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Public Service Enterprise Group 10-Q 2006
3B2 EDGAR HTML from 44993 1..102 ++



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006


OR

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

FOR THE TRANSITION PERIOD FROM  TO  

         

 

Commission
File Number

  Registrants, State of Incorporation,
Address, and Telephone Number
  I.R.S. Employer
Identification No.

001-09120

 

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

 

      22-2625848  

001-00973

 

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

 

      22-1212800  

000-49614

 

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

 

      22-3663480  

000-32503

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


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

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

             

Public Service Enterprise Group Incorporated

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

Public Service Electric and Gas Company

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

PSEG Power LLC

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

PSEG Energy Holdings L.L.C.

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

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

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

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

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




TABLE OF CONTENTS

         

 

 

 

 

  Page

FORWARD-LOOKING STATEMENTS

      ii  

PART I. FINANCIAL INFORMATION

   

Item 1.

 

Financial Statements

 

 

 Public Service Enterprise Group Incorporated

      1  

 

 Public Service Electric and Gas Company

      5  

 

 

 PSEG Power LLC

      9  

 

 PSEG Energy Holdings L.L.C.

      13  

 

 

Notes to Condensed Consolidated Financial Statements

 

 Note 1. Organization and Basis of Presentation

      17  

 

 

 Note 2. Recent Accounting Standards

      19  

 

 Note 3. Discontinued Operations, Dispositions and Acquisitions

      22  

 

 

 Note 4. Earnings Per Share (EPS)

      24  

 

 Note 5. Commitments and Contingent Liabilities

      25  

 

 

 Note 6. Financial Risk Management Activities

      39  

 

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

      42  

 

 

 Note 8. Changes in Capitalization

      43  

 

 Note 9. Other Income and Deductions

      44  

 

 

 Note 10. Income Taxes

      46  

 

 Note 11. Financial Information by Business Segments

      47  

 

 

 Note 12. Stock-Based Compensation

      48  

 

 Note 13. Related-Party Transactions

      52  

 

 

 Note 14. Guarantees of Debt

      55  

 

 Note 15. Subsequent Events

      57  

Item 2.

 

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

      58  

 

Termination of Merger Agreement

      58  

 

 

Overview of 2006 and Future Outlook

      58  

 

Results of Operations

      63  

 

 

Liquidity and Capital Resources

      72  

 

Capital Requirements

      78  

 

 

Off-Balance Sheet Arrangements

      78  

 

Accounting Matters

      78  

Item 3.

 

Qualitative and Quantitative Disclosures About Market Risk

      79  

Item 4.

 

Controls and Procedures

      83  

PART II. OTHER INFORMATION

   

Item 1.

 

Legal Proceedings

      84  

Item 5.

 

Other Information

      85  

Item 6.

 

Exhibits

      94  

Signatures

      95  

i


FORWARD-LOOKING STATEMENTS

Certain of the matters discussed in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such statements are based on management’s beliefs as well as assumptions made by and information currently available to management. When used herein, the words “anticipate,” “intend,” “estimate,” “believe,” “expect,” “plan,” “hypothetical,” “potential,” “forecast,” “project,” variations of such words and similar expressions are intended to identify forward-looking statements. Public Service Enterprise Group Incorporated (PSEG), Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG Energy Holdings L.L.C. (Energy Holdings) undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following review should not be construed as a complete list of factors that could affect forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements discussed above, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following:

 

      regulatory issues that significantly impact operations;

 

 

 

 

ability to attain satisfactory regulatory results;

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

changes in energy policies and regulation;

 

 

 

 

changes in demand;

 

 

 

 

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

 

 

 

 

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

 

 

 

 

growth in costs and expenses;

 

 

 

 

environmental regulations that significantly impact operations;

 

 

 

 

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

 

 

 

 

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

 

 

 

 

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

 

 

 

 

continued availability of insurance coverage at commercially reasonable rates;

 

 

 

 

involvement in lawsuits, including liability claims and commercial disputes;

 

 

 

 

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

 

 

 

 

business combinations among competitors and major customers;

 

 

 

 

general economic conditions, including inflation or deflation;

 

 

 

 

changes in tax laws and regulations;

 

 

 

 

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

ii


 

 

 

 

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

PSEG, PSE&G and Energy Holdings

 

      ability to obtain adequate and timely rate relief;

PSEG, Power and Energy Holdings

 

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

 

 

 

 

inability to meet generation operating performance expectations;

 

 

 

 

energy transmission constraints or lack thereof;

 

 

 

 

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

 

 

 

 

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

 

 

 

 

surplus of energy capacity and excess supply;

 

 

 

 

substantial competition in the domestic and worldwide energy markets;

 

 

 

 

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

 

 

 

 

availability of fuel and timely transportation at reasonable prices;

 

 

 

 

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

 

 

 

 

changes in product or sourcing mix;

 

 

 

 

delays, cost escalations or unsuccessful construction and development;

 

 

 

 

delay in market rules;

PSEG and Power

 

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

 

 

 

 

ability to maintain nuclear operating performance at projected levels;

PSEG and Energy Holdings

 

      changes in foreign currency exchange rates;

 

 

 

 

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

 

 

 

 

ability to realize tax benefits;

 

 

 

 

changes in political regimes in foreign countries; and

 

 

 

 

international developments negatively impacting business.

Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and PSEG, PSE&G, Power and Energy Holdings cannot assure you that the results or developments anticipated by management will be realized, or even if realized, will have the expected consequences to, or effects on, PSEG, PSE&G, Power and Energy Holdings or their respective business prospects, financial condition or results of operations. Undue reliance should not be placed on these forward-looking statements in making any investment decision. Each of PSEG, PSE&G, Power and Energy Holdings expressly disclaims any obligation or undertaking to release publicly any updates or revisions to these forward-looking statements to reflect events or circumstances that occur or arise or are anticipated to occur or arise after the date hereof. In making any investment decision regarding PSEG’s, PSE&G’s, Power’s and Energy Holdings’ securities, PSEG, PSE&G, Power and Energy Holdings are not making, and you should not infer, any representation about the likely existence of any particular future set of facts or circumstances. The forward-looking statements contained in this report are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

iii


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                 

 

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

 

  (Millions)

 

  (Unaudited)

OPERATING REVENUES

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

OPERATING EXPENSES

               

Energy Costs

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

Operation and Maintenance

      541         537         1,705         1,661  

Write-down of Project Investments

                      263          

Depreciation and Amortization

      234         204         645         562  

Taxes Other Than Income Taxes

      32         34         100         105  

 

               

Total Operating Expenses

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

 

               

Income from Equity Method Investments

      30         30         93         90  

 

               

OPERATING INCOME

      806         600         1,496         1,558  

Other Income

      51         92         153         169  

Other Deductions

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

Interest Expense

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

Preferred Stock Dividends

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

 

               

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

      603         452         938         1,052  

Income Tax Expense

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

 

               

INCOME FROM CONTINUING OPERATIONS

      374         269         559         640  

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

              (16 )         227         (184 )  

 

               

NET INCOME

    $   374       $   253       $   786       $   456  

 

               

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (THOUSANDS):

               

BASIC

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

 

               

DILUTED

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

 

               

EARNINGS PER SHARE:

               

BASIC

               

INCOME FROM CONTINUING OPERATIONS

    $   1.48       $   1.12       $   2.22       $   2.68  

NET INCOME

    $   1.48       $   1.06       $   3.12       $   1.91  

 

               

DILUTED

               

INCOME FROM CONTINUING OPERATIONS

    $   1.48       $   1.10       $   2.22       $   2.63  

NET INCOME

    $   1.48       $   1.03       $   3.12       $   1.87  

 

               

DIVIDENDS PAID PER SHARE OF COMMON STOCK

    $   0.57       $   0.56       $   1.71       $   1.68  

 

               

See Notes to Condensed Consolidated Financial Statements.

1


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

ASSETS

       

CURRENT ASSETS

       

Cash and Cash Equivalents

    $   292       $   288  

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

      1,337         1,936  

Unbilled Revenues

      222         394  

Fuel

      853         812  

Materials and Supplies

      311         277  

Energy Trading Contracts

      62         327  

Prepayments

      224         129  

Restricted Funds

      98         76  

Derivative Contracts

      37         50  

Assets of Discontinued Operations

              498  

Assets Held for Sale

      21          

Other

      37         41  

 

       

Total Current Assets

      3,494         4,828  

 

       

PROPERTY, PLANT AND EQUIPMENT

      19,634         18,896  

Less: Accumulated Depreciation and Amortization

      (5,950 )         (5,560 )  

 

       

Net Property, Plant and Equipment

      13,684         13,336  

 

       

NONCURRENT ASSETS

       

Regulatory Assets

      5,028         5,053  

Long-Term Investments

      3,890         4,077  

Nuclear Decommissioning Trust (NDT) Funds

      1,191         1,133  

Other Special Funds

      569         559  

Goodwill and Other Intangibles

      597         608  

Energy Trading Contracts

      19         42  

Derivative Contracts

      59          

Other

      183         177  

 

       

Total Noncurrent Assets

      11,536         11,649  

 

       

TOTAL ASSETS

    $   28,714       $   29,813  

 

       

See Notes to Condensed Consolidated Financial Statements.

2


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS

             

 

  September 30,
2006
  December 31,
2005
   

 

  (Millions)
(Unaudited)
   

LIABILITIES AND CAPITALIZATION

           

CURRENT LIABILITIES

           

Long-Term Debt Due Within One Year

    $   672       $   1,536      

Commercial Paper and Loans

      555         100      

Accounts Payable

      806         1,154      

Derivative Contracts

      186         425      

Energy Trading Contracts

      237         200      

Accrued Interest

      191         152      

Accrued Taxes

      112         141      

Clean Energy Program

      114         96      

Liabilities of Discontinued Operations

              436      

Other

      430         515      

 

           

Total Current Liabilities

      3,303         4,755      

 

           

NONCURRENT LIABILITIES

           

Deferred Income Taxes and Investment Tax Credits (ITC)

      4,646         4,248      

Regulatory Liabilities

      668         720      

Asset Retirement Obligations

      618         585      

Other Postretirement Benefit (OPEB) Costs

      632         597      

Clean Energy Program

      160         233      

Environmental Costs

      396         420      

Derivative Contracts

      214         637      

Energy Trading Contracts

      40         19      

Other

      263         218      

 

           

Total Noncurrent Liabilities

      7,637         7,677      

 

           

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

           

CAPITALIZATION

           

LONG-TERM DEBT

           

Long-Term Debt

      7,436         7,849      

Securitization Debt

      1,758         1,879      

Project Level, Non-Recourse Debt

      855         891      

Debt Supporting Trust Preferred Securities

      660         660      

 

           

Total Long-Term Debt

      10,709         11,279      

 

           

SUBSIDIARIES’ PREFERRED SECURITIES

           

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

      80         80      

 

           

COMMON STOCKHOLDERS’ EQUITY

           

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

      4,644         4,618      

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

      (527 )         (532 )      

Retained Earnings

      2,901         2,545      

Accumulated Other Comprehensive Loss

      (33 )         (609 )      

 

           

Total Common Stockholders’ Equity

      6,985         6,022      

 

           

Total Capitalization

      17,774         17,381      

 

           

TOTAL LIABILITIES AND CAPITALIZATION

    $   28,714       $   29,813      

 

           

See Notes to Condensed Consolidated Financial Statements.

3


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

         

 

  For The Nine Months Ended
September 30,
  2006   2005

 

  (Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net Income

    $   786       $   456  

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

       

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

      (228 )         178  

Gain on Disposition of Property, Plant and Equipment

      (1 )         (5 )  

Write-Down of Project Investments

              22  

Depreciation and Amortization

      645         572  

Amortization of Nuclear Fuel

      73         69  

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

      (5 )         155  

Non-Cash Employee Benefit Plan Costs

      178         175  

Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes

      32         9  

Loss (Gain) on Sale of Investments

      255         (50 )  

Undistributed Earnings from Affiliates

      (45 )         (40 )  

Foreign Currency Transaction Loss (Gain)

      4         (1 )  

Unrealized (Gains) Losses on Energy Contracts and Other Derivatives

      (47 )         4  

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

      112         75  

Under Recovery of Societal Benefits Charge (SBC)

      (89 )         (94 )  

Net Realized Gains and Income from NDT Funds

      (54 )         (94 )  

Other Non-Cash Charges

      25         26  

Net Change in Certain Current Assets and Liabilities

      73         (439 )  

Employee Benefit Plan Funding and Related Payments

      (127 )         (159 )  

Proceeds from the Withdrawal of Partnership Interests and Other Distributions

      7         63  

Other

      (150 )         (19 )  

 

       

Net Cash Provided By Operating Activities

      1,444         903  

 

       

CASH FLOWS FROM INVESTING ACTIVITIES

       

Additions to Property, Plant and Equipment

      (748 )         (751 )  

Proceeds from Collection of Notes Receivable

              132  

Proceeds from Sale of Discontinued Operations

      494         220  

Proceeds from Sale of Property, Plant and Equipment

      3         6  

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

      186         26  

Proceeds from NDT Funds Sales

      1,056         2,751  

Investment in NDT Funds

      (1,069 )         (2,769 )  

Restricted Funds

      (22 )         (47 )  

NDT Funds Interest and Dividends

      29         25  

Other

      18         13  

 

       

Net Cash Used In Investing Activities

      (53 )         (394 )  

 

       

CASH FLOWS FROM FINANCING ACTIVITIES

       

Net Change in Commercial Paper and Loans

      452         (267 )  

Issuance of Long-Term Debt

              728  

Issuance of Non-Recourse Debt

              4  

Issuance of Common Stock

      56         55  

Redemptions of Long-Term Debt

      (1,246 )         (230 )  

Repayment of Non-Recourse Debt

      (37 )         (20 )  

Redemption of Debt Underlying Trust Securities

      (154 )          

Cash Dividends Paid on Common Stock

      (430 )         (401 )  

Other

      (26 )         (42 )  

 

       

Net Cash Used In Financing Activities

      (1,385 )         (173 )  

 

       

Effect of Exchange Rate Change

      (2 )         1  

 

       

Net Increase in Cash and Cash Equivalents

      4         337  

Cash and Cash Equivalents at Beginning of Period

      288         263  

 

       

Cash and Cash Equivalents at End of Period

    $   292       $   600  

 

       

Supplemental Disclosure of Cash Flow Information:

       

Income Taxes Paid

    $   312       $   102  

Interest Paid, Net of Amounts Capitalized

    $   510       $   618  

See Notes to Condensed Consolidated Financial Statements.

4


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                 

 

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

 

  (Millions)
(Unaudited)

OPERATING REVENUES

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

OPERATING EXPENSES

               

Energy Costs

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

Operation and Maintenance

      278         276         855         839  

Depreciation and Amortization

      174         155         476         418  

Taxes Other Than Income Taxes

      32         35         100         106  

 

               

Total Operating Expenses

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

 

               

OPERATING INCOME

      237         273         598         724  

Other Income

      6         3         18         7  

Other Deductions

              (1 )         (2 )         (2 )  

Interest Expense

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

 

               

INCOME BEFORE INCOME TAXES

      157         189         360         473  

Income Tax Expense

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

 

               

NET INCOME

      88         115         200         282  

Preferred Stock Dividends

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

 

               

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

    $   87       $   114       $   197       $   279  

 

               

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

5


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

ASSETS

       

CURRENT ASSETS

       

Cash and Cash Equivalents

    $   76       $   159  

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

      770         959  

Unbilled Revenues

      222         394  

Materials and Supplies

      49         49  

Prepayments

      151         49  

Restricted Funds

      15         14  

Other

      33         32  

 

       

Total Current Assets

      1,316         1,656  

 

       

PROPERTY, PLANT AND EQUIPMENT

      11,023         10,636  

Less: Accumulated Depreciation and Amortization

      (3,827 )         (3,627 )  

 

       

Net Property, Plant and Equipment

      7,196         7,009  

 

       

NONCURRENT ASSETS

       

Regulatory Assets

      5,028         5,053  

Long-Term Investments

      147         144  

Other Special Funds

      310         315  

Other

      117         114  

 

       

Total Noncurrent Assets

      5,602         5,626  

 

       

TOTAL ASSETS

    $   14,114       $   14,291  

 

       

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

6


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

LIABILITIES AND CAPITALIZATION

       

CURRENT LIABILITIES

       

Long-Term Debt Due Within One Year

    $   282       $   485  

Commercial Paper and Loans

      327          

Accounts Payable

      290         286  

Accounts Payable—Affiliated Companies, net

      403         391  

Accrued Interest

      41         59  

Clean Energy Program

      114         96  

Derivative Contracts

      9         6  

Other

      269         370  

 

       

Total Current Liabilities

      1,735         1,693  

 

       

NONCURRENT LIABILITIES

       

Deferred Income Taxes and ITC

      2,523         2,608  

Other Postretirement Benefit (OPEB) Costs

      586         561  

Regulatory Liabilities

      668         720  

Clean Energy Program

      160         233  

Environmental Costs

      341         365  

Asset Retirement Obligations

      218         210  

Derivative Contracts

      23         6  

Other

      27         27  

 

       

Total Noncurrent Liabilities

      4,546         4,730  

 

       

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

       

CAPITALIZATION

       

LONG-TERM DEBT

       

Long-Term Debt

      2,754         2,866  

Securitization Debt

      1,758         1,879  

 

       

Total Long-Term Debt

      4,512         4,745  

 

       

PREFERRED SECURITIES

       

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

      80         80  

 

       

COMMON STOCKHOLDER’S EQUITY

       

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

      892         892  

Contributed Capital

      170         170  

Basis Adjustment

      986         986  

Retained Earnings

      1,197         1,000  

Accumulated Other Comprehensive Loss

      (4 )         (5 )  

 

       

Total Common Stockholder’s Equity

      3,241         3,043  

 

       

Total Capitalization

      7,833         7,868  

 

       

TOTAL LIABILITIES AND CAPITALIZATION

    $   14,114       $   14,291  

 

       

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

7


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

         

 

  For The Nine Months Ended
September 30,
  2006   2005

 

  (Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net Income

    $   200       $   282  

Adjustments to Reconcile Net Income to Net Cash Flows from

       

Operating Activities:

       

Depreciation and Amortization

      476         418  

Provision for Deferred Income Taxes and ITC

      (69 )         (77 )  

Non-Cash Employee Benefit Plan Costs

      127         124  

Non-Cash Interest Expense

      14         13  

Employee Benefit Plan Funding and Related Payments

      (81 )         (104 )  

Over Recovery of Electric Energy Costs (BGS and NTC)

      39         81  

Over (Under) Recovery of Gas Costs

      73         (6 )  

Under Recovery of SBC

      (89 )         (94 )  

Other Non-Cash Charges

      6         3  

Net Changes in Certain Current Assets and Liabilities:

       

Accounts Receivable and Unbilled Revenues

      361         74  

Materials and Supplies

              (7 )  

Prepayments

      (102 )         (91 )  

Accrued Taxes

      (25 )         (21 )  

Accrued Interest

      (18 )         (16 )  

Accounts Payable

      4         70  

Accounts Receivable/Payable-Affiliated Companies, net

      (337 )         (207 )  

Other Current Assets and Liabilities

      (77 )         102  

Other

      (79 )         (80 )  

 

       

Net Cash Provided By Operating Activities

      423         464  

 

       

CASH FLOWS FROM INVESTING ACTIVITIES

       

Additions to Property, Plant and Equipment

      (392 )         (372 )  

Restricted Funds

      (1 )         (3 )  

 

       

Net Cash Used In Investing Activities

      (393 )         (375 )  

 

       

CASH FLOWS FROM FINANCING ACTIVITIES

       

Net Change in Short-Term Debt

      327         80  

Issuance of Long-Term Debt

              250  

Redemption of Securitization Debt

      (115 )         (105 )  

Redemption of Long-Term Debt

      (322 )         (125 )  

Issuance of Securitization Debt

              103  

Deferred Issuance Costs

              (3 )  

Preferred Stock Dividends

      (3 )         (3 )  

 

       

Net Cash (Used In) Provided by Financing Activities

      (113 )         197  

 

       

Net (Decrease) Increase In Cash and Cash Equivalents

      (83 )         286  

Cash and Cash Equivalents at Beginning of Period

      159         6  

 

       

Cash and Cash Equivalents at End of Period

    $   76       $   292  

 

       

Supplemental Disclosure of Cash Flow Information:

       

Income Taxes Paid

    $   187       $   249  

Interest Paid, Net of Amounts Capitalized

    $   251       $   250  

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

8


PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                 

 

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

 

  (Millions)
(Unaudited)

OPERATING REVENUES

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

OPERATING EXPENSES

               

Energy Costs

      830         983         2,992         2,941  

Operation and Maintenance

      222         223         721         685  

Depreciation and Amortization

      41         34         116         96  

 

               

Total Operating Expenses

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

 

               

OPERATING INCOME

      396         204         762         512  

Other Income

      38         74         113         135  

Other Deductions

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

Interest Expense

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

 

               

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

      360         233         684         528  

Income Tax Expense

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

 

               

INCOME FROM CONTINUING OPERATIONS

      205         132         394         303  

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

              (6 )                 (19 )  

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

              (1 )                 (178 )  

 

               

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

    $   205       $   125       $   394       $   106  

 

               

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

9


PSEG POWER LLC
CONDENSED CONSOLIDATED BALANCE SHEETS

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

ASSETS

       

CURRENT ASSETS

       

Cash and Cash Equivalents

    $   5       $   8  

Accounts Receivable

      450         862  

Accounts Receivable—Affiliated Companies, net

      335         288  

Fuel

      852         812  

Materials and Supplies

      218         201  

Energy Trading Contracts

      62         327  

Derivative Contracts

      15         50  

Other

      35         27  

 

       

Total Current Assets

      1,972         2,575  

 

       

PROPERTY, PLANT AND EQUIPMENT

      6,694         6,457  

Less: Accumulated Depreciation and Amortization

      (1,698 )         (1,577 )  

 

       

Net Property, Plant and Equipment

      4,996         4,880  

 

       

NONCURRENT ASSETS

       

Deferred Income Taxes and Investment Tax Credits (ITC)

              70  

Nuclear Decommissioning Trust (NDT) Funds

      1,191         1,133  

Goodwill and Other Intangibles

      62         63  

Other Special Funds

      155         143  

Energy Trading Contracts

      19         42  

Derivative Contracts

      25          

Other

      53         39  

 

       

Total Noncurrent Assets

      1,505         1,490  

 

       

TOTAL ASSETS

    $   8,473       $   8,945  

 

       

LIABILITIES AND MEMBER’S EQUITY

       

CURRENT LIABILITIES

       

Long-Term Debt Due Within One Year

    $         $   500  

Accounts Payable

      403         745  

Short-Term Loan from Affiliate

      68         202  

Energy Trading Contracts

      237         200  

Derivative Contracts

      165         403  

Accrued Interest

      81         41  

Other

      83         86  

 

       

Total Current Liabilities

      1,037         2,177  

 

       

NONCURRENT LIABILITIES

       

Deferred Income Taxes and Investment Tax Credits (ITC)

      271          

Asset Retirement Obligations

      398         373  

Energy Trading Contracts

      40         19  

Derivative Contracts

      167         597  

Environmental Costs

      55         55  

Other

      74         70  

 

       

Total Noncurrent Liabilities

      1,005         1,114  

 

       

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

       

LONG-TERM DEBT

       

Total Long-Term Debt

      2,817         2,817  

 

       

MEMBER’S EQUITY

       

Contributed Capital

      2,000         2,000  

Basis Adjustment

      (986 )         (986 )  

Retained Earnings

      2,704         2,310  

Accumulated Other Comprehensive Loss

      (104 )         (487 )  

 

       

Total Member’s Equity

      3,614         2,837  

 

       

TOTAL LIABILITIES AND MEMBER’S EQUITY

    $   8,473       $   8,945  

 

       

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

10


PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

         

 

  For The Nine Months Ended
September 30,

 

  2006   2005

 

  (Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net Income

    $   394       $   106  

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

       

Loss on Disposal of Discontinued operations, net of tax

              178  

Gain on Disposition of Property, Plant and Equipment

      (1 )         (5 )  

Depreciation and Amortization

      116         96  

Amortization of Nuclear Fuel

      73         69  

Interest Accretion on Asset Retirement Obligations

      25         21  

Provision for Deferred Income Taxes and ITC

      74         239  

Unrealized Losses (Gains) on Energy Contracts and Other Derivatives

      2         (2 )  

Non-Cash Employee Benefit Plan Costs

      35         34  

Net Realized Gains and Income from NDT Funds

      (54 )         (94 )  

Net Change in Certain Current Assets and Liabilities:

       

Fuel, Materials and Supplies

      (57 )         (187 )  

Accounts Receivable

      412         (89 )  

Accounts Payable

      (325 )         (348 )  

Accounts Receivable/Payable—Affiliated Companies, net

      303         177  

Accrued Interest Payable

      39          

Other Current Assets and Liabilities

      25         61  

Employee Benefit Plan Funding and Related Payments

      (34 )         (35 )  

Other

      (107 )         55  

 

       

Net Cash Provided By Operating Activities

      920         276  

 

       

CASH FLOWS FROM INVESTING ACTIVITIES

       

Additions to Property, Plant and Equipment

      (316 )         (345 )  

Sales of Property, Plant and Equipment

      1         226  

Proceeds from NDT Funds Sales

      1,056         2,751  

NDT Funds Interest and Dividends

      29         25  

Investment in NDT Funds

      (1,069 )         (2,769 )  

Short-Term Loan—Affiliated Company, net

              (62 )  

Other

      10         5  

 

       

Net Cash Used In Investing Activities

      (289 )         (169 )  

 

       

CASH FLOWS FROM FINANCING ACTIVITIES

       

Redemption of Long-Term Debt

      (500 )          

Short-Term Loan—Affiliated Company, net

      (134 )         (98 )  

 

       

Net Cash Used In Financing Activities

      (634 )         (98 )  

 

       

Net (Decrease) Increase in Cash and Cash Equivalents

      (3 )         9  

Cash and Cash Equivalents at Beginning of Period

      8         10  

 

       

Cash and Cash Equivalents at End of Period

    $   5       $   19  

 

       

Supplemental Disclosure of Cash Flow Information:

       

Income Taxes Paid

    $   200       $   9  

Interest Paid, Net of Amounts Capitalized

    $   92       $   62  

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

11


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

                 

 

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

 

  2006   2005   2006   2005

 

  (Millions)
(Unaudited)

OPERATING REVENUES

               

Electric Generation and Distribution Revenues

    $   358       $   280       $   939       $   728  

Income from Leveraged and Operating Leases

      38         44         115         136  

Other

      5         10         26         53  

 

               

Total Operating Revenues

      401         334         1,080         917  

 

               

OPERATING EXPENSES

               

Energy Costs

      195         184         583         484  

Operation and Maintenance

      49         41         150         151  

Write-down of Project Investments

                      263          

Depreciation and Amortization

      14         10         38         35  

 

               

Total Operating Expenses

      258         235         1,034         670  

 

               

Income from Equity Method Investments

      30         30         93         90  

 

               

OPERATING INCOME

      173         129         139         337  

Other Income

      14         5         33         18  

Other Deductions

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

Interest Expense

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

 

               

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

      121         75         (6 )         170  

Income Tax (Expense) Benefit

      (20 )         (27 )         31         (42 )  

Minority Interests in Earnings of Subsidiaries

                      (1 )         (1 )  

 

               

INCOME FROM CONTINUING OPERATIONS

      101         48         24         127  

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

              (9 )         (1 )         13  

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

                      228          

 

               

NET INCOME

      101         39         251         140  

Preference Units Distributions

                              (3 )  

 

               

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

    $   101       $   39       $   251       $   137  

 

               

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

13


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

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

ASSETS

       

CURRENT ASSETS

       

Cash and Cash Equivalents

    $   102       $   68  

Accounts Receivable:

       

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

      103         101  

Other Accounts Receivable

      12         14  

Affiliated Companies

      2          

Notes Receivable:

       

Affiliated Companies

      374         409  

Other

              5  

Inventory

      45         27  

Restricted Funds

      83         62  

Assets of Discontinued Operations

              498  

Assets Held for Sale

      21          

Derivative Contracts

      21          

Other

      10         7  

 

       

Total Current Assets

      773         1,191  

 

       

PROPERTY, PLANT AND EQUIPMENT

      1,674         1,560  

Less: Accumulated Depreciation and Amortization

      (290 )         (237 )  

 

       

Net Property, Plant and Equipment

      1,384         1,323  

 

       

NONCURRENT ASSETS

       

Leveraged Leases, net

      2,779         2,720  

Corporate Joint Ventures and Partnership Interests

      920         1,180  

Goodwill and Other Intangibles

      531         540  

Derivative Contracts

      34         3  

Other

      104         98  

 

       

Total Noncurrent Assets

      4,368         4,541  

 

       

TOTAL ASSETS

    $   6,525       $   7,055  

 

       

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

14


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

         

 

  September 30,
2006
  December 31,
2005

 

  (Millions)
(Unaudited)

LIABILITIES AND MEMBER’S EQUITY

       

CURRENT LIABILITIES

       

Long-Term Debt Due Within One Year

    $   341       $   348  

Accounts Payable:

       

Trade

      53         50  

Affiliated Companies

      76         11  

Derivative Contracts

      8         13  

Accrued Interest

      48         42  

Liabilities of Discontinued Operations

              436  

Other

      73         83  

 

       

Total Current Liabilities

      599         983  

 

       

NONCURRENT LIABILITIES

       

Deferred Income Taxes and Investment and Energy Tax Credits

      1,839         1,705  

Derivative Contracts

      18         27  

Other

      103         66  

 

       

Total Noncurrent Liabilities

      1,960         1,798  

 

       

COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)

       

MINORITY INTERESTS

      24         15  

 

       

LONG-TERM DEBT

       

Project Level, Non-Recourse Debt

      855         891  

Senior Notes

      1,149         1,448  

 

       

Total Long-Term Debt

      2,004         2,339  

 

       

MEMBER’S EQUITY

       

Ordinary Unit

      1,288         1,713  

Retained Earnings

      568         317  

Accumulated Other Comprehensive Income (Loss)

      82         (110 )  

 

       

Total Member’s Equity

      1,938         1,920  

 

       

TOTAL LIABILITIES AND MEMBER’S EQUITY

    $   6,525       $   7,055  

 

       

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

15


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

         

 

  For The Nine Months Ended
September 30,

 

  2006   2005

 

  (Millions)
(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

       

Net Income

    $   251       $   140  

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

       

Depreciation and Amortization

      38         45  

Demand Side Management Amortization

      2         6  

Investment Write-off

              22  

Deferred Income Taxes (Other than Leases)

      (8 )         (7 )  

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

      32         9  

Undistributed Earnings from Affiliates

      (45 )         (40 )  

Loss (Gain) on Sale of Investments

      255         (50 )  

Gain on Sale of Discontinued Operations

      (228 )          

Foreign Currency Transaction Loss (Gain)

      4         (1 )  

Change in Fair Value of Derivative Financial Instruments

      (49 )         6  

Other Non-Cash Charges

      3         4  

Net Changes in Certain Current Assets and Liabilities:

       

Accounts Receivable

      (23 )         (3 )  

Inventory

      (15 )         4  

Accounts Payable

      (58 )         18  

Other Current Assets and Liabilities

      (21 )         15  

Proceeds from Withdrawal of Partnership Interests and Other Distributions

      7         63  

Other

      4         (2 )  

 

       

Net Cash Provided By Operating Activities

      149         229  

 

       

CASH FLOWS FROM INVESTING ACTIVITIES

       

Additions to Property, Plant and Equipment

      (37 )         (26 )  

Proceeds from Sale of Discontinued Operations

      494          

Proceeds from the Sale of Investments

      186         26  

Short-Term Loan Receivable—Affiliated Company, net

      34         54  

Restricted Funds

      (21 )         (44 )  

Proceeds from Collection of Notes Receivable

              137  

Additions to other assets

      (5 )         (11 )  

Other

      8         9  

 

       

Net Cash Provided By Investing Activities

      659         145  

 

       

CASH FLOWS FROM FINANCING ACTIVITIES

       

Proceeds from Non-Recourse Long-Term Debt

              4  

Repayment of Non-Recourse Long-Term Debt

      (37 )         (20 )  

Repayment of Senior Notes

      (309 )          

Return of Capital Contributed

      (425 )         (100 )  

Redemptions Preference Units

              (184 )  

Cash Distributions Paid on Preference Units

              (3 )  

Other

      (1 )         (6 )  

 

       

Net Cash Used In Financing Activities

      (772 )         (309 )  

 

       

Effect of Exchange Rate Change

      (2 )         1  

 

       

Net Increase In Cash and Cash Equivalents

      34         66  

Cash and Cash Equivalents at Beginning of Period

      68         183  

 

       

Cash and Cash Equivalents at End of Period

    $   102       $   249  

 

       

Supplemental Disclosure of Cash Flow Information:

       

Income Taxes (Received) Paid

    $   (86 )       $   4  

Interest Paid, Net of Amounts Capitalized

    $   108       $   203  

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

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

This combined Form 10-Q is separately filed by Public Service Enterprise Group Incorporated (PSEG), Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG Energy Holdings L.L.C. (Energy Holdings). Information contained herein relating to any individual company is filed by such company on its own behalf. PSE&G, Power and Energy Holdings each make representations only as to itself and make no representations as to any other company.

Note 1. Organization and Basis of Presentation

Organization

PSEG

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

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

PSE&G

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

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

Power

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

Energy Holdings

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

Services

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

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

Basis of Presentation

PSEG, PSE&G, Power and Energy Holdings

The respective financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements (Notes) should be read in conjunction with, and update and supplement matters discussed in PSEG’s, PSE&G’s, Power’s and Energy Holdings’ respective Annual Reports on Form 10-K for the year ended December 31, 2005 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006.

The unaudited condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. The year-end Condensed Consolidated Balance Sheets were derived from the audited Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2005.

Pension and Other Postretirement Benefits (OPEB)

PSEG

PSEG sponsors several qualified and nonqualified pension plans and OPEB plans covering PSEG’s and its participating affiliates’ current and former employees who meet certain eligibility criteria. In September 2006, PSEG contributed $50 million to its pension plans and $12 million to its OPEB plans. PSEG does not anticipate making any further contributions to the plans in 2006. The following table provides the components of net periodic benefit costs relating to all qualified and nonqualified pension and OPEB plans on an aggregate basis. OPEB costs are presented net of the federal subsidy expected for prescription drugs under the Medicare Prescription Drug Improvement and Modernization Act of 2003.

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

                                 

 

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

 

  (Millions)

Components of Net Periodic Benefit Costs:

                               

Service Cost

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

Interest Cost

      53         52         17         16         158         155         51         46  

Expected Return on Plan Assets

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

Amortization of Net

                               

Transition Obligation

                      7         7                         21         21  

Prior Service Cost

      3         4         4         3         8         12         10         6  

Loss

      14         12         2                 41         35         6         2  

 

                               

Net Periodic Benefit Costs

      27         28         32         28         73         82         93         81  

Effect of Regulatory Asset

                      4         5                         14         15  

 

                               

Total Benefit Costs

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

 

                               

PSE&G, Power, Energy Holdings and Services

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

                                 

 

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

 

  (Millions)

PSE&G

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

Power

      8         8         4         3         22         24         12         9  

Energy Holdings

      1         1                         2         2                  

Services

      4         5         1         1         12         15         4         3  

 

                               

Total Benefit Costs

    $   27       $   28       $   36       $