee and failure to recover adequate value could lead to a foreclosure of the lease. If foreclosures were to occur, Energy Holdings could potentially record a pre-tax write-off up to its gross investment in these facilities and may also be required to pay significant cash tax liabilities.

Energy Holdings’ collateral related to the lease to two affiliates (the Dynegy lessees) of Dynegy Incorporated (Dynegy), includes a guarantee from Dynegy Holdings LLC (DH), a subsidiary of Dynegy. In early August 2011, Dynegy reorganized the legal entity structure for its generation assets. It transferred substantially all of its coal and natural gas-fired generation assets, other than the Dynegy lessees that lease the Roseton Station Units 1 and 2 and Danskammer Station Units 3 and 4, to new subsidiaries which Dynegy termed as “bankruptcy remote”. This resulted in a lowering of certain credit ratings of Dynegy and DH. Dynegy’s credit is currently rated “CC” by S&P and “Caa3” by Moody’s. On July 22, 2011, subsidiaries of Energy Holdings that hold the lessor interests filed a lawsuit in Delaware Chancery Court to halt the proposed transfer of assets to the new subsidiaries alleging that the proposed transfers would violate DH’s obligations under its Roseton and Danskammer guarantees. The request for a temporary restraining order was denied on July 29, 2011 and on August 5, 2011, the Delaware Supreme Court denied Energy Holdings’ application for certification of an interlocutory appeal and motions to expedite and for injunctive relief. Thereafter on August 8, 2011, Energy Holdings voluntarily dismissed this lawsuit without prejudice.

In September 2011, Dynegy continued its corporate reorganization, transferring DH’s interests in its newly formed coal generation subsidiary directly to the parent company, Dynegy, in exchange for an undertaking. It

 

17


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

also launched an exchange offer for a substantial portion of DH’s debt in exchange for Dynegy debt at various discounts. Dynegy has indicated that in the absence of a debt restructuring and/or refinancing, it may not have sufficient resources to pay its indebtedness under the lease. The consummation of these transactions triggered the filing of two separate lawsuits, one by a group of corporate unsecured bondholders of DH and a second on behalf of a majority of the holders of certain debt certificates related to the Dynegy lessee facilities; these lawsuits asserted fraudulent conveyance claims among several other causes of action. In addition to claims asserted against DH, one of the suits included claims against several members of DH’s Board of Directors.

As a result of the above actions, Energy Holdings has evaluated its likely recovery under the lease arrangements for the Roseton and Danskammer facilities leased to subsidiaries of DH, considering the overall value of the underlying assets subject to lease, and has fully reserved its $264 million gross investment. This gross charge is reflected as a reduction to Operating Revenues and resulted in an after-tax charge of approximately $170 million. In the absence of a negotiated resolution of the disputes with Dynegy, Energy Holdings intends to assert claims against DH, its directors and various Dynegy affiliates relative to the reorganization activities which have diminished the value of assets available to satisfy DH’s lease guarantee obligations. In addition, Energy Holdings has a tax indemnity agreement, which is designed to protect it from adverse tax consequences should the lease structure not be maintained. Should there be adverse consequences, Energy Holdings intends to assert its claims under this agreement, notwithstanding any attempt by Dynegy in contravention of current case law to limit such claims in a bankruptcy proceeding of DH. In the event of a bankruptcy filing or the failure of DH to honor its obligations under the lease guarantee, it is possible that the lease certificate holders could foreclose on the underlying facilities in partial satisfaction of their indebtedness. Should this occur, Energy Holdings could be required to pay approximately $100 million to satisfy income tax obligations, an amount for which it would seek reimbursement from DH under the tax indemnity agreement. This potential cash tax obligation is fully reflected in the overall estimate of the aggregate after-tax charge.

Note 6. Available-for-Sale Securities

Nuclear Decommissioning Trust (NDT) Funds

Power maintains an external master nuclear decommissioning trust to fund its share of decommissioning for its five nuclear facilities upon termination of operation. The trust contains two separate funds: a qualified fund and a non-qualified fund. Section 468A of the Internal Revenue Code limits the amount of money that can be contributed into a qualified fund. The trust funds are managed by third party investment advisors who operate under investment guidelines developed by Power.

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

 

    

As of September 30, 2011

 
    

Cost

    

Gross

Unrealized

Gains

    

Gross

Unrealized

Losses

   

Estimated

Fair

Value

 
     Millions  
Equity Securities    $ 537       $ 93       $ (55   $ 575   
  

 

 

    

 

 

    

 

 

   

 

 

 
Debt Securities           

Government Obligations

     340         16         (1     355   

Other Debt Securities

     273         14         (3     284   
  

 

 

    

 

 

    

 

 

   

 

 

 
Total Debt Securities      613         30         (4     639   
Other Securities      66         0         0        66   
  

 

 

    

 

 

    

 

 

   

 

 

 
Total Available-for-Sale Securities    $ 1,216       $ 123       $ (59   $ 1,280   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

    

As of December 31, 2010

 
    

Cost

    

Gross

Unrealized

Gains

    

Gross

Unrealized

Losses

   

Estimated

Fair

Value

 
     Millions  

Equity Securities

   $ 525       $ 213       $ (3   $ 735   
  

 

 

    

 

 

    

 

 

   

 

 

 

Debt Securities

          

Government Obligations

     301         6         (4     303   

Other Debt Securities

     247         10         (2     255   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Debt Securities

     548         16         (6     558   

Other Securities

     70         0         0        70   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Available-for-Sale Securities

   $ 1,143       $ 229       $ (9   $ 1,363   
  

 

 

    

 

 

    

 

 

   

 

 

 

These amounts do not include receivables and payables for NDT Fund transactions which have not settled at the end of each period. Such amounts are included in Accounts Receivable and Accounts Payable on the Condensed Consolidated Balance Sheets as shown in the following table.

 

     As of
September 30,
     As of
December 31,
 
    

2011

    

2010

 
     Millions  

Accounts Receivable

   $ 100       $ 35   

Accounts Payable

   $ 95       $ 60   

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

 

    As of September 30, 2011     As of December 31, 2010  
    Less Than 12
Months
    Greater Than 12
Months
    Less Than 12
Months
    Greater Than 12
Months
 
   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

 
    Millions  

Equity Securities (A)

  $ 252      $ (55   $ 0      $ 0      $ 55      $ (3   $ 0      $ 0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Debt Securities

               

Government Obligations (B)

    72        (1     2        0        106        (4     1        0   

Other Debt Securities (C)

    65        (2     6        (1     65        (1     8        (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt Securities

    137        (3     8        (1     171        (5     9        (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Securities

    1        0        0        0        0        0        0        0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Available-for-Sale Securities

  $ 390      $ (58   $ 8      $ (1   $ 226      $ (8   $ 9      $ (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Equity Securities—Investments in marketable equity securities within the NDT funds are primarily investments in common stocks within a broad range of industries and sectors. The unrealized losses are distributed over hundreds of companies with limited impairment durations. Power does not consider these securities to be other-than-temporarily impaired as of September 30, 2011.

 

19


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(B) Debt Securities (Government)—Unrealized losses on Power’s NDT investments in United States Treasury obligations and Federal Agency mortgage-backed securities were caused by interest rate changes. Since these investments are guaranteed by the United States government or an agency of the United States government, it is not expected that these securities will settle for less than their amortized cost basis, since Power does not intend to sell nor will it be more-likely-than-not required to sell. Power does not consider these securities to be other-than-temporarily impaired as of September 30, 2011.

 

(C) Debt Securities (Corporate)—Power’s investments in corporate bonds are primarily in investment grade securities. It is not expected that these securities would settle for less than their amortized cost. Since Power does not intend to sell these securities nor will it be more-likely-than-not required to sell, Power does not consider these debt securities to be other-than-temporarily impaired as of September 30, 2011.

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    

2011

   

2010

   

2011

   

2010

 
     Millions     Millions  

Proceeds from Sales

   $ 431      $ 302      $ 1,088      $ 728   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Realized Gains (Losses)

        

Gross Realized Gains

   $ 26      $ 26      $ 121      $ 86   

Gross Realized Losses

     (10     (8     (28     (31
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Realized Gains

   $ 16      $ 18      $ 93      $ 55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains disclosed in the above table were recognized in Other Income and Other Deductions in PSEG’s and Power’s Condensed Consolidated Statements of Operations. Net unrealized gains of $32 million (after-tax) were recognized in Accumulated Other Comprehensive Income (OCI) on Power’s Condensed Consolidated Balance Sheet as of September 30, 2011. The available-for-sale debt securities held as of September 30, 2011 had the following maturities:

 

Time Frame

  

Fair Value

 
     Millions  

Less than 1 Year

   $ 11   

1 - 5 Years

     141   

6 - 10 Years

     172   

11 - 15 Years

     43   

16 - 20 Years

     18   

Over 20 Years

     254   
  

 

 

 
   $ 639   
  

 

 

 

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

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

 

20


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

2011, other-than-temporary impairments of $10 million were recognized on securities in the NDT funds. Any subsequent recoveries in the value of these securities are recognized in OCI unless the securities are sold, in which case, any gain is recognized in income. The assessment of fair market value compared to cost is applied on a weighted average basis taking into account various purchase dates and initial cost detail of the securities.

Rabbi Trusts

PSEG maintains certain unfunded nonqualified benefit plans to provide supplemental retirement and deferred compensation benefits to certain key employees. Certain assets related to these plans have been set aside in grantor trusts commonly known as “Rabbi Trusts.” In August 2010, PSEG revised the asset structure of the Rabbi Trust and realized gains of $31 million as the investments were transitioned to a new asset allocation and investment manager. The new structure resulted in lower investment management fees.

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

 

     As of September 30, 2011  
    

Cost

    

Gross

Unrealized

Gains

    

Gross

Unrealized

Losses

    

Estimated

Fair

Value

 
     Millions  

Equity Securities

   $ 16       $ 2       $ 0       $ 18   

Debt Securities

     147         5         0         152   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total PSEG Available-for-Sale Securities

   $ 163       $ 7       $ 0       $ 170   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2010  
    

Cost

    

Gross

Unrealized

Gains

    

Gross

Unrealized

Losses

    

Estimated

Fair

Value

 
     Millions  

Equity Securities

   $ 16       $ 2       $ 0       $ 18   

Debt Securities

     142         0         0         142   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total PSEG Available-for-Sale Securities

   $ 158       $ 2       $ 0       $ 160   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. For the nine months ended September 30, 2011, other-than-temporary impairments of $3 million were recognized on the bond portfolio of the Rabbi Trusts.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
    

2011

    

2010

    

2011

    

2010

 
     Millions      Millions  

Proceeds from Sales

   $ 0       $ 158       $ 0       $ 158   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Realized Gains (Losses)

           

Gross Realized Gains

   $ 0       $ 31       $ 0       $ 31   

Gross Realized Losses

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Realized Gains (Losses)

   $ 0       $ 31       $ 0       $ 31   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

21


Table of Contents

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

September 30,

2011

    

As of

December 31,

2010

 
     Millions  

Power

   $ 33       $ 32   

PSE&G

     57         54   

Other

     80         74   
  

 

 

    

 

 

 

Total PSEG Available-for-Sale Securities

   $ 170       $ 160   
  

 

 

    

 

 

 

Note 7. Pension and OPEB

PSEG sponsors several qualified and nonqualified pension plans and OPEB plans covering PSEG’s and its participating affiliates’ current and former employees who meet certain eligibility criteria. In early June 2011, PSEG amended certain provisions of its pension and OPEB plans, including revisions to the benefit formulas for certain participants of PSEG’s qualified and nonqualified pension and OPEB plans. The weighted average discount rate for the pension plans decreased from 5.51% to 5.31% while the discount rate for the OPEB plans decreased from 5.50% to 5.30%. The expected long-term rate of return on plan assets remained at 8.50%. The pension benefit and OPEB obligations, as well as the asset values, were re-measured as of May 31, 2011 (the closest month-end date to the time the revisions were made). As a result, the annual net periodic pension benefit cost for 2011 will decrease by $32 million and the 2011 annual net OPEB cost will decrease by $6 million compared to costs that would have been expensed in 2011 if PSEG did not re-measure. The re-measured pension projected benefit obligations and accumulated OPEB obligation as of May 31, 2011 were $4.3 billion and $1.2 billion, respectively. The year-to-date rate of return on plan assets through the May 31 remeasurement date was 6.70%.

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. The costs for January through May 2011 are calculated under the prior plans’ assumptions. The costs for June 2011 and subsequent months are being calculated under the revised plan provisions. OPEB costs are presented net of the federal subsidy expected for prescription drugs under the Medicare Prescription Drug Improvement and Modernization Act of 2003. New federal health care legislation enacted in March 2010 eliminates the tax deductibility of retiree health care costs beginning in 2013, to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D coverage. See Note 13. Income Taxes for additional information.

 

22


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Pension and OPEB costs for PSEG are detailed as follows:

 

     Pension Benefits
Three Months
Ended
September 30,
    OPEB
Three Months
Ended
September 30,
    Pension Benefits
Nine Months
Ended
September 30,
    OPEB
Nine Months
Ended
September 30,
 
    

2011

   

2010

   

2011

   

2010

   

2011

   

2010

   

2011

   

2010

 
     Millions  

Components of Net Periodic
Benefit Cost

                

Service Cost

   $  22      $  21      $ 3      $ 4      $   69      $ 65      $  10      $ 12   

Interest Cost

     56        58        15        18        172        173        45        54   

Expected Return on Plan Assets

     (85     (67     (5     (4     (248     (200     (13     (11

Amortization of Net

                

Transition Obligation

     0        0        1        6        0        0        4        20   

Prior Service Cost (Credit)

     (4     0        (4     4        (6     0        (10     10   

Actuarial Loss

     29        31        4        2        89        92        11        6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Periodic Benefit Cost

     18        43        14        30        76        130        47        91   

Effect of Regulatory Asset

     0        0        5        5        0        0        15        15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Benefit Costs, Including Effect of Regulatory Asset

   $ 18      $ 43      $ 19      $  35      $ 76      $ 130      $ 62      $ 106   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Pension Benefits
Three Months
Ended
September 30,
     OPEB
Three Months
Ended
September 30,
     Pension Benefits
Nine Months
Ended
September 30,
     OPEB
Nine Months
Ended
September 30,
 
    

2011

    

2010

    

2011

    

2010

    

2011

    

2010

    

2011

    

2010

 
     Millions  

Power

   $ 6       $ 13       $ 3       $ 4       $ 24       $ 40       $ 9       $ 13   

PSE&G

     9         24         16         30         41         72         51         90   

Other

     3         6         0         1         11         18         2         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Benefit Costs

   $ 18       $ 43       $ 19       $ 35       $ 76       $ 130       $ 62       $ 106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the three months ended March 31, 2011, PSEG contributed its entire planned contributions for the year 2011 of $415 million and $11 million into its pension and postretirement healthcare plans, respectively.

Note 8. Commitments and Contingent Liabilities

Guaranteed Obligations—PSEG and Power

Power’s activities primarily involve the purchase and sale of energy and related products under transportation, physical, financial and forward contracts at fixed and variable prices. These transactions are with numerous counterparties and brokers that may require cash, cash-related instruments or guarantees.

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

 

 

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

 

 

obtain credit.

 

23


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Under these agreements, guarantees cover lines of credit between entities and are often reciprocal in nature. The exposure between counterparties can move in either direction.

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

 

 

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

 

 

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

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

Power is subject to

 

 

counterparty collateral calls related to commodity contracts, and

 

 

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

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

The face value of outstanding guarantees, current exposure and margin positions as of September 30, 2011 and December 31, 2010 are shown below:

 

    

As of

September 30,

2011

   

As of

December 31,

2010

 
     Millions  

Face Value of Outstanding Guarantees

   $ 1,758      $ 1,936   

Exposure under Current Guarantees

   $ 283      $ 330   

Letters of Credit Margin Posted

   $ 135      $ 137   

Letters of Credit Margin Received

   $ 53      $ 109   

Cash Deposited and Received

    

Counterparty Cash Margin Deposited

   $ 1      $ 0   

Counterparty Cash Margin Received

     (5     (2

Net Broker Balance Deposited (Received)

     37        (28

In the Event Power Were to Lose its Investment Grade Rating

    

Additional Collateral that could be Required

   $ 765      $ 828   

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

   $ 3,466      $ 2,750   

Additional Amounts Posted

    

Other Letters of Credit

   $ 99      $ 98   

Power nets receivables and payables with the corresponding net energy contract balances. See Note 10. Financial Risk Management Activities for further discussion. The remaining balance of net cash (received) deposited is primarily included in Accounts Receivable.

 

24


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In the event of a deterioration of Power’s credit rating to below investment grade, which would represent a two level downgrade from its current ratings, many of these agreements allow the counterparty to demand further performance assurance. See table above.

In addition, during 2011, the SEC and the Commodity Futures Trading Commission (CFTC) are continuing efforts to implement new rules to enact stricter regulation over swaps and derivatives. Power will carefully monitor these new rules as they are developed to analyze the potential impact on its swap and derivatives transactions, including any potential increase to collateral requirements.

In April 2011, PSEG and Power entered into new 5-year credit agreements resulting in an increase of $650 million in Power’s total credit capacity.

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

Environmental Matters

Passaic River

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

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

The United States Environmental Protection Agency (EPA) has determined that an eight-mile stretch of the Passaic River in the area of Newark, New Jersey is a “facility” within the meaning of that term under CERCLA. The EPA has determined the need to perform a study of the entire 17-mile tidal reach of the lower Passaic River.

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

The EPA believes that hazardous substances were released from the Essex Site and one of PSE&G’s former MGP locations (Harrison Site). In 2006, the EPA notified the potentially responsible parties (PRPs) that the cost of its study would greatly exceed the original estimated cost of $20 million. The total cost of the study is now estimated at approximately $86 million. 73 PRPs, including Power and PSE&G, agreed to assume responsibility for the study and to divide the associated costs according to a mutually agreed upon formula. The PRP group, currently 71 members, is presently executing the study. Approximately five percent of the study costs are attributable to PSE&G’s former MGP sites and approximately one percent to Power’s generating stations. Power has provided notice to insurers concerning this potential claim.

In 2007, the EPA released a draft “Focused Feasibility Study” that proposed six options to address the contamination cleanup of the lower eight miles of the Passaic River. The estimated costs for the proposed remedy range from $1.3 billion to $3.7 billion. The work contemplated by the study is not subject to the cost sharing agreement discussed above. A revised focused feasibility study may be released as early as the second quarter of 2012.

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.

 

25


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Power and PSE&G are unable to estimate their portion of the possible loss or range of loss related to these matters.

New Jersey Spill Compensation and Control Act (Spill Act)

In 2005, the New Jersey Department of Environmental Protection (NJDEP) filed suit against a PRP and its related companies in the New Jersey Superior Court seeking damages and reimbursement for costs expended by the State of New Jersey to address the effects of the PRP’s discharge of hazardous substances into both the Passaic River and the balance of the Newark Bay Complex. Power and PSE&G are alleged to have owned, operated or contributed hazardous substances to a total of 11 sites or facilities that impacted these water bodies. In February 2009, third party complaints were filed against some 320 third party defendants, including Power and PSE&G, claiming that each of the third party defendants is responsible for its proportionate share of the clean-up costs for the hazardous substances they allegedly discharged into the Passaic River and the Newark Bay Complex. The third party complaints seek statutory contribution and contribution under the Spill Act to recover past and future removal costs and damages. Power and PSE&G filed answers to the complaint in June 2010. A special master for discovery has been appointed by the court and document production has commenced. Power and PSE&G believe they have good and valid defenses to the allegations contained in the third party complaints and will vigorously assert those defenses. Power and PSE&G are unable to estimate their portion of the possible loss or range of loss related to this matter.

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

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. Notices to fund the next phase of the study have been received but it is uncertain at this time whether the PSEG companies will consent to fund the next phase. Power and PSE&G are unable to estimate their portion of the possible loss or range of loss related to this matter.

MGP Remediation Program

PSE&G is working with the NJDEP to assess, investigate and remediate environmental conditions at its former MGP sites. To date, 38 sites requiring some level of remedial action have been identified.

 

26


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

During the third quarter of 2011, PSE&G updated the estimated cost to remediate all MGP sites to completion and determined that the cost to completion could range between $643 million and $741 million from September 30, 2011 through 2021. Since no amount within the range was considered to be most likely, PSE&G reflected a liability of $643 million on its Condensed Consolidated Balance Sheet as of September 30, 2011. Of this amount, $53 million was recorded in Other Current Liabilities and $590 million was reflected as Environmental Costs in Noncurrent Liabilities. PSE&G has recorded a $643 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 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 the Hudson and Mercer facilities designed to meet targeted reductions in emissions of sulfur dioxide (SO2), nitrogen oxide (NOx ), particulate matter and mercury. Power completed the construction of all plant modifications by the end of 2010 at a cost of $1.3 billion. Performance testing to validate the agreed-upon emission reductions was completed in the second quarter of 2011 and all performance metrics were met.

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

Hazardous Air Pollutants Regulation

In accordance with a court ruling, the EPA proposed a Maximum Achievable Control Technology (MACT) regulation in March 2011 which is expected to be finalized by December 2011. This regulation prescribes reduced levels of mercury and other hazardous air pollutants pursuant to the Clean Air Act. Until the final rule is adopted, the impact cannot be determined; however, if the rule is adopted as proposed, Power believes the back end technology environmental controls recently installed at its Hudson and Mercer coal facilities should meet the rule’s requirements. Some additional controls could be necessary at Power’s Connecticut facilities and some of its other New Jersey facilities, pending engineering evaluation. The impact to Power’s jointly owned coal fired generating facilities in Pennsylvania is under evaluation.

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.

With newly installed controls at its plants in New Jersey, Power expects to achieve the required mercury reductions that are part of Power’s multi-pollutant reduction agreement that resolved issues arising out of the PSD/NSR air pollution control programs discussed above.

 

27


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOx Regulation

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 generating units. The rule has a significant impact on Power’s generation fleet, as it imposes NOx emissions limits that will require significant capital investment for controls or the retirement of up to 102 combustion turbines (approximately 2,000 MW) and five older New Jersey steam electric generating units (approximately 800 MW) by April 30, 2015. Power is unable to estimate the possible loss or range of loss related to this matter.

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

Cross-State Air Pollution Rule (CSAPR)

On July 6, 2011, the EPA issued the CSAPR. CSAPR limits power plant emissions in 27 states that contribute to the ability of downwind states to attain and/or maintain current particulate matter and ozone emission standards. Emission reductions will be governed by this rule beginning on January 1, 2012 for SO2 and “annual NOx” and May 1, 2012 for “Ozone season NOx”. Certain states will be required to make additional SO2 reductions in 2014.

PSEG continues to evaluate the impact of this rule on it due to many of the uncertainties that still exist regarding implementation. As Power has made major capital investments over the past several years to lower the SO2 and NOX emissions of its fossil plants in the states affected by CSAPR (New Jersey, New York and Pennsylvania), Power does not foresee the need to make significant additional expenditures to its generation fleet to comply with the regulation. As such, Power believes this rule will not have a material impact to its capital investment program or units’ operations.

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 1999, in anticipation of the transfer of PSE&G’s generation-related assets to Power, a study was conducted pursuant to ISRA, which applied to the sale of certain assets. Power had a $50 million liability related to these obligations, which was included in Environmental Costs on Power’s and PSEG’s Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010.

Clean Water Act Permit Renewals

Pursuant to the Federal Water Pollution Control Act (FWPCA), New Jersey Pollutant Discharge Elimination System (NJPDES) permits expire within five years of their effective date. In order to renew these permits, but allow a plant to continue to operate, an owner or operator must file a permit application no later than six months prior to expiration of the permit.

One of the most significant NJPDES permits governing cooling water intake structures at Power is for Salem. In 2001, the NJDEP issued a renewed NJPDES permit for Salem, expiring in July 2006, allowing for the continued operation of Salem with its existing cooling water intake system. In February 2006, Power filed with the NJDEP a renewal application allowing Salem to continue operating under its existing NJPDES permit until a new permit is issued. Power prepared its renewal application in accordance with the FWPCA Section 316(b) and the 316(b) rules published in 2004. Those rules did not mandate the use of cooling towers at large existing generating plants. Rather, the rules provided alternatives for compliance with 316(b), including the use of restoration efforts to mitigate for the potential effects of cooling water intake structures, as well as the use of site-specific analysis to determine the best technology available for minimizing adverse impact based upon a cost-benefit test. Power has used restoration and/or a site-specific cost-benefit test in applications filed to renew the permits at its once-through cooled plants, including Salem, Hudson and Mercer.

 

28


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

As a result of several legal challenges to the 2004 316(b) rule by certain northeast states, environmentalists and industry groups, the rule has been suspended and has been returned to the EPA to be consistent with a 2009 United States Supreme Court decision which concluded 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.

In April 2011, the EPA published a new proposed rule which did not establish any particular technology as the best technology available (e.g. closed cycle cooling). Instead, the proposed rule established impingement and entrainment mortality standards for existing cooling water intake structures with a design flow of more than 2 million gallons per day. Power reviewed the proposed rule, assessed the potential impact on its generating facilities and used this information to develop its comments to the EPA which were filed in August 2011. Although the EPA has recently stated that a revision of the proposed rule to include an alternative framework for compliance is currently being considered, if the rule were to be adopted as proposed, the impact would be material since the majority of Power’s electric generating stations would be affected. Power is unable to predict the outcome of this proposed rulemaking, the final form that the proposed regulations may take and the effect, if any, that they may have on its future capital requirements, financial condition or results of operations. The results of further proceedings on this matter could have a material impact on Power’s ability to renew permits at its larger once-through cooled plants, including Salem, Hudson, Mercer, Bridgeport and possibly Sewaren and New Haven, without making significant upgrades to existing intake structures and cooling systems. The costs of those upgrades to one or more of Power’s once-through cooled plants would be material, and would require economic review to determine whether to continue operations at these facilities. For example, in Power’s application to renew its Salem permit, filed with the NJDEP in February 2006, the estimated costs for adding cooling towers for Salem were approximately $1 billion, of which Power’s share would have been approximately $575 million. These cost estimates have not been updated. Currently, potential costs associated with any closed cycle cooling requirements are not included in Power’s forecasted capital expenditures.

In addition to the EPA rulemaking, several states, including California and New York, have begun setting policies that may require closed cycle cooling. It is unknown how these policies may ultimately impact the EPA’s rulemaking.

In January 2010, the NJDEP issued a draft NJPDES permit to another company which would require the installation of closed cycle cooling at that company’s nuclear generating station located in New Jersey. In December 2010, the NJDEP and that company entered into an Administrative Consent Order (ACO) which would require the company to cease operations at the nuclear generating station no later than 2019. In the ACO, the NJDEP agreed that closed cycle cooling is not the best technology available for that facility and agreed to issue a new draft NJPDES permit for that facility without a requirement for construction of cooling towers or other closed cycle cooling facilities. The new draft NJPDES permit will be issued in substitution for the draft NJPDES permit issued in January 2010. Power cannot predict at this time the final outcome of the NJDEP decision and the impact, if any, such a decision would have on any of Power’s once-through cooled generating stations.

New Generation and Development

Nuclear

Power has approved the expenditure of approximately $192 million for a steam path retrofit and related upgrades at its co-owned Peach Bottom Units 2 and 3. Unit 3 upgrades were completed on schedule in October 2011. Unit 2 upgrades are expected to result in an increase of Power’s share of nominal capacity by approximately 18 MW in 2012. Total expenditures through September 30, 2011 were $94 million and are expected to continue through 2012. The actual increase in nominal capacity is under evaluation.

Power has begun expenditures in pursuit of additional output through an extended power uprate of the Peach Bottom nuclear units. The uprate is expected to be in service in 2015 for Unit 2 and 2016 for Unit 3. Power’s

 

29


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

share of the increased capacity is expected to be approximately 133 MW with an anticipated cost of approximately $400 million. Total expenditures through September 30, 2011 were $28 million and are expected to continue through 2016.

Connecticut

Power was selected by the Connecticut Department of Public Utility Control in a regulatory process to build 130 MW of gas fired peaking capacity. Final approval was received and construction began in the second quarter of 2011. The project is expected to be in service by June 2012. Power estimates the cost of these generating units to be $140 million to $150 million. Total capitalized expenditures through September 30, 2011 were $99 million, which are included in Property, Plant and Equipment on the Condensed Consolidated Balance Sheets of PSEG and Power. The initial filing is expected to be made in the fourth quarter of 2011. Costs for this project will be recovered subject to regulatory review and approval.

PJM Interconnection L.L.C. (PJM)

Power plans to construct gas fired peaking facilities at its Kearny site. Construction began in the second quarter of 2011. The projects are expected to be in service by June 2012. Capacity in the amount of 178 MW was bid into and cleared the PJM Reliability Pricing Model (RPM) base residual capacity auction for the 2012-2013 period. Capacity in the amount of 267 MW was bid into and cleared the PJM RPM base residual capacity auction for the 2013-2014 and 2014-2015 periods. Power estimates the cost of these generating units to be $250 million to $300 million. Total capitalized expenditures through September 30, 2011 were $148 million which are included in Property, Plant and Equipment on Power’s and PSEG’s Condensed Consolidated Balance Sheets.

PSE&G—Solar

As part of the BPU-approved Solar 4 All Program, PSE&G is installing up to 40 MW of solar generation on existing utility poles within its service territory. PSE&G has entered into an agreement to purchase solar units for this program. PSE&G’s commitments under this agreement are contingent upon, among other things, the availability of suitable utility poles for installation of the units PSE&G estimates the total cost of this project to be $264 million. Approximately 23 MW have been installed as of September 30, 2011. PSE&G’s cumulative investments for these solar units were approximately $164 million, with additional purchases to be made on a quarterly basis during the remaining two-year term of the purchase agreement, to the extent adequate space on poles is available.

Another aspect of the Solar 4 All program is the installation of 40 MW of solar systems on land and buildings owned by PSE&G and third parties. PSE&G estimates the total cost of this phase of the program to be $189 million. Through September 30, 2011, 23 MW representing 15 projects were placed into service with an investment of approximately $116 million.

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

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

Power seeks to mitigate volatility in its results by contracting in advance for the sale of most of its anticipated electric output as well as its anticipated fuel needs. As part of its objective, Power has entered into contracts to

 

30


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

directly supply PSE&G and other New Jersey electric distribution companies (EDCs) with a portion of their respective BGS requirements through the New Jersey BGS auction process, described above. In addition to the BGS-related contracts, Power also enters into firm supply contracts with EDCs, as well as other firm sales and commitments.

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

 

     Auction Year  
    

2008

    

2009

    

2010

    

2011

 

36-Month Terms Ending

     May 2011         May 2012         May 2013         May 2014 (A) 

Load (MW)

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

$ per kWh

     0.11150         0.10372         0.09577         0.09430   

 

(A) Prices set in the 2011 BGS auction became effective on June 1, 2011 when the 2008 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 17. Related-Party Transactions. Current plans call for Power to hedge on behalf of PSE&G approximately 70 billion cubic feet or 50% of its residential gas supply annual requirements.

Minimum Fuel Purchase Requirements

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

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

Power’s strategy is to maintain certain levels of uranium in inventory and to make periodic purchases to support such levels. As such, the commitments referred to below may include estimated quantities to be purchased that deviate from contractual nominal quantities. Power’s nuclear fuel commitments cover approximately 100% of its estimated uranium, enrichment and fabrication requirements through 2013 and a portion for 2014 through 2015 at Salem, Hope Creek and Peach Bottom.

As of September 30, 2011, the total minimum purchase requirements included in these commitments were as follows:

 

Fuel Type

  

Commitments
through 2015
Power’s Share

 
     Millions  

Nuclear Fuel

  

Uranium

   $ 493   

Enrichment

   $ 383   

Fabrication

   $ 130   

Natural Gas

   $ 903   

Coal/Oil

   $ 896   

 

31


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Included in the $896 million commitment for coal is $647 million related to a certain coal contract under which Power can cancel future contractual deliveries at no cost. In 2011, Power has not cancelled any related coal deliveries.

Regulatory Proceedings

Electric Discount and Energy Competition Act (Competition Act)

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

Also in 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 October 2007, the Court granted PSE&G’s motion to dismiss the amended Complaint and in November 2007, the plaintiff filed a notice of appeal with the Appellate Division of the New Jersey Superior Court (Appellate Division). In February 2009, the Appellate Division affirmed the decision of the lower court dismissing the case. In May 2009, the New Jersey Supreme Court denied a request from the plaintiff to review the Appellate Division’s decision.

In July 2007, the same plaintiff also filed a petition with the BPU requesting review and adjustment to PSE&G’s recovery of the same stranded cost charges. In September 2007, PSE&G filed a motion with the BPU to dismiss the petition. In June 2010, the BPU granted PSE&G’s motion to dismiss. In April 2011, the BPU issued a written order memorializing this decision. In June 2011, the plaintiff/petitioner filed a notice of appeal of the BPU action with the Appellate Division. A briefing schedule has been established.

New Jersey Clean Energy Program

In 2008, the BPU approved funding requirements for each New Jersey EDC applicable to its Renewable Energy and Energy Efficiency programs for the years 2009 to 2012. The aggregate funding amount is $1.2 billion for all years. PSE&G’s share is $705 million. PSE&G has recorded a discounted liability of $294 million as of September 30, 2011. Of this amount, $224 million was recorded as a current liability and $70 million as a noncurrent liability. The liability is reduced as normal payments are made. 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 Societal Benefits Charge (SBC).

The BPU has started a new Comprehensive Resource Analysis proceeding to determine SBC funding for the years 2013-2016. It has no impact on current SBC assessments.

Long-Term Capacity Agreement Pilot Program (LCAPP)

In January 2011, New Jersey enacted the LCAPP Act directing the BPU to conduct a process to procure and subsidize up to 2,000 megawatts of baseload or mid-merit electric power generation. In March 2011, the BPU issued a written order approving a form of agreement and selecting three generators to build a total of approximately 1,949 MW of new combined-cycle generating facilities located in New Jersey. Each of the New Jersey EDCs, including PSE&G, executed standard offer capacity agreements (SOCA) with each of the three selected generators in compliance with the BPU’s directive, but did so under protest preserving its respective legal rights. The SOCA requires that the generator bid in and clear the PJM RPM base residual auction in each year of the SOCA term. The SOCA provides for the EDCs to make capacity payments to, or receive capacity payments from, the generators as calculated based on the difference between the RPM clearing price for each year of the term and the price bid and accepted for that generator in the BPU process. The LCAPP Act and the

 

32


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

BPU order provide that, once the SOCAs are executed and approved by the BPU, they will be irrevocable and the EDCs will be entitled to full rate recovery of the prudently incurred costs. PSE&G will not make or receive payments under the three contracts unless (1) the plant successfully bids into and clears the capacity auction, and (2) the proposed plant is constructed. In April 2011, the BPU approved the executed contracts. Both PSE&G and Power joined other parties, including the EDCs, and appealed the BPU’s implementation of the LCAPP Act to the Appellate Division. The Division of Rate Counsel filed a motion to dismiss the EDCs’ appeal, which was denied by the Appellate Division.

Leveraged Lease Investments

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

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

In order to reduce the cash tax exposure related to these leases, Energy Holdings pursued opportunities to terminate international leases with lessees that were willing to meet certain economic thresholds. As of December 31, 2010, Energy Holdings had terminated all of these leasing transactions and reduced the related cash tax exposure by $1.1 billion. PSEG has completely eliminated its gross investment in such transactions.

Cash Impact

As of September 30, 2011, an aggregate of approximately $266 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, eliminating its cash exposure completely. In the event PSEG is successful in defense of its position, the deposit is fully refundable with interest. Penalties of $150 million would also become payable if the IRS successfully asserted and litigated a case against PSEG. PSEG has not established a reserve for penalties because it believes it has strong defenses to the assertion of penalties under applicable law. Interest and penalty exposure will grow at an average rate of $2 million per quarter during 2011. If the IRS is successful in a litigated case consistent with the positions it has taken in the generic settlement offer recently proposed, an additional $20 million to $40 million of tax would be due for tax positions through September 30, 2011.

Unless this matter is resolved with the IRS, PSEG currently anticipates that it may be required to pay between $110 million and $300 million in tax, interest and penalties for the tax years 1997-2000 during 2011 and subsequently commence litigation to recover those amounts. It is possible that an additional payment of between $220 million and $560 million could be required during 2011 for tax years 2001-2003 followed by further litigation to recover those amounts. The amounts that may be required to litigate differ from the potential net cash exposure noted above, as the former amounts include all potential deficiencies for only contested tax years 1997 through 2003. These litigation amounts also include penalties which are not included in the computation of potential net cash exposure as PSEG believes it has strong defenses. These amounts also

 

33


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

exclude an offset for taxes paid on lease terminations, which is netted in the potential net cash exposure as PSEG would be entitled to a refund of such amounts under a loss scenario. Any potential claims PSEG would make to recover such amounts would include the deposit noted above.

Earnings Impact

PSEG’s current reserve position represents its view of the earnings impact that could result from a settlement related to these transactions, although a total loss, consistent with the broad settlement offer previously proposed by the IRS, would result in an additional earnings charge of $120 million to $140 million.

Note 9. Changes in Capitalization

The following capital transactions occurred in the first nine months of 2011:

Power

 

 

issued $250 million of 2.75% Senior Notes due September 2016 in September,

 

 

issued $250 million of 4.15% Senior Notes due September 2021 in September,

 

 

paid $606 million of 7.75% Senior Notes at maturity in April, and

 

 

paid cash dividends of $350 million to PSEG.

PSE&G

 

 

issued $250 million of 0.85% Medium Term Notes due August 2014 in August, and

 

 

paid $142 million of Transition Funding’s securitization debt, and

 

 

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

Energy Holdings

 

 

paid $1 million of nonrecourse project debt.

PSE&G

In addition, $164 million of tax-exempt bonds of the Pollution Control Financing Authority of Salem County (Authority Bonds), which are serviced and secured by PSE&G’s first mortgage bonds of like tenor, are subject to a mandatory put in November 2011. PSE&G intends to buy the Authority Bonds in on their mandatory put date. The Authority Bonds had an initial term rate of 0.95%.

Also, $100 million of tax-exempt bonds of the New Jersey Economic Development Authority (EDA Bonds), which are serviced and secured by PSE&G’s first mortgage bonds of like tenor, are subject to a mandatory put in December 2011. PSE&G intends to buy the EDA Bonds in on their mandatory put date. The EDA Bonds had an initial term rate of 1.20%.

Note 10. 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

 

34


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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

Cash Flow Hedges

Power uses forward sale and purchase contracts, swaps and futures contracts to hedge

 

 

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

 

 

the price of fuel to meet its fuel purchase requirements.

These derivative transactions are designated and effective as cash flow hedges. As of September 30, 2011 and December 31, 2010, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with these hedges was as follows:

 

    

As of

September 30,

2011

    

As of

December 31,

2010

 
     Millions  

Fair Value of Cash Flow Hedges

   $ 79       $ 196   

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

   $ 34       $ 114   

The expiration date of the longest-dated cash flow hedge at Power is in 2013. Power’s after-tax unrealized gains on these derivatives that are expected to be reclassified to earnings during the next 12 months are $33 million. There was ineffectiveness of $3 million associated with these hedges as of September 30, 2011.

Trading Derivatives

The primary 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. Historically, Power engaged in trading of electricity and energy-related products where such transactions were not associated with the output or fuel purchase requirements of its facilities. This trading consisted mostly of energy supply contracts where Power secured sales commitments with the intent to supply the energy services from purchases in the market rather than from its owned generation. Such trading activities are marked to market through the income statement and represented less than one percent of gross margin (revenues less energy costs) on an annual basis. Effective July 2011, Power anticipates that it will only enter into transactions that are associated with the output or fuel purchase requirements of its facilities.

Other Derivatives

Power enters into additional contracts that are derivatives, but do not qualify for or are not designated as cash flow hedges. These asset backed transactions are intended to mitigate exposure to fluctuations in commodity prices and optimize the value of our expected generation. Trade types include financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. Changes in fair market value of these contracts are recorded in earnings. The fair value of these contracts as of September 30, 2011 and December 31, 2010 was $19 million and $(4) million, respectively.

Interest Rates

PSEG, Power and PSE&G are subject to the risk of fluctuating interest rates in the normal course of business. Exposure to this risk is managed by targeting a balanced debt maturity profile which limits refinancing in any given period or interest rate environment. In addition, we have used a mix of fixed and floating rate debt, interest rate swaps and interest rate lock agreements.

 

35


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Fair Value Hedges

PSEG enters into fair value hedges to convert fixed-rate debt into variable-rate debt. Since 2009, PSEG has entered into eleven interest rate swaps totaling $1.4 billion. These swaps convert $300 million of Power’s $600 million of 6.95% Senior Notes due June 2012, Power’s $250 million of 5% Senior Notes due April 2014, Power’s $300 million of 5.5% Senior Notes due December 2015, $300 million of Power’s $303 million of 5.32% Senior Notes due September 2016 and Power’s $250 million of 2.75% Senior Notes due September 2016 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the changes in the fair value of the underlying debt. As of September 30, 2011 and December 31, 2010, the fair value of all the underlying hedges was $66 million and $39 million, respectively.

Cash Flow Hedges

PSEG 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 September 30, 2011, there was no hedge ineffectiveness associated with these hedges. The total fair value of these interest rate derivatives was immaterial as of each of September 30, 2011 and December 31, 2010. The Accumulated Other Comprehensive Income (Loss) (after tax) related to interest rate derivatives designated as cash flow hedges was $(3) million and $(3) million as of September 30, 2011 and December 31, 2010, respectively.

Fair Values of Derivative Instruments

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

 

    As of September 30, 2011  
    Power    

PSE&G

   

PSEG

   

Consolidated

 
   

Cash Flow

Hedges

   

Non
Hedges

   

Netting
(A)

   

Total
Power

   

Non
Hedges

   

Fair Value

Hedges

       

Balance Sheet Location

 

Energy-
Related
Contracts

   

Energy-
Related
Contracts

       

Energy-
Related
Contracts

   

Interest
Rate
Swaps

   

Total
Derivatives

 
    Millions  

Derivative Contracts

             

Current Assets

  $ 76      $ 232      $ (213   $ 95      $ 0      $ 18      $ 113   

Noncurrent Assets

    7        44        (27     24        0        51        75   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Mark-to-Market Derivative Assets

  $ 83      $ 276      $ (240 )    $ 119      $ 0      $ 69      $ 188   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative Contracts

             

Current Liabilities

  $ (2   $ (281   $ 204      $ (79   $ (15   $ 0      $ (94

Noncurrent Liabilities

    (2     (41     26        (17     (11     (3     (31
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Mark-to-Market Derivative (Liabilities)

  $ (4 )    $ (322 )    $ 230      $ (96 )    $ (26 )    $ (3 )    $ (125 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 79      $ (46 )    $ (10 )    $ 23      $ (26 )    $ 66      $ 63   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

     As of December 31, 2010  
    Power     PSE&G     PSEG     Consolidated  
    Cash Flow
Hedges
    Non
Hedges
    Netting
(A)
    Total
Power
    Non
Hedges
    FairValue
Hedges
       

Balance Sheet Location

 

Energy-

Related

Contracts

   

Energy-

Related

Contracts

       

Energy-

Related

Contracts

   

Interest

Rate

Swaps

   

Total

Derivatives

 
    Millions  
Derivative Contracts              

Current Assets

  $ 204      $ 403      $ (444   $ 163      $ 0      $ 19      $ 182   

Noncurrent Assets

    3        80        (41     42        17        20        79   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Mark-to-Market Derivative Assets

  $ 207      $ 483      $ (485 )    $ 205      $ 17      $ 39      $ 261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative Contracts

             

Current Liabilities

  $ (11   $ (454   $ 374      $ (91   $ (12   $ 0      $ (103

Noncurrent Liabilities

    0        (72     50        (22     0        0        (22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Mark-to-Market Derivative (Liabilities)

  $ (11 )    $ (526 )    $ 424      $ (113 )    $ (12 )    $ 0      $ (125 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 196      $ (43 )    $ (61 )    $ 92      $ 5      $ 39      $ 136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(A) Represents the netting of fair value balances with the same counterparty and the application of collateral. As of September 30, 2011 and December 31, 2010, net cash collateral received of $10 million and $61 million, respectively, was netted against the corresponding net derivative contract positions. Of the $10 million as of September 30, 2011, cash collateral of $(9) million and $(1) million were netted against current assets and noncurrent assets, respectively. Of the $61 million as of December 31, 2010, cash collateral of $(132) million and $(3) million were netted against current assets and noncurrent assets, respectively, and cash collateral of $62 million and $12 million were netted against current liabilities and noncurrent liabilities, respectively.

The aggregate fair value of energy-related contracts in a liability position as of September 30, 2011 that contain triggers for additional collateral was $182 million. This potential additional collateral is included in the $765 million discussed in Note 8. Commitments and Contingent Liabilities.

 

37


Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended September 30, 2011 and 2010:

 

Derivatives in

Cash Flow Hedging

Relationships

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

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

in Income on
Derivatives
(Ineffective
Portion)
   Amount of
Pre-Tax
Gain (Loss)
Recognized
in Income on
Derivatives
(Ineffective
Portion)
 
   Three Months
Ended
September 30,
          Three Months
Ended
September 30,
          Three Months
Ended
September 30,
 
   2011      2010           2011      2010           2011      2010  
     Millions  

PSEG

                       

Energy-Related Contracts

   $ 21       $ 62       Operating Revenues    $ 60       $ 60       Operating Revenues    $ 0       $ 0   
Energy-Related Contracts      0         0       Energy Costs      0         0            0         0   

Interest Rate Swaps

     0         0       Interest Expense      0         0            0         0   
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

Total PSEG

   $ 21       $ 62          $ 60       $ 60          $ 0       $ 0   
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

Power

                       
                       

Energy-Related Contracts

   $ 21       $ 62       Operating Revenues    $ 60       $ 60       Operating Revenues    $ 0       $ 0   
Energy-Related Contracts      0         0       Energy Costs      0         0            0         0   
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

Total Power

   $ 21       $ 62          $ 60       $ 60          $ 0       $ 0   
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

 

The following shows the effect on the Condensed Consolidated Statements of Operations and on AOCI of derivative instruments designated as cash flow hedges for the nine months ended September 30, 2011 and 2010:

 

Derivatives in

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)
 
  Nine Months
Ended
September 30,
        Nine Months
Ended
September 30,
        Nine Months
Ended
September 30,
 
  2011     2010         2011     2010         2011     2010  
    Millions  

PSEG (A)

               

Energy-Related Contracts

  $ 18      $ 171      Operating Revenues   $ 152      $ 178      Operating Revenues</