UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission |
Registrants, State of Incorporation, |
I.R.S. Employer |
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001-09120 |
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED |
22-2625848 |
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000-32503 |
PSEG ENERGY HOLDINGS L.L.C. |
42-1544079 |
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Public Service Enterprise Group Incorporated |
Large accelerated filer S |
Accelerated filer £ |
Non-accelerated filer £ |
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PSEG Energy Holdings L.L.C. |
Large accelerated filer £ |
Accelerated filer £ |
Non-accelerated filer S |
Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S
As of April 30, 2007, Public Service Enterprise Group Incorporated had outstanding 253,516,650 shares of its sole class of Common Stock, without par value.
PSEG Energy Holdings L.L.C. is a wholly owned subsidiary of Public Service Enterprise Group Incorporated and meets the conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q and is filing its Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H.
EXPLANATORY NOTE—RESTATEMENT This
Form 10-Q/A is being filed to amend the Form 10-Q for the quarter ended March 31,
2007 to reflect a change to the Condensed Consolidated Balance Sheets as
of March 31, 2007 for Public Service Enterprise Group Incorporated (PSEG)
and PSEG Energy Holdings L.L.C. (Energy Holdings) to reclass
$207 million from Long-Term Debt to Long-Term Debt Due Within One Year. This
change relates to an error in the classification of $207 million of Energy
Holdings’ Senior Notes due in February 2008 as
reported in the PSEG and Energy Holdings March 31, 2007, Form 10-Q. In addition,
during the second quarter of 2007, an immaterial error was discovered in
the calculation of the cumulative effect of adopting Financial Accounting
Standards Board (FASB) Staff Position (FSP) No. FAS 13-2 “Accounting
for a Change or Projected Change in the Timing of Cash Flows Relating to
Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2)
recorded in the first quarter of 2007. As a result, Energy Holdings recognized
an additional $15 million reduction in Retained Earnings, an increase of
$19 million in Deferred Taxes and an increase of $4 million in Investment
in Leveraged Leases. This restatement is limited to these line items and
time period, and had no effect on PSEG’s or
Energy Holdings’ results of operations, cash flows or margins. For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, each item of the Form 10-Q for the quarter ended March 31, 2007 as
originally filed on May 4, 2007 that was affected by the restatement has been amended to the extent affected and restated in its entirety. No attempt has been made in this Form 10-Q/A to modify or update
other disclosures as presented in the original Form 10-Q except as required to reflect the effects of the restatement. This
combined Form 10-Q/A for the quarter ended March 31,
2007 is being filed by PSEG and Energy Holdings. Except
for Part I, Items 1, 2 and 4 and certain exhibits under Part II,
Item 6, no other information included in the Form 10-Q, as originally
filed on May 4, 2007, is
being revised by or being repeated in this document.
TABLE OF CONTENTS
Page
ii
Item 1.
1
5
9
12
16
17
Note 3. Discontinued Operations, Dispositions and Impairments
19
21
21
31
34
34
35
36
37
39
40
42
44
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
45
45
49
55
61
61
Item 4.
62
Item 6.
63
65 i
Certain of the matters discussed in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are
subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such statements are based on management’s beliefs as well as assumptions made by and
information currently available to management. When used herein, the words “anticipate,” “intend,” “estimate,” “believe,” “expect,” “plan,” “hypothetical,” “potential,” “forecast,” “project,” variations of
such words and similar expressions are intended to identify forward-looking statements. Public Service Enterprise Group Incorporated (PSEG), Public Service Electric and Gas Company (PSE&G), PSEG
Power LLC (Power) and PSEG Energy Holdings L.L.C. (Energy Holdings) undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise. The following review should not be construed as a complete list of factors that could affect forward-looking statements. In addition to any assumptions and other factors referred
to specifically in connection with such forward-looking statements discussed above, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements
include, among others, the following:
•
regulatory issues that significantly impact operations; • ability to attain satisfactory regulatory results; • operating performance or cash flow from investments falling below projected levels; • credit, commodity, interest rate, counterparty and other financial market risks; • liquidity and the ability to access capital and maintain adequate credit ratings; • adverse or unanticipated weather conditions that significantly impact costs and/or operations, including generation; • ability to attract and retain management and other key employees; • changes in the electric industry, including changes to regional transmission organizations and power pools; • changes in energy policies and regulation; • changes in demand; • changes in the number of market participants and the risk profiles of such participants; • availability of power transmission facilities that impact the ability to deliver output to customers; • growth in costs and expenses; • environmental regulations that significantly impact operations; • changes in rates of return on overall debt and equity markets that could adversely impact the value of pension and other postretirement benefits assets and liabilities and the Nuclear
Decommissioning Trust Funds; • changes in political conditions; • changes in technology that make generation, transmission and/or distribution assets less competitive; • continued availability of insurance coverage at commercially reasonable rates; • involvement in lawsuits, including liability claims and commercial disputes; • acquisitions, divestitures, mergers, restructurings or strategic initiatives that change PSEG’s, PSE&G’s, Power’s and Energy Holdings’ strategy or structure; • business combinations among competitors and major customers; • general economic conditions, including inflation or deflation; • changes in tax laws and regulations; • changes to accounting standards or accounting principles generally accepted in the U.S., which may require adjustments to financial statements; • ability to recover investments or service debt as a result of any of the risks or uncertainties mentioned herein; • acts of war or terrorism; ii
PSEG, PSE&G and Energy Holdings
•
adverse changes in rate regulation and/or ability to obtain adequate and timely rate relief;
PSEG, Power and Energy Holdings
inability to effectively manage portfolios of electric generation assets, gas supply contracts and electric and gas supply obligations; • inability to meet generation operating performance expectations; • energy transmission constraints or lack thereof; • adverse changes in the market for energy, capacity, natural gas, coal, nuclear fuel, emissions credits, congestion credits and other commodity prices, especially during significant price movements for
natural gas and power; • adverse market developments or changes in market rules, including delays or impediments to implementation of reasonable capacity markets; • surplus of energy capacity and excess supply; • substantial competition in the domestic and worldwide energy markets; • margin posting requirements, especially during significant price movements for natural gas and power; • availability of fuel and timely transportation at reasonable prices; • effects on competitive position of actions involving competitors or major customers; • changes in product or sourcing mix; • delays, cost escalations or unsuccessful construction and development; PSEG and Power
•
changes in regulation and safety and security measures at nuclear facilities; • ability to maintain nuclear operating performance at projected levels; PSEG and Energy Holdings
•
changes in foreign currency exchange rates; • deterioration in the credit of lessees and their ability to adequately service lease rentals; • ability to realize tax benefits and favorably resolve tax audit claims; • changes in political regimes in foreign countries; and • international developments negatively impacting business. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and PSEG, PSE&G, Power and Energy Holdings cannot assure you that the results or
developments anticipated by management will be realized, or even if realized, will have the expected consequences to, or effects on, PSEG, PSE&G, Power and Energy Holdings or their respective business
prospects, financial condition or results of operations. Undue reliance should not be placed on these forward-looking statements in making any investment decision. Each of PSEG, PSE&G, Power and
Energy Holdings expressly disclaims any obligation or undertaking to release publicly any updates or revisions to these forward-looking statements to reflect events or circumstances that occur or arise or
are anticipated to occur or arise after the date hereof. In making any investment decision regarding PSEG’s, PSE&G’s, Power’s and Energy Holdings’ securities, PSEG, PSE&G, Power and Energy Holdings
are not making, and you should not infer, any representation about the likely existence of any particular future set of facts or circumstances. The forward-looking statements contained in this report are
intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. iii
•
PART I. FINANCIAL INFORMATION PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
For the Quarters
2007
2006
(Millions) OPERATING REVENUES
$
3,614
$
3,461 OPERATING EXPENSES Energy Costs
2,041
2,146 Operation and Maintenance
610
578 Depreciation and Amortization
196
201 Taxes Other Than Income Taxes
43
41 Total Operating Expenses
2,890
2,966 Income from Equity Method Investments
26
33 OPERATING INCOME
750
528 Other Income
72
50 Other Deductions
(37
)
(27
) Interest Expense
(187
)
(193
) Preferred Stock Dividends
(1
)
(1
) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
597
357 Income Tax Expense
(262
)
(149
) INCOME FROM CONTINUING OPERATIONS
335
208 Loss from Discontinued Operations, net of tax benefit of $4 and $5 in 2007 and 2006, respectively
(6
)
(5
) NET INCOME
$
329
$
203 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS): BASIC
252,892
251,187 DILUTED
253,356
252,065 EARNINGS PER SHARE: BASIC INCOME FROM CONTINUING OPERATIONS
$
1.32
$
0.83 NET INCOME
$
1.30
$
0.81 DILUTED INCOME FROM CONTINUING OPERATIONS
$
1.32
$
0.83 NET INCOME
$
1.30
$
0.81 DIVIDENDS PAID PER SHARE OF COMMON STOCK
$
0.585
$
0.57 See Notes to Condensed Consolidated Financial Statements. 1
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Ended
March 31,
(Unaudited)
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
March 31,
December 31,
(Millions) ASSETS CURRENT ASSETS Cash and Cash Equivalents
$
483
$
141 Accounts Receivable, net of allowances of $60 and $52 in 2007 and 2006, respectively
1,806
1,368 Unbilled Revenues
260
328 Fuel
355
847 Materials and Supplies
297
290 Prepayments
54
72 Restricted Funds
46
79 Derivative Contracts
53
127 Assets of Discontinued Operations
325
325 Assets Held for Sale
42
40 Other
48
45 Total Current Assets
3,769
3,662 PROPERTY, PLANT AND EQUIPMENT
19,107
18,851 Less: Accumulated Depreciation and Amortization
(5,974
)
(5,849
) Net Property, Plant and Equipment
13,133
13,002 NONCURRENT ASSETS Regulatory Assets
5,288
5,694 Long-Term Investments
3,778
3,868 Nuclear Decommissioning Trust (NDT) Funds
1,324
1,256 Other Special Funds
154
147 Goodwill
534
539 Intangibles
49
46 Derivative Contracts
37
55 Other
300
301 Total Noncurrent Assets
11,464
11,906 TOTAL ASSETS
$
28,366
$
28,570 See Notes to Condensed Consolidated Financial Statements. 2
CONDENSED CONSOLIDATED BALANCE SHEETS
2007
(As Restated
see Note 15)
2006
(Unaudited)
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
March 31,
December 31,
(Millions) LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES Long-Term Debt Due Within One Year
$
946
$
849 Commercial Paper and Loans
277
381 Accounts Payable
1,013
964 Derivative Contracts
414
335 Accrued Interest
185
124 Accrued Taxes
225
152 Clean Energy Program
123
120 Other
508
481 Total Current Liabilities
3,691
3,406 NONCURRENT LIABILITIES Deferred Income Taxes and Investment Tax Credits (ITC)
4,098
4,462 Regulatory Liabilities
448
646 Asset Retirement Obligations
517
509 Other Postretirement Benefit (OPEB) Costs
1,091
1,089 Accrued Pension Costs
330
327 Clean Energy Program
105
133 Environmental Costs
416
421 Derivative Contracts
200
204 Long-Term Accrued Taxes
496
— Other
173
176 Total Noncurrent Liabilities
7,874
7,967 COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5) CAPITALIZATION LONG-TERM DEBT Long-Term Debt
7,431
7,636 Securitization Debt
1,668
1,708 Project Level, Non-Recourse Debt
822
840 Debt Supporting Trust Preferred Securities
186
186 Total Long-Term Debt
10,107
10,370 SUBSIDIARIES’ PREFERRED SECURITIES Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2007 and 2006—795,234 shares
80
80 COMMON STOCKHOLDERS’ EQUITY Common Stock, no par, authorized 500,000,000 shares; issued; 2007—266,576,508 shares; 2006—266,372,440 shares
4,683
4,661 Treasury Stock, at cost; 2007—13,189,987 shares; 2006—13,727,032 shares
(499
)
(516
) Retained Earnings
2,702
2,710 Accumulated Other Comprehensive Loss
(272
)
(108
) Total Common Stockholders’ Equity
6,614
6,747 Total Capitalization
16,801
17,197 TOTAL LIABILITIES AND CAPITALIZATION
$
28,366
$
28,570 See Notes to Condensed Consolidated Financial Statements. 3
CONDENSED CONSOLIDATED BALANCE SHEETS
2007
(As Restated
see Note 15)
2006
(Unaudited)
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
For The Quarters
Ended
2007
2006
(Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income
$
329
$
203 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: Depreciation and Amortization
196
205 Amortization of Nuclear Fuel
25
25 Provision for Deferred Income Taxes (Other than Leases) and ITC
(13
)
3 Non-Cash Employee Benefit Plan Costs
46
59 Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes
(15
)
(22
) Gain on Sale of Investments
(16
)
— Undistributed Losses (Earnings) from Affiliates
31
(29
) Foreign Currency Transaction Loss (Gain)
1
(1
) Unrealized Losses on Energy Contracts and Other Derivatives
34
21 (Under) Over Recovery of Electric Energy Costs (BGS and NTC) and Gas Costs
(47
)
49 Under Recovery of Societal Benefits Charge (SBC)
(1
)
(19
) Net Realized Gains and Income from NDT Funds
(19
)
(18
) Net Change in Certain Current Assets and Liabilities
450
524 Employee Benefit Plan Funding and Related Payments
(21
)
(35
) Investment Income and Dividend Distributions from Partnerships
11
1 Other
(35
)
(56
) Net Cash Provided By Operating Activities
956
910 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment
(275
)
(240
) Proceeds from the Sale of Investments and Return of Capital from Partnerships
7
2 Proceeds from NDT Funds Sales
501
300 Investment in NDT Funds
(511
)
(305
) Restricted Funds
34
(17
) NDT Funds Interest and Dividends
12
10 Other
(1
)
17 Net Cash Used In Investing Activities
(233
)
(233
) CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Commercial Paper and Loans
(104
)
54 Issuance of Common Stock
33
17 Redemptions of Long-Term Debt
(113
)
(457
) Repayment of Non-Recourse Debt
(16
)
(12
) Redemption of Securitization Debt
(38
)
(36
) Redemption of Debt Underlying Trust Securities
—
(154
) Cash Dividends Paid on Common Stock
(148
)
(143
) Other
5
(15
) Net Cash Used In Financing Activities
(381
)
(746
) Effect of Exchange Rate Change
—
(1
) Net Increase (Decrease) in Cash and Cash Equivalents
342
(70
) Cash and Cash Equivalents at Beginning of Period
141
288 Cash and Cash Equivalents at End of Period
$
483
$
218 Supplemental Disclosure of Cash Flow Information: Income Taxes Paid
$
85
$
25 Interest Paid, Net of Amounts Capitalized
$
126
$
134 See Notes to Condensed Consolidated Financial Statements. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31,
(Unaudited)
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
For The Quarters
2007
2006
(Millions) OPERATING REVENUES
$
2,486
$
2,293 OPERATING EXPENSES Energy Costs
1,665
1,574 Operation and Maintenance
325
301 Depreciation and Amortization
145
152 Taxes Other Than Income Taxes
43
41 Total Operating Expenses
2,178
2,068 OPERATING INCOME
308
225 Other Income
5
4 Other Deductions
(1
)
(1
) Interest Expense
(81
)
(85
) INCOME BEFORE INCOME TAXES
231
143 Income Tax Expense
(99
)
(65
) NET INCOME
132
78 Preferred Stock Dividends
(1
)
(1
) EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
$
131
$
77 See disclosures regarding Public Service Electric and Gas Company 5
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Ended
March 31,
(Unaudited)
GROUP INCORPORATED
included in the Notes to Condensed Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
March 31,
December 31,
(Millions) ASSETS CURRENT ASSETS Cash and Cash Equivalents
$
45
$
28 Accounts Receivable, net of allowances of $55 in 2007 and $46 in 2006
1,142
805 Unbilled Revenues
260
328 Materials and Supplies
57
50 Prepayments
16
14 Restricted Funds
13
12 Other
44
38 Total Current Assets
1,577
1,275 PROPERTY, PLANT AND EQUIPMENT
11,193
11,061 Less: Accumulated Depreciation and Amortization
(3,853
)
(3,794
) Net Property, Plant and Equipment
7,340
7,267 NONCURRENT ASSETS Regulatory Assets
5,288
5,694 Long-Term Investments
150
149 Other Special Funds
54
53 Other
115
115 Total Noncurrent Assets
5,607
6,011 TOTAL ASSETS
$
14,524
$
14,553 See disclosures regarding Public Service Electric and Gas Company 6
CONDENSED CONSOLIDATED BALANCE SHEETS
2007
2006
(Unaudited)
included in the Notes to Condensed Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
March 31,
December 31,
(Millions) LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES Long-Term Debt Due Within One Year
$
173
$
284 Commercial Paper and Loans
269
31 Accounts Payable
261
254 Accounts Payable—Affiliated Companies, net
503
645 Accrued Interest
43
55 Clean Energy Program
123
120 Derivative Contracts
15
2 Other
398
322 Total Current Liabilities
1,785
1,713 NONCURRENT LIABILITIES Deferred Income Taxes and ITC
2,494
2,517 Other Postretirement Benefit (OPEB) Costs
897
898 Accrued Pension Costs
133
133 Regulatory Liabilities
448
646 Clean Energy Program
105
133 Environmental Costs
363
367 Asset Retirement Obligations
223
221 Derivative Contracts
27
18 Long-Term Accrued Taxes Due to Affiliate
51
— Other
6
6 Total Noncurrent Liabilities
4,747
4,939 COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5) CAPITALIZATION LONG-TERM DEBT Long-Term Debt
3,003
3,003 Securitization Debt
1,668
1,708 Total Long-Term Debt
4,671
4,711 PREFERRED SECURITIES Preferred Stock Without Mandatory Redemption, $100 par value, 7,500,000 authorized; issued and outstanding, 2007 and 2006—795,234 shares
80
80 COMMON STOCKHOLDER’S EQUITY Common Stock; 150,000,000 shares authorized, 132,450,344 shares issued and outstanding
892
892 Contributed Capital
170
170 Basis Adjustment
986
986 Retained Earnings
1,192
1,061 Accumulated Other Comprehensive Income
1
1 Total Common Stockholder’s Equity
3,241
3,110 Total Capitalization
7,992
7,901 TOTAL LIABILITIES AND CAPITALIZATION
$
14,524
$
14,553 See disclosures regarding Public Service Electric and Gas Company 7
CONDENSED CONSOLIDATED BALANCE SHEETS
2007
2006
(Unaudited)
included in the Notes to Condensed Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
For the Quarters
Ended
2007
2006
(Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income
$
132
$
78 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: Depreciation and Amortization
145
152 Provision for Deferred Income Taxes and ITC
(24
)
(25
) Non-Cash Employee Benefit Plan Costs
35
42 Non-Cash Interest Expense
1
— Employee Benefit Plan Funding and Related Payments
(16
)
(13
) Over Recovery of Electric Energy Costs (BGS and NTC)
4
19 (Under)/Over Recovery of Gas Costs
(51
)
30 Under Recovery of SBC
(1
)
(19
) Other Non-Cash Charges
(1
)
(1
) Net Changes in Certain Current Assets and Liabilities: Accounts Receivable and Unbilled Revenues
(269
)
82 Materials and Supplies
(7
)
— Prepayments
(4
)
35 Accrued Taxes
41
22 Accrued Interest
(11
)
(16
) Accounts Payable
7
(34
) Accounts Receivable/Payable-Affiliated Companies, net
59
(52
) Other Current Assets and Liabilities
27
(21
) Other
(6
)
(12
) Net Cash Provided By Operating Activities
61
267 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment
(130
)
(108
) Net Cash Used In Investing Activities
(130
)
(108
) CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Short-Term Debt
238
— Redemption of Securitization Debt
(38
)
(36
) Redemption of Long-Term Debt
(113
)
(148
) Preferred Stock Dividends
(1
)
(1
) Net Cash Provided by (Used In) Financing Activities
86
(185
) Net Increase (Decrease) In Cash and Cash Equivalents
17
(26
) Cash and Cash Equivalents at Beginning of Period
28
159 Cash and Cash Equivalents at End of Period
$
45
$
133 Supplemental Disclosure of Cash Flow Information: Income Taxes Paid
$
49
$
(4
) Interest Paid, Net of Amounts Capitalized
$
102
$
92 See disclosures regarding Public Service Electric and Gas Company 8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31,
(Unaudited)
included in the Notes to Condensed Consolidated Financial Statements.
PSEG POWER LLC
For the Quarters
Ended
2007
2006
(Millions) OPERATING REVENUES
$
2,149
$
1,967 OPERATING EXPENSES Energy Costs
1,488
1,487 Operation and Maintenance
238
232 Depreciation and Amortization
34
31 Total Operating Expenses
1,760
1,750 OPERATING INCOME
389
217 Other Income
51
41 Other Deductions
(29
)
(19
) Interest Expense
(37
)
(32
) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
374
207 Income Tax Expense
(155
)
(86
) INCOME FROM CONTINUING OPERATIONS
219
121 Loss from Discontinued Operations, net of tax benefit of $4 and $6 in 2007 and 2006, respectively
(6
)
(9
) EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
$
213
$
112 See disclosures regarding PSEG Power LLC included in the 9
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
March 31,
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
PSEG POWER LLC
March 31,
December 31,
(Millions) ASSETS CURRENT ASSETS Cash and Cash Equivalents
$
7
$
13 Accounts Receivable
535
430 Accounts Receivable - Affiliated Companies, net
251
495 Short-Term Loan to Affiliate
525
— Fuel
354
846 Materials and Supplies
204
202 Energy Trading Contracts
50
55 Derivative Contracts
1
56 Assets of Discontinued Operations
325
325 Assets Held for Sale
40
40 Other
23
26 Total Current Assets
2,315
2,488 PROPERTY, PLANT AND EQUIPMENT
5,969
5,868 Less: Accumulated Depreciation and Amortization
(1,696
)
(1,638
) Net Property, Plant and Equipment
4,273
4,230 NONCURRENT ASSETS Deferred Income Taxes and Investment Tax Credits (ITC)
39
— Nuclear Decommissioning Trust (NDT) Funds
1,324
1,256 Goodwill
16
16 Other Intangibles
38
35 Other Special Funds
43
42 Energy Trading Contracts
10
10 Derivative Contracts
19
19 Other
51
50 Total Noncurrent Assets
1,540
1,428 TOTAL ASSETS
$
8,128
$
8,146 LIABILITIES AND MEMBER’S EQUITY CURRENT LIABILITIES Accounts Payable
$
623
$
589 Short-Term Loan from Affiliate
—
54 Energy Trading Contracts
66
222 Derivative Contracts
311
90 Accrued Interest
80
34 Other
96
95 Total Current Liabilities
1,176
1,084 NONCURRENT LIABILITIES Deferred Income Taxes and Investment Tax Credits (ITC)
—
48 Asset Retirement Obligations
292
287 Other Postretirement Benefit (OPEB) Costs
139
138 Energy Trading Contracts
5
19 Derivative Contracts
157
151 Accrued Pension Costs
107
106 Environmental Costs
53
54 Long-Term Accrued Taxes due to Affiliate
22
— Other
16
18 Total Noncurrent Liabilities
791
821 COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5) LONG-TERM DEBT Total Long-Term Debt
2,818
2,818 MEMBER’S EQUITY Contributed Capital
2,000
2,000 Basis Adjustment
(986
)
(986
) Retained Earnings
2,661
2,586 Accumulated Other Comprehensive Loss
(332
)
(177
) Total Member’s Equity
3,343
3,423 TOTAL LIABILITIES AND MEMBER’S EQUITY
$
8,128
$
8,146 See disclosures regarding PSEG Power LLC included in the 10
CONDENSED CONSOLIDATED BALANCE SHEETS
2007
2006
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
PSEG POWER LLC
For The Quarters
2007
2006
(Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income
$
213
$
112 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: Depreciation and Amortization
34
35 Amortization of Nuclear Fuel
25
25 Interest Accretion on Asset Retirement Obligations
6
8 Provision for Deferred Income Taxes and ITC
26
24 Unrealized Losses on Energy Contracts and Other Derivatives
4
21 Non-Cash Employee Benefit Plan Costs
7
11 Net Realized Gains and Income from NDT Funds
(19
)
(18
) Net Change in Certain Current Assets and Liabilities: Fuel, Materials and Supplies
490
413 Accounts Receivable
(105
)
187 Accrued Interest
46
55 Accounts Payable
57
(292
) Accounts Receivable/Payable-Affiliated Companies, net
72
145 Other Current Assets and Liabilities
4
18 Employee Benefit Plan Funding and Related Payments
(1
)
(16
) Other
(35
)
(46
) Net Cash Provided By Operating Activities
824
682 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment
(126
)
(118
) Proceeds from NDT Funds Sales
501
300 NDT Funds Interest and Dividends
12
10 Investment in NDT Funds
(511
)
(305
) Short-Term Loan - Affiliated Company, net
(525
)
(380
) Other
(2
)
10 Net Cash Used In Investing Activities
(651
)
(483
) CASH FLOWS FROM FINANCING ACTIVITIES Cash Dividend Paid
(125
)
— Short-Term Loan—Affiliated Company, net
(54
)
(202
) Net Cash Used In Financing Activities
(179
)
(202
) Net Decrease in Cash and Cash Equivalents
(6
)
(3
) Cash and Cash Equivalents at Beginning of Period
13
8 Cash and Cash Equivalents at End of Period
$
7
$
5 Supplemental Disclosure of Cash Flow Information: Income Taxes Paid
$
24
$
18 Interest Paid, Net of Amounts Capitalized
$
3
$
2 See disclosures regarding PSEG Power LLC included in the 11
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Ended
March 31,
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
[THIS PAGE INTENTIONALLY LEFT BLANK]
PSEG ENERGY HOLDINGS L.L.C.
For The Quarters
2007
2006
(Millions) OPERATING REVENUES Electric Generation and Distribution Revenues
$
201
$
263 Income from Leveraged and Operating Leases
33
39 Other
20
10 Total Operating Revenues
254
312 OPERATING EXPENSES Energy Costs
161
194 Operation and Maintenance
53
49 Depreciation and Amortization
14
12 Total Operating Expenses
228
255 Income from Equity Method Investments
26
33 OPERATING INCOME
52
90 Other Income
16
7 Other Deductions
(2
)
(7
) Interest Expense
(43
)
(50
) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
23
40 Income Tax Expense
(20
)
(12
) INCOME FROM CONTINUING OPERATIONS
3
28 Income from Discontinued Operations, net of tax expense of $1 in 2006
—
4 EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
$
3
$
32 See disclosures regarding PSEG Energy Holdings L.L.C. included in the 12
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Ended
March 31,
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
PSEG ENERGY HOLDINGS L.L.C.
March 31,
December 31,
(Millions) ASSETS CURRENT ASSETS Cash and Cash Equivalents
$
65
$
98 Accounts Receivable: Trade-net of allowances of $5 and $6 in 2007 and 2006, respectively
111
103 Other Accounts Receivable
18
29 Affiliated Companies
33
— Notes Receivable: Affiliated Companies
25
28 Inventory
35
41 Restricted Funds
33
67 Assets Held for Sale
2
— Derivative Contracts
2
14 Other
7
8 Total Current Assets
331
388 PROPERTY, PLANT AND EQUIPMENT
1,726
1,706 Less: Accumulated Depreciation and Amortization
(310
)
(307
) Net Property, Plant and Equipment
1,416
1,399 NONCURRENT ASSETS Leveraged Leases, net
2,750
2,810 Corporate Joint Ventures and Partnership Interests
836
868 Goodwill
518
523 Intangibles
11
11 Derivative Contracts
8
26 Other
139
139 Total Noncurrent Assets
4,262
4,377 TOTAL ASSETS
$
6,009
$
6,164 See disclosures regarding PSEG Energy Holdings L.L.C. included in the 13
CONDENSED CONSOLIDATED BALANCE SHEETS
2007
(As Restated
See Note 15)
2006
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
PSEG ENERGY HOLDINGS L.L.C.
March 31,
December 31,
(Millions) LIABILITIES AND MEMBER’S EQUITY CURRENT LIABILITIES Long-Term Debt Due Within One Year
$
250
$
42 Short-Term Borrowings
8
— Accounts Payable: Trade
67
54 Affiliated Companies
2
12 Derivative Contracts
17
16 Accrued Interest
44
27 Other
63
72 Total Current Liabilities
451
223 NONCURRENT LIABILITIES Deferred Income Taxes and Investment and Energy Tax Credits
1,672
1,925 Derivative Contracts
8
11 Long-Term Accrued Taxes due to Affiliate
424
— Other
103
102 Total Noncurrent Liabilities
2,207
2,038 COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5) MINORITY INTERESTS
26
26 LONG-TERM DEBT Project Level, Non-Recourse Debt
822
840 Senior Notes
942
1,149 Total Long-Term Debt
1,764
1,989 MEMBER’S EQUITY Ordinary Unit
1,048
1,193 Retained Earnings
419
592 Accumulated Other Comprehensive Income
94
103 Total Member’s Equity
1,561
1,888 TOTAL LIABILITIES AND MEMBER’S EQUITY
$
6,009
$
6,164 See disclosures regarding PSEG Energy Holdings L.L.C. included in the 14
CONDENSED CONSOLIDATED BALANCE SHEETS
2007
(As Restated
See Note 15)
2006
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
PSEG ENERGY HOLDINGS L.L.C.
For The Quarters
Ended
2007
2006
(Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income
$
3
$
32 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities: Depreciation and Amortization
14
13 Demand Side Management Amortization
—
1 Deferred Income Taxes (Other than Leases)
(14
)
4 Leveraged Lease Income, Adjusted for Rents Received and Deferred Income Taxes
(15
)
(22
) Undistributed Losses (Earnings) from Affiliates
31
(29
) Gain on Sale of Investments
(16
)
(2
) Unrealized Gain on Investments
—
(1
) Foreign Currency Transaction Loss (Gain)
1
(1
) Change in Fair Value of Derivative Financial Instruments
30
1 Net Changes in Certain Current Assets and Liabilities: Accounts Receivable
13
25 Inventory
5
3 Accounts Payable
21
(29
) Other Current Assets and Liabilities
7
4 Investment Income and Dividend Distributions from Partnerships
11
1 Other
—
1 Net Cash Provided By Operating Activities
91
1 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment
(16
)
(14
) Proceeds from Sale of Property
—
1 Proceeds from the Sale of Investments
7
2 Short-Term Loan Receivable - Affiliated Company, net
3
351 Restricted Funds
34
(17
) Other
1
1 Net Cash Provided By Investing Activities
29
324 CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Short-Term Borrowings
8
— Repayment of Non-Recourse Long-Term Debt
(16
)
(12
) Repayment of Senior Notes
—
(309
) Return of Contributed Capital
(145
)
— Other
—
(1
) Net Cash Used In Financing Activities
(153
)
(322
) Effect of Exchange Rate Change
—
(1
) Net (Decrease) Increase In Cash and Cash Equivalents
(33
)
2 Cash and Cash Equivalents at Beginning of Period
98
68 Cash and Cash Equivalents at End of Period
$
65
$
70 Supplemental Disclosure of Cash Flow Information: Income Taxes Paid
$
1
$
2 Interest Paid, Net of Amounts Capitalized
$
23
$
26 See disclosures regarding PSEG Energy Holdings L.L.C. included in the 15
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31,
(Unaudited)
Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS This combined Form 10-Q/A is separately filed by Public Service Enterprise Group Incorporated (PSEG), and PSEG Energy Holdings L.L.C. (Energy Holdings). Information contained herein relating
to any individual company is filed by such company on its own behalf. Energy Holdings makes representations only as to itself and makes no representations as to any other company. Note 1. Organization and Basis of Presentation Organization PSEG PSEG has four principal direct wholly owned subsidiaries: PSE&G, Power, Energy Holdings and PSEG Services Corporation (Services). PSE&G PSE&G is an operating public utility engaged principally in the transmission of electric energy and distribution of electric energy and natural gas in certain areas of New Jersey. PSE&G is subject to
regulation by the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). PSE&G also owns PSE&G Transition Funding LLC (Transition Funding) and PSE&G Transition Funding II LLC (Transition Funding II), bankruptcy-remote entities that purchased certain transition
property from PSE&G and issued transition bonds secured by such property. The transition property consists principally of the rights to receive electricity consumption-based per kilowatt-hour (kWh) charges
from PSE&G electric distribution customers, which represent irrevocable rights to receive amounts sufficient to recover certain of PSE&G’s transition costs related to deregulation, as approved by the BPU. Power Power is a multi-regional, wholesale energy supply company that integrates its generating asset operations and gas supply commitments with its wholesale energy, fuel supply, energy trading and
marketing and risk management function through three principal direct wholly owned subsidiaries: PSEG Nuclear LLC (Nuclear), PSEG Fossil LLC (Fossil) and PSEG Energy Resources & Trade LLC
(ER&T). Nuclear and Fossil own and operate generation and generation-related facilities. ER&T is responsible for the day-to-day management of Power’s portfolio. Fossil, Nuclear and ER&T are subject to
regulation by FERC, and certain Fossil subsidiaries are also subject to state regulation, and Nuclear is also subject to regulation by the Nuclear Regulatory Commission (NRC). Energy Holdings Energy Holdings has two principal direct wholly owned subsidiaries: PSEG Global L.L.C. (Global), which owns and operates international and domestic projects engaged in the generation and
distribution of energy and PSEG Resources L.L.C. (Resources), which has invested primarily in energy-related leveraged leases. Energy Holdings also owns Enterprise Group Development Corporation
(EGDC), a commercial real estate property management business. Services Services provides management and administrative and general services to PSEG and its subsidiaries. These include accounting, treasury, risk management, planning, information technology, tax, law,
corporate secretarial, human resources, investor relations, corporate communications and certain other services. Services charges PSEG and its subsidiaries for the cost of work performed and services
provided pursuant to the terms and conditions of intercompany service agreements. Basis of Presentation PSEG, PSE&G, Power and Energy Holdings The respective financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q.
Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed
or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements and Notes to 16
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Financial Statements (Notes) should be read in conjunction with, and update and supplement matters discussed in PSEG’s, PSE&G’s, Power’s and Energy Holdings’ respective
Annual Reports on Form 10-K for the year ended December 31, 2006. The unaudited condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim
periods presented. All such adjustments are of a normal recurring nature. The year-end Condensed Consolidated Balance Sheets were derived from the audited Consolidated Financial Statements included
in the Annual Report on Form 10-K for the year ended December 31, 2006. Reclassifications PSEG, PSE&G, Power and Energy Holdings Certain reclassifications have been made to the prior quarter financial statements to conform to the current quarter presentation. The reclassifications relate primarily to PSE&G’s determination, during
the fourth quarter of 2006, that the revenues and expenses related to one of its contracts that had been recorded on a gross basis would more appropriately be recorded on a net basis in Operating Revenues
based upon the provisions of EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”. Therefore, prior amounts have been reclassified, resulting in a reduction of $57 million in both
Operating Revenues and Energy Costs for the quarter ended March 31, 2006 for PSEG and PSE&G, with no impact on Operating Income. Note 2. Recent Accounting Standards The following accounting standards were issued by the Financial Accounting Standards Board (FASB), but have not yet been adopted by PSEG, PSE&G, Power and Energy Holdings. Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157) PSEG, PSE&G, Power and Energy Holdings In September 2006, the FASB issued SFAS 157, which provides a single definition of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Prior to SFAS 157, guidance for applying fair value was incorporated into several accounting pronouncements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific
measurement, and sets out a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources (observable inputs) and those based on an entity’s own
assumptions (unobservable inputs). Under SFAS 157, fair value measurements are disclosed by level within that hierarchy, with the highest priority being quoted prices in active markets. While this
statement does not require any new fair value measurements, the application of this statement will change current practice for some fair value measurements. This statement also nullifies the guidance in footnote 3 of Emerging Issues Task Force (EITF) Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management Activities” (EITF 02-3). The guidance in footnote 3 applies to derivative instruments measured at fair value at initial recognition, and it
precludes immediate recognition in earnings of an unrealized gain or loss, measured as the difference between the transaction price and the fair value of the instrument at initial recognition, if the fair value
of the instrument is determined using significant unobservable inputs. Under EITF 02-3, an entity cannot recognize an unrealized gain or loss at inception of a derivative instrument unless the fair value of
that instrument is obtained from a quoted market price in an active market or is otherwise evidenced by comparison to other observable current market transactions or based on a valuation technique
incorporating observable market data. SFAS 157 requires that the principles of fair value measurement apply for derivatives and other financial instruments at initial recognition and in all subsequent
periods. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007; however, earlier application is encouraged. PSEG, PSE&G, Power and Energy Holdings are
currently assessing the potential impact of SFAS 157 on their respective consolidated financial positions and results of operations. 17
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159) PSEG, PSE&G, Power and Energy Holdings In February 2007, the FASB issued SFAS 159, which permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair
value. An entity will report unrealized gains and losses on items where the fair value option has been elected in earnings at each subsequent reporting date. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.
The decision about whether to elect the fair value option is applied instrument by instrument, with a few exceptions; the decision is irrevocable; and the decision is required to be applied to entire
instruments and not to portions of instruments. The statement requires disclosures that facilitate comparisons (a) between entities that choose different measurement attributes for similar assets and liabilities and (b) between assets and liabilities in
the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Upon implementation, an entity shall report the effect of the first remeasurement to fair value as
a cumulative effect adjustment to the opening balance of Retained Earnings. PSEG, PSE&G, Power and Energy Holdings are currently assessing the potential impact of SFAS 159 on their respective
consolidated financial positions and results of operations. The following new accounting standards were adopted by PSEG, PSE&G, Power and Energy Holdings during 2007. FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109” (FIN 48) PSEG, PSE&G, Power and Energy Holdings In July 2006, the FASB issued FIN 48, which prescribes a model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. Under FIN 48, the financial statements reflect expected future tax consequences of such positions presuming the tax authorities’ full knowledge of the position
and all relevant facts. FIN 48 permits recognition of the benefit of tax positions only when it is “more likely-than-not” that the position is sustainable based on the merits of the position. It further limits the
amount of tax benefit to be recognized to the largest amount of benefit that is greater than 50% likely of being realized. FIN 48 also requires explicit disclosures about uncertainties in income tax positions,
including a detailed roll-forward of unrecognized tax benefits taken that do not qualify for financial statement recognition. FIN 48 was effective January 1, 2007. In general, companies record the change in net assets that resulted from the application of FIN 48 as an adjustment to Retained Earnings. However, for PSE&G,
because any charges to income arising from the adoption of FIN 48 would be recoverable in future rates, the offset to any incremental PSE&G liability is recorded as a Regulatory Asset rather than Retained
Earnings. The following table presents the impact at January 1, 2007 on the Condensed Consolidated Balance Sheets for PSEG and its subsidiaries as a result of implementing FIN 48:
PSE&G
Power
Energy
PSEG
Balance Sheet
(Millions) Increase to Long Term Accrued Taxes
$
20
$
21
$
355
$
396 Decrease to Accumulated Deferred Income Tax Liability
$
9
$
7
$
246
$
262 Increase to Regulatory Assets
$
11
$
—
$
—
$
11 Decrease to Retained Earnings
$
—
$
14
$
109
$
123 The impact to earnings resulting from the adoption of FIN 48 for the quarter ended March 31, 2007 was an after-tax decrease of $6 million for PSEG, including $1 million for Power and $5 million for
Energy Holdings. There was no impact on earnings for PSE&G. For additional information relating to the impacts of FIN 48, see Note 11. Income Taxes. 18
(UNAUDITED)
Holdings
Consolidated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FASB Staff Position (FSP) No. FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-2) PSEG and Energy Holdings In July 2006, the FASB issued FSP 13-2, which addressed how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the
accounting by a lessor for that lease. The FSP amends SFAS 13, “Accounting for Leases,” stating that a change in the timing of the above referenced cash flows must be reviewed at least annually or more
frequently, if events or circumstances indicate a change in timing is probable. If a change in timing has occurred, or is projected to occur, the rate of return and the allocation of income to positive
investment years must be recalculated from the inception of the lease. The guidance in this FSP was adopted January 1, 2007. The cumulative effect of applying the provisions of this FSP is reported as an adjustment to the beginning balance of Retained Earnings as of the
date of adoption. As a result of implementing FSP 13-2, upon adoption PSEG and Energy Holdings each recognized a reduction in Investment in Leveraged Leases of $69 million, a reduction in Deferred
Income Taxes of $2 million and a reduction in Retained Earnings of $67 million. The impact to earnings resulting from the adoption of FSP 13-2 for the quarter ended March 31, 2007 was an after-tax decrease of $3 million for PSEG and Energy Holdings. Note 3. Discontinued Operations, Dispositions and Impairments Discontinued Operations Power Lawrenceburg Energy Center (Lawrenceburg) On December 29, 2006, Power entered into an agreement to sell its natural gas-fired Lawrenceburg facility located in Lawrenceburg, Indiana to AEP Generating Company, a subsidiary of American
Electric Power Company, Inc. (AEP). The sale price for the facility and inventory is $325 million. The proceeds, together with anticipated reduction in tax liability, are expected to be approximately $425 million and will be used to retire
debt. The transaction will result in an after-tax charge to PSEG’s and Power’s earnings of approximately $208 million, or about $0.82 cents per share of PSEG common stock, which was reflected as a charge
in Discontinued Operations in the fourth quarter of 2006. Power has received the required regulatory approvals for the sale and anticipates that the transaction will close in the second quarter of 2007. Lawrenceburg’s operating results for the quarters ended March 31, 2007 and 2006, which were reclassified to Discontinued Operations, are summarized below:
Quarters Ended
2007
2006
(Millions) Operating Revenues
$
—
$
— Loss Before Income Taxes
$
(10
)
$
(15
) Net Loss
$
(6
)
$
(9
) The carrying amounts of the assets of Lawrenceburg as of March 31, 2007 and December 31, 2006 are summarized in the following table:
As of
As of
(Millions) Current Assets
$
10
$
10 Noncurrent Assets
315
315 Total Assets of Discontinued Operations
$
325
$
325 19
(UNAUDITED)
March 31,
March 31, 2007
December 31, 2006
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Energy Holdings Elektrocieplownia Chorzow Elcho Sp. Z o.o. (Elcho) and Elektrownia Skawina SA (Skawina) On May 29, 2006, Global completed the sale of its interest in two coal-fired plants in Poland, Elcho and Skawina. Proceeds, net of transaction costs, were $476 million, resulting in a gain of $227 million
net of tax expense of $142 million. The 2006 operating results for Global’s assets in Poland have been reclassified to Discontinued Operations. Elcho’s and Skawina’s operating results for the quarter ended March 31, 2006 are summarized below:
Quarter Ended
Elcho
Skawina
(Millions) Operating Revenues
$
30
$
33 Income Before Income Taxes
$
3
$
2 Net Income
$
3
$
1 Dispositions Power In December 2006, Power recorded a pre-tax impairment loss of $44 million to write down four turbines to their estimated realizable value and reclassified them to Assets Held for Sale on Power’s
Condensed Consolidated Balance Sheet. In April 2007, Power sold the four turbines to a third party and received proceeds of approximately $40 million, which approximates the recorded book value. Energy Holdings Thermal Energy Development Partnership, L.P. (Tracy Biomass) On December 22, 2006, Global entered into an agreement to sell its 34.5% interest in Tracy Biomass for approximately $7 million. The sale closed on January 26, 2007 and resulted in a 2007 pre-tax
gain of approximately $7 million ($6 million after-tax). Impairment Energy Holdings Venezuela PSEG has indirect ownership interests in two generating facilities in Maracay and Cagua, Venezuela that have a total capacity of 120 MW. The projects are owned and operated by Turboven, an entity
which is jointly-owned by Global (50%) and Corporacion Industrial de Energia (CIE). Global also has a 9% indirect interest in TGM through a partnership with CIE. As of March 31, 2007, the book value
of these investments was approximately $35 million. During Global’s year-end review of its equity method investments, management concluded that due to the current political situation in Venezuela, it is probable that Global would not be able to
recover its capitalized costs associated with its investments in Venezuela. Therefore, Global recorded a pre-tax impairment loss of approximately $7 million to write down these investments in the fourth
quarter of 2006. In January 2007, the Venezuelan government announced its intention to nationalize certain sectors of Venezuelan industry and commerce, including certain foreign-owned energy and communications
companies. In a subsequent press release, Turboven was named as one of the companies that Venezuela intended to nationalize. Since these announcements, Venezuela has proceeded to nationalize certain
companies; however, Global has not received any further official communication from the government of Venezuela regarding Turboven. 20
(UNAUDITED)
March 31, 2006
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 4. Earnings Per Share (EPS) PSEG Diluted EPS is calculated by dividing Net Income by the weighted average number of shares of common stock outstanding, including shares issuable upon exercise of stock options outstanding under
PSEG’s stock option plans and upon payment of performance units. The following table shows the effect of these stock options and performance units on the weighted average number of shares outstanding
used in calculating diluted EPS:
Quarters Ended March 31,
2007
2006
Basic
Diluted
Basic
Diluted EPS Numerator: Earnings (Millions) Continuing Operations
$
335
$
335
$
208
$
208 Discontinued Operations
(6
)
(6
)
(5
)
(5
) Net Income
$
329
$
329
$
203
$
203 EPS Denominator (Thousands): Weighted Average Common Shares Outstanding
252,892
252,892
251,187
251,187 Effect of Stock Options
—
390
—
787 Effect of Stock Performance Units
—
74
—
91 Total Shares
252,892
253,356
251,187
252,065 EPS: Continuing Operations
$
1.32
$
1.32
$
0.83
$
0.83 Discontinued Operations
(0.02
)
(0.02
)
(0.02
)
(0.02
) Net Income
$
1.30
$
1.30
$
0.81
$
0.81 Dividend payments on common stock for the quarter ended March 31, 2007 were $0.585 per share and totaled approximately $148 million. Dividend payments on common stock for the quarter ended
March 31, 2006 were $0.57 per share and totaled approximately $143 million. Note 5. Commitments and Contingent Liabilities Guaranteed Obligations Power Power contracts for electricity, natural gas, oil, coal, pipeline capacity, transportation and emission allowances and engages in risk management activities through ER&T. These activities primarily involve
the purchase and sale of energy and related products under transportation, physical, financial and forward contracts at fixed and variable prices. These transactions are executed with both numerous
counterparties and brokers. Counterparties and brokers may require guarantees, cash or cash related instruments to be deposited on these transactions as described below. Power has unconditionally guaranteed payments by its subsidiaries, ER&T and PSEG Power New York Inc. (Power New York) in commodity-related transactions to support current exposure, interest
and other costs on sums due and payable in the ordinary course of business. These payment guarantees are provided to counterparties in order to obtain credit. Under these agreements, guarantees cover
lines of credit between entities and are often reciprocal in nature. The exposure between counterparties can move in either direction. The face value of the guarantees outstanding as of March 31, 2007 and
December 31, 2006 was approximately $1.6 billion. In order for Power to incur a liability for the face value of the outstanding guarantees, ER&T and Power New York would have to fully utilize the credit granted to them by every counterparty to whom
Power has provided a guarantee and all of ER&T’s and Power New York’s contracts would have to be “out-of-the- 21
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS money” (if the contracts are terminated, Power would owe money to the counterparties). The probability of all contracts at ER&T and Power New York being simultaneously “out-of-the-money” is highly
unlikely due to offsetting positions within the portfolio. For this reason, the current exposure at any point in time is a more meaningful representation of the potential liability to Power under these
guarantees. The current exposure consists of the net of accounts receivable and accounts payable and the forward value on open positions, less any margins posted. The current exposure from such liabilities
was $532 million and $518 million as of March 31, 2007 and December 31, 2006, respectively. Power is subject to counterparty collateral calls related to commodity contracts that are bilateral and are subject to certain creditworthiness standards as guarantor under performance guarantees for
ER&T’s agreements. Changes in commodity prices, including fuel, emissions allowances and electricity, can have a material impact on margin requirements under such contracts. As of March 31, 2007, Power
had posted margin of approximately $66 million, primarily in the form of letters of credit, and received margin of approximately $57 million to satisfy collateral obligations and support various contractual
and environmental obligations. As of December 31, 2006, Power had posted margin of approximately $40 million, primarily in the form of letters of credit, and received margin of approximately $86 million,
including approximately $82 million in the form of letters of credit. Power also routinely enters into exchange-traded futures and options transactions for electricity and natural gas as part of its operations. Generally, such future contracts require a deposit of cash
margin, the amount of which is subject to change based on market movement and in accordance with exchange rules. As of March 31, 2007 and December 31, 2006, Power had deposited margin of
approximately $164 million and $89 million, respectively. Exchange-traded transactions that are margined and monitored separately from physical trading activity may not be subject to change in the event
of a downgrade to Power’s rating. In the event of a deterioration of Power’s credit rating to below investment grade, which would represent a two level downgrade from its current ratings, many of these agreements allow the
counterparty to demand that ER&T provide further performance assurance. As of March 31, 2007, if Power were to lose its investment grade rating and, assuming all counterparties to which ER&T is “out-of-
the-money” were contractually entitled to demand, and demanded, performance assurance, ER&T could be required to post additional collateral in an amount equal to approximately $664 million. Power
believes that it has sufficient liquidity to post such collateral, if necessary. Energy Holdings Energy Holdings and/or Global have guaranteed certain obligations of their subsidiaries or affiliates, including the successful completion, performance or other obligations related to certain projects. In 2006, Global sold its investments in Poland. As of March 31, 2007 and December 31, 2006, Global was still obligated for the $6 million equity commitment guarantee at Skawina. The guarantee
expires in August 2007. If payments are required, such payments are indemnified by the purchaser in accordance with the purchase agreement. Global also has a contingent guarantee expiring in April 2011 related to debt service obligations associated with Chilquinta Energia S.A., an energy distribution company in Chile in which Global owns
50%. As of March 31, 2007 and December 31, 2006, the contingent guarantee was approximately $25 million. In September 2003, Energy Holdings completed the sale of PSEG Energy Technologies Inc. (Energy Technologies) and nearly all of its assets. However, Energy Holdings retained certain outstanding
construction and warranty obligations related to ongoing construction projects previously performed by Energy Technologies. These construction obligations have performance bonds issued by insurance
companies for which exposure is adequately supported by the outstanding letters of credit shown in the table above for PSEG Energy Technologies Asset Management Company LLC. As of March 31, 2007
and December 31, 2006, there were $14 million of such bonds outstanding, which are related to uncompleted construction projects. As of March 31, 2007 and December 31, 2006, there was an additional $2
million of performance guarantees related to Energy Technologies. As of March 31, 2007 and December 31, 2006, Energy Holdings and/or Global have various other guarantees amounting to $28 million and $30 million, respectively. 22
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Environmental Matters PSEG, PSE&G and Power Hazardous Substances The New Jersey Department of Environmental Protection (NJDEP) has regulations in effect concerning site investigation and remediation that require an ecological evaluation of potential damages to
natural resources in connection with an environmental investigation of contaminated sites. These regulations may substantially increase the costs of environmental investigations and necessary remediation,
particularly at sites situated on surface water bodies. PSE&G, Power and their respective predecessor companies own or owned and/or operate or operated certain facilities situated on surface water bodies,
certain of which are currently the subject of remedial activities. The U.S. Environmental Protection Agency (EPA) has determined that a six-mile stretch of the Passaic River in the area of Newark, New Jersey is a “facility” within the meaning of that term under
the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA). PSE&G and certain of its predecessors conducted industrial operations at properties adjacent to
the Passaic River facility. The operations included one operating electric generating station (Essex Site), one former generating station and four former manufactured gas plants (MGPs). PSE&G’s costs to
clean up former MGPs are recoverable from utility customers through the Societal Benefits Clause (SBC). PSE&G has sold the site of the former generating station and obtained releases and indemnities for
liabilities arising out of the site in connection with the sale. The Essex Site was transferred to Power in August 2000. Power assumed any environmental liabilities of PSE&G associated with the electric
generating stations that PSE&G transferred to it, including the Essex Site. In 2003, the EPA notified 41 potentially responsible parties (PRPs), including PSE&G and Power, that it was expanding its assessment of the Passaic River Study Area to the entire 17-mile tidal reach of
the lower Passaic River. The EPA further indicated, with respect to PSE&G, that it believed that hazardous substances had been released from the Essex Site and a former MGP located in Harrison, New
Jersey (Harrison Site), which also includes facilities for PSE&G’s ongoing gas operations. The EPA estimated that its study would require five to eight years to complete and would cost approximately $20
million, of which it would seek to recover $10 million from the PRPs, including PSE&G and Power. Power has provided notice to insurers concerning this potential claim. Also, in 2003, PSEG, PSE&G and 56 other PRPs received a Directive and Notice to Insurers from the NJDEP that directed the PRPs to arrange for a natural resource damage assessment and interim
compensatory restoration of natural resource injuries along the lower Passaic River and its tributaries pursuant to the New Jersey Spill Compensation and Control Act. The NJDEP alleged in the Directive
that it had determined that hazardous substances had been discharged from the Essex Site and the Harrison Site. The NJDEP announced that it had estimated the cost of interim natural resource injury
restoration activities along the lower Passaic River to approximate $950 million. PSE&G and Power have indicated to both the EPA and NJDEP that they are willing to work with the agencies in an effort to resolve their respective claims and, along with approximately 65 other
PRPs, have entered into an agreement with the EPA or have indicated their intention to enter an agreement that provides for sharing the costs of the $20 million study between the government
organizations and the PRPs. In 2006, the EPA notified the PRPs that the cost of the study will greatly exceed the $20 million initially estimated and offered to the PRPs the opportunity to conduct the study
themselves rather than reimburse the government for the additional costs it incurs. The PRP group has engaged in discussions with the EPA regarding the offer and approximately 70 PRPs, including PSE&G
and Power, have agreed to assume responsibility for the study pursuant to an Administrative Order on Consent and to divide the associated costs among themselves according to a mutually agreed-upon
formula. PSEG, PSE&G and Power cannot predict what further actions, if any, or the costs or the timing thereof, that may be required with respect to the Passaic River or natural resource damages.
However, such costs could be material. 23
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PSE&G MGP Remediation Program PSE&G is currently working with the NJDEP under a program to assess, investigate and remediate environmental conditions at PSE&G’s former MGP sites (Remediation Program). To date, 38 sites have
been identified as sites requiring some level of remedial action. In addition, the NJDEP has announced initiatives to accelerate the investigation and subsequent remediation of the riverbeds underlying
surface water bodies that have been impacted by hazardous substances from adjoining sites. Specifically, in 2005 the NJDEP initiated a program on the Delaware River aimed at identifying the 10 most
significant sites for cleanup. One of the sites identified is a former MGP facility located in Camden. The Remediation Program is periodically reviewed, and the estimated costs are revised by PSE&G based
on regulatory requirements, experience with the program and available remediation technologies. Since the inception of the Remediation Program in 1988 through March 31, 2007, PSE&G had expenditures
of approximately $390 million. During the fourth quarter of 2006, PSE&G refined the detailed site estimates. The cost of remediating all sites to completion, as well as the anticipated costs to address MGP-related material discovered
in two rivers adjacent to former MGP sites, could range between $798 million and $838 million, including amounts spent to date. No amount within the range was considered to be most likely. Therefore,
$408 million was accrued at March 31, 2007, which represents the difference between the low end of the total program cost estimate of $798 million and the total incurred costs through March 31, 2007 of
$390 million. Of this amount, approximately $45 million was recorded in Other Current Liabilities and $363 million was reflected in Other Noncurrent Liabilities. The costs associated with the MGP
Remediation Program have historically been recovered through the SBC charges to PSE&G ratepayers. As such, a $408 million Regulatory Asset was recorded. Costs for the MGP Remediation Program were approximately $42 million for 2006. PSE&G anticipates spending $47 million in 2007, $50 million in 2008, and an average of approximately $40 million per
year each year thereafter through 2016. Power Prevention of Significant Deterioration (PSD)/New Source Review (NSR) The PSD/NSR regulations, promulgated under the Clean Air Act (CAA), require major sources of certain air pollutants to obtain permits, install pollution control technology and obtain offsets, in
some circumstances, when those sources undergo a “major modification,” as defined in the regulations. The Federal government may order companies not in compliance with the PSD/NSR regulations to
install the best available control technology at the affected plants and to pay monetary penalties of up to approximately $27,500 for each day of continued violation. The EPA and the NJDEP issued a demand in March 2000 under the CAA requiring information to assess whether projects completed since 1978 at the Hudson and Mercer coal-burning units were
implemented in accordance with applicable PSD/NSR regulations. Power completed its response to requests for information and, in January 2002, reached an agreement with the NJDEP and the EPA to
resolve allegations of noncompliance with PSD/NSR regulations. Under that agreement, over the course of 10 years, Power agreed to install advanced air pollution controls to reduce emissions of Sulfur
Dioxide (SO2), Nitrogen Oxide (NOx), particulate matter and mercury from the coal-burning units at the Mercer and Hudson generating stations to ensure compliance with PSD/NSR. Power also agreed to
spend at least $6 million on supplemental environmental projects and pay a $1 million civil penalty. The agreement resolving the NSR allegations concerning the Hudson and Mercer coal-fired units also
resolved a dispute over Bergen 2 regarding the applicability of PSD requirements and allowed construction of the unit to be completed and operations to commence. Power subsequently notified the EPA and the NJDEP that it was evaluating the continued operation of the Hudson coal unit in light of changes in the energy and capacity markets, increases in the cost
of pollution control equipment and other necessary modifications to the unit. On November 30, 2006, Power reached an agreement with the EPA and NJDEP on an amendment to its 2002 agreement
intended to achieve the 24
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS emissions reductions targets of this agreement while providing more time to assess the feasibility of installing additional advanced emissions controls at Hudson. The amended agreement with the EPA and the NJDEP, which is pending final approval, would allow Power to continue operating Hudson and extend for four years the deadline for installing
environmental controls beyond the previous December 31, 2006 deadline. Power will be required to undertake a number of technology projects (SCRs, scrubbers, baghouses, carbon injection), plant
modifications and operating procedure changes at Hudson and Mercer designed to meet targeted reductions in emissions of NOx, SO2, particulate matter and mercury. In addition, Power has agreed to
notify the EPA and NJDEP by the end of 2007 whether it will install the additional emissions controls at Hudson by the end of 2010, or plan for the orderly shut down of the unit. Under the program to date, Power has installed SCRs at Mercer at a cost of approximately $114 million. The cost of implementing the balance of the amended agreement at Mercer and Hudson is
estimated at approximately $500 million for Mercer and at $600 million to $750 million for Hudson and will be incurred in the 2007-2010 timeframe. As part of the agreement, Fossil has agreed to purchase
and retire emissions allowances, contribute approximately $3 million for programs to reduce particulate emissions from diesel engines in New Jersey and pay a $6 million civil penalty. In addition, in March
2007, Fossil entered into an engineering, procurement and construction contract with a third party contractor to complete all back-end technology requirements for the Mercer station, as referenced above. As a result of the agreement, Power increased its environmental reserves by approximately $15 million to account for civil penalties associated with the amendment to the agreement and other costs.
PSEG and Power recorded the charge in Other Deductions on their respective Condensed Consolidated Statements of Operations in the fourth quarter of 2006. Mercury Regulation New Jersey and Connecticut have adopted standards for the reduction of emissions of mercury from coal-fired electric generating units. In February 2007, Pennsylvania also issued new requirements for
the reduction of mercury emissions from coal-fired power plants. Connecticut requires coal-fired power plants in Connecticut to achieve either an emissions limit or a 90% mercury removal efficiency
through technology installed to control mercury emissions effective in July 2008. The regulations in New Jersey require coal-fired electric generating units in New Jersey to meet certain emissions limits or
reduce emissions by 90% by December 15, 2007. Under the New Jersey regulations, companies that are parties to multi-pollutant reduction agreements are permitted to postpone such reductions on half of their coal-fired electric generating capacity
until December 15, 2012. With respect to Power’s New Jersey facilities, the other half of the reductions that are required to be achieved by December 15, 2007 will be achieved through the installation of
carbon injection technology and baghouses as part of Power’s multi-pollutant reduction agreement with the NJDEP, which resulted from the amended 2002 agreement that resolved issues arising out of the
PSD and the NSR air pollution control programs at the Hudson, Mercer and Bergen facilities, discussed above. The estimated costs of technology believed to be capable of meeting these emissions limits at
Power’s coal-fired unit in Connecticut and at its Mercer Station are included in Power’s capital expenditures forecast. Total estimated costs for each project are between $150 million and $200 million. The
Mercer expenditures are included in the PSD/NSR discussion above. Connecticut has released proposed revisions to mercury regulations that encompass “Permit Requirements for Mercury Emissions from Coal-Fired Electric Generating Units”. On March 13, 2007, the
Connecticut Department of Environmental Protection (CTDEP) released its hearing report on the “Permit Requirements from Mercury Emissions from Coal-Fired Electric Generating Units”. On February
17, 2007, Pennsylvania finalized its “State-specific” requirements to reduce mercury emissions from coal-fired electric generating units. As written, the regulations would not materially affect the costs
already identified in Power’s capital expenditures forecast. 25
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS New Jersey Industrial Site Recovery Act (ISRA) Potential environmental liabilities related to subsurface contamination at certain generating stations have been identified. In the second quarter of 1999, in anticipation of the transfer of PSE&G’s
generation-related assets to Power, a study was conducted pursuant to ISRA, which applies to the sale of certain assets. Power had a $51 million liability as of March 31, 2007 and December 31, 2006, related
to these obligations, which is included in Other Noncurrent Liabilities on Power’s Condensed Consolidated Balance Sheets and Environmental Costs on PSEG’s Condensed Consolidated Balance Sheets. Permit Renewals In June 2001, the NJDEP issued a renewed New Jersey Pollutant Discharge Elimination System (NJPDES) permit for Salem, expiring in July 2006, allowing for the continued operation of Salem with
its existing cooling water intake system. A renewal application prepared in accordance with Federal Water Pollution Control Act (FWPCA) Section 316(b) and the Phase II 316(b) rule was filed in February
2006 with the NJDEP, which allows the station to continue operating under its existing NJPDES permit until a new permit is issued. Power’s application to renew Salem’s NJPDES permit demonstrates that
the station satisfies FWPCA Section 316(b) and meets the Phase II 316(b) rule’s performance standards for reduction of impingement and entrainment through the station’s existing cooling water intake
technology and operations plus implemented restoration measures. The application further demonstrates that even without the benefits of restoration, the station meets the Phase II 316(b) rule’s site-specific
determination standards, both on a comparison of the costs and benefits of new intake technology as well as a comparison of the costs to implement the technology at the facility to the cost estimates
prepared by the EPA. The U.S. Court of Appeals for the Second Circuit issued a decision after Power filed its application that rejected the use of restoration and the site-specific cost-benefit test under the
Phase II 316(b) rule. The Second Circuit Court and the United States Supreme Court have granted requests by the EPA and the industry petitioners for additional time to appeal the Second Circuit Court’s
decision. If NJDEP were to require the installation of structures at the Salem facility to reduce cooling water intake flow commensurate with closed cycle cooling as a result of the unfavorable decision in
the Phase II litigation, the costs would be material. Power’s application to renew the permit estimated that the costs associated with cooling towers for Salem are approximately $1 billion, of which Power’s
share would be approximately $575 million. If NJDEP and the CTDEP were to require installation of closed-cycle cooling or its equivalent at Power’s five once-through cooled facilities, compliance with
that requirement could have a significant impact on the facilities. These costs are not included in Power’s currently forecasted capital expenditures. Energy Holdings Bioenergie S.p.A. (Bioenergie) In May 2006, Global became the majority shareholder of Prisma 2000 S.p.A. In March 2007, the shareholders of Prisma 2000 S.p.A. agreed to change the company name to Bioenergie. Bioenergie holds
100% of the stock of San Marco Bioenergie S.p.A (San Marco), owner of a 20 MW biomass generation facility in Italy. Global also assumed operational responsibility for the facility in May 2006, which was
previously operated by Carlo Gavazzi Green Power pursuant to a Services Agreement with a Global subsidiary. Global’s total investment in Bioenergie is approximately $80 million. In August 2006, Global became aware that the Italian government was conducting a criminal investigation regarding allegations of violations of the facility’s air permit. The scope of the investigation
was subsequently expanded to include alleged violations of the facility’s waste recycling and waste storage permits. The alleged violations include exceedances of permit limits for regulated pollutants,
manipulation of the facility’s continuous emission monitoring system, false reporting and the use of fuels not authorized by the permit. The Italian government has named five individuals as targets of the criminal investigation, including three former San Marco employees (including the former Managing Director and former plant and
operations managers) and two former members of the facility’s Board of Directors. While San Marco has not been named as a target, there is a potential risk that it could be so named. In December 2006
and January 26
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2007, the facility was served with orders that prohibit it from conducting operations (Sequestration Orders) to prevent recurring violations and the destruction of evidence. Counsel for San Marco has
advised the Prosecuting Attorney that it will fully cooperate with the ongoing investigation and will implement the corrective actions required to prevent recurrence of the violations. On April 26, 2007, the Prosecutor issued an order lifting the Sequestration Orders and returning control of the plant to San Marco. It is anticipated that the facility will resume commercial operations in
the summer of 2007. Electroandes S.A. (Electroandes) In July 2005, Electroandes received a notice from Superintendencia Nacional de Administracion Tributaria (SUNAT), the governing tax authority in Peru, claiming past due taxes for 2002 totaling
approximately $2 million related to certain interest deductions. Electroandes has taken similar interest deductions subsequent to 2002. The total cumulative estimated potential amount for past due taxes,
including associated interest and penalties, is approximately $9 million through March 31, 2007. Electroandes believes it has valid legal defenses to these claims, and has filed an appeal with SUNAT with
respect to which it has not yet received a response; however, no assurances can be given regarding the outcome of this matter. In March 2007, Global announced that it is exploring a potential sale of
Electroandes. Luz del Sur S.A.A. (LDS) In January 2007, SUNAT filed two tax assessments against LDS totaling approximately $18 million, of which Global’s share would be approximately $7 million based on its 38% interest in LDS. The
assessments relate to deductions LDS claimed beginning in 2000 for certain operating fees it paid to International Technical Operators under a technical services agreement, for certain bad debt deductions
and certain other matters. The above assessments include interest and penalties claimed by SUNAT. LDS believes that most of such deductions were appropriate and filed an appeal in February 2007. LDS
has obtained a legal opinion that it should be successful in contesting these material items/disallowances, however, no assurances can be given. New Generation and Development Power Power has contracts with outside parties to purchase upgraded turbines for Salem Unit 2 and to purchase upgraded turbines and complete a power uprate for Hope Creek to modestly increase its
generating capacity. Phase II of the Salem Unit 2 turbine upgrade is currently scheduled for 2008 concurrent with steam generator replacement and is anticipated to increase capacity by 26 MW. Phase II of
the Hope Creek turbine replacement is expected to be completed in 2007 along with the thermal power uprate and is expected to add approximately 125 MW of capacity. Power’s expenditures to date
approximate $184 million (including Interest Capitalized During Construction (IDC) of $20 million) with an aggregate estimated share of total costs for these projects of $207 million (including IDC of $23
million). Timing, costs and results of these projects are dependent on timely completion of work, timely approval from the NRC and various other factors. Completion of the projects discussed above within the estimated time frames and cost estimates cannot be assured. Construction delays, cost increases and various other factors could result in changes
in the operational dates or ultimate costs to complete. Basic Generation Service (BGS) and Basic Gas Supply Service (BGSS) PSE&G and Power PSE&G is required to obtain all electric supply requirements through the annual New Jersey BGS auctions for customers who do not purchase electric supply from third-party suppliers. PSE&G enters into
the Supplier Master Agreement (SMA) with the winners of these BGS auctions within three business days following the BPU’s approval. PSE&G has entered into contracts with Power, as well as with other
winning BGS suppliers, to purchase BGS for PSE&G’s anticipated load requirements. The winners of the auction are responsible for fulfilling all the requirements of a PJM Interconnection, L.L.C. (PJM)
Load Serving Entity 27
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (LSE) including capacity, energy, ancillary services, transmission and any other services required by PJM. BGS suppliers assume any migration risk and must satisfy New Jersey’s renewable portfolio
standards. Through the BGS auctions, PSE&G has contracted for its anticipated BGS-Fixed Price load, as follows: Term
Term Ending
May
2007(a)
May
2008(b)
May
2009(c)
May
2010(d)
34 months
36 months
36 months
36 months Load (MW)
2,840
2,840
2,882
2,758 $ per kWh
$
0.05515
$
0.06541
$
0.10251
$
0.09888
(a)
Prices set in the February 2004 BGS auction. (b) Prices set in the February 2005 BGS auction. (c) Prices set in the February 2006 BGS auction. (d) Prices set in the February 2007 BGS auction, which becomes effective on June 1, 2007 when the agreements for the 34-month (May 2007) BGS-FP supply agreements expire. Power seeks to mitigate volatility in its results by contracting in advance for its anticipated electric output as well as its anticipated fuel needs. As part of its objective, Power has entered into contracts to directly supply PSE&G and other New Jersey Electric Distribution Companies (EDCs) with a portion of their respective BGS requirements
through the New Jersey BGS auction process, described above. In addition to the BGS-related contracts, Power enters into firm supply contracts with EDCs, as well as other firm sales and commitments. PSE&G has a full requirements contract with Power to meet the gas supply requirements of PSE&G’s gas customers. The contract extends through March 31, 2012, and year-to-year thereafter. Power has
entered into hedges for a portion of these anticipated BGSS obligations, as permitted by the BPU. The BPU permits recovery of the cost of gas hedging up to 115 billion cubic feet or approximately 80% of
PSE&G’s residential gas supply annually through the BGSS tariff. For additional information, see Note 13. Related-Party Transactions. Minimum Fuel Purchase Requirements Power Coal and Oil Power purchases coal and oil for certain of its fossil generation stations through various long-term commitments. The coal purchase commitments through 2009 amount to approximately 70% of its
average anticipated coal needs, including transportation. These commitments total approximately $659 million. Nuclear Fuel Power has several long-term purchase contracts for the supply of nuclear fuel for the Salem and Hope Creek Nuclear Generating Stations. Power has inventory and commitments to purchase sufficient
quantities of uranium (concentrates and uranium hexafluoride) to meet 100% of its total estimated requirements through 2011. Additionally, Power has commitments covering approximately 55% of its
estimated requirements for 2012 and 15% from 2013 through 2016. These commitments, based on current market prices, total approximately $577 million ($428 million Power’s estimated share). Power’s
policy is to maintain certain levels of concentrates and uranium hexafluoride in inventory and to make periodic purchases to support such levels. As such, the commitments referred to above include
estimated quantities to be purchased that are in excess of contractual minimum quantities. 28
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Power also has commitments that provide 100% of its uranium enrichment requirements through 2010 that total approximately $200 million ($147 million Power’s estimated share). Power has commitments for the fabrication of fuel assemblies for reloads required through 2011 for Salem and through 2012 for Hope Creek that total approximately $123 million ($93 million Power’s
estimated share). Natural Gas In addition to its fuel requirements, Power has entered into various multi-year contracts for firm transportation and storage capacity for natural gas, primarily to meet its gas supply obligations to PSE&G.
As of March 31, 2007, the total minimum requirements under these contracts were approximately $1.1 billion through 2016. These purchase obligations are consistent with Power’s strategy to enter into contracts for its fuel supply in comparable volumes to its sales contracts. Energy Holdings The Texas generation facilities have entered into gas supply agreements for their anticipated fuel requirements to satisfy obligations under their forward energy sales contracts. The plants had fuel
purchase commitments totaling $106 million to support all of their contracted energy sales. Operating Services Contract (OSC) Power On January 17, 2005, Nuclear entered into an OSC with Exelon Generation LLC (Exelon) relating to the operation of the Hope Creek and Salem nuclear generating stations. The OSC requires Exelon
to provide key personnel to oversee daily plant operations at the Hope Creek and Salem nuclear generating stations and to implement a management model that Exelon has used to manage its own nuclear
facilities. Nuclear continues as the license holder with exclusive legal authority to operate and maintain the plants, retains responsibility for management oversight and has full authority with respect to the
marketing of its share of the output from the facilities. Exelon is entitled to receive reimbursement of its costs in discharging its obligations, an annual operating services fee of $3 million and incentive fees
up to $12 million annually based on attainment of goals relating to safety, capacity factor and operation and maintenance expenses. On October 27, 2006, Nuclear informed Exelon that it was electing to
continue the OSC for up to two years beyond the initial January 2007 period. In December 2006, Power announced its plans to resume direct management of the Salem and Hope Creek nuclear generating stations before the expiration of the OSC. As part of this plan, on January
1, 2007, the senior management team at Salem and Hope Creek, which consisted of three senior executives from Exelon, became employees of Power. Power has continued to recruit additional employees
to build its organizational structure. Power is analyzing its various options and expects to implement a plan during the second quarter to fully resume functions that Exelon currently performs, which would
put Power in a position to terminate the OSC by the end of 2007. Maintenance Agreement Power Power entered into a long-term contractual services agreement with a vendor in September 2003 to provide the outage and service needs for certain of Power’s generating units at market rates. The
contract covers approximately 25 years and could result in annual payments ranging from approximately $10 million to $50 million for services, parts and materials rendered. 29
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Investment Tax Credits (ITC) PSEG and PSE&G As of June 1999, the Internal Revenue Service (IRS) had issued several private letter rulings (PLRs) that concluded that the refunding of excess deferred tax and ITC balances to utility customers was
permitted only over the related assets’ regulatory lives, which for PSE&G, were terminated upon New Jersey’s electric industry deregulation. Based on this fact, PSEG and PSE&G reversed the deferred tax
and ITC liability relating to PSE&G’s generation assets that were transferred to Power, and recorded a $235 million reduction of the extraordinary charge in 1999 due to the restructuring of the utility
industry in New Jersey. PSE&G was directed by the BPU to seek a PLR from the IRS to determine if the ITC included in the impairment write-down of generation assets could be credited to customers
without violating the tax normalization rules of the Internal Revenue Code. PSE&G filed a PLR request with the IRS in 2002. On May 11, 2006, the IRS issued a PLR to PSE&G. The PLR concluded that none of the generation ITC could be passed to utility customers without violating the normalization rules. While the holding
in the PLR is a favorable development for PSE&G, an outstanding Treasury regulation project could overturn the holding in the PLR if the Treasury were to alter a position set out in certain December 21,
2005 proposed regulations. The issue cannot be fully resolved until the final Treasury regulations are issued. On May 16, 2006, the BPU voted in favor of a special investigation and hearing before the BPU concerning PSE&G’s actions leading up to receiving the PLR, specifically its failure to abide by a BPU
order to withdraw the request. An order detailing such special investigation has not yet been issued and no investigation has begun. On October 13, 2006, the Appellate Division of the Superior Court of New Jersey granted PSE&G’s motion to dismiss PSE&G’s appeal of the BPU’s order to withdraw the PLR since PSE&G has already
received the PLR. The court also determined that if the BPU seeks to take future action against PSE&G based on the alleged violation of its order, PSE&G can restart the appeal. BPU Deferral Audit PSEG and PSE&G The BPU Energy and Audit Division conducts audits of deferred balances, which are under various adjustment clauses. A draft Deferral Audit—Phase II report relating to the 12-month period ended
July 31, 2003 was released by the consultant to the BPU in April 2005. The draft report addresses the SBC, Market Transition Charge (MTC) and Non-Utility Generation (NUG) deferred balances. The
BPU released the report on May 13, 2005. While the consultant to the BPU found that the Phase II deferral balances complied in all material respects with the BPU Orders regarding such deferrals, the consultant noted that the BPU Staff had
raised certain questions with respect to the reconciliation method PSE&G employed in calculating the overrecovery of its MTC and other charges during the Phase I and Phase II four-year transition period.
The amount in dispute is approximately $130 million. On January 31, 2007, PSE&G requested that the matter be transmitted to the Office of Administrative Law for the development of an evidentiary record and an initial decision. The BPU granted the
request on February 7, 2007. While PSE&G believes the MTC methodology it used was fully litigated and resolved, without exception, by the BPU and other intervening parties in its previous electric base rate case, deferral audit
and deferral proceeding that were approved by the BPU in its order on April 22, 2004, and that such order is non-appealable, PSE&G cannot predict the impact of the outcome of this proceeding. New Jersey Clean Energy Program PSE&G The BPU has approved a funding requirement for each New Jersey utility applicable to its Renewable Energy and Energy Efficiency programs for the years 2005 to 2008. The sum of PSE&G’s electric
and gas funding requirement was $37 million and $30 million for the three months ended March 31, 2007 and 2006, 30
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS respectively. The remaining liability has been recorded at a discounted present value with an offsetting Regulatory Asset, since the costs associated with this program are expected to be recovered from
PSE&G ratepayers through the SBC. The liability for the funding requirement as of March 31, 2007 and December 31, 2006 was $228 million and $253 million, respectively. Leveraged Lease Investments PSEG and Energy Holdings On November 16, 2006, the IRS issued a report with respect to its audit of PSEG’s corporate tax returns for tax years 1997 through 2000, which disallowed all deductions associated with certain of
Resources’ lease transactions that are similar to a type that the IRS publicly announced its intention to challenge. In addition, the IRS imposed a 20% penalty for substantial understatement of tax liability.
In February 2007, PSEG filed a protest to the Office of Appeals of the IRS. As of March 31, 2007 and December 31, 2006, Resources’ total gross investment in such transactions was approximately $1.4
billion and $1.5 billion, respectively. If all deductions associated with these lease transactions, entered into by PSEG between 1997 and 2002, are successfully challenged by the IRS, it could have a material adverse impact on PSEG’s and
Energy Holdings’ financial position, results of operations and net cash flows and could impact future returns on these transactions. PSEG believes that its tax position related to these transactions is proper
based on applicable statutes, regulations and case law and will aggressively contest the IRS’s disallowance. PSEG believes that it is more likely than not that it will prevail with respect to the IRS’s challenge,
although no assurances can be given. If the IRS’s disallowance of tax benefits associated with all of these lease transactions was sustained, approximately $796 million of PSEG’s deferred tax liabilities that have been recorded under
leveraged lease accounting through March 31, 2007 would become currently payable. In addition, current interest would be charged of approximately $132 million after-tax, and penalties of $159 million
may become payable. Energy Holdings’ management has assessed the probability of various outcomes to this matter and recorded reserves in accordance with FIN 48. For additional information and guidance for leveraged leases, see Note 2. Recent Accounting Standards. Note 6. Financial Risk Management Activities PSEG, PSE&G, Power and Energy Holdings The operations of PSEG, PSE&G, Power and Energy Holdings are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices that could
affect their results of operations and financial conditions. PSEG, PSE&G, Power and Energy Holdings manage exposure to these market risks through their regular operating and financing activities and,
when deemed appropriate, hedge these risks through the use of derivative financial instruments. PSEG, PSE&G, Power and Energy Holdings use the term ‘hedge’ to mean a strategy designed to manage risks
of volatility in prices or rate movements on certain assets, liabilities or anticipated transactions and by creating a relationship in which gains or losses on derivative instruments are expected to
counterbalance the gains or losses on the assets, liabilities or anticipated transactions exposed to such market risks. Each of PSEG, PSE&G, Power and Energy Holdings uses derivative instruments as risk
management tools consistent with its respective business plan and prudent business practices. Derivative Instruments and Hedging Activities Commodity Contracts Power Power actively transacts in energy and energy-related products, including electricity, natural gas, electric capacity, firm transmission rights (FTRs), coal, oil and emission allowances in the spot, forward
and futures markets, primarily in the Northeastern and Mid Atlantic United States. 31
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Power maintains a strategy of entering into positions to optimize the value of its portfolio and reduce earnings volatility of generation assets, gas supply contracts and its electric and gas supply
obligations. Power engages in physical and financial transactions in the electricity wholesale markets and executes an overall risk management strategy seeking to mitigate the effects of adverse movements
in the fuel and electricity markets. These contracts also involve financial transactions including swaps, options, futures and FTRs. During the quarter ended March 31, 2007, higher market prices for
electricity have resulted in additional unrealized losses on many of these contracts leading to an increase in Accumulated Other Comprehensive Loss (OCL). Power marks its derivative energy-related
contracts to market in accordance with SFAS 133, with changes in fair value charged to the Condensed Consolidated Statements of Operations. Wherever possible, fair values for these contracts are
obtained from quoted market sources. For contracts where no quoted market exists, modeling techniques are employed using assumptions reflective of current market rates, yield curves and forward prices,
as applicable, to interpolate certain prices. The effect of using such modeling techniques is not material to Power’s financial results. Cash Flow Hedges Power uses forward sale and purchase contracts, swaps and FTR contracts to hedge forecasted energy sales from its generation stations and to hedge related load obligations. Power also enters into
swaps and futures transactions to hedge the price of fuel to meet its fuel purchase requirements. These derivative transactions are designated and effective as cash flow hedges under SFAS 133. As of March
31, 2007, the fair value of these hedges was $(449) million and resulted in $(267) million after-tax recorded in OCL. As of December 31, 2006, the fair value of these hedges was $(166) million. These hedges,
along with realized losses on hedges of $(19) million retained in OCL, resulted in a $(108) million after-tax balance in OCL. The increase of $159 million in OCL during the quarter ended March 31, 2007
was caused mainly by higher electricity market prices. During the 12 months ending March 31, 2008, $186 million after-tax of net unrealized losses on these commodity derivatives is expected to be
reclassified to earnings. Approximately $85 million of after-tax unrealized losses on these commodity derivatives in OCL is expected to be reclassified to earnings for the 12 months ending March 31, 2009.
Ineffectiveness associated with these hedges, as defined in SFAS 133, was $(2) million at March 31, 2007. The expiration date of the longest dated cash flow hedge is in 2010. Other Derivatives Power also enters into certain other contracts that are derivatives, but do not qualify for hedge accounting under SFAS 133. Most of these contracts are used for fuel purchases for generation
requirements and for electricity purchases for contractual sales obligations. Therefore, the changes in fair market value of these derivative contracts are recorded in Energy Costs or Operating Revenues, as
appropriate, on the Condensed Consolidated Statements of Operations. The net fair value of these instruments as of March 31, 2007 was less than $(1) million. The net fair value of these instruments as of
December 31, 2006 was $1 million. Energy Holdings Other Derivatives The Texas generation facilities enter into electricity forward and capacity sale contracts to sell their 2,000 MW capacity for portions of the current calendar year, with the balance sold into the daily spot
market. The Texas generation facilities also enter into gas purchase contracts to specifically match the generation requirements to support the electricity forward sales contracts. Although these contracts fix
the amount of revenue, fuel costs and cash flows, and thereby provide financial stability to the Texas generation facilities, these contracts are, based on their terms, derivatives that do not meet the specific
accounting criteria in SFAS 133 to qualify for the normal purchases and normal sales exception, or to be designated as a hedge for accounting purposes. As a result, these contracts must be recorded at fair
value. The net fair value of the open positions was approximately $9 million and $38 million as of March 31, 2007 and December 31, 2006, respectively. 32
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Interest Rates PSEG, PSE&G, Power and Energy Holdings PSEG, PSE&G, Power and Energy Holdings are subject to the risk of fluctuating interest rates in the normal course of business. PSEG’s policy is to manage interest rate risk through the use of fixed and
floating rate debt and interest rate derivatives. Fair Value Hedges PSEG and Power In March 2004, Power issued $250 million of 3.75% Senior Notes due April 2009. PSEG used an interest rate swap to convert Power’s fixed-rate debt into variable-rate debt. The interest rate swap is
designated and effective as a fair value hedge. The fair value changes of the interest rate swap are fully offset by the fair value changes in the underlying debt. As of March 31, 2007 and December 31, 2006,
the fair value of the hedge was $(7) million and $(9) million, respectively. Cash Flow Hedges PSEG, PSE&G and Energy Holdings PSEG, PSE&G and Energy Holdings use interest rate swaps and other interest rate derivatives to manage their exposures to the variability of cash flows, primarily related to variable-rate debt
instruments. The interest rate derivatives used are designated and effective as cash flow hedges. Except for PSE&G’s cash flow hedges, the fair value changes of these derivatives are initially recorded in
Accumulated Other Comprehensive Income/Loss. As of March 31, 2007, the fair value of these cash flow hedges was $(5) million, consisting of $(4) million and $(1) million at PSE&G and Energy Holdings,
respectively. As of December 31, 2006, the fair value of these cash flow hedges was $(4) million, primarily at PSE&G. The $(4) million at PSE&G as of both March 31, 2007 and December 31, 2006 is not
included in Accumulated Other Comprehensive Income/Loss, as it is deferred as a Regulatory Asset and is expected to be recovered from PSE&G’s customers. During the next 12 months, approximately $1
million of unrealized losses (net of taxes) on interest rate derivatives in OCL is expected to be reclassified at PSEG. As of March 31, 2007, there was no hedge ineffectiveness associated with these hedges. Foreign Currencies Energy Holdings Global is exposed to foreign currency risk and other foreign operations risk that arise from investments in foreign subsidiaries and affiliates. A key component of its risks is that some of its foreign
subsidiaries and affiliates have functional currencies other than the consolidated reporting currency, the U.S. Dollar. Additionally, Global and certain of its foreign subsidiaries and affiliates have entered
into monetary obligations and maintain receipts/receivables in U.S. Dollars or currencies other than their own functional currencies. Global, a U.S. Dollar functional currency entity, is primarily exposed to
changes in the Peruvian Nuevo Sol and the Chilean Peso and to a lesser extent, the Euro. Changes in valuation of these currencies can impact the value of Global’s investments, results of operations,
financial condition and cash flows. Global has attempted to limit potential foreign exchange exposure by entering into revenue contracts that adjust for changes in foreign exchange rates. Global may also
use foreign currency forward, swap and option agreements to manage risk related to certain foreign currency fluctuations. Although the Chilean Peso and the Peruvian Nuevo Sol had originally depreciated relative to the U.S. Dollar after Global’s initial investments, the currencies have appreciated significantly over the
past few years. The net cumulative foreign currency revaluations have increased the total amount of Energy Holdings’ Member’s Equity by $124 million as of March 31, 2007. Hedges of Net Investments in Foreign Operations Energy Holdings In March 2004 and April 2004, Energy Holdings entered into four cross-currency interest rate swap agreements. The swaps are designed to hedge the net investment in a foreign subsidiary associated
with the 33
(UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS exposure in the U.S. Dollar to Chilean Peso exchange rate. The fair value of the cross-currency swaps was $(22) million and $(25) million as of March 31, 2007 and December 31, 2006, respectively. The
change in fair value of the majority of the swaps is recorded in Cumulative Translation Adjustment within OCL. As a result, Energy Holdings’ Member’s Equity was reduced by $22 million as of March 31,
2007. Note 7. Comprehensive Income, Net of Tax
PSE&G
Power(A)
Energy
Other(C)
Consolidated
(Millions) For the Quarter Ended March 31, 2007: Net Income (Loss)
$
132
$
213
$
3
$
(19
)
$
329 Other Comprehensive Loss
—
(155
)
(9
)
—
(164
) Comprehensive Income (Loss)
$
132
$
58
$
(6
)
$
(19
)
$
165 For the Quarter Ended March 31, 2006: Net Income (Loss)
$
78
$
112
$
32
$
(19
)
$
203 Other Comprehensive Income
—
133
2
1
136 Comprehensive Income (Loss)
$
78
$
245
$
34
$
(18
)
$
339
(A)
Changes at Power primarily relate to changes in SFAS 133 unrealized gains and losses on derivative contracts that qualify for hedge accounting in 2007 and 2006, combined with unrealized gains in the
NDT Fund in 2006. (B) Changes at Energy Holdings primarily relate to foreign currency translation adjustments in 2007 and 2006 and unrealized gains on derivative contracts in 2006. (C) Other primarily consists of activity at PSEG (as parent company), Services and intercompany eliminations. Note 8. Changes in Capitalization PSEG On April 13, 2007, PSEG called for redemption on May 15, 2007, the outstanding $375 million of its Floating Rate Notes Due 2008 at 100% of the principal amount. For the quarter ended March 31, 2007, PSEG issued 393,355 shares of its common stock in connection with settling stock options for approximately $16 million. For the quarter ended March 31, 2007, PSEG issued approximately 204,068 shares of its common stock under its Dividend Reinvestment Program and its Employee Stock Purchase Program for
approximately $17 million. PSE&G On January 2, 2007, PSE&G repaid at maturity $113 million of its 6.25% Series WW First and Refunding Mortgage Bonds. For the quarter ended March 31, 2007, Transition Funding repaid approximately $38 million of its transition bonds. Power In March 2007, Power paid a cash dividend to PSEG of $125 million. Energy Holdings In March 2007, Energy Holdings made a cash distribution to PSEG of $145 million in the form of a return of capital. 34
(UNAUDITED)
Holdings(B)
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS During the first three months of 2007, Energy Holdings’ subsidiaries repaid approximately $16 million of non-recourse debt, including $14 million by Global, primarily related to the Texas generation
facilities, $1 million by Resources and $1 million by EGDC. Note 9. Other Income and Deductions
PSE&G
Power
Energy
Other(A)
Consolidated
(Millions) Other Income: For the Quarter Ended March 31, 2007: Interest and Dividend Income
$
3
$
5
$
3
$
—
$
11 NDT Fund Realized Gains
—
34
—
—
34 NDT Interest and Dividend Income
—
12
—
—
12 Change in Derivative Fair Value
—
—
1
—
1 Arbitration Award (Konya-Ilgin)
—
—
9
—
9 Other
2
—
3
—
5 Total Other Income
$
5
$
51
$
16
$
—
$
72 For the Quarter Ended March 31, 2006: Interest and Dividend Income
$
3
$
4
$
2
$
(2
)
$
7 NDT Fund Realized Gains
—
27
—
—
27 NDT Interest and Dividend Income
—
10
—
—
10 Foreign Currency Gains
—
—
3
—
3 Change in Derivative Fair Value
—
—
1
—
1 Other
1
—
1
—
2 Total Other Income
$
4
$
41
$
7
$
(2
)
$
50
PSE&G
Power
Energy
Other(A)
Consolidated
(Millions) Other Deductions: For the Quarter Ended March 31, 2007: Donations
$
1
$
—
$
—
$
5
$
6 NDT Fund Realized Losses and Expenses
—
17
—
—
17 Foreign Currency Losses
—
—
1
—
1 Loss on Disposition of Assets
—
1
—
—
1 Other-Than-Temporary Impairment of Investments
—
10
—
—
10 Other
—
1
1
—
2 Total Other Deductions
$
1
$
29
$
2
$
5
$
37 For the Quarter Ended March 31, 2006: Donations
$
1
$
—
$
—
$
—
$
1 NDT Fund Realized Losses and Expenses
—
19
—
—
19 Foreign Currency Losses
—
—
2
—
2 Change in Derivative Fair Value
—
—
2
—
2 Other
—
—
3
—
3 Total Other Deductions
$
1
$
19
$
7
$
—
$
27
(A) 35
(UNAUDITED)
Holdings
Total
Holdings
Total
Other consists of reclassifications for minority interests in PSEG’s consolidated results of operations and intercompany eliminations at PSEG (as parent company).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 10. Pension and Other Postretirement Benefits (OPEB) PSEG PSEG sponsors several qualified and nonqualified pension plans and OPEB plans covering PSEG’s and its participating affiliates’ current and former employees who meet certain eligibility criteria. The
following table provides the components of net periodic benefit costs relating to all qualified and nonqualified pension and OPEB plans on an aggregate basis. OPEB costs are presented net of the federal
subsidy expected for prescription drugs under the Medicare Prescription Drug Improvement and Modernization Act of 2003.
Pension Benefits
OPEB
Quarters Ended
Quarters Ended
2007
2006
2007
2006
(Millions) Components of Net Periodic Benefit Costs: Service Cost
$
21
$
21
$
4
$
5 Interest Cost
54
53
18
17 Expected Return on Plan Assets
(72
)
(67
)
(4
)
(3
) Amortization of Net Transition Obligation
—
—
7
7 Prior Service Cost
3
3
3
3 Loss
5
13
2
2 Net Periodic Benefit Cost
11
23
30
31 Effect of Regulatory Asset
—
—
5
5 Total Benefit Costs
$
11
$
23
$
35
$
36 PSE&G, Power, Energy Holdings and Services Pension costs and OPEB costs for PSE&G, Power, Energy Holdings and Services are detailed as follows:
Pension Benefits
OPEB
Quarters Ended
Quarters Ended
2007
2006
2007
2006
(Millions) PSE&G
$
5
$
12
$
30
$
30 Power
3
7
4
4 Energy Holdings
—
—
—
— Services
3
4
1
2 Total PSEG Consolidated Benefit Costs
$
11
$
23
$
35
$
36 36
March 31,
March 31,
March 31,
March 31,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) An analysis of the tax provision expense is as follows:
PSE&G
Power
Energy
Other (A)
Consolidated
(Millions) For the Quarter Ended March 31, 2007: Income (Loss) Before Income Taxes
$
231
$
374
$
23
$
(31
)
$
597 Tax Computed at the Statutory Rate
$
81
$
131
$
8
$
(11
)
$
209 Increase (Decrease) Attributable to Flow Through of Certain Tax Adjustments: State Income Taxes after Federal Benefit
16
23
(1
)
(1
)
37 Rate Differential of Foreign Operations
—
—
9
—
9 Reserve for Tax Contingencies
—
1
5
—
6 Other
2
—
(1
)
—
1 Total Income Tax Expense (Benefit)
$
99
$
155
$
20
$
(12
)
$
262 Effective Income Tax Rate
42.9
%
41.4
%
87.0
%(B)
38.7
%
43.9
% For the Quarter Ended March 31, 2006: Income (Loss) Before Income Taxes
$
143
$
207
$
40
$
(33
)
$
357 Tax Computed at the Statutory Rate
$
50
$
73
$
14
$
(12
)
$
125 Increase (Decrease) Attributable to Flow Through of Certain Tax Adjustments: State Income Taxes after Federal Benefit
11
11
(2
)
(2
)
18 Plant Related Items
3
—
—
—
3 Other
1
2
—
—
3 Total Income Tax Expense (Benefit)
$
65
$
86
$
12
$
(14
)
$
149 Effective Income Tax Rate
45.5
%
41.5
%
30.0
%
42.4
%
41.7
%
(A)
PSEG’s other activities include amounts applicable to PSEG (as parent corporation) that primarily relate to financing and certain administrative and general costs. (B) Reflects interim period distortion due to asset sales and other one-time adjustments. 37
Holdings
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PSEG, PSE&G, Power and Energy Holdings adopted FIN 48 effective January 1, 2007, which prescribes a model for how a company should recognize, measure, present and disclose in its financial
statements uncertain tax positions that it has taken or expects to take on a tax return. For additional information, see Note 2. Recent Accounting Standards. Upon adoption, PSEG, PSE&G, Power and
Energy Holdings recorded the following amounts related to their respective uncertain tax positions:
PSE&G
Power
Energy
Other(B)
Consolidated Unrecognized Tax Benefits(A)
$
49
$
21
$
408
$
1
$
479 Accumulated Deferred Income Taxes associated with Unrecognized Tax Benefits
(9
)
(7
)
(246
)
—
(262
) Regulatory Asset-Unrecognized Tax Benefits
(11
)
—
—
—
(11
) Unrecognized Tax Benefits that, if recognized, would impact the effective tax rate(A)
$
29
$
14
$
162
$
1
$
206 Interest and Penalties Accrued
$
5
$
3
$
81
$
—
$
89
(A)
Includes interest and penalties (B) PSEG’s other activities include amounts applicable to PSEG (as parent corporation) that primarily relate to financing and certain administrative and general costs. There were no material changes to the amounts above during the quarter ended March 31, 2007 and no significant increases or decreases in unrecognized tax benefits are reasonably possible to occur
within the next 12 months. PSEG, PSE&G, Power and Energy Holdings include all accrued interest and penalties, required to be recorded under FIN 48, as income tax expense. Income tax years for PSEG, PSE&G, Power and Energy Holdings that remain subject to examination by material jurisdictions, where an examination has not already concluded, are as follows:
PSE&G
Power
Energy
Consolidated United States Federal
2001-2006
2001-2006
2001-2006
2001-2006 New Jersey
2001-2006
N/A
1997-2006
1997-2006 Pennsylvania
2003-2006
N/A
2003-2006
2003-2006 Connecticut
N/A
N/A
N/A
2003-2006 Texas
N/A
N/A
2006
2006 California
N/A
N/A
2002-2006
2002-2006 Indiana
N/A
N/A
N/A
2003-2006 Ohio
N/A
N/A
N/A
2003-2005 Foreign Chile
N/A
N/A
2004-2006
2004-2006 Peru
N/A
N/A
2002-2006
2002-2006 38
Holdings
Total
Holdings
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 12. Financial Information by Business Segments Information related to the segments of PSEG and its subsidiaries is detailed below:
PSE&G
Power
Energy Holdings
Other(B)
Consolidated
Resources
Global
Other(A)
(Millions) For the Quarter Ended March 31, 2007: Total Operating Revenues
$
2,486
$
2,149
$
44
$
208
$
2
$
(1,275
)
$
3,614 Income (Loss) From Continuing Operations
132
219
17
(13
)
(1
)
(19
)
335 Loss from Discontinued Operations, net of tax
—
(6
)
—
—
—
—
(6
) Net Income (Loss)
132
213
17
(13
)
(1
)
(19
)
329 Preferred Securities Dividends
(1
)
—
—
—
—
1
— Segment Earnings (Loss)
131
213
17
(13
)
(1
)
(18
)
329 Gross Additions to Long-Lived Assets
130
126
—
16
—
3
275 As of March 31, 2007: Total Assets
$
14,524
$
8,128
$
2,908
$
3,004
$
97
$
(295
)
$
28,366 Investments in Equity Method Subsidiaries
$
—
$
16
$
8
$
786
$
—
$
—
$
810 For the Quarter Ended March 31, 2006: Total Operating Revenues
$
2,293
$
1,967
$
47
$
263
$
2
$
(1,111
)
$
3,461 Income (Loss) From Continuing Operations
78
121
20
9
(1
)
(19
)
208 Income (Loss) from Discontinued Operations, net of tax
—
(9
)
—
4
—
—
(5
) Net Income (Loss)
78
112
20
13
(1
)
(19
)
203 Preferred Securities Dividends
(1
)
—
—
—
—
1
— Segment Earnings (Loss)
77
112
20
13
(1
)
(18
)
203 Gross Additions to Long-Lived Assets
108
118
—
13
1
—
240 As of December 31, 2006: Total Assets
$
14,553
$
8,146
$
2,969
$
3,095
$
100
$
(293
)
$
28,570 Investments in Equity Method Subsidiaries
$
—
$
16
$
5
$
817
$
—
$
—
$
838
(A)
Energy Holdings’ other activities include amounts applicable to Energy Holdings (as parent company) and EGDC. The net losses primarily relate to financing and certain administrative and general
costs of Energy Holdings. (B) PSEG’s other activities include amounts applicable to PSEG (as parent corporation), and intercompany eliminations, primarily relating to intercompany transactions between Power and PSE&G. No
gains or losses are recorded on any intercompany transactions; rather, all intercompany transactions are at cost or, in the case of the BGS and BGSS contracts between Power and PSE&G, at rates
prescribed by the BPU. For a further discussion of the intercompany transactions between Power and PSE&G, see Note 13. Related-Party Transactions. The net losses primarily relate to financing and
certain administrative and general costs at PSEG, as parent corporation. 39
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 13. Related-Party Transactions The majority of the following discussion relates to intercompany transactions. These transactions were recognized on each company’s stand-alone financial statements and were eliminated during the
consolidation process in accordance with GAAP when preparing PSEG’s Condensed Consolidated Financial Statements. BGS and BGSS Contracts PSE&G and Power PSE&G has entered into a requirements contract with Power under which Power provides the gas supply services needed to meet PSE&G’s BGSS and other contractual requirements through March 2012
and year-to-year thereafter. Power has also entered into contracts to supply energy, capacity and ancillary services to PSE&G through the BGS auction process. The amounts which Power charged to PSE&G for BGS and BGSS are presented below:
Power’s Billings for
2007
2006
(Millions) BGS
$
218
$
101 BGSS
$
1,049
$
1,003 As of March 31, 2007 and December 31, 2006, Power had net receivables from PSE&G of approximately $379 million and $370 million, respectively, primarily related to the BGS and BGSS contracts. In
addition, as of March 31, 2007 and December 31, 2006, PSE&G had a payable to Power of approximately $5 million and $174 million, respectively, related to gas supply hedges Power entered into for BGSS. Services PSE&G, Power and Energy Holdings Services provides and bills administrative services to PSE&G, Power and Energy Holdings. In addition, PSE&G, Power and Energy Holdings have other payables to Services, including amounts related to
certain common costs, such as pension and OPEB costs, which Services pays on behalf of each of the operating companies. The billings for administrative services and payables are presented below:
Services’ Billings for the
Payable to Services as of
March 31,
December 31,
2007
2006
(Millions) PSE&G
$
49
$
55
$
32
$
41 Power
$
33
$
37
$
18
$
21 Energy Holdings
$
5
$
5
$
2
$
2 PSE&G, Power and Energy Holdings believe that the costs of services provided by Services approximate market value for such services. 40
the Quarters Ended
March 31,
Quarters Ended
March 31,
2007
2006
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Tax Sharing Agreements PSEG, PSE&G, Power and Energy Holdings PSE&G, Power and Energy Holdings had (payables to) receivables from PSEG related to taxes as follows:
(Payable to) Receivable
March 31,
December 31,
(Millions) PSE&G
$
(89
)
$
(63
) Power
$
(122
)
$
(28
) Energy Holdings
$
30
$
(10
) As a result of the adoption of FIN 48, PSE&G, Power and Energy Holdings each recorded payables to PSEG related to uncertain tax positions. See Note 2. Recent Accounting Standards. Such amounts
as of March 31, 2007 were as follows:
Payable to PSEG
(Millions) PSE&G
$
51 Power
$
22 Energy Holdings
$
424 Affiliate Loans and Advances PSEG and Power As of March 31, 2007, Power had a demand note receivable of $525 million due from PSEG. As of December 31, 2006, Power had a demand note payable to PSEG of approximately $54 million for
short-term funding needs. PSEG and Energy Holdings As of March 31, 2007 and December 31, 2006, Energy Holdings had a demand note receivable due from PSEG of $25 million and $28 million, respectively. These notes reflect the investment of Energy
Holdings’ excess cash with PSEG. PSE&G and Services As of each of March 31, 2007 and December 31, 2006, PSE&G had advanced working capital to Services of approximately $33 million. This amount is included in Other Noncurrent Assets on PSE&G’s
Condensed Consolidated Balance Sheets. Power and Services As of each of March 31, 2007 and December 31, 2006, Power had advanced working capital to Services of approximately $17 million. This amount is included in Other Noncurrent Assets on Power’s
Condensed Consolidated Balance Sheets. Other PSEG and PSE&G As of March 31, 2007 and December 31, 2006, PSE&G had net receivables from PSEG of approximately $2 million and $3 million, respectively, related to amounts that PSEG had collected on PSE&G’s
behalf. 41
from PSEG as of
2007
2006
as of
March 31,
2007
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PSEG and Power As of March 31, 2007 and December 31, 2006, Power had net receivables from PSEG of approximately $6 million and $1 million, respectively, related to amounts that PSEG had collected on Power’s
behalf. PSEG and Energy Holdings As of March 31, 2007, Energy Holdings had net receivables from PSEG of approximately $2 million, primarily for interest due on the demand note receivable from PSEG. Energy Holdings and PSE&G As of each of March 31, 2007 and December 31, 2006, Energy Holdings had a receivable of approximately $1 million related to efficiency incentive initiatives performed for PSE&G’s customers. Energy
Holdings recorded revenues for such services of approximately $1 million and $4 million for the quarters ended March 31, 2007 and 2006, respectively. Power Each series of Power’s Senior Notes and Pollution Control Notes is fully and unconditionally and jointly and severally guaranteed by Fossil, Nuclear and ER&T. The following table presents condensed
financial information for the guarantor subsidiaries, as well as Power’s non-guarantor subsidiaries.
Power
Guarantor
Other
Consolidating
Consolidated
(Millions) For the Quarter Ended March 31, 2007: Operating Revenues
$
—
$
2,401
$
27
$
(279
)
$
2,149 Operating Expenses
—
2,014
24
(278
)
1,760 Operating Income
—
387
3
(1
)
389 Equity Earnings (Losses) of Subsidiaries
217
(12
)
—
(205
)
— Other Income
49
66
—
(64
)
51 Other Deductions
—
(29
)
—
—
(29
) Interest Expense
(54
)
(35
)
(11
)
63
(37
) Income Taxes
1
(160
)
3
1
(155
) Loss from Discontinued Operations, net of tax
—
—
(6
)
—
(6
) Net Income (Loss)
$
213
$
217
$
(11
)
$
(206
)
$
213 For the Quarter Ended March 31, 2007: Net Cash Provided By (Used In) Operating Activities
$
61
$
801
$
(17
)
$
(21
)
$
824 Net Cash Provided By (Used In) Investing Activities
$
64
$
114
$
(14
)
$
(815
)
$
(651
) Net Cash (Used In) Provided By Financing Activities
$
(125
)
$
(921
)
$
31
$
836
$
(179
) 42
Subsidiaries
Subsidiaries
Adjustments
Total
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Power
Guarantor
Other
Consolidating
Consolidated
(Millions) For the Quarter Ended March 31, 2006: Operating Revenues
$
—
$
2,194
$
33
$
(260
)
$
1,967 Operating Expenses
—
1,977
33
(260
)
1,750 Operating Income
—
217
—
—
217 Equity Earnings (Losses) of Subsidiaries
113
(11
)
—
(102
)
— Other Income
40
45
—
(44
)
41 Other Deductions
—
(19
)
—
—
(19
) Interest Expense
(43
)
(14
)
(19
)
44
(32
)
Subsidiaries
Subsidiaries
Adjustments
Total