|
|
| (One intermediate revision by the same user not shown) |
| Line 16: |
Line 16: |
|
| |
|
| =Text= | | =Text= |
| {{#Wiki_filter:William Levis R 0. Box 236, Hancocks Bridge, NJ 08038 President and CNO tel: 856.339.1100 fax: 856.339.1104 email: william.levis@pseg.com This letterforwards ProprietaryInformation in accordance with 10CFR 2.390. The balance of this letter may be considered non-proprietaryupon removal of Attachment 2. | | {{#Wiki_filter:}} |
| NuclearL.L. C.
| |
| APR 3 0 2OO17 10 CFR 140.21 LR-N07-0076 U. S. Nuclear Regulatory Commission ATTN: Document Control Desk Washington, DC 20555-0001 Salem Nuclear Generating Station Units 1 and 2 Facility Operating License Nos. DPR-70 and 75 NRC Docket Nos. 50-272 and 50-311 Hope Creek Nuclear Generating Station Facility Operating License No. NPF-57 NRC Docket No. 50-354
| |
| | |
| ==Subject:==
| |
| 2007 Annual Report - Guarantees of Payment of Deferred Premiums PSEG Nuclear LLC (PSEG) the owners of Salem Generating Station Unit Nos. 1 and 2 and Hope Creek Generating Station submit the following statements and supporting documents to satisfy guarantee requirements as provided under 10CFR140.21(e):
| |
| : 1. 2006 PSEG Annual Report and/or Form 10-K. (Enclosure)
| |
| : 2. Individual certified]Internal Cash Flow Statements showing 2006 Actual and 2007 Projected with Explanation of Significant Variations. (Attachment 2)
| |
| : 3. A non-proprietary version of the Internal Cash Flow Statement is contained in Attachment 3.
| |
| Attachment 2 contains information proprietary to PSEG. PSEG requests that the contents of Attachment 2 be withheld from public disclosure in accordance with 10CFR2.390(a)(4). An affidavit to withhold proprietary information in accordance with 10CFR2.390(a)(4) is included as Attachment 1.
| |
| | |
| APR 3 0 20 This letterforwards ProprietaryInformation in accordance with IOCFR 2.390. The balance of this letter may be considered non-proprietaryupon removal of Attachment 2.
| |
| Document Control Desk LR-N07-0076 Page 2 Similar documents, not included in this submittal, will be filed by Exelon Energy Company LLC for the owners of the Peach Bottom Atomic Power Station, Unit Nos. 2 and 3.
| |
| Should you have any questions regarding this transmittal, please contact E. H. Villar at (856) 339-5456.
| |
| Sincerely,
| |
| | |
| APR$3 0 200 This letterforwards ProprietaryInformation in accordance with 10CFR 2.390. The balance of this letter may be considered non-proprietaryupon removal of Attachment 2.
| |
| Document Control Desk LR-N07-0076 Page 3 Enclosure 2006PSEG Annual Report Attachments (3)
| |
| Affidavit to withhold proprietary information PSEG Power LLC, Internal Cash Flow Statement (Proprietary)
| |
| PSEG Power LLC, Internal Cash Flow Statement (Non-Proprietary)
| |
| | |
| APR 5 .0 2007 This letterforwards ProprietaryInformation in accordance-with 10CFR 2.390. The balance of this letter may be considered non-proprietaryupon removal of Attachment 2.
| |
| C All w/o 2006 PSEG Annual Report and Attachments 1 and 2 Mr. S. Collins, Administrator- Region I U. S. Nuclear Regulatory Commission 475 Allendale Road King of Prussia, PA 19406 USNRC Senior Resident Inspector - Salem.(X24)
| |
| USNRC Senior Resident Inspector - Hope Creek (X24)
| |
| Mr. R. Ennis, Project Manager - Hope Creek and Salem U. S. Nuclear Regulatory Commission Mail Stop 08B2 11555 Rockville Pike Rockville, MD 20852 Mr. K. Tosch, Manager IV Bureau of Nuclear Engineering P. 0. Box 415 Trenton, NJ 08625
| |
| | |
| LR-N07-0076 Affidavit to withhold proprietary information in accordance with ]OCFR2.390(a)(4)
| |
| | |
| AFFIDAVIT I, William Levis, President & Chief Nuclear Officer of PSEG Nuclear LLC (PSEG), do hereby affirm and state:
| |
| I am an officer of PSEG authorized to execute this affidavit on its behalf. I am further authorized to review information submitted to the Nuclear Regulatory Commission (NRC) and apply for the withholding of information from disclosure.
| |
| PSEG is providing information pursuant to 10CFR140.21(e), which constitutes proprietary financial information that should be held in confidence by the NRC pursuant to the policy reflected in 10CFR2.390(a)(4), because:
| |
| This information is and has been held in confidence by PSEG.
| |
| This information is of a type that is held in confidence by PSEG, and there is a rational basis for doing so because the information contains sensitive financial information concerning PSEG's projected revenues and operating expenses.
| |
| The information is being transmitted to the NRC in confidence.
| |
| This information is not available in public sources and could not be gathered readily from other publicly available information.
| |
| Public disclosure of this information would create substantial harm to the competitive position of PSEG by disclosing PSEG's internal financial projections to other parties whose commercial interests may be adverse to those of PSEG.
| |
| Accordingly, PSEG requests that the designated documents be withheld from public disclosure pursuant to the policy reflected in 10CFR2.390(a)(4).
| |
| William Levis President & Chief Nuclear Officer I,,JLG,, Y I UL,,,,,1%J , 1 1-4%VV J7i My Commission expires on / 7 'r7 Ann L Shimp Notary Public of New Jersey My Commission Expires October 17, 2007
| |
| | |
| LR-N07-0076 Non-Proprietary PSEG Power LLC (Salem and Hope Creek)
| |
| Internal Cash Flow Statement
| |
| | |
| PSEG Power LLC (Salem and Hope Creek)
| |
| Projected Internal Cash Flow Statement For 2007 Projected Compared to 2006 Actual (Millions) 2006 2007 Actual Pr~mected Explanation of Significant Variations Net Income $ 276 $
| |
| Less: Dividends Paid Retained in Business 276 Adjustments:
| |
| Loss on Disposal of Discontinued Operations 208 Write-Down of Property, Plant and Equipment 44 Depreciation and Amortization 157 Amortization of Nuclear Fuel 97 Deferred Income Taxes and Investment Tax Credits 34 Accretion on Asset Retirement Obligations 33 Net Realized Gains and Income on NDT Funds (63)
| |
| Unrealized Losses on Energy Trading Contracts 5 Employee Benefit Plan Contracts 9 Interest Capitalized During Construction (41)
| |
| Total Adjustments 483 Internal Cash Flow $ 759 $ =
| |
| Average Quarterly Cash Flow $ 190 $
| |
| As indicated by this statement, the Average Quarterly Cash Flow covers the maximum contingent liability, which amounts to $33 million annually, of PSEG Power LLC as defined under the Price Anderson Act.
| |
| PSEG POWER LLC
| |
| | |
| making things work PSEG 2006 ANNUAL REPORT
| |
| | |
| CONTENTS 2 Letter from the Chief Executive Officer 8 Letter from the President of PSEG 12 Making Things Work 24 Board of Directors 25 Form 10-K ibc Stockholder Information
| |
| | |
| 2006 FINANCIAL HIGHLIGHTS While the forward looking statements about PSEG's expectations made throughout this report are based on information currently available and on reasonable assumptions, actual results could be materially different. Historical results are not necessarily indicative of future earnings. For more information, please refer to PSEG reports that are filed periodically with the Securities and Exchange Commission.
| |
| Dollars in millions, where applicable 2006 2005 % Change Total Revenues $ 12,164 $ 12,164 0 Income from Continuing Operations $ 752 $ 886 (15)
| |
| Pro Forma Operating Earnings (Non-GAAP) $ 938 $ 918 2 Net Income $ 739 $ 661 12 Earnings Per Share-Diluted Income from Continuing Operations $ 2.98 $ 3.63 (18)
| |
| Pro Forma Operating Earnings (Non-GAAP) $ 3.71 $ 3.77 (2)
| |
| Net Income $ 2.93 $ 2.71 8 Weighted average common stock shares outstanding - (thousands)
| |
| Diluted 252,314 244,406 3 Dividends Paid per Share $ 2.28 $ 2.24 2 Book Value per Share - Year-end $ 26.71 $ 23.98 11 Market Price per Share - Year-end $ 66.38 $ 64.97 2 Total Assets $ 28,570 $ 29,821 (4)
| |
| Note: Pro Forma Operating Earnings exclude an after-tax loss on the sale of RGE of $178 million, or $0.70 per share, and after-tax Merger-related costs of $8 million, or $0.03 per share, in 2006 and after-tax Merger-related costs of $32 million, or $0.14 per share, in 2005. PSEG believes that the non-GAAP financial measure "Operating Earnings" provides a consistent and comparable measure of performance of its businesses to help the shareholders understand performance trends.
| |
| | |
| making performance work
| |
| | |
| PSEG 2OO6 ANNUAL REPORT PP. 2/3 LETTER FROM THE CHAIRMAN OF THE BOARD &
| |
| CHIEF EXECUTIVE OFFICER E. JAMES FERLAND I am pleased to report that 2006 was a year of significant, continued achievement for your company.
| |
| We generated solid earnings and cash flow, set new company records for electric output at our nuclear stations and fossil fleet, and won recognition for the second consecutive year as America's most reliable electric utility.
| |
| Moreover, 2006 was our employees' safest year ever, reflecting their continued dedica-tion to the high performance standards that underpin your company's success. This accomplishment builds on more than a decade of safety progress during which employees have reduced the number and severity of accidents by more than two-thirds. It is a tribute to their focus each day on making our workplace safer and their care for the cus-tomers and communities we serve.
| |
| A Strong Stand-Alone Position and Outlook These and other accomplishments prepared the ground for an even brighter future. By a considerable margin we have the strongest financial outlook in my 20-plus years as CEO of your company: We anticipate operating earnings to be about one-third higher in 2007 than 2006, and in excess of ten percent higher still in 2008.
| |
| On a disappointing note, we were unable to complete the merger with Exelon due largely to the demands of the New Jersey Board of Public Utilities. Those demands, had they been accepted, would have produced a far inferior outlook for the combined company than our stand-alone prospects. Exelon reached a similar conclusion and terminated the merger agreement.
| |
| Throughout the merger process we kept a close eye on maintaining a strong go-it-alone strategy in the event the merger did not succeed. As a result, we are a much stronger and better positioned company than we were in December 2004 when the merger agree-ment was signed.
| |
| | |
| Among the major reasons for this:
| |
| -Our Hope Creek and Salem nuclear sta- 10-YEAR CUMULATIVE TOTAL. COMPARITIVE RETURNS tions have greatly improved performance, AS OF DECEMBER 29, 2oo6 setting new plant records for electric gen-eration in 2005 and again in 2006;
| |
| *We have continued to improve the balance sheet, strengthening our financial position;
| |
| -We further reduced international risk and exposure by selling a number of overseas assets; and
| |
| ,s r
| |
| *We are also benefiting from a period of higher energy prices.
| |
| These developments have not gone unno-PSEG's total return for the last 10 years has outpaced two major market indices. This chart shows the value at ticed by the financial community. Our each yearns end of $100 invested at year end 1996 The value assumes reinvested dividends.
| |
| stock price was approximately 50 percent higher at year end 2006 than it was prior to the announcement of the proposed higher levels than three years ago. Strong Our Salem and Hope Creek nuclear gener-merger in mid-December 2004. operations, a period of higher energy ating facilities in southern New Jersey prices and an improving picture for elec- continued their excellent operations in Investors have continued to benefit as well tric capacity markets are contributing to 2006. The plants have been producing more from our emphasis on long-term shareholder a very positive trend for your company. In energy than ever before; they have set value: The value of your investment dou- addition to being solidly positioned for new refueling duration records, including a bled during the past five years, assuming growth in 2007 and 2008, we continue to world record at one of the Salem units; you held shares throughout the period. benefit from the stability provided by a and have made significant and measura-strong, balanced mix of energy businesses. ble improvements in a broad range of Dividends are one of the key ways we other key operational areas. Importantly, this have traditionally rewarded shareholders. PSEG Power strong performance has been recognized In 2006, we paid dividends once again, PSEG Power, our large wholesale energy by the Nuclear Regulatory Commission, extending PSEG's record of paying annual supply business, had an outstanding which oversees the industry, and INPO, the dividends to 100 consecutive years. We year in 2006. It continued to strengthen nuclear industry's evaluation arm.
| |
| increased our dividend modestly in 2006 its position as our main earnings driver.
| |
| and again early in 2007, bringing our Power has a low-cost generation fleet of Our fossil units also significantly improved annual indicated dividend rate to $2.34 nuclear and fossil units, and is reaping performance and reliability in 2006, gen-per share. We expect to continue modest benefits from strong operations in a favor- erating all-time highs for output. In addition increases in the dividend as our financial able pricing environment. As Power's to responding well in the peak summer conditions allows. older contracts for its output have rolled season, our fossil operations focused on off, they have been replaced by newer long-term maintenance to lay the founda-Energy prices in 2006 were again volatile, contracts at much higher prices, boosting tion for continued strong performance.
| |
| but generally remained at significantly profitability.
| |
| | |
| PSEG 2OO6 ANNUAL REPORT PP. 4/5 PSEG Energy Holdings The 20-plus years in which I have been We remain a company PSEG Energy Holdings, our business with privileged to lead your company have known for keeping our a mix of domestic and international energy been productive and eventful. There have commitments to customers, assets and investments, had its most profit- been many changes during this time, able year ever in 2006. It enjoyed especially including a new, constructive opening to employees, communities robust earnings from its two 1,000-mega- market forces. PSEG not only participated and, not least, shareholders watt combined-cycle generating facilities in the process that brought competition to who invest their hard- in Texas, due to a combination of strong our industry, but in many ways has helped operations and record electric demand lead it. For all the changes, I am also earned money with us. there during an especially hot summer. struck by how remarkably steady our course has been. We remain a company known Holdings also made considerable progress for keeping our commitments to customers, PSE&G with its long-term plan to reduce interna- employees, communities and, not least, Our New Jersey energy delivery company, tional exposure, pay down debt and deliver shareholders who invest their hard-earned PSE&G, has long been known for out- returns to the parent company. In 2006 money with us.
| |
| standing safety and reliability. It further it divested a number of non-strategic inter-improved operations to the point that national assets, enabling it to retire debt In closing, I want to pay tribute to your in 2005 and again in 2006 it was recog- and return $520 million to the parent com- company's dedicated workforce, past and nized by PA Consulting, a well-known pany. During the past three years Holdings' present. Our reputation as a reliable, benchmarking firm, as the nation's most main subsidiaries - PSEG Resources and profitable, well-run company owes more to reliable electric utility. PSE&G has received PSEG Global - sold assets for approxi- our employees than I can possibly say similar recognition as the reliability leader mately $1.5 billion, close to $200 million in this letter. They have met many chal-in the Mid-Atlantic region five years in over the assets' book value. PSEG Global's lenges, adjusted to many changes and a row. portfolio has been effectively reshaped dur- contributed in innumerable ways to making ing this period with a view to reducing risk PSEG the great company it is. I am In 2006, PSE&G employees again rose to going forward. Fully one half of its earn- confident that under Ralph Izzo's leadership the occasion in restoring customers safely ings in 2006 came from U.S.-based they will write a new and even brighter following six major storms and periods assets, with most of the rest from electric chapter in PSEG's 100-year-plus history.
| |
| of record heat that pushed electric demand distribution companies in Chile and Peru. It has been my privilege to work with them to an all-time peak. They performed and I wish them every continued success.
| |
| superbly on both the gas and electric sides A Smooth Transition of the business. In 2006, we also prepared the ground for a smooth transition to new leadership at Quality service has long fostered an envi- your company. Ralph Izzo, who has served ronment in which PSE&G is fairly compen- superbly in many senior management Sincerely, sated for our large, necessary investments positions during the past 15 years, was in energy infrastructure. The electric and elected president and a director in October gas rate relief approved by the New Jersey 2006. Ralph is well qualified to lead Board of Public Utilities in November your company upon my retirement at the E. James Ferland 2006 will help PSE&G's long-term financial end of March 2007. In Ralph's letter Chairman of the Board and picture - with a fair return for our which follows my own, he has more to say Chief Executive Officer investors and resources to support our abil- about key business goals as well as his Public Service Enterprise Group ity to provide safe, reliable service. vision for your company. February 28, 2007
| |
| | |
| 4, 1, " -,
| |
| | |
| A LETTER FROM THE PRESIDENT &
| |
| CHIEF OPERATING OFFICER RALPH IZZO We achieved strong results in 2006, as Jim Ferland discussed in his letter, and have an even brighter outlook. Our task ahead is to make a strong company even stronger -
| |
| to keep increasing our financial strength through operational excellence and apply that strength through disciplined investment.
| |
| Building a Strong Foundation for Growth.. .through Operational Excellence Operational excellence has been the basis for success at PSEG for more than a century and will continue to be. It is demonstrated in the many ways our employees use their skills and training to achieve best-ever safety results, win national and regional reliability awards, set new records in electric generation and, not least, deliver one of life's neces-sities for our customers in the icy depth of winter and the heat of summer.
| |
| Accomplishments such as these constitute a strong, stable foundation that can support new growth initiatives. With this in mind, we have identified three key goals for 2007:
| |
| Re-staff the organization in ways that contribute to long-term success; ensure that our return to stand-alone nuclear operations continues at a high level of performance; and further strengthen the balance sheet.
| |
| I am encouraged by our progress in assembling a talented and highly capable leadership team, and especially pleased that the team reflects our continuing commitment to increase the representation of women and minorities in officer positions. A number of other staff positions that became open in anticipation of the merger need to be filled. We will continue rebuilding our workforce with an eye on rewarding good internal perform-ers, recruiting diverse talent from outside the company and preserving cost savings from more efficient operations.
| |
| | |
| PSEG 20o6 ANNUAL REPORT PP. 8/9 making the vision work
| |
| | |
| Another priority is to continue progress Jim Ferland mentioned in his letter, we concentrating on areas where our expertise at the Salem and Hope Creek nuclear are anticipating about a one-third improve- lies. Global climate change and other generating stations. On January 1, 2007 ment in operating earnings in 2007 with environmental concerns will create oppor-the senior management team at Salem growth in 2008 in excess of 10 percent. tunities for new, clean generation. In the and Hope Creek became PSEG employ- fossil generation area, we are examining ees as part of our plan to resume direct Our company is well served by having one questions such as at what point might management at the stations before of the nation's most diverse generation conditions be right for building new plants the expiration of our Nuclear Operating fleets, giving us the ability to meet energy or acquiring them. Also, nuclear power Services Agreement with Exelon. This needs in a wide variety of conditions, is increasingly recognized as an abundant was an important step toward assuring around the clock and throughout the year. source of clean, emissions-free electric Salem and Hope Creek continue on their We expect cash flow to remain robust generation that promotes energy independ-journey toward operational excellence based on a combination of strong opera- ence while combating global warming. We under the guidance of one of the most tions, the prices we have contracted for will be ready to act on this option for capable and experienced management our anticipated energy supply, and positive future growth if and when the time comes teams in the industry. developments in electric capacity mar- to build additional nuclear generation.
| |
| kets. This should yield ample resources to We recently advised the Nuclear keep strengthening our financial position, At PSE&G, we will also keep an eye on Regulatory Commission that we intend thereby providing more and better options growth opportunities - making investments to pursue life extension of all three for future growth. The advantages of diver- that further improve customer service and nuclear units at Salem and Hope Creek sification will remain an important strategic produce fair returns for shareholders. We in 2009. We are determined to continue consideration for us. are eager to take advantage of advances building the type of nuclear expertise in metering technology to better enable that will contribute clean, reliable power We intend to pursue opportunities in energy efficiency as well as improvements to meet the energy needs of New Jersey new energy markets as they develop - in our operations without compromising and surrounding areas for years to come.
| |
| We are also focusing on improving our PSEG OPERATING EARNINGS PER SHARE balance sheet by further reducing debt.
| |
| $6,OO Cash flow from operations was $1.9 Excess of 10% Growth billion in 2006, enabling us to achieve $4.60-$5.00 a meaningful reduction in our financial leverage. We are quite comfortable
| |
| $400 $3.71 with our liquidity position, with available liquidity at year-end 2006 exceeding $3.00
| |
| $3 billion.
| |
| $2.00 Approaching Investment Decisions with Discipline.. .from a Position of Strength $i,00o While focused on our near-term objec-tives, we are also hard at work planning $0.00 2006 ACTUAL- 2007 GUIDANCE 2008 OUTLOOK how to sustain a strong growth trajectory over the long term. The outlook for See 2006 financial highlights on page one for GAAP reconciliation 2007 and 2008 is extremely bright. As
| |
| | |
| PSEG 2006 ANNUAL REPORT PP. io/ii PSEG has long been On the environment, for example, we will through outstanding civic leadership. We explore new ways to help people conserve continue to support our employees' long among the leaders in energy and maximize benefits from energy and active tradition of volunteerism on shaping the utility industry, use. We have already pledged our full behalf of many worthy causes that behefit support for the effort launched by New children and families across New Jersey and the need to continue Jersey Governor Jon Corzine to develop a and elsewhere.
| |
| as a thought leader has comprehensive Energy Master Plan. We never been greater. We will will be active in this and many initiatives I want to join Jim Ferland in congratulating to promote a sustainable energy future our employees for their outstanding safety do this by contributing that works for customers, the environment performance this year and their many other practical solutions on and your company. achievements. I am extremely fortunate to be on the same team with them, and also challenging and emerging In the area of workforce development, we humbled recognizing how much I owe to so issues - solutions that will build on initiatives such as our Energy many dedicated men and women. My increase shareholder value Utility Technology degree program - thanks also go to Jim Ferland for all his wise which is providing us with new and diverse counsel, support and encouragement over by providing benefits talent from community colleges and other the years. He has given me opportunities to to society. educational institutions. More than half lead that have exceeded what I could have of the graduates of the program who have imagined possible when I first joined PSEG.
| |
| safety or reliability. Lastly, we will consider become full-time employees are women For this I will be always grateful.
| |
| the best role for us to play in an expanding and minorities. The program has been renewable energy market. widely recognized as a model, including by At this time of transition, I also wish to the U.S. Equal Employment Opportunity thank our other retiring senior officers for No matter what investment path we even- Commission, which honored PSEG with their many contributions. Several delayed tually choose, we intend to proceed in a its Freedom to Compete Award in 2006 planned retirements to keep your company disciplined fashion. We will stay away from for promoting access and inclusion in the functioning extremely well during the 21-isolated projects, but rather look to invest workplace. month merger process. Their loyalty and in areas that complement our existing fine work are deeply appreciated.
| |
| assets. We will ask tough questions about Technology has long been a key'enabler every option, including whether it will be in our business, and its importance has I am confident that we can build on the accretive to earnings within a reasonable continued to grow. We will take a compre- best of PSEG's proud traditions. I look timeframe and be supportable with our hensive look at how we can use technology forward to continuing to work with all my credit ratings. such as an advanced metering infrastructure colleagues to make this vision for a brighter to further improve operational performance. future a reality.
| |
| Reinforcing our Thought Leadership... This will involve rethinking the systems and in Industry and Society processes that support customer operations Sincerely, PSEG has long been among the leaders in - and finding new ways to keep improv-shaping the utility industry, and the need to ing service while holding down costs.
| |
| continue as a thought leader has never been greater. We will do this by contributing prac- While we will utilize new tools, our strong Ralph Izzo tical solutions on challenging and emerging values as a company will not change. We President and Chief Operating Officer issues - solutions that increase shareholder remain deeply committed to improving the Public Service Enterprise Group value by providing benefits to society. quality of life in the communities we serve February 28, 2007
| |
| | |
| 7.
| |
| it - --V-,!% -qqjjjr-,ý-I N
| |
| .,%
| |
| 7M I '. t we make your investment rewarding
| |
| | |
| PSEG 2OO6 ANNUAL REPORT PP. 12/13 FINANCIAL PERFORMANCE PSEG's reliability in keeping the lights on and gas flowing for customers strongly parallels our solid, steady performance for investors. Excellence in operations is a key way we define success - and a key to shareholder value. That's been true since PSEG was founded in 1903 and remains true today.
| |
| Not many companies can say they've provided quality service for more than a century -
| |
| and paid annual dividends for 100 consecutive years. We can.
| |
| Our dividend testifies to more than financial strength. It reflects how well we do our jobs, how effectively we make operating decisions and how carefully we develop strate-gies for future success.
| |
| This consistency is highly valued by our many investors. It is why we have a large and loyal base of institutional and individual shareholders, including many who have invested with the company over a lifetime.
| |
| PSEG common stock is an investment that parents have given to their children, and grand-parents to their grandchildren. We are proud of the trust our shareholders place in us.
| |
| We seek to provide investors with attractive total returns over the long term: Not just for a quarter - or a year - but with a focus on value that endures and grows over time.
| |
| Dividends and price appreciation remain our goal. So does our commitment to making PSEG a rewarding investment for this generation and the next.
| |
| | |
| nzoG aoo6 ANNUAL UEPORT PP. 14/15 K*
| |
| \.
| |
| ,K
| |
| ,'
| |
| K
| |
| \
| |
| a
| |
| ),,'
| |
| (
| |
| -1 I
| |
| we make assets work harder
| |
| | |
| L~2.
| |
| we make lives better
| |
| | |
| PSEG 2006 ANNUAL REPORT PP. 16/17 RELIABLE SERVICE Energy is one of life's necessities. We take our responsibilities as an energy business seriously.
| |
| Our New Jersey utility, PSE&G, has long defined the standard in delivering electricity and gas safely and reliably to make life better for millions of people and to help keep thou-sands of businesses humming.
| |
| PSE&G has made top-in-class reliability a habit. We were awarded PA Consulting's prestigious ReliabilityOneT M national achievement award as America's most reliable electric M
| |
| T utility in 2005 and again in 2006. Moreover, we have won regional ReliabilityOne titles in the Mid-Atlantic area five years in a row.
| |
| Our motivation is simple: We understand that we are not just powering appliances and equipment, but also empowering people's lives. It's not just turning on the oven that is important, it's the time that families spend around the dinner table. It's not just making the computer come alive, it's the accomplishment of building a business. It's not just the stadium's massive lights shining brightly, it's the 50,000 people cheering on their team.
| |
| Reliability is ultimately about people being there for other people - caring for their needs and building trust. PSE&G's exemplary reliability is a testament to our employees -
| |
| their skills, training and work ethic. Day in and out, and through storms and emergencies, the men and women of PSE&G have shown how remarkable they are in serving others -
| |
| and making lives better.
| |
| | |
| A cleaner, more sustainable environment is in everyone's interest. PSEG is committed to doing its part to make it happen.
| |
| Global warming is one of the world's most important environmental issues, and long before it becarne headline news, PSEG staked out a leadership position in addressing it.
| |
| More than a decade ago, PSEG joined the federal government's Climate Challenge pro-gram and committed to stabilize its carbon dioxide emissions at 1990 levels by the year 2000. PSEG achieved this goal while generating almost two million more megawatt-hours of electricity in 2000 than in 1990.
| |
| We are dedicated to do even more in the years ahead, building on our efforts in recycling, resource conservation, waste reduction and other areas. These activities reflect our contin-ual search for new and better ways to promote environmentally sound business practices.
| |
| In this vein, PSEG is voluntarily targeting an 18 percent reduction in its carbon dioxide emissions rate by 2009. We are reducing Our impact elsewhere as well. Our new Bethlehem Energy Center (BEC) near Albany, New York produces energy far more efficiently than the station it replaced, while dramatically cutting emissions and reducing by 98%
| |
| the use of water from the Hudson River.
| |
| In these and many other endeavors, we are determined to show that economic and environmental progress can work together - and contribute to a cleaner, healthier world for our children.
| |
| | |
| PSEG zoo6 ANNUAL REPORT PP. i8/i9 we make our world cleaner
| |
| | |
| we help people reach theirpotential PSEG 2OO6 ANNUAL REPORT PP. 20/21 WORKFORCE DEVELOPMENT At PSEG, we want employees to have the power to be their best. That's because our success for more than a century arises directly from our employees. It's not just their performance, but their dedication and pride that make us one of the nation's leading energy companies.
| |
| We come from different backgrounds but share common goals: pursuing excellence, focusing on safety and striving to serve customers and shareholders to the best of our ability. In doing so, we foster a workplace based on mutual trust and respect where people feel empowered to achieve excellence - and where their contributions are recog-nized and rewarded.
| |
| In support of the diverse and highly skilled workforce of the future, PSEG is investing in innovative programs that open doors wider to outstanding career opportunities. Our Energy Utility Technology degree program, which PSEG sponsors with several colleges, has been recognized as a model workforce development initiative by the U.S. Equal Employment Opportunity Commission.
| |
| Diversity is one of PSEG's most important commitments. It is a key to PSEG's long-term efforts to attract talented individuals, encourage new ideas, promote better solutions and expand growth opportunities - as we strive to be even more successful in the next 100 years.
| |
| | |
| emc RIND&
| |
| Making communities stronger goes to the heart of what PSEG is about. The "PS" in PSEG has always stood for Public Service and with good reason. In addition to delivering essential energy services to nearly three of every four New Jersey households, PSEG supports many civic and charitable endeavors throughout the Garden State.
| |
| Today, PSEG is helping strengthen communities everywhere we operate - across the nation and overseas.
| |
| Many of our efforts go toward helping children, building economic vibrancy and promoting a sustainable environment. Among other initiatives, we are leading the campaign for the construction of the PSE&G Children's Specialized Hospital, a new pediatric rehabili-tation hospital in New Brunswick, New Jersey. We are also active in New Jersey After 3 to expand the range and quality of enriching after-school programs for children across the state.
| |
| The way we look at it, Public Service is more than our first name. It's a key goal of our company and employees. Thanks to our employees' involvement, PSEG is a long-time leader in raising funds for the March of Dimes to improve the health of infants and mothers. Our employees also contribute in countless other ways to their communities from serving on school boards to coaching sports.
| |
| In short, we don't just serve the community. We are part of the community - and have a serious commitment to making it stronger for all of us.
| |
| | |
| PSEG 2OO6 ANNUAL REPORT PP. 22/23
| |
| *W :
| |
| /
| |
| 11 t
| |
| ii lwmý
| |
| ""M*ý=
| |
| we make communities stronger
| |
| | |
| EXECUTIVE OFFICERS E. James Ferland Derek M. DiRisio Ralph A. La Rossa R. Edwin Selover Chairman of the Board and Chief Vice President and Controller; Vice President and Chief Operating Officer Executive Vice President and General Executive Officer; Chairman of the Board President and Controller of PSE&G, of PSE&G Counsel; Executive Vice President and Chief Executive Officer of PSE&G, PSEG Energy Holdings, PSEG Power and General Counsel of PSE&G, PSEG PSEG Energy Holdings, PSEG Power and PSEG Services Thomas M. O'Flynn Energy Holdings, PSEG Power and and PSEG Services Executive Vice President and Chief PSEG Services Ralph Izzo Financial Officer; President, Chief Frank Cassidy President and Chief Operating Officer Operating Officer and Chief Financial Elbert C. Simpson President and Chief Operating Officer Officer of PSEG Energy Holdings; President and Chief Operating Officer of of PSEG Power Executive Vice President and Chief PSEG Services Financial Officer of PSE&G and PSEG Power; and Executive Vice President -
| |
| Finance of PSEG Services BOARD OF DIRECTORS Caroline Dorsa has been a director since February 2003. Albert R. Gamper, Jr. has been a director since Ralph Izzo has been a director since October 2006. Has Has been Senior Vice President and Chief Financial December 2000. Was Chairman of the Board of The CIT been President and Chief Operating Officer of PSEG Officer of Avaya, Inc., of Basking Ridge, New Jersey, a Group, Inc. of Livingston, New Jersey, a commercial since October 2006. Was President and Chief Operating leading global provider of business communications finance company, from July 2004 until December 2004. Officer of PSE&G from October 2003 to September 2006.
| |
| applications, systems and services, since February 2007. Was Chairman of the Board and Chief Executive Officer Was Vice President and Treasurer of Merck & Co., Inc. of The CIT Group, Inc. from September 2003 to July Shirley Ann Jackson has been a director since June from December 1996 to January 2007; Treasurer from 2004. Was Chairman of the Board, President and Chief 2001. Has been President of Rensselaer Polytechnic January 1994 to November 1996; and Executive Executive Officer of The CIT Group, Inc. from June Institute since July 1999. Was Chairman of the U.S.
| |
| Director of the U.S. Human Health Marketing subsidiary 2002 to September 2003. Was President and Chief Nuclear Regulatory Commission from 1995 to 1999.
| |
| of Merck & Co., Inc. from June 1992 to January 1994. Executive Officer of The CIT Group, Inc. from February Was Professor of Theoretical Physics at Rutgers University 2002 to June 2002. Was President and Chief Executive and concurrently served as a Consultant in semicon-Ernest H. Drew has been a director since January 1993. Officer of Tyco Capital Corporation from June 2001 to ductor theory to the former AT&T Bell Laboratories from Was Chief Executive Officer of Industries and Technology February 2002. Was Chairman of the Board, President 1991 to 1995.
| |
| Group, Westinghouse Electric Corporation, from July and Chief Executive Officer of The CIT Group, Inc. from 1997 to December 1997. Was a member, Board of January 2000 to June 2001, and President and Chief Thomas A. Renyi has been a director since February Management of Hoechst AG, Frankfurt, Germany, a man- Executive Officer of The CIT Group, Inc. from December 2003. Has been Chairman of the Board and Chief ufacturer of pharmaceuticals, chemicals, fibers, film, 1989 to December 1999. Executive Officer of The Bank of New York Company, specialties and advanced materials, from January 1995 Inc., New York, New York, and The Bank of New York, to June 1997. Was Chairman of the Board and Chief Conrad K. Harper has been a director since May 1997. New York, New York, a provider of banking and other Executive Officer of Hoechst Celanese Corporation of Has been of counsel to the law firm of Simpson financial services to corporations and individuals, since Somerville, New Jersey from May 1994 until January Thacher & Bartlett LLP of New York, New York since February 1998. Was President and Chief Executive 1995, and was President and Chief Executive Officer January 2003. Was a partner in the law firm of Officer of The Bank of New York Company, Inc. from from January 1988 to May 1994. Simpson Thacher & Bartlett from October 1996 to July 1997 to January 1998 and President of The Bank December 2002, and from October 1974 to May of New York from March 1992 to June 1997. Was E. James Ferland has been a director since July 1986. 1993. Was Legal Adviser, U.S. Department of State, President and Chief Executive Officer of The Bank of New Has been Chairman of the Board and Chief Executive from May 1993 to June 1996. York from January 1996 to January 1998 and President Officer of PSEG since September 2006; Chairman of the and Chief Operating Officer from December 1994 to Board and Chief Executive Officer of PSE&G since William V. Hickey has been a director since October December 1995.
| |
| July 1986; Chairman of the Board and Chief Executive 2001. Has been President and Chief Executive Officer of Officer of PSEG Energy Holdings since June 1989; Sealed Air Corporation, of Saddle Brook, New Jersey, Richard J. Swift has been a director since December Chairman of the Board and Chief Executive Officer of a manufacturer of food, protective and specialty packag- 1994. Was Chairman of the Financial Accounting PSEG Power since June 1999; and Chairman of the ing materials and systems, since March 2000, and its Standards Advisory Council from January 2002 to Board and Chief Executive Officer of PSEG Services since President since 1996. Has served in management posi- December 2006. Was Chairman of the Board, President November 1999. Was Chairman of the Board, President tions with increasing levels of responsibility with Sealed and Chief Executive Officer of Foster Wheeler Ltd., of and Chief Executive Officer of PSEG from July 1986 Air Corporation since joining the company in 1980. Clinton, New Jersey, a firm providing design, engineering, to September 2006. construction, manufacturing, management, plant operations and environmental services, from April 1994 to October 2001.
| |
| | |
| UNITED STATES SECURITIES AND EXCHANGE COMMISSION 100 F. ST. N.E.
| |
| WASHINGTON, D.C. 20549 FORM 10-K' (Mark One)
| |
| [ ANNUAL REPORT PURSUANTTO SECTION' 13 OR*15(d) OF THE SECURITIES EXCHANGE.ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006, OR,"
| |
| El TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission Registrants, State of Incorporation, ' II.R.S. Employer File Number Address, and Telephone Number Identificfition No.
| |
| 001-09120 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 22-2625848 (A New Jersey Corporation) 80 Park Plaza, P.O. Box 1171 Newark, -New Jersey 07101-1171, 973 430-7000 http'//www.pseg.com 001-00973 PUBLIC SERVICE ELECTRIC AND'GAS COMPANY 22-1212800 (A New Jersey Corporation) 80 Park Plaza, P.O. Box 570 Newark, New Jersey 07101-0570 973 430-7000 http.//www.pseg.com "000-49614 * :PSEG POWER LLC " 22-3663480 (A Delaware Limited Liability Company) 80 Park Plaza-T25
| |
| .'Newark, New Jersey 07102-4194 973f 430-,7000 http://www.pseg.com 000-32503 PSEG ENERGY-HOLDINGS L.L.C. 42-1544079 (A New Jersey Limited Liability Company)
| |
| .80 Park Plaza-T20 ', :
| |
| Newark, New Jersey 07102-4194 973 430-7000
| |
| * http'//www.pseg.com Securities' registered pursuant to Section 12(b) of 'the Act:
| |
| Name of Each Exchange Registrant Title of Each'Class On Which Registered Public Service Enterprise Common. Stock without '''New' York Stock Group 'Inuorporated
| |
| * par value " Exchange 5.381% Preferred Trust Securities, $50 liquidation anmount per Preferred Trust Security, issued by PSEG Funding Trust I (Registrant) and listed on the New York Stock Exchange:
| |
| Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's Debentures), $25 par value at 8.75%, issued by PSEG Funding Trust II (Registrant) and listed on the New York Stock Exchange.
| |
| Name of Each Exchange Registrant Title of Each Class Title of Each Class On Which Registered Public Service Electric Cumulative Preferred Stock First and Refunding and Gas Company $100 par value Series: Mortgage Bonds:
| |
| Series Due 4.08% cc 2021 4.18 % S-63/4% vv 2016 'New York Stock Exchange 4.30% -61/4% 'WW 2007
| |
| '5.05% 63/8% YY 2023' 5.28% 8% 2037 5% 2037 (Cover continued on next page)
| |
| | |
| (Cover cohtinued from previous pdge)
| |
| Securities registered pursUant to Section 12(g) of the Act:
| |
| Registrant. Title of Class Public Service Enterprise Floating Rate Capital Securities (Guaranteed Preferred Beneficial Interest in PSEG's Group Incorporated Debentures), $1,000 par-value issued b'y Enterprise Capital Trust II (Registrant), LIBOR plus 1.22%
| |
| Floating Rate Notes, Series A Public Service Electric and 6.92% Cumulative Preferred Stock $100 par value Gas Company Medium-Term Notes, Series A T Medium-Term Notes, Series B Medium-Term Notes, Series C Medium-Term Notes, Series D PSEG Power LLC. Limited Liability Company Membership Interest PSEG Energy Holdings Limited Liability Company Membership Interest L.L.C.
| |
| Indicate by check mark whether each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
| |
| Public Service Enterprise Group Incorporated . Yes ZJ , No El Public Service Electric and Gas Company Yes El No° PSEG,.Power LLC Yes El No []
| |
| PSEG Energy Holdings L.L.C. Yes El No []
| |
| Indicate by check mark if each of the registrants is not required to file ieports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes El No IxE Indicate by check mark whether each of the registrants (1) has 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) has been subject to such filing requirements for the past 90 days. Yes [] No El Indicate by check mark if disclosure of delinquent,filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. El Indicate by check mark whether each registrant is a Jarge 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, Z Accelerated filer El Non-accelerated filer El Public Service Electric and Gas Company Large accelerated file El Accelerated filer El Non-accelerated filer j]
| |
| PSEG Power LLC Large kccelerated filer El Accelerated filer El Non-accelerated filer []
| |
| PSEG Energy Holdings L.L.C. Large accelerated filer El Accelerated filer El Non-accelerated filet.[]
| |
| Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| |
| Yes El No ""
| |
| The aggregate market value of the Common Stock of Public Service Enterprise Group Incorporated held by non-affiliates as of June 30, 2006 was $16,424,868,840 based upon the New York Stock Exchange Composite Transaction closing price.
| |
| The number of shares outstanding of Public Service Enterprise Group Incorporated's sole class of Common Stock, as of the latest practicable date, was as follows:
| |
| Class- Outstanding at January 31, 2007 Common Stock, without par value 252,771,080 As of January 31, 2007, 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 I(1)(a) and (b) of Form'10-K and are filing their respective Annual Reports on Form 10-K with the reduced disclosure format authorized by General. Instruction I.
| |
| DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K of Public Service Enterprise Group Incorporated Documents Incorporated by Reference III Portions of the definitive Proxy Statement for the 2007 Annual Meeting of Stockholders of Public Service Enterprise Group Incorporated, ;which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 5, 2007, as specified herein.
| |
| | |
| TABLE OF CONTENTS
| |
| .Page FORWARD-LOOKING STATEMENTS. ".,........................
| |
| ...................... iii WHERE TO FIND MORE INFORMATION.........................................
| |
| PART I Iterm 1. B usin ess ........... ................... ............... . ........ . ..............
| |
| .1.
| |
| General.. .............................................. ................
| |
| 13 Regulatory Issues ....... :.................................
| |
| Segm ent Inform ation .. . .................................. ! ............................ 26 27 Environm ental M atters ...... . .......... ........ ...... .... .. .....................
| |
| Risk. Factors ................ ........................
| |
| Item IA. '32:
| |
| Item lB. Unfesdlved.'Staff Comments ....... " . .:.................. 38 Item 2. P.roperties.. :. ...... .... .. ........................................ 39 Item 3. Legal Proceedings ......................... ............. ............... 46 Item 4. Submission of Matters to a Vote of Security Holders .................................... 50 PART U Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Item 5.
| |
| Purchases of Equity Securities........... . ........... ..... . ........................... 51 Item 6. Selected Financial Data ............ ,...................................... 53 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. .............................................. 54.
| |
| Overview of 2006 and Future Outlook ................... .............................. 54 R esults of O perations .................................................................... 59 Liquidity and Capital Resources ................... ; ........................ 70 C apital R equirem ents ................................................................... 79 Off-Balance Sheet Arrangem ents ........................................ .............. . 81 Critical Accounting Estim ates .......................................................... 81 Item 7A. Qualitative and Quantitative Disclosures About Market Risk .......................... 85 Item 8. Financial Statements and Supplementary Data2 ........... ..................... 91 Report of Independent Registered Public Accounting Firm ........................... 92 Consolidated Financial Statem ents ............................ ........................ 96 Notes to Consolidated Financial Statements Note 1. Organization and Summary of Significant Accounting Policies......... 115.
| |
| Note 2. Recent Accounting Standards ............................................. 121 Note 3. Asset Retirement Obligations............................. 124 Note 4. Discontinued Operations, Dispositions, Acquisitions and .Impairments ..... 126 Note 5. Regulatory Matters ........................................... 131 N ote 6. Earnings Per Share ........................................................ 133 Note 7. Goodwill and Other Intangibles............ ..................... 134 N ote 8. Long-Term Investm ents ....................................................... 135 Note 9. Schedule of Consolidated Capital Stock and Other Securities .............. 139 Note 10. Schedule of Consolidated Debt ........................................... 140 Note 11. Financial Risk Management Activities ........................... 146 Note 12. Commitments and Contingent Liabilities ................................ 149 Note 13., Nuclear D ecomm issioning ................................................ 161 Note 14. Other Income and'Deductions ............................................ 163 N ote 15. Incom e. T axes ............................................................. 165 Note 16. Pension, Other Postretirement Benefits (OPEB) and Savings Plans ....... 170 Note 17. Stock Based Compensation ................................................ 177 Note 18. Financial Information by Business Segment .............................. 181 Note 19. Property, Plant and Equipment and Jointly-Owned Facilities ............. 185 Note 20. Selected Quarterly Data (Unaudited). ............................ 187 i
| |
| | |
| - ;Page Note 21. Related-Party Transactions .............. ............... ..... 188 Note 22. Guarantees of Debt .............. . ............................... 191
| |
| - Note 23. Subsequent Events ............................................. . 192 Item 9. Changes In .and Disagreements With Accountants, on Accounting" and Financial D isclosure ! ..................................... ......... ............................... 193*
| |
| Item 9A. Controls and Procedures ..................... ...... ........................................ 193 Item 9B. Other Information ........................... ...................................... 193 PART III Item 10. Directors and Executive Officers of the Registrants ............. ...... ...... ...... 196 Item 11. Executive Com pensation ............................. ............. ........ ............ ... 200 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder M atters........................................... ......................... 223 Item 13. Certain Relationships and Related Transactions ......................................... 224 Item 14. Principal Accounting Fees and Services .......... "..................................... 225 PART IV Item 15. Efhibits and Financial Statement Schedules .6...........................2 Schedule II-Valuation and Qualifying Accounts... ........... 237 Signatures .............................................................. ........ . ..... 240 E xhibit Index ...... .. ...... ..... ....................... .......
| |
| ..... 2..........4........
| |
| 244 ii
| |
| | |
| FORWARD-LOOKING STATEMENTS:
| |
| Certain of the' natters' 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 ififormation, *future events or otherwise. The following review should not be construed -as a complete list of factoi's that could affect forward-looking statements. In addition to any assurniptions 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; e ability to attract and retain management and other key employees; a changes in the electric industry, including changes to power pools; e changes in energy policies and regulation; 9 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; e growth in costs and expenses; 9 environmental regulations that significantly impact operations;
| |
| * changes in rates of return on overall debt and equity markets that could adversely impact thevalue of pension and other postretirement benefits assets and liabilities and the Nuclear Decommissioning Trust Funds; k changes. in political conditions; changes in technology that make generation, transmission and/or distribution assets less competitive; c'ntinued of ins'sirance. coverage at commercially' reasonable rates;'
| |
| * involveme.nt 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 of structure;
| |
| " " business combinations among. compe.titors 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; iii
| |
| | |
| PSEG, PSE&G and Energy Holdings r
| |
| * adverse changes in rate regulation'*and/or ability to obtain adequate and timely rate relief; PSEG, Power and Energy Holdings
| |
| * inability to effeetively manage portfolios of electric generation assets, gas supply contractsand electric and gas supply obligations; inability to meet generation operating. performance expectations;
| |
| * energy transmission: constraints or lack thereof; .
| |
| e adverse changes in the market, for energy, capacity, natural gas, emissions credits, congestion credits and other commodity prices, especially during significant price moven'ients'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~movemenis' 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; .
| |
| * changes in political regimes in foreign cou'ntries; 'and " "
| |
| "i international developments negativelyimpacting 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 fgcts 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.
| |
| iv
| |
| | |
| WHERE TO FIND MORE INFORMATION 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) file annual, quarterly and special reports; proxy statements and other information'with the Securities and Exchange Commission (SEC). You may read and copy any document that PSEG, PSE&G, Power and Energy Holdihgs file at the Public,' Reference Room of the SEC at 450 Fifth Street, N.W.,. Washington, D.C. 20549.
| |
| Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. You may also obtain PSEG's, PSE&G's, Power's and Energy Holdings' filings on the Internet at the SEC's website at www.sec.gov or at PSEG's website, www.pseg.com. PSEG's Common Stock is. listed on the New York Stock Exchange-under the ticker symbol 'PEG.' You can obtain information about.PSEG at the 'offices of the New York Stock Exchange, 20 Broad Street, New York, New-York 10005.,
| |
| PART I This combined Annual Report on Form 10-K is separately filed by PSEG, PSE&G, Power and 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 makes representations only as to itself and its subsidiaries and makes no other representations whatsoever as .to any'other company.
| |
| ITEM 1. BUSINESS GENERAL:'
| |
| PSEG, PSE&G,' Power and Energy Holdings PSEG was incorporated under the laws of the State of New Jersey in. 1985 and has its principal executive offices located at 80 Park Plaza, Newark, New Jersey 07102. PSEG has four principal direct wholly owned subsidiaries: PSE&G, Power, Energy Holdings and PSEG Services Corporation (Services). The following organization chart shows PSEG and its principal subsidiaries, as well as the principal operating subsidiaries of Power: PSEG Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy Resources, &'-Trade LLC (ER&T); and of Energy Holdings: PSEG Global L.L.C. (Global),. and PSEG Resources L.L.C.
| |
| (Resources):
| |
| " " PSEG PSE&G Power Energy Holdings Services
| |
| "" Nudlear ] Resources I
| |
| * ~ ~ER&T I " ""'"""
| |
| PSEG is an energy company with a diversified business mix. PSEG's operations are primarily in the Northeastern and Mid Atlantic United States (U.S.) and in other select markets. As the competitive~portion of PSEG's business has grown, the resulting financial risks and rewards have become greater,, causing financial requirements to change and increasing the volatility of earnings and cash flows.
| |
| For additional' information, see Item 7. Management's Discussion 'and Analysis of Financial Condition and Results of Operations (MD&A)-Overview of 2006 and'Future Outlook. .
| |
| 1
| |
| | |
| Termination of Merger Agreement, 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 terminating the Merger under ,the provisions of.the Merger Agreement. .
| |
| PSE&G PSE&G is a.New Jersey corporation, incorporated in 1924', and has its principal executiVe .offices' at 80 Park Plaza, Newark, New' Jersey 07102. PSE&G is an operating public utility company engaged' principally in the transmission aifid distribution df electric energy and gas in New Jeirsey. In 'addition, PSE&G owns .PSE&G Transition Funding LLC (Transition Funding) and PSE&G Transition Funding II LLC (Transition Funding II), which are bankruptcy-remote entities that purchased the irrevocable right to receive certain non-bypassable charges per Kilowatt-hour (kWh) of energy delivered to PSE&G customers and issued transition bonds secured by such property.
| |
| PSE&G provides 'electric 'and gas service in areas of New Jersey in which approximately 5.5 :million people, 'about 70% of the state's population, reside. PSE&G's electric and-gas serVice.area'is a corridor of approximately 2,600 square miles running diagonally across New Jersey from Bergen County in the noitheast to. an area below the city of Camden in the southwest. The greater portion of this area is served with both electricity and gas, but some parts are served with electricity only and other parts with gas only. This heavily populated, commercialized and industrialized territory encompasses most of New' Jersey's largest municipalities, including its six largest cities-Newark, Jersey City, Paterson, Elizabeth, Trenton and Camden-in addition to approximately 300 suburban and rural communities. This service territory contains.a diversified mix of commerce and industry, including major facilities of many nationally prominent corporations. PSE&G's load requirements are split among residential,. commercial, andindustrial customers, described below under customers. PSE&G believes that it has all'the non-exclusive franchise rights (including
| |
| 'consents) necessary for its electric and gas distribution. operations in the territory.it- serves.
| |
| Energy 'Supply ' .
| |
| -PSE&G' distributes electric en'e-gy 'and. gas -to end-use customers within its designated service territory.
| |
| All electric and gas customers' in New Jersey have'the ability 'to choose an electric energy and/or gas; supplier.
| |
| Pursuant to the NewJersey'Board of Public Utilities (BPU) requirements, PSE&G serves as the supplier of last resort for electric and gas customers within- its service territory. PSE&G earns no margin on the commodity portion of its electric and gas sales.
| |
| As shown in the'table below, PSE&G continues'to provide the electric energy and gas supply for the majority of the customers in its service territory for the year ended December-31, 2006.. ..
| |
| S, GWH % Million Therms .%
| |
| PSE& G ...................... . .............. ................ 34,340 79 1,975 . _62 Third Party Suppliers ......................................... 9;323 21 - 1,194 - 38 Total Delivered ....................................... 43,663 100 3,169 100 New Jersey's Electric Distribution.,Companies (EDCs), including PSE&G, provide two types of Basic Generation Service (BGS). BGS-Fixed Price (FP) provides supply for-smaller commercial and residential customers at seasonally-adjusted fixed prices and .BGS-Commercial and Industrial Energy Price (CIEP) provides supply for larger customers at hourly PJM Interconnection, L.L.C. (PJM) real-time market prices.
| |
| BGS prices are determined through annual auctions conducted before the BPU.
| |
| PSE&G has a full requirements contract with Power to meet' the Basic Gas Supply Service (BGSS).
| |
| requirements of PSE&G's gas customers. The contract term 'extends to March 31, 2012, and year-to-year thereafter. Power charges PSE&G for gas commodity costs which PSE&G recovers from its customers.
| |
| Any 'difference between -the BGS and. BGSS costs and -revenues received from PSE&G's residential customers are deferred and collected or refunded through adjustments in future rates. ' '
| |
| 2
| |
| | |
| Distribution Rates.,
| |
| PSE&G earns. margins through the transmission and disiribution of electricity and gas. ,PSE&G's revenues for these*:services are based upon tariffs approved by the BPU and FERC: Approximately 98% of PSE&G's 2006 revenues were covered by BPU tariffs'. The demand for electric energy and gas' by PSE&G's customers is'affected by customer conservation, economic conditions, weather and other factors not within PSE&G's control. ' .. . .
| |
| On November 9,:2006 the' BPU approved separate settlements providing for increases in. PSE&G's electric and gas base rates. The' settlements include a restriction against any further base rate changes becoming effective before November 15, 2009. In .addition, PSE&G must file a joint *electricand.gas petition for fny -fhture base rate increases. For additional information on these settlements, see Regulatory Issues-State Regulation.
| |
| Market Price Environment Over the. past few years, there has been a significant volatility in commodity prices, including fuel, emission allowances and electricity. Such volatility can have a considerable impact on PSE&G since a Irising commodity price environment results. in higher delivered electric and,gas rates for end-use customers, and.
| |
| may result in decreased demand by end users of both.electricity and gas, increased regulatory pressures and greater. working capital requirements as the ,collection of higher commodity costs may be deferred under PSEG's regulated rate structure. For additional information see jtem 7. MD&A.
| |
| Competitive Environment The electric and gas transmission and. distribution business has minimal risks from competitors.
| |
| PSE&G's transmission and distribution business is minimally impacted when. customers choose alternate electric or gas suppliers since PSE&G earns its return by providing transmission and distribution service,'not by. supplying the corhmodity. " '
| |
| Customers As of December 31, 2006, PSE&G provided service~to approximately 2.1'.million electric customers and approximately 1.7 million gas customers, detailed below. In addition to ,its transmission and distribution business, PSE&G also offers appliance services and repairs to customers throughout its Service territory.
| |
| % of Sales Electric Gas Customer Type Comm ercial ............................... ....................... . ............. '. 56% 36%
| |
| Residential. ..... ....... 31% 60%
| |
| Industrial ................. .............................................. 13% 4%
| |
| T otal ..... . ........................... .............. '..............................
| |
| "100% . 100%
| |
| Employee' Relations
| |
| 'As of December 31, 2006, PSE&G had 6,154 employees. PSE&G has six-year collective bargaining agreements, which were ratified in 2005, with four unions representing 4,955. employees. PSE&G believes that i't' maintains' satisfactory relationships with its employees.
| |
| Power Power is a Delaware limited liability ,company, formed. in 1999, and has its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102. Power is.,a multi-regional, wholesaleenergy supply company that integrates its generating asset operations with its wholesale energy, fuel.supply, energy trading and marketing and risk management functions through three principal direct wholly owned subsidiaries: Nuclear, Fossil and ER&T. '
| |
| As of December 31, 2006; Power's generation portfolio' consisted 'of approximately 14;639 MW of installed capacity, which is primarily located in the' Northeast and Mid Atlantic regions of the U.S. where 3
| |
| | |
| some 'of the nation's largest and most developed energy markets are located. For additional information, see Item 2. Properties. .
| |
| As a merchant generator, Power.'s profit is derived from selling under contract or on the spot market a range of diverse products such as energy, capacity, emissions credits, congestion credits .and a series of energy-related, products used to optimize the operation of the energy grid, known as ancillary services, Power's revenues also include gas supply sales under the BGSS contract with PSE&G.,
| |
| Nuclear .' I' Nuclear has an ownership interest in five nuclear generating units: the Salem Nuclear Generating Station, Units.1 and 2 (Salem 1.and. 2), each owned 57.41% by. Nuclear and 42.59% by Exelon. Generation, the Hope Creek Nuclear Generating Station (Hope Creek)', which is owned 100% by Nuclear; .and, the Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom 2 and 3), each of which is operated by Exelon Generation and owned 50% by Nuclear and 50% by Exelon Generation. For additional information, see Item 2. Properties-Power.
| |
| Nuclear Operations ' ,... ,
| |
| In January 2005; Nuclear entered'into an'Opetatiig -Service!Contract. (OSC) with Exelon Generation relating to the operation of the Hope Creek and'Salem nuclear generating stations. The OSC requires Exelon Generation .to provide key personnel to overse e 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 Salem and Hope Creek plants, retains responsibility for management oversight and has full authority, with respect to the marketing of its share of the output from the facilities. In Octobei '2006, Nuclear informed Exelon Generation that it wais electing to continue the 'OSC for up to two years beyond the' initial January 2007 period. . ' ' , '1, '
| |
| 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 'Generation, became employees of Power.
| |
| Duiring 2006, over half of'Power's generating output was from its nuclear generating stations. Nuclear unit' capacity factors .for 2006. were as folloWs: ' *'-' -
| |
| Capacity Factor*
| |
| Unit Salem Unit 1 ................................ ............................... 100.7%
| |
| Salen U nit 2 ............................................................................. . 93.6%
| |
| Hope 'Creek....... ................................ .92.6%
| |
| Peach Bottom Unit 2. ......................................................... 93.3%
| |
| Peach Bottom U nit 3 ............................................... ............ ...... " 101.8%
| |
| Total Power Ownership. .................................................... 95.9%
| |
| * Maximum Dependable Capacity (MDC).net.
| |
| For 'additional information on recent operational issues, see. Regulatory Issues-Nuclear Regulatory Commission (NRC).
| |
| Nuclear Fuel
| |
| 'Nuclear has severallong-term purchase'co'ntracts for the supply'of nuclear fuel for the Salem and Hope Creek Nuclear Generating Stations which include'
| |
| 'purchase of uranium'(concentrates and uranium hexafluoride); '.
| |
| * conversion of uranium concentrates to uranium hexafluoride;
| |
| .A enrichment of uranium. hexafluoride; and
| |
| * fabrication of nuclear fuel assemblies.
| |
| 4
| |
| | |
| The nuclear fuel markets are competitive and although prices for uranium, -conversion and enrichment are increasing, Nuclear does not anticipate any significant. problems in. meeting its future rbquirements. "
| |
| Nuclear has been advised by Exelon Generation that it has similar purchase contracts to satisfy the fuel requirements for Peach Bottom. For additional information, see Item 7. MD&A-Overview of 2006 and Future Outlook-Power and Note 12. Commitments and Contingent- Liabilities of the Notes.,
| |
| Fossil Fossil has an ownership interest in 17 generating stations,' primarily in the N6rtheast and Mid Atlantic U.S.', including the Bethlehem Energy Center in New York and the Linden station in New Jersey, which were completed and placed in service in 2005 and :2006, respectively. Power's facility in Indiana, the Lawrenceburg Energy Center, 'is currently under an agreement to be sold. For additional information, see Item 2.
| |
| Properties-Power.
| |
| Fossil uses coal, natural gas and oil for electric generation., These fuels are purchased through various contracts and in the spot market and represent a significantportion of-Power's-working capital requirements.
| |
| In order to minimize emissions levels, the Bridgeport generating facility uses -a specific type of. coal, which is obtained from Indonesia through a fixed-price supply'contract that runs through 2008. If the. supply of coal from Indonesia or equivalent coal from other sources was not available for the Connecticut facilities.,
| |
| additional. material capital expenditures could be required to modify the existing plants to enable their continued, operation. In addition, the Hudson facility, under a consent decree. with the New Jersey Department of Environmental Protection (NJDEP) and the U.S. Environmental Protection Agency (EPA),
| |
| will also utilize, this type of coal. .Power believes it has. access to sufficient fuel supply, including transportation, for its facilities .over the next several years. For additional information, see Item 7. MD&A-Overview of 2006 and Future Outlook-Power and Note 12. Commitments and Contingent Liabilities of the Notes.
| |
| ER&T ER&T purchases the capacity and energy.produced by each of the generation subsidiaries-of Power. In conjunction- with these purchases, ER&T uses commodity and .financial instruments designed to cover estimated commitments for, BGS and other bilateral contract agreements. ER&T also markets electricity, capacity, ancillary services and natural gas products on a wholesale basis. ER&T is a fully integrated wholesale energy marketing and trading organization that is active in the long-term and spot wholesale energy and energy-related markets.
| |
| Electric Supply .....
| |
| Power's generation capacity is comprised of a diverse mix of -fuels of approximately 47% gas, 26%
| |
| nuclear, 18% coal, 8% oil and 1% pumped'storage. Power's fueldiversity serves to mitigate risks associated with fuel price -volatility -and market demand cycles.
| |
| The following table indicates proportionate MWh output of Power's ge'nerating. stations by fuel type, based on actual 2006 output of approximately 54,000'MWhs, and its estimated 53,000 MWh output by fuel type. for 2007. , . '
| |
| Actual Estimated Generation by Fuel Type 2006 2007(A)
| |
| Nuclear: ,
| |
| New -Jersey -facilities .............. ......................................... 37% 37%
| |
| Pennsylvania facilities .. ......................................................... ... . 18% 18%
| |
| Fossil:
| |
| Coal:. *.
| |
| * N ew ,Jersey facilities.......%; ........................ .................................. 11% 11%
| |
| Pennsylvania facilities ............................. ............... ......... 11% .11%
| |
| C onnecticut facilities ....................................... ......................... 5% 4%
| |
| Oil and Natural Gas:.
| |
| N ew Jersey facilities .................................................................. 12% 14%
| |
| N ew Y ork facilities .................................................................. 4% 3%
| |
| Connecticut facilities...... .1% 1%
| |
| Pumped Storage....................................................................... . 1% 1%
| |
| Total ........................ ........................................... 100% 100%
| |
| (A) No assurances can be given that actual 2007 output by source will match estimates.
| |
| 5 .
| |
| | |
| !. Fora discussion of Power's management and hedging strategy relating to its energy sales supply and fuel.
| |
| needs,, see ',Market Price Environment and Item 7A. MD&A-Overview of 2006 and.-Future Outlook-Power. -a Gas Supply As described above, Power sells gas to PSE&G under the BGSS contract. Additionally, based upon availability; Power sells gas to others. About 41% of PSE&G's peak daily gas requirements are provided through. firm transportation, which is available every day of the year. The remainder comes- from field storage, liquefied natural gas, seasonal purchases, contract peaking ,supply, propane and refinery and landfill gas. Power purchases.gas for, its, gas operations directly from natural gas producers and marketers. These supplies are transported to New Jersey by four interstate pipeline suppliers.
| |
| Power has,'approximately. 1 billion cubic-feetrper-day of firm transportation capacity under contract to meet the primary needs of PSE&G's gas consumers and the needs of its own generation fleet: In addition, Power supplements that supply with a total storage ,capacity-of 78.billion cubic feet that provides a maximum of approximately.1 billion cubic feet-per-day of. gas during the winter season.
| |
| Power expects- to be able to nmeet the energy-related deman'ds of its firm natural gas customers.
| |
| However, the ability to maintain an adequate supply could be affected by several factors 'not within Power's control, including curtailments of 'natural gas-'bý ;is' suppliers, severe weather' and the availability'of feedstocks for the production of supplements to its' natural gas supply:'In addition, supply of all types of gas is affected by the nationwide availability of all sources of fuel for energy production.
| |
| Market Price Environment System operators in the electric markets in which Power participates will generally dispatch the lowest cost units in the system first, with higher cost units dispatched as demand increases. As such, nuclear units, with their tow-varia'ble" cost. of operation, will generally be dispatched whenevier they are available. Coal units generally follow nexV in the merit order of dispatch and: gas and oil units generally follow to meet the total amount of demand. The price. that all dispatched, units receive is set- by the last, or marginal unit that is dispatched. . . " ''" .... '
| |
| This method of determining supply' and pricing cr&'tes an environment where natural gas prices often have a major impact on the price that generators will receive for their output, especially in periods of relatively strong demand. As such, significant changes in the price of natural gas will often translate into significant changes in the price of electricity.
| |
| As a ýmerchant, generator,. Power's profit is derived from ,selling under contract or. on the spot market a range of diverse products such as energy, capacity, emissions. credits,. *congestion credits and a series of energy-related products that the. system operator. uses to optimize the operation of the energy grid; known as ancillary services. Accordingly, commodity prices,, such as electricity, gas, coal and. emissions, as well. as the availability of Power's diverse fleet of generation units to produce these products, when necessary,.have a considerable effect on Power's profitability. There is significant volatility in commodity markets, including electricity, fuel and emission allowances. For example, the spot price of'electricity at the quoted PJM West market has increased from an average of about $25 per MWh for 2002 to an average of about $60 per MWh in 2005 and then decreased to an average of about $50 per MWh in 2006. Similarly, the price of natural gas at the Henry Hub terminal has increased from an average of about $3 per one million British Thermal Units (MMBtu) in 2002 to about $9 per MMBtu in 2005 and then decreased to an average of about $7 per MMBtu in 2006. The prices at which transactions are entered into for future delivery of these products, as evidenced through themarket for forward contracts at points such as PJM West, have' escalated as well. The.hi'storical spot prices and forward prices as of year-end 2006 are reflected in the graphs below. '
| |
| .6
| |
| | |
| Historical and Forward Henry Hub Gas Pirices
| |
| - 7--.- Historical Gas Prices" -- - - Forward Gas Princes as of.December 31, 2006
| |
| $11
| |
| $10
| |
| $9
| |
| $8
| |
| $7
| |
| $6
| |
| $5
| |
| $4
| |
| $3 2002 2003 2004 2005 2006 2007.. 2008 2009. 2010
| |
| . ,,Year 1, 1 1 1 . 1, 1 ý.
| |
| Historical and Forward PJM Western Hub RTC Prices
| |
| '-4-.-"e- WH Historical Prices' - -. - WH4 Forward Prices as of December 31, 2006
| |
| $75.
| |
| $65
| |
| $5s5 .. . . . . ,
| |
| $4
| |
| $45
| |
| $35
| |
| $25 2006 1.
| |
| J .
| |
| Year In the electricity markets -where Power participates, "the pricing of, electricity can vary by location. For example, prices may be :higher in congested areas -due to transmission constraints during peak, demand periods reflecting the bid prices of the..higher cost units that are dispatched to supply demand. This typically occurs in the eastern portion of PJM, where many of Power's plants are locate& At. various times, depending upon, its production and its. obligations, these 'price differentials can serve to:-increase'or decrease 'Power's profitability.. . . , .. - . ..-
| |
| While the prices reflected in the tables above do not necessarily represent prices at which Power has contracted, they are representative of market prices at relatively liquid hubs, with nearer term forward pricing generallý resulting from more liquid markets than pricing for later years.' Whil' they provide some perspedfive on past 'atdfuture' prices nd recent* prices are coasideably high&r than in prior'years, the forward prices are highly. volatile, and there is no. assurance that, such' prices will rbmain in affect nor that
| |
| *Power will be able, to contract its output at these forward prices..
| |
| Power is also provided with payments from the various markets for the capability, to provide electricity, known as a capacity payments, which are reflective of the value to the grid for having the. assurance qf sufficient generating capacity to meet system reliability and energy requirements, and to :encourage the future investment in adequate sources of new generation to meet system demand. While there is generally sufficient capacity in the markets in which Power operates, there are certain areas in these markets wh6re there are constraints in the transmission system, causing concerns for reliability and a more acute need 'for 'capacity.
| |
| Some generators, including Power, 'announced the retirement of certain older generating facilities 'in these constrained areas due- to insufficient. revenues, to .support their continued operation. In. separate: instances, both. PJM and the New England PoWers Pool (NEPOOL)' .responded with -,Reliability-Must-Run (RMR) contracts for'these units to enable their continued:availability that 'provide their ownerswith fixed payments which, while not necessarily reflective of the.full value of those units'. contribution to reliability' (e.g' they are 7
| |
| | |
| cost-based), are nonethdess significant. Such payment structure by 'its nature acknowledges that these units provide a reliability service -that is-not compensated' in the. existing miarkets. It also suggests that fixed periodic payments, as would be provided in 'a capacity market, are an aplpropriate form of compensation- for such units for this service. Power receives RMR payments in both PJM and NEPOOL.'
| |
| In-addition, FERC issued certain orders in 2006 related to market design that have changed the nature of capacity payments in the. New England Power Pool. (NEPOOL) and is scheduled to change the nature of payments in. PJM. In PJM, a new capacity-pricing regime knovwnas the Reliability Pricing Model (RPM) will provide generators with differentiated capacity payments based upon the location of their respective facilities.
| |
| Similarly, the Forward Capacity Market (FCM) settlement in NEPOOL provides for locational capacity payments. Both market designs are based in part on the premise that "a more structured, forward-looking, transparent pricing scheme will give prospective investors in new generating facilities more clarity on the future value of capacity, sending a pricing signal to .encourage expansion of capacity for future market demands;FERC has approved the market changes.in each of these markets, with the anticipated start date for RPM set for June 1, 2007 and FCM transition period having begun on December 1, 2006. Power believes that the majority of its generating capacity may experience changes in value from aspects of these market designs. While Power believes it may derive considerable additional revenue from these changes, it is difficult to predict' the ultimate outcome of these changes..
| |
| For additional information on Power's collection of RMR payments in PJM and NEPOOL and the RPM and FCM proposals,-,see Regulatory Issues-Federal Regulation. -
| |
| Competitive Environment Power's competitors include merchant generators with or without trading capabilities, including banks, funds and other financial entities, utilities that have generating- capability or have formed generation and/or trading affiliates, aggregators, wholesale power marketers and developers of transmission and Demand Side Management (DSM) projects and combinations thereof. These participaiits compete with P6wer and one another -buying and selling in wholesale power pools, entering, into bilateral contracts and/or selling to aggregated retail customers.-
| |
| Power's businesses ýare 'also under competitive pressure due to technological advances in the power industry and increased efficiency in. certain energy markets. For example, it 'is possible that advances in technology, such as distributed generation, will reduce the cost of alternative methods of producing electricity to a level that is competitive with that of most central station electiic production.
| |
| There is also warisk to Power if states should decide to turn away from competition and allow regulated utilities to continue to own or reacquire and operate. generating,:stations .in a regulated and potentially uneconomical manner, or to encourage, rate-based 'generation for the construction of new base-load units.
| |
| This has"'already occurred in, certain, states. The lack of consistent rules in energy markets can*negatively impact the competitiveness of Power's plants. Also, regional inconsistencies iin environmental regulations, particularly those related to emissions, have put some of Power's plants which are located in the Northeast, where rules are more stringent, at an economic disadvantage compared to its competitors in certain Midwest states:",
| |
| Also, environmentalissues such as .air pollution controls may have 'a competitive impact on Power to the extent its plants are more expensive to maintain in' compliance, thus affecting, its ability to be a lower cost provider compared to competitors without such restrictions.
| |
| In addition, as discussed in the Regulatory Issues section herein-specifically; in the discussion concerning' (i) Transmission Rates and Cost Allocation and (ii), Transmission Infrastructure-current rules being developed at FERC, at DOE and at PJM with*respect to 'the construction of transmission and the allocation of costs for such construction may 'have the effect of altering the iev6l playing field, between transmission options and generation options, which- cduld have a competitive 'impact upon PSEG and Power.
| |
| Customers As EWGs, Power's subsidiaries do not directly serve retail, customers. Power uses its generation facilities primarily for the production, of electricity for sale at the wholesale level. Power's customers-consist mainly, of wholesale buyers, primarily within PJM,.but, also in New'York and :Connecticut. Power is 'at times a direct or indirect supplier of New Jersey's EDCs,' including PSE&G,, depending on the positions it takes in the New Jersey BGS auction. In prior years, Power had also been.a bidder in the. CIEP auction, which serves large 8'
| |
| | |
| industrial and commercial. customers at hourly PJM real-time market prices for a term of 12 months. Power's three-year contract with a Connecticut utility ended on December 31, 2006. These. contracts are full requirements. contracts, Where Power is responsible to serve a percentage'of the full-supply needs of, the customer class being served, including energy, capacity, congestion. and ancillary services. In-addition, Power has four-year contracts with two Pennsylvania utilities'expiring in-2008 and is considering pursuing similar opportunities in other states.
| |
| PSE&G has a full requirements contract with Power to meet the gas supply requirements of PSE&G's gas customers. The. contract term.was originally 'through March 31, 2007, and year-to-year thereafter.. In the settlement of the 2005/06 'BGSS proceeding the Parties agreed to an amendment to the contract that changed the contract term to.March.31, 2012, and year-to-year thereafter: Power charges PSE&G for gas, commodity,,',* .
| |
| costs Which PSE&G.recovers from its customers. Any difference between, the' residential gas cost charged.by" Power under, the BGSS-contract -and revenues received from PSE&G's residential customers are deferred and collected or' refunded. through adjustments in future rates.:
| |
| For the ,year ended.'December; 31, 2006, approximately 46% of Power's revenue was comprised of billings'to PSE&G'for BGS, and BGSS. See Note 21'. Related-Party Transactions of the Notes for additional information.
| |
| Employee Relations
| |
| ..As of December 31,. 2006, Power had 21538 employees, of which 1,414 employees (705 employees for Fossil and 708 employees for Nuclear) are represented by three union groups under six-year collective bargainingagreements,w'hich were ratified in February, July and August 2005, respectively. Power believes that it maintains satisfactory relationships with its employees.
| |
| Energy Holdings .
| |
| Energy Holdings is a New Jersey limited liability 'company -and is the successor to PSEG Energy Holdings Inc., which' was incorporated in 1989. Energy Holdings' principal executive offices are located at 80 Park' Plaza, Newark, NeW .Jersey'07102. Energy Holdings has two principal direct wholly owned'subsidiaries, which are also its segments: Global and Resources.
| |
| Energy Ho1dings'pursuedlinvestment' opportunities'in'the domestic and international energy markets, with Global foc'sed on the operating segments of the electric industries"'and Resources primarily' made financi'al investments in these industries..
| |
| Global '".
| |
| Global owns investments in power producers and distributors that own an d operate electric generation and distribution facilities in selected domestic and international markets. See Itm '2. Properties-Energy
| |
| .Holdings for discussion of individual investments, including significant power purchase agreements (PPAs),
| |
| fuel supply agreements, financing structures and other matters.
| |
| Global's -assets include consolidated, projects and those accounted for under'the equity method. As of
| |
| 'December 31, 2006j. Global's Share .of project MW and number of customers by region are as follows:
| |
| As of'December 31, 2006 Total Capital Number of Invested (1) ' Assets
| |
| * MW.. Customers (Millions) -
| |
| .Chile and Peru Distribution and Generation............. ........ $1,245, $1,864.. 303.' 1,974,000 U .S. Generation ............................. ......... .......... 508 911 2,396 N/A Other ..................................................... 153 343 172 N/A oTotal $11,906 $3,118 0 1 8 2,871 1,974,000
| |
| ' ''''j '.'' ' ' ' .. '$
| |
| T- tal .... *...... ........ :.... ........ .. '* ................... :.... -.... 9 6 2, 7 , 7 , 0 (1) Total Capital Invested represents Global's equity invested in the'projects, excludingcurrency translation adjustments.
| |
| 9
| |
| | |
| Energy Holdings has reduced its international risk by opportunistically monetizing investments at Global that no longer had a strategic'fit. During the past three years, Global, has received proceeds of over $1 billion from sales of investments .in China,, Brazil,. Poland, India, Africa and the Middle East. The decrease in Global's portfolio size due to the~above sales was partially offset by strong earnings from its Texas generation facilities and its electric distribution companies -in Chile and Peru. As a result, Global's current portfolio is primarily comprised of investments in Chile, Peru and the United States. Global also has modest- sized investments in Italy, India and Venezuela totaling about 8% of Global's total investment balance,.
| |
| As a result of these sales" approximately 50% of Global's future earnings is expected to be derived from its domestic generation business, of which, Over half are from its 2,000 MW gas-fired combined. cycle merchant generation business in Texas, with the balance from its 12 fully-contracted generating: facilities in which Global's ownership interests -equate to nearly 400 MW. The other 50% of 'Global's earnings is expected to be essentially from three electric distribution businesses in Chile and Peru and 'a 183 MW hydro generation facility in Peru. The regulatory environments in both Chile and Peru have vbeen generally constructive since Global acquired these investments. Rate cases are held every four years (with the next rate case beginning in 2008)' and the rate calculation methodologies are designed to achieve a reasonable return on the net replacement value of each system. See Regulation for additional information on the regulatory process in Chile and Peru. Chile also maintains an investment grade rating and Peru's rating, although"'non-investment grade, has improved.
| |
| Energy Holdings continues to review Global's portfolio, with a focus on its international investments. As part of this review, Energy Holdings considers the returns ofits remaining investments against alternative investments across the PSEG companies,- while considering the strategic fit and relative risks of these busiinesses.
| |
| Market Price Environment Global's projects in California, Hawaii and New Hampshire are fully contracted under long-term PPAs with the public utilities or power procurers in. those .areas. Therefore, Global does not have price risk with respect to the output of such assets, and generally; with respect to such assets, has limited risk with respect to fuel prices. Global's risks related to. these projects are primarily, operational in nature and have historically been minimal.
| |
| Global's generation business in Texas (Texas Independent Energy. L. P. (TIE)) is a merchant generation business wilth higher risks, TIE seeks to enter into a mix of contracts to sell its output-approximately 20% of its output is sold under a five-year contract, which expires in 2010, and another 10,% to 20o is sold forward under one-year on-peak calendar or seasonal contracts and. the balance is sold during the year. As a result, TIE's business is subject to substantial volatility in earnings and cash flows as power prices fluctuate.
| |
| Although Global's business in Texas has performed very well as high natural gas prices and the resulting high energy prices led to strong margins in 2005 and 2006, there can be no assurances that such pricing in the market will continue at these levels.
| |
| Competitive Environment Although TIE's generating stations operate very efficiently, relative to other gas-fired generating plants, new technology could make TIE's plants less economical in the future. Also', several competitors have announced plans to build a substantial amount of capacity in the Electric Reliability Council of Texas
| |
| .(ERCOT) market. Although it is not clear if this-capacity will be built or, if so, what the economic impact would be, such additions could impact market prices and TIE's competitiveness: Also, as ERCOT transitions to nodal pricing from zonal pricing the competitiveness of TIE's generating plants could be impacted. As TIE represents'a substantial portion of Energy Holdings' and Global's bhsiness, volatility in that portion of the business will impact Global's and Energy 'Holdings' overall. portfolio results.
| |
| 'Of the remaining portion of Global's business, the majority Qf its earnings are generated by two major rate-regulated':distribution businesses in Chile and one in Peru. Although these entities are not.granted exclusive franchises, there is minimal competition for distribution companies. See Regulatory Issues--
| |
| International Regulation for a discussion of the ratemaking process in Chile and Peru. Global also owns a hydro generation facility in. Peru. Although 'new generation capacity is being built in Peru, there are not many opportunities for hydro expansion, mitigating competition with Global's hydro generation investment.
| |
| 10
| |
| | |
| Customers , . ' .
| |
| Global has ownership interests in three distribution companies' in South America which serve approximately 'two million customers. Global also has ownership interests in -electric generation facilities which sell energy, -capacity and ancillary services to numerous customers through PPAs, as well as into the wholesale.market. For additional. information, see Item 2. Properties-Energy Holdings. .
| |
| . Resources' ...
| |
| Resources has investments' in'energy-related 'financialI tranfisactions and manages a diversified pbrtfolio of assets, including leveraged leases, operating leases, leveraged buyout funds, limited partnerships ":and marketable! securities. Established in 1985, Resources has a. portfolio' of approximately 45 separate investments. Resources does not anticipate making'significant additional investments in the near term'.
| |
| Resources also owns and 'manages a Demand Side.. Management (DSM) business. DSM revenues, are earned principally from. monthly.payments received from utilities, which represent shared electricity savings from the installation of the energy efficient equipment.
| |
| The major components of Resources' investment portfolio as a percent of its total assets, as. of December 31, 2006 were: ... .. .
| |
| As of December 31, 2006
| |
| % of Resources'-
| |
| :Amount Total Assets (Millions)
| |
| Leveraged Leases Energy-Related Foreign .......................... $1,499 51%
| |
| D om estic ................................................................. .. 1,041 35%
| |
| Real' Estate-Domestic.................................... .......... .. '182 ' 6%
| |
| 'Commuter Railcars-Foreign......... .......... ............... ........... 88 3%
| |
| Total Leveraged Leases ......................... 2,810 95%
| |
| Owned Property (real estate and aircraft) ....... .. ............................ . 124 4%
| |
| 1%
| |
| ............... 35 Limited Partnerships, Other Investments & Current and Other Assets Total Resources' Assets .................................... ............. $2,969 ' 100%
| |
| As of December 31, 2006, no single investment represented more than 10% of Resources' total assets.
| |
| Leveraged Lease Investments Resources maintains a portfolio that is designed to provide a fixed rate of return. Income on leveraged leases is recognized by a method which produces a constant rate of return on the outstanding investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Any gains or losses incurred as a result of a lease termination are recorded as Operating Revenues as these. events occur in the ordinary course of business of managing the investment portfolio.
| |
| In a leveraged lease, the lessor acquires an asset by investing equity representing approximately 15% to 20%'of the cost of the asset and incurring non-recourse lease debt for the balance. The lessor acquires economic and tax ownership of the asset and then leases it to the lessee for a period of time no greater than 80% of its remaining useful life. As the owner, the lessor is entitled to depreciate the asset under applicable federal and state tax:guidelines. In addition, the lessor receives income from lease payments made by the lessee during the term of the lease and from tax benefits associated with interest and depreciation deductions With respect to the leased property. The ability of Resources to realize these' tax benefits is" dependent on 6perating gaihs generated by its affiliates and allocated *pursuant to PSEG's 'consolidated tax sharing agreement. The Inteirial Revenue Service (IRS) hais "recently disallowed certain t0i' deductions claimed 'by Resources for certain of these leases. See Note 12. Commitments and Contingent Liabilities of the Notes for further discussion. Lease rental 'payments are unconditional obligations of the lessee and. are set at, levels at least, sufficient to service the .non-recourse lease debt. The lessor is also 'entitled. to any residual value associated with the-leased asset at the end of the lease term. An evaluation of the after-tax cash flows -to the lessor determines the return on the investment. Under generally accepted accounting principles in-the U.S.
| |
| 11
| |
| | |
| (GAAP), the lease investment is recorded on a net basis and income is recognized as a constant return on the net unrecovered investment.
| |
| Resources has evaluated the lease investments it has made against specific risk factors. The assumed residual-value risk, if any, is analyzed and verified by third parties at the time an investmentis made. Credit risk is assessed and, in some cases, mitigated or eliminated 'through various structuring techniques, such as defeasance mechanisms and letters of credit. As of December 31, 2006, the weighted average credit rating of the lessees in the -portfolio was A-/A3. Resources has not taken currency risk in its cross-border lease investments. Transactions have been structured with rental payments denominated and payable in U.S.
| |
| dollars. Resources, as a passive lessor or investor, has not taken operating risk with respect to the assets it owns, so leveraged leases have been structured with the lessee having an absolute obligation to make rental payments whether or not the related assets operate. The assets subject to lease are an'integral element in Resources' overall security and collateral position. If the value of such assets were to be impaired, the rate of return' on a particular' transaction' could 'be affected: The, operating characteristics and the business environment in which the assets operate are, therefore, important and must be understood and periodically evaluated. For this reason, Resources will retain, as necessary, experts to conduct appraisals on the assets it owns and leases.
| |
| On December 28, 2005, Resources sold its interest in the Seminole Generation Station Unit 2 in Palatka, Florida.' For additional information relating to this disposition, see Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments of the Notes.
| |
| Resources' tgn largest lease investments as of December 31, 2006 were as follows:
| |
| Recorded Investment Balances % of as of Resources' Investment Description December 31, 2006 Total Assets (Millions)
| |
| Reliant Energy MidAtlantic Power Holdings, LLC..................... Three generating stations (Keystone, Conemaugh and Shawville) $ 284 10%
| |
| Dynegy Holdings Inc ................ Two electric 'generating stations (Dtnskammer and'Roseton) 239 8%
| |
| Midwest Generation (Guaranteed by Edison Mission Energy) .......
| |
| Two electric generating stations (Powerton and Joliet) 206 7%
| |
| ENECO .. ....... ................... Gas distribution network (Netherlands) 168 6%
| |
| E SG ....... ........................ Electric distribution system (Austria) 145 5%
| |
| EZH ............. ................... Electric generating station (Netherlands) 133 4%.
| |
| M errill Creek ... : ................ ... Merrill' Creek Reservoir Project 130 4%'
| |
| Grarid Gulf. ......................... Nuclear generating station '(U.S.) ' 121 4%
| |
| Nuon .............. .......... Gas distribution network (Netherlands) *111 .4%
| |
| EDON ........... 'Gas distribution network (Netherlands)' 105 '3%.
| |
| $1,642 55%
| |
| For additional information on leases, including credit, tax and accounting risk related to certain lessees, see Item 7' MD&A-Results' of Operatio'ns-Energy Holdings,. Item 7A. Qualitative and Quantitative Disclosures About.Market Risk-Credit Risk--=Energy Holdings and Note, 12. Commitments and Contingent Liabilities of the Notes.
| |
| *As of December 31, 2006, Resources has 'a remaining gross investment in three leased aircraft of approximately $41 million. On September 14, 2005, Delta Airlines . (Delta) and.Northwest Airlines (Northwest), the lessees for Resources'.-four remaining aircraft at that time, filed for Chapter 11 bankruptcy protection.: This had no material effect on Energy Holdings as it continues to believe that -it will be able to 12
| |
| | |
| recover the recorded amount of its investments in these aircraft as of December 31,.2006, although no assurances can be given. In 2004 and 2005, Resources successfully restructured the leases and converted the Delta and Northwest leases from leveraged leases to operating leases. The Delta' aircraft was sold' in January 2006 generating a small gain for Resources. .
| |
| Other Subsidiaries Enterprise Group Development Corporation (EGDC), a commercial real estate property management business, is conducting a controlled exit from its real estate business. Total assets of EGDC as of December 31, 2006 and 2005 were $70 million and $71 million, respectively, less non-recourse debt of $19 million and
| |
| $21 "million, respectively less minority interest of. $6 million for each year,, for a net investment of approximately $45 million and $44 million, respectively. These investments are composed' of three properties in New Jersey, Maryland and Virginia and an .80% partnership interest in buildings and -land in New Jersey.
| |
| Employee Relations As of December 31, 2006; Energy Holdings had 53 diiect, employees. In addition, Energy Holdings' subsidiaries had a total of 1,091 employees, of which 692 'were represented by unions 'under collective bargaining agreements 'expiring between Jun6 2007 and_ January '2010. Energy Holdings believes 'that it' maintains satisfactory relationships with its 'employees.
| |
| Services Services is a New Jersey corporation with its principal executive offices at 80 Phrk Plaza,' Newark., New Jersey 07102. Services provides management and. administrative and general services to PSEG and its subsidiaries. These include accounting, treasury, financial risk management, law, tdix, communications, planning, development, 'human resources, corporate secretarial, information technology, investor relations, stockholder' services, real estate, insurance, library, records and information. services, security 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. As' of' December 31, 2006, Services had' 932 employees, including 100 employees represented by a union group under a six-year collective bargaining agreement that' was ratified in February 2005. 'Services believes that it maintains satisfactory relationships with its employees.
| |
| REGULATORY ISSUES Federal Regulation Public Utility Holding Company Act (P.UHCA)
| |
| PSEG, .PSE&G, Power and Energy Holdings The 'Energy. Policy Act (EP 'Act), which becanie 'law onAugust 8, 2005, repealed PUHCA as of Februaiy 8, 2006 and established PUHCA 2005, which grants to FERC "books and records" oveisight of publid utility holdin'g companies. PSEG had historically claimed an exemption from regulation by the SEC as a registered holding company under PUHCA. As part of that exemption, Fossil, Nuclear, certain subsidiaries of Fossil and certain subsidiaries of Energy Holdings with domestic operations obtained EWG or Qualifying Facility (QF) status (the latter designation obt'ined under the Public Utility. Regulatory Policies Act of 1978 (PURPA)), while most of Energy Holdings' foreign investments obtaiiied Foreign Utility Company (FUCO) status. Notwithstanding the' repeal of PUHCA, these companies have retained their designations as EWGs, FUCOs or QFs, since such designiation 'affords certain protections under FERC's-PUHCA 2005. Specifically,.
| |
| companies subject to the provisions of PUHCA 2005' must provide state regulators access to their books and records. PSEG, PSE&G, Power and Energy Holdings do not expect PUHCA 2005 to materially affect' their respective businesses, prospects'or properties, and in October'2006, PSEG obtained from FERC a waiver of PUHCA' 2005's accounting, record retention and reporting requirements. For additional information on the impact-of PUHCA repeal, see State Regulation. .
| |
| 13
| |
| | |
| Environmental PSEG, PSE&G, Power and,Energy Holdings PSEG and its subsidiaries are subject to the rules and regulations relating to environmental issues promulgated, by the EPA, the' U.S. Department of Energy (DOE) and other regulators. For information on environmental regulation, see Environmental Matters.
| |
| FERC PSEG, PSE&G, Power and Energy Holdings FERC is an independent federal agency -that regulates the transmission of electric 'energy and sale of electric' energy at wholesale in interstate commerce pursuant to the Federal Power Act,(FPA). FERC also regulates the interstate transportation of, as well as certain wholesale sales 6f, 'natural gas'pursuant to the Natural Gas Act. FERC's oversight includes: merger review, compliance, including Standards of Conduct issues, transmission rates and terms and conditions of service, and market power, market design and capacity design and rates. Several PSEG subsidiaries, including PSE&G, Fossil, Nuclear, and ER&T, as well as certain subsidiaries of Fossil and..certain domestic subsidiariesof Energy Holdings are "public utilities" as defined by the. FPA and subject to extensive regulation by FERC. FERC's regulation of public utilities is comprehensive
| |
| 'and governs such matters as rates, services, mergers, financings, affiliate transactions, market conduct and
| |
| .reporting. FERC is also responsible under PURPA for administering PURPA's requirements for QFs.
| |
| PSEG, through its sub'diaries, owns several QF plants. QFs are subject to many, but not all, of the same FERC requirements as public utilities.
| |
| Expanded Merger ,Review Authority .... . -.-
| |
| PSEG, PSE&G, P1pwer and Energy Holdings The EP Act expanded FERC's authority to revieW mergers and acquisitions under the FPA. It extended the scope of FERC's authority to require prior FERC. approval regarding transactions involving certain transfers of generation facilities, certain holding company transactions, and'utility mergers and consolidations having a value in. excess of $10 -million. The EP Act requires. that FERC, -when reviewing proposed transactions, -examine cross-subsidization and pledges or. encumbrances of, utility assets. PSEG, PSE&G, Power and Energy Ho1ldings'are unable to predict the effect of this authority on any. potential future transactions in which they may be involved.
| |
| Compliance PSEG, PSE&G, Power and Energy Holdings Reliability Standards The EP Act required FERC to empower a single,'national Electric Reliability Organization (ERO) to develop and enforce national and regional reliability standards for the U.S. bulk power system. FERC has designated the North American Electric Reliability Corporation (NERC) as this ERO. NERC has filed. with FERC delegation agreements. that would in turn delegate, to a significant degree, the enforcement of. such reliability standards to' eight regional reliability councils approved by NERC, such as ReliabilityFirst. Thus, the relationship bIetween NERC and the regional reliability councils (responsible for reliability standards compliance. within a particular geographic iregibn) is a contractual on6. PSE&G's transmnission assets, .and most 'of Power's generation assets, are located within the geographic scope bf Reliability First, and PSEG'ý remaining domestic assets" including' the New York, Connecticut and Texas generating assets, are within the scope of other regional.reliability councils such as NPCC and, ERCOT. .... ' .
| |
| After being designated as an ERO,. NERC asked FERC to 'approve ,a ,set of proposed. mandatory Relia'bility Standards, -many of 'which mirrored existing, voluntary standards. On .October 20, 2006, FERC issued a Noti'ce of-Proposed Rulemaking (NOPR), which proposed. to approve' 83 of the.107 filed standards and. asked for additional 'information regarding the remaining 24 standards. Compliance with these 83 standards, enforcement of which will largely be delegated to the, regional reliability councils -such as Reliability First; is mandatory and sanctions may attach,for non-compliance.. Pursuant to the EP Act,- FERC has the ability to impose penalties of up to $1 million a day, for violations of these standards.:.-Under the 14
| |
| | |
| NOPR, which is not yet a Final Rule,. compliance with these Standards will be required :by the commencement of the 2007, summer peak season. 'These Standards are applicable to transmission Owners and generation -owners, and thus PSEG, PSE&G, Power and .Energy Holdings' (or their subsidiaries) will be obligated to comply with -the Standards. PSEG,. PSE&G,'Power and, Energy. Holdings are currently evaluating all of.the requirements imposed by the Standards and are preparing to ensure that they will be in compliance by 'FERC-required date., It should be noted, in this regard' that' PSE&G's local control center (LCC) was the first control center voluntarily audited by -NERC in January 2006 with respect to LCC
| |
| "'readiness." NERC concluded in this audit that PSE&G has adequate facilities, processes, plans, procedures, tools,. and trained personnel to effectively operate as an LLC within PJM and found no significant operational problems.
| |
| FERC Standards. of Conduct .
| |
| On January 18, 2007, FERC issued a NOPR which proposes to make certain 'changes to its Standards'of Conduct applicable'to both electric and natural gas transmission providers. The NOPR was issued in response to a decision by the United States Court of Appeals of 'the District of Columbia, 'vhich vacated FERC's existing Standards ..of Conduct as they applied to natural gas pipelines. The NOPR, however, proposes changes to thde Standards of Conduct for -both natural gas and electric providlers Some of the proposed changes include modifying the definition of Energy Affiliate and thereby changing the scope of applicability of the 'Standards of Conduct, changing the regulations with respect to the permissible tasks of "shared" employees (employees that may be shared by both the Transmission Provider and. the Energy Affiliates) and modifying the information disclosure regulations: PSE&G is currently subject to FEIC's Standards of Conduct as a Transmission Provider and subsidiaries of Power and Energy Holdings are subject to 'the Standards of Conduct as Energy Affiliates. Thus, FERC's proposed changes 'may 'have an impact on PSEG, PSE&G, Power and Energy Holdings and the interactions between these entities, although its-impact is not clear, at.this time. PSEG is currently evaluating the NOPR and will file comments to the same prior to FERC issuing a Final Rule. The outcome of this proceeding cannot be predicted at this time.
| |
| Transmission Rates and Cost Allocation PSEG, PSE&G and'Power PJM Schedule 12 Cost Allocation for Regional Transmission Expansion Planning( RTEP) Projects
| |
| -On January 5, 2006, PJM proposed cost allocation recommendations for new transmission projects pursuant. to Schedule 6 of its. FERC-approved Operating Agreement and Schedule 12 of its Open Access Transmission Tariff (Tariff). PJM identified the "Responsible Customers" that would be required to pay for certain transmission upgrades approved through, PJM's Regional Transmission Expansion Planning (RTEP) process and the percentage of the project cost 'that would be allocated tosuch Responsible Customers. This was the first 'filing by PJM pursuant to these new cost allocation mechanisms and it included (i)- large cost allocations to eastern load as a result of proposed construction in the western and southern portions of PJM and (ii) allocations to merchant transmission projects such as Neptune Regional Transmission System, LLC.
| |
| On May 26, 2006, FERC issued an, order*that, accepted and suspended PJM's 'cost allocation filing, made the filing effective subject to refund as of May 30, 2006 and established a hearing and settlement judicial procedure.
| |
| In addition, on May 4, 2006, PJM made- a second RTEP cost allocation filing at FERC, addressing cost allocations to Responsible Customers associated with additional RTEP projects. PSEG,protested the filing, objecting to, among .other things, PJM's netting of cost impacts within a PJM zone to allocate RTEP costs and PJM's failure to.c.onsider the impact of certain adjustments in determining zonal cost allocation.
| |
| On July 19, .2006, .FERC consolidated PJM's January 5, 2006 and May 4, 2006 filings that propose to allocate the costs of new transmission projects that PJM.has directed to be built through its RTEP,.:process.
| |
| On July 21, 2006, PJM submitted. to-FERC a further proposal to allocate the costs of an additional group of new trahsmission projects that PJM has directed be built through its RTEP. The July 2-1, 2006 filing includes allocations for the '$850 million, 2007mile 500 .kV. Loudon transmission line which runs from Allegheny Power's service territory, through West Virginia to Northern Virginia, as well as many .other transmission projects 'it the PJM region. This proceeding was consolidated with the.other two PJM cost allocation 'filings and :was then the subject of settlement proceedings before a ALJ. Settlement discuissions terminated in November 2006 and, on November 7, 2006, the. proceedings were set for hearing, with a, hearing to commence 15
| |
| | |
| n0l later than-June 19, 2007. PJM.has.:used the same allocation methodology to identify which load should pay for these new transmission projects. through regulated transmission rates. PSEG is. actively participating; in this proceeding, as the cost allocation methodology used by PJM may result in a disproportionate allocation of costs to loads in the eastern portion of PJM. However, assuming continued *pass-through of transmission charges to retail customers, neither Power nor PSE&G are expected to be impacted by the allocation of Schedule .12 .charges. PSEG, PSE&G' and Power are unable'to predict the outcome cif'this hearing at this time.
| |
| Regional through and out rates (RTOR). , . ,-
| |
| RTOR are separate transmission rates for transactions where electricity originated in o'ne transmission control area is transmitted to a point, outside that control area. Both the Midwest Independent Transmission System Operator, Inc. (MISO) and PJM charged RTORs through December 1;,2004. FERC approved a new regional, rate design, which became effective .December .1;, 2004 for the entire- PJM/MISO region0 and approved the continuation of license *plate rates and a transitional Seams .Elimination Charge/Cost Adjustment/Assignment (SECA) methodology effective from December 1, 2004 through.March:2006..
| |
| On'February 10, 2005, FERC issued anorder that accepted various SECA filings, established December 2004 as the effective date for the SECA rates; made them subject to refund and surcharge, .-ind 'stablished hearing procedures to resolve'the outstanding factual issues raised in the filings and the resl6nsive pleadings.
| |
| ,.. trial-type A hearing was held in May 2006, encompassing a ,review.of the actual amount of lost revenues to be recovered via the SECA mechanism. On. August,10, 2006, the ALU .issued an initial deci-sionfinding that'the ratedesign for: the, recovery of SECA charges is flawed, andthat the SECA rate 'charges are therefore unjust, unreasonable and unduly discriminatory. FERC has not yet issued an order on review of the ALJ initial decision. In addition; -in March 2006, PSE&G ,and Power entered into a settlement .with a limited group of parties in PJM, which 'settlement was certified to FERC, under,which the parties have agreed to pay and collect reductions .of SECA revenues. On; October 12,. 2006, the limited settlement agreement was expanded to include additional parties and on January 18, 2007, an additional settlement agreement was entered into with certain MISO parties. FERC has not yet acted to approve the March, October or January SECA settlements. Due to the uncertainty of this proceeding, PSE&G has continued to defer' the collection of any SECA revenues on its books. At the present time, PSEG, PSE&G and Power.do not-,anticipate any adverse impact as a result of 'the SECA decision.,
| |
| PJM Long-Term Transmission Rate Design On May 31, 2005, FERC issued an'order addressing the recovery of costs for transmission upgrades designated through PJM's RTEP process. Among other matters,'FERC's order respohded to a proposal to continue PJM's current rate design, under which transmission customers pay rates within the partichlar transmission"zone in which ihey' take service.' FERC concluded that the existing rate design may' 'nt be just and reasonable and it established a hearing to examine the justness and reasdnableniess. Of. cofitinuing' PJM's modified zonal rate design. Certain entities filed .pr6posals with"FERC on September 30, .2005-for alternative rate designs" for the PJM region. PSE&G, as part -of a coalition of potentially' affected. PJM transmission owners; filed answering testimony on November 22, 2005 that supported c6ritinuation of the Zonalrrate design in PJM. - " .
| |
| A hearing was held in April 2006 and on July 13, 2006, a FERC ALJ issued a decision concluding that the" existing PJM modified zonal rate design for existing facilities has been shown 'to betuinjust and unreasonable, and should be replaced with a postage 'stamp rate design (single "postage stiamp" rate paid by all transmission' customers in PJM) for such fa6ilities to be effective April 1,'2006. T6 mitigate raite impacts, the ALJ determined' that the rate design should be phased in, so that no customer receives greatei than a 10% annual rate increase. The ALJ also 'determined that the existing process for allocating costs of new transmission projects pursuant to Schedule. 6 "of PJM's Operating Agreement 'and Schedule 12 of the PJM Tariff was just and' reasonable. Briefs on exceptions' to the ALJ's initial decision and reply briefs were filed in this proceeding challenging the decision to find the existing rate,, design. unjust: and .unreasonable, the appropriateness of imposing a postage stamp rate design, the decision as. to 'the: appropriateness of applying the current Schedule .6. and Schedule .12 process for allocating costs of new transmission ,projects and the phase-in of the.new rat& design. FERC has not yet issued a decision on review: of the ALJ'S initial decision, Should FERC ultimately approve this postage stamp rate'design-on review of the"'ALJ's initial decision;.or adopt one or a. combination of. the alternative rate. designs proposed, assuming continUed pass-through of 16
| |
| | |
| transmission charges to, retail, customers,. PSEG's and PSE&G's results of.operations could be adversely impacted with no adverse,,impact currently anticipated for Power .. r,.- ".
| |
| .Market Power,' Market Design and Capacity Issues PSEG, PSE&G and Power.
| |
| Market Power,
| |
| 'Under FERC regulations, public utilities may sell.power at cost-based rates or apply to FERC for authority.to sell at market-based rates (MBR). PSE&G, ER&T and certain other. subsidiaries of Fossil and Energy, Holdings have applied for. and received MBR authority Jfrom FERC, which: permits, them to sell power into the wholesale market at market-based rates. FERC.requires that. *holders'of MBR tariffs file an update, on a triennial basis, demonstrating that they continue to lack market power. On -November 30, 2006, PSE&G. and ER&T filed their respective triennial updated market power reports with FERC. FERC has not yet acted on these updated market power. reports. . - ... .. ' - .
| |
| On'May"19,. 2006, FERC issued a NOPR concerning the standards 'to 'be used by FERC in granting market-based rate..'authority. The proposed regulations would 'adopt, in most fespects, FERC's current
| |
| .standards.' In'its NOPR, .FERC sflggests 'certain changes,' such a's in the'ar~as 6f cost-based markdt power mitigation, modifications to the horizontal (generation) market power screens, and clarifications -to existing vertical market power screens. On September 20, 2006, PSE&G and Power submitted comments in this NOPR proce-eding: FERC has not yet issued a Final Rule in. this rulemaking proceeding:' The-outcome of this proceeding and its impact. on PSEG, PSE&G, Power and. Ehergy Holdings' cannot be predicted at this time, but- Power does not.'expect the new rules to disqualify, its MBR authority."'However,. no assurances can be giVeri. . * :, .. , . : , " .' '" -
| |
| " FERC's MBR 'policies and the wholesale 'electricity markets which they help supportare evolving'and subjeceto'change. Specifically, on December 19, 2006, the United States Court of. Appeals for the Ninth Circuit overturned certain FERC orders in a series of cases, to whidh PSEG.w'as not a party, which .invlvced long 'term wholesale co fract6 entered into during the Califotnia Energy C6isis and, by. so'doing, 'seriously underniined' the "contract sanctity" .doctrine that had previously been 'applied to preserve these contiacts.
| |
| Moreover, the court held that FERC's MBR policies are insufficient to establish that agreements reached under MBR'tariffs are just and reas'4nable at the outset. Thus, the fact that a contract is entered into under a MBR tariff may not render it immune from "just and reasonable" 'review' by'tFER'C This case will likely 'be.
| |
| appealed, to the U.S. Supreme Court but represents a significant development and is one that will be
| |
| 'monitored for its impact on the wholesale electric market in the future.
| |
| RMR Status ,
| |
| PJM Although applicable tariff provisions differ from region to region, RMR tariff provisions provide compensation to a generation owner. when a unit proposed for retirement must continue operating for reliability. purposes. In September 2004, Power filed notice with PJM that it was considering the retirement of seven generating units .in New, Jers'ey, effective. December 7,_.2004, due to concerns. about the economic viability of the ,units under the then current. market structure. The units' that were being. considered, for retirement were Sewaren 1, 2, 3 and 4, Kearny 7 and 8, and Hudson 1. Kearny.7 and 8 were retired in 2005.. In response to Power's .filed notice, PJM identified certain system. reliability concerns associated; with the proposed retirements. ..
| |
| Effective. February 24, .2005, subject to. refund. and .hearing,., Power began to. collect a monthly fixed paymerit of $3.3-million, pre-tax,, net.of operating margins for the Sewaren 1, 2, 3 and:4 and Hudson 1'units.
| |
| -A detailed settlement was. filed with FERC on September 23, .2005 "that permits Power to recover annual fixed' costs 0of approximately $19 million: and $14.5 million; pre-tax, fof 'the Sewaren and Hudson units,.
| |
| respectively, plus reimbursements of' Power's expenditures in connection; with certain construction at the units that are necessary to maintain: reliability, offset by certain revenues earned in PJM's energy market.
| |
| FERC accepted this' settlement retroactive to February 24, 2005. On March 28,.2006', Power filed a refund report 'with FERC pursuant to which ,Power 'refunded $11 million, to PJM, although most of this refund related to.the timing of payments' under the settlement agreementand thus will be repaid to Power, with carrying charges, at a later date. FERC did not issue a public notice requesting comments on the report and 17
| |
| | |
| no party has mide any objections or other comments' with respect ;to the 'report. -Power is in the process of extending its RMR contract for Hudson Unit I through ,September 2010. For additional information, see Note 12. Commitments and Contingent Liabilities of the Notes.
| |
| New England * -
| |
| In the New England electricity market, many owners of generation facilities have fil6d with FERC for RMR treatment under the NEPOOL 'Open Access Transmission Tariff. If FERC granits RMR status for a generation facility -located 'in the New 'England' market;" the* owxner is -entitled to receive costLof-service treatment for its"facilit3, for the' duration* of an RMR contract that it bnters' into: with ISO New Enigland. Itic, On November 17, 2004, PSEG Power* Connecticut' LLC -(Power Connecticut), a wholly owned 'indirect subsidiaTry 'of Power; filed 'a request for RMR treatment for the'.New'Haven Harbor generation station and Unit ,2 at the 'Bridgeport Harbor generation station. FERC' issued an order on Ja'nuary 14, 2005, subjddf 'to refund and hearing which allowed Power Connecticut t6'-begin collecting monthly fixed' payment's Of approximately $1.6 million and ,$3-.9 million, pre-tax, for. reliability services provided by .the Bridgeport Harbor Station, Unit 2 arid the New Haven .Harbor Station, respectively, net of operating margins. On June 17, 2005, *Power Connecticut filed revised studies supporting monthly recovery of $13 million and $3.3 million, pre-tax, for the Bridgeport Harbor and New'Haven.. Harbor units, respectiyely.
| |
| On April 21, 20,06, Power Connecticut, the Connecticut Department,; of Public."Utility Control,' the Connecticut'Office ofConsumer Counsel and ISO New EnglandInc. filed with FERC aJoint Stipulation and Settlement Agreement and Motion for.-Expedited Consideration. The Joint Stipulationand. Settlement settled all matters associated with the RMR agreements filed by Power Connecticut for its Bridgeport Harbor 2 and New Haven Harbor stations. Among other things, the. settlement provides for monthly fixed payments of approximately $1 million fof Bridgeport H'arbor' and $3 million'for New Haven Harbor. Thieo'.nly'disputed issues concern the standard ofrieview'applicable to Wcertain types of potential t6riff,changes that',could be filed in the future. No 'party has challenged the settlement rates proposed to become effectiv. Tha AL certified the' settlement to FERC on June, 2f", 2006' as a contested' offer of settlement. It' is anticip*ted that the settlement will be ap''roved as certified or, if mbdified,' Will not be modified in a manner' that'advyerrsely affects the. settlement rates. However, Power Connecticut cannot predict. a final outcome at this. time, as FERC has not yet'acted't6 approve the settlement. ' . ' '
| |
| PJM Reliability Pricing Model (RPM)
| |
| On August 31, 2005, PJM filed its RPM with. FERC. The RPM constitutes a locational in's"talled' capacity market design for the PJM region; including a forward auction for installed capacity priced according to a downward-sloping demand"curve and a transitional implementation of the market design. FERC issued an order on April 20, 2006 that accepted- most .of th'e coie concepts of the- RPM filing' Vith' an implemehtation date of June 1, ,2007. The 'April' 20; 2006 orderý set certain details of the filing for paper Peaýriiig aid-'technical conference pr~dedures including the slope of. the demand ciirve and the'& mechanisiim'f~r' identifiiatioii 4ofthe locational capacity zones. Such hearing and techni'&al conferenc'e;pr6cediies have n beei'ieh "`ompl~ted.Also, commencing in Juný' 2006; settlement discussions mediated by a' FERC ALJ'commr*nced at jhe recjuest of certain intervenors., A final settleffment was filed with FERC0on'Septembei 29, 2006 with'a requested approval daje of no later than December"22, 2006: PSE&G and Power filed comments to the s'ettlement supporting the basic structural elements 'of the RPM proposal but nonetheless requesting certain modifications which, v 'ih their vieW; would better promote theadequacy of'generation reserves on a cost-effective basis. On December 22, 2006, FERC issued. an order approving the September 29 .settlement, With" certain conditions. 'FERC's approval of this settlement is 'expected to have a.'.fav6rable impact On generation facilities located in
| |
| .constrained locational zones.* The final revenue impact on 'Power of the' settlement -approved in the December,22, 2006 FERC order could result in incremental margin of $100 million tot $150 million, in 2007, with higher increases in future years as the full year impact is realized- and.existing capacity'contracts expire.
| |
| The April 20, 2006 order'remains subject to rehearing requests filed by severalparties. Moreover, on January 22, 2007; PSEG as well as 6ther parties to the proceeding filed for-reheafing of the December 22, .2006 order.
| |
| Given the. pending rehearing requests and the likelihood of eventualtjudicial appeals, PSEG, -PSE&G and Power are unable to predict the'outcome of'this proceeding.,' ' ' ' ',
| |
| 18
| |
| | |
| ForwardCapacity Market (FCM) Settlement. in New England On January 31, 2006, certain interested market'participants in New England agreed to a'settlement in principle of litigation' regarding the design of the region's market for installed capacity, .which would institute a transitiori peri6d leading io' the implementation of a new market :design for capacity as early as 2010.
| |
| Commencing in December 2006, allfgenerators in New, England began receiving fixed capacity Payments that escalate gradually over the transition period. RMR contracts, such as Power's, would continue to be effective until the implementation of the new market design. The new market design is expected to consist of a forward auction for installed capacity that is intended to recognize the locational value of generators.qi o the system, and is expected to contain incentive mechanisms to encourage generator availability during gene'ration '.shortages.' During the transition, period, these payments are expected, to benefit Po'wer's Bridgeport Hartlor 2'piant. The'fin'al version of, the settlement was filed with FERC on March [6, 2006 and was approed b6' order dated June 16, 2006 finding that, as a package, the settlement represents a just Iand ieasonable outcome. Thie settlement was contested by certain parties and a rehearing was sought of the June 16,-2006 order. On October 31, 2006, FERC denied rehearing and accepted the'FCM' settlement in A final order; the 'order, however, remains subject to judicial challenge.
| |
| Transmission Infrastructure PSEG, PSE&G, and Power RTEP On September:.8, 2006, PJM filed with FERC a proposal 'that would sigpificantly modify its regional transmission planning process for economic transmission .planning.. Currently, the PJM. RTEP identifies transmission that is needed to .address reliability, operational performance and economic needs of the PJM region based on~historic congestion. The PJM proposal sought to expand the economic portion of the RTEP by forecasting,economic congestion over its transmission planning horizon, which, in 2006, PJM modified from five .to 15 years. PSE&G and Power filed a.protest to the PJM proposal.requesting that FERC reject PJM,'s proposal or set it for hearing. On November 21, 2006, FERC issued an order conditionally accepting PJM's proposed changes to. the RTEP for economic transmission planning. FERC .directed PJM.to make certain modifications to its proposal, including requiring PJM to make a compliance filing within 120 days identifying how it will weigh and/or combine the metrics it proposes for determining the net benefits of a particular project and to. make a compliance filing within 90 days elaborating on the criteria it will use to determine if an alternative project is more "economic" than an RTEP project. Nonetheless, PJM's changes to its economic transmission planning process may result in the establishment of a preference for rate-based transmission solutions to addr.ess congestion, as opposed to reliance on private investment and competitive non-transmission market, solutions. PSE&G and Power filed for rehearing of the 'November 21, 2006 FERC order on December 21, 2006. FERC has 'not yet issued an order on rehearing. PSEG, PSE&G and Power are unable to predict the final outcome of this proceeding.
| |
| DOE Congestion Study * ,
| |
| On August -8, 2006, the DOE issued a National Electric Transmission' Congestion Study, (Congestion Study), as ?directed by. Congress in the EP. Act. This" Congestion Study identified two, areas in -the' U.S. as 5'critical congestion areas;" one of the areas -is the region between New York and Washington, D.C. Under the EP Act, the' DOE has the ability to designate transmission corridors in these "critical congestion areas,"
| |
| to. which FERC back-stop transmission siting authority will attach. Thus, corridor designation may facilitate the construction of rate-based transmission projects- to address congestion ifl these corridors.. The DOE' has not yet designated. any. transmission corridors as a result Of this Congestion Study, but will likely do so in the first quarter of 2007. PSE&G and Power filed comments to the. Congestion Study, in which they contended that the Congestion Study contained several analytical flaws. PSEG, PSE&G and Power are unable to predict the outcome of this proceeding at this time.
| |
| LD.V Complaint Proceeding On December 30,,2004, Jersey. Central Power & Light Company (JCP&L) filed a complaint, at FERC against the other. four signatories, including PSE&G, to the Lower Delaware Valley (LDV) 'Transmission System Agreement, which expires in 2027 and governs the construction of, and investment: in,'certain 500 kV transmission facilities in New Jersey. In the complaint proceeding, JCP&L seeks to terminate its payment obligations to the other contract signatories. A hearing was conducted in this proceeding in.November'2006 19
| |
| | |
| and an initial decision is expected by the ALJ-in March 2007. In this, litigation, JCP&L is-not only seeking to terminate its payment obligations to PSE&G of approximately $3 million per year through 2027, but also to receive credit from PSE&G and the. other LDV Agreement parties for transmission facilities' previously constructed by JCP&L in New Jersey; if the ALJ were to accept all of JCP&L's. crediting'argumerits,, ,an outcome that is unlikely, PSE&G would owe approximately $5 million to JCP&L under the LDV Agreement. PSE&G cannot predict the outcome of this proceeding at this time.
| |
| PJM Strategic Initiative .
| |
| In the'foufth quarter of 2006, PJM launched a "strategic initiative" to more specifically define itsirole in the evolving wholesale energy markets. As part of this initiatiIve, PJM sought commenits from its members, including PSEG, on a number of items, including whether PJM should consider splittingits wholesale market operations from its transmission grid operations and whether' PJM should consider changes to its current corporate governance structure. PJM has since. pulled back from its idea of'splitting market and grid operations bui continues to consider whether there 'is a "need to modify aspects of its current market and governance structure. PSEG will continue to actively participate in these discussions.
| |
| NRC PSEG and Power Nuclear's operation of nuclear generating:facilities is subject to continuous.regulation-by the NRC, a federal agency established to regulate nuclear activities to ensure protection of public health and safety, as well as the security and protection of the environment. Such regulation involves testing, evaluation and modification of all aspects' of plant operation in light of NRC safety and environmental requirements.
| |
| Continuous demonstration to the NRC that plant operations meet requirements is als6 necessary. The NRC has the ultimate. authority to determine whether any nuclear generating unit may'operate. Power has recently commenced the process to extend the operating licenses for the Salem and Hope Creek 'facilities. The current operating licenses ofý Power's nuclear facilities expire in'the years shown below:'
| |
| Facility Year
| |
| -.Salem 1..... . ........................ ..... .. ........... 2016
| |
| -Salem 2 ........................... . ........ ........... 2020 Hope Creek ................ ......... :............ 2026 Peach Bottom 2. ..... ......... 2033 Peach Bottom 3........ ............. ............. 2034 Nuclear Safety Issues In January 2004, the NRC issued a letter requesting Power to conduct a review of its Salem and Hope Creek nuclear generation facilities to assess the workplace environment-for raising and addressing safety issues. Power responded to; the letter in February 2004 and had independent 'assessments: of the work environment -at both facilities performed which concluded that Salem and Hope Creek were safe for continued operations, but also identified issues that needed to be addressed. These facilities were under enhancedoversight by the NRC related to the work environment until August 31, 2006, at which time the NRC provided a letter informing Power that its mid-cycle performance review had concluded that the substantive cross cutting issue in the safety-conscious work environment area at Salem and Hope Creek was closed: The NRC has restored Salem and Hope Creek to normal oversight levels.
| |
| Recirculation Pump "
| |
| In a letter to the NRC dated January 9, 2005, Power committed -to iristall vibmation-mbnitoring equipment, on Hope Creek's "B" Reactor Recirculation Pump prior to the unit's return to service to address pump vibration concerns and replace the pump's-shaft during the next refueling outage or any sooner outage of sufficient duration. This commitment was the subject of a January 11, 2005.Confirmatory Action Letter from the NRC. The shaft was replaced during the Hope Creek outage in April 2006. On April 20, 2006, the NRC issued a Closure of Confirmatory-Action Letter indicating that all of the commitments were completed.
| |
| 20
| |
| | |
| Other.
| |
| PSE&G
| |
| " Investment.Tax'Credits (ITC).
| |
| As of June 1999, the Internal Revenue Service. (IRS) had issued several lprivate etter rulings (PLRs) that concluded that the refunding of excess deferred tax and ITC balances to utility, customers was. permitted only. ov.er the related assets' regulatory lives, Which were terminated upon New Jersey's electric industry deregulation. Based on this fact, PSEG and PSE&G reversed the deferred tax. and ITC liability .relating to PSE&G's generation assets that were transferred to Power,"and recorded a, $235 million reduction of the extraordinary charge in 1999 due to the restructuring of the utility -industry in New Jersey. PSE&Gw,,as directed bythe BPU to seek a PLR from the IRS to determine if the ITC included in the impairment write-down of generation assets, could be credited to customers, without violating the tax normalization rules of the Internal Revenue Code. PSE&G filed a PLR request with the. IRS in 2002.
| |
| On December 21, 2005, the U.S. Department of the 'Treasury (Tieasury) proposed new reguiatibns for comment 'addressing the normalization of ITC', replacing regulations originally proposed in 2003. The ýnew proposed -regulations, if finalized, would "not permit 'retroactive- application.. Accordingly, the IRS's conclusions in the above referenced PLRs would continue io'remain in effect for all industry deregulations prior to December 21, '2005.
| |
| On April 26, 2006, the BPU issued an order to PSE&G reyoking its previous instruction and'directin*
| |
| PSE&G to withdraw its request for a PLR by April 27,20061 The BPU asserted that the Treasury's proposed regulation project was the more appropriate authority to rely upon in deciding the ITC issue. 'i.
| |
| 'On MayI','2006,'PSE&G filed: a motion for reconsideration with the'BPU requesting that, it modify'its April 26,.2006 order to PSE&G to withdraw the PLR request. On May 5; 2006,-the BPU deniedPSE&G's motion for reconsideration 'and reiterated its order to withdraw' the PLR -request. On May 8,-2006, ESE&G filed a petition with the Appellate Court of New'Jersey challenging the BPU's order-to withdraw the PLR:
| |
| On May 11, 2006, the IRS issued a.PLR to PSE&G. The PLR conclided that none of the generation ITC could be passed to utility customers without violating.. the 'normalization rules. While the holding in~the PLR is a favorable development for PSE&G, the outstanding Treasury regulation. project could overturn..the holding in the PLR if the Treasury we're to alter,. the position set out' in the December 21, 2005 proposed regulations. The issue cannotbe fully resolved until the final Treasury regulations are: issued.
| |
| 'On May 16, 2006, the 'BPU voted in' favor of a special investig.ation and heatiing' efore the&.BPU
| |
| .concerninm PSE&G's actions leading up to receiving the PLR, specifically its failure to abide by the'BPU order to withdraw the request. An order detailing such .special investigation has n6t yet been issued find 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.
| |
| State Regulation ' ' ',.' ','
| |
| PSEG, PSE&G, Power and Energy Holdings "
| |
| The BPU is the' regulatory huthority that oVersees electric'and natural gas distribution cbmpanies in N6W Jersey. PSE&G is subject'to comprehensive regulation by the BPU including, among other matters, regulation of retail electric and gas distribution rates and service, and'.the'-issuance and sale of securities.
| |
| Power's partial ownership of generating facilities in Pennsylvania, as well as PSE&G's ownership of certain transmission. facilities in Pennsylvania, are subject 'to .regulation by the,. Pennsylvania-. Public., Utility Commission (PAPUC), Which oversees retail' electric and natural gas service: in Pennsylvania.. PSE&G and Power are also subject 'to'rules and regulations of the NJDEP and the New- Jersey! Department of Transportation (NJDOT). * '.
| |
| AAs discussed below; various Power- subsidiaries' and Energy Holdings' subsidiaries are subject .to some state regulation' in other individual' states where they operate facilities, including New York; Connecticut, Indiana, Texas, California,' Hawaii and New Hampshire. " ... '
| |
| 21
| |
| | |
| PUHCA Repeal On August 1, 2005, the BPU initiated a proceeding to consider whether additional ratepayer protections were necessary in light of the, repeal of PUHCA by the EP Act. The proceeding considered the BPU's current authority to protect utility ratepayers from risks associated with a utility being part, of a holding company structure. The BPU determined that additional protections were necessary and commenced a two phase rulemakinfg to address its view' 'of ` otential risks Associated with a utility being part. of 'a holding company-structure. Phase 'I of the rnilefi aking effort resulted in, the adoption 'of new regulations effective
| |
| ,October 2, 2006, addressing'the diversification activities of New Jersey utilities and their holding companies.
| |
| These new rules impose. a.req'iiremenft-that each New Jersey public 6tility and its holding company ensure tfiat'fhe aggregate assets of all nonutility activities in the holding. company system do not exceed a defined percentage (25%) of the aggregate a's'sets of the utility and utility-related assets in the 'holding' company system without -BPU consent. The rules broadly define utility-related activities to include suchWthings As the production, gener:ation, transmifting, delivering, storing, selling, marketing of natural gas, propane, electricity and other fuels to wholesale or retail customers, energy management services and sale of energy appliances.
| |
| Both PSE&G and PSEG currently satisfy these requirements and expect-to continue to satisfy them based on the companies' current business plans. However, constant monitoring will be required to..ensure that the regulation is satisfied and to meet ,the annual certification process. The BPU if currently developing Phase II of the rulemaking in a stakeholder 'process:, In Phase II, the BPU is, proposing new,. regulations that would increase the BPU's access to books and records, impose restrictions on service agreements between utilities and their affiliated service' companies. and impose, additional requirements' on utility board of director composition, utility participation in miney pools and additional reporting obligations..
| |
| New Jersey Energy Master Plan ' . -
| |
| " The' Governor.of New Jersey has recently directed the BPU, in partnership with other' New Jersey agencies, to develop an energy'master 'Plan. State-law'in New Jersey requires that' an energy 'master plan be developed every three years, the 'purpose of -which is- to ensure safe, secure 'and reasonably-priced energy supply, foster economic .growth and development and protectthe environment. In the Governors directive' regarding -the energy master plan, the Governor established three specific goals: (1) red uce the State's projected. energy use by.20%, by the 'year 2020: (2) supply 20% of the State's. electricity needs with certain renewable 'energy sources' by.2020; and (3) emphasize energy efficiency; conservation and renewable energy resources to meet future increases in New Jersey electric demand' without increasing New Jergey's reliance.on non-renewable resources. -In November, PSEG submitted a.. nfumber' of strategies designed to improve efficiencies in customer use and increase the level, of renewable generation. During January and/February 2007, PSEG has been actively involved in'the broad-based constituent working groups' created to -develop specific strategies to achieve the goals and objectives. Public, meetings 'dn. the energy master plan are expected take place during the first and second quaIrters of'2007, and a final plan 'is expected to.be complefed byOctober 2007. The outcome of this proceeding and its impact on PSEG, PSE&G and Powker cannot be predicted'at this time. .
| |
| PSE&G and Power BGS Auctions All of New Jersey's EDCs jointly procure the supply to meet their BGS obligations through two concurrent auctions authorized by the BPU for New Jersey's total BGS requirement. Results of these auctions determine which energy suppliers are autfiorized:*to'.supply BGS to' New Jersey's EDCs: Certain conditions are required to participate in these auctions. Energy suppliers.must agree to execute the BGS Master Service Agreement, provide required security.within three days of'BPU certification of auction results.and satisfy certain creditworthiness requirements.
| |
| In 2006, the BPU initiated a proceeding to'review the-annual BGS procurement process 'as'well as the policy 'issues thereto for all .of the New Jersey. EDCs. In June 2006, the BPU ruled on certain issues regarding the acquisition of BGS for the period beginning in 'June 2007,. The BPU agreed that a descending clock auction format should be used for the procurement of BGS-FP supply for 2007.
| |
| On July 10, 2006, PSE&G filed the Joint EDC proposal for the procurement' of BGS 'for the period beginning June 1, 2007..This proposal includes' a descending clock auction format to be. held'in February 2007 for the procurement of all,.BGS supply. On October 28, 2006, the BPU -approved a descending clock auction format for BGS-FP and BGS-CIEP supply for the period'beginning June 1.,2007.1 On December.22" 2006, the 22
| |
| | |
| B.PU. approved the remainder of the items in the EDCs filing, without material changes. The BPU also directed theEDCs to remit all remaining.retail margin monies previously collected from larger customers to the State Treasurer in January 2007, and to remit any.future collections of the retail -margin to the State Treasurer on a quarterly basis. In 2003, the BPU directed the EDCs to collect a 0.5 per kWh retail adder from all BGS customers greater than 750 kW. These monies were held in a regulatory liability account. For additional information see Note 5 Regulatory Matters and.Note 12. Commitments and Contingent Liabilities of the 'Notes.
| |
| PSE&G Electric.Distribution FinancialReview Based on the Electric Base Rate' Case approved in July 2003, PSE&G recorded 'a regulatory liability in the second quarter of 2003 by reducing its depreciation reserve for its electric distribution assets by $155 million and amortized this liability from August 1, 2003 through December 31, 2005. The $64 million annual amortization of this liability resulted in a reduction of Depreciation and Amortization expense. PSE&G filed for a $64 million (based on 2003 test year sales volumpes) annual increase in electric distribution, rates effecti.ve January 1, 2006, subject, to BPU approval, including a review of PSE&G's earnings and other relevant financial information. Baised on current sales volumes, the amount. approximates $69 million.
| |
| On November 9, 2006, the BPU approved a settlement agreement reached by the parties to the
| |
| . proceeding authorizing a $22 million reduction to electric distribution rates, resulting in additional revenue to PSE&G of approximately $47 million annually based on current sales volumes.
| |
| The settlement includes a restriction against .any .further base rate changes becoming effective before November.15, 2009.. In addition, PSE&G must file a joint electric and gas petition for any future base rate increases.
| |
| BGSS Filings The parties to the 2005/2006 BGSS proceeding entered into a Stipulation in which the parties agreed that the BGSS Commodity Charge increases of September 1, 2005 and December 15, 2005 that were previously approved by the BPU on a provisional basis should become final. The BPU. approved the Stipulation. In addition, all the remaining gas contract issues were also resolved and an amended Gas Requirements Contract was attached td'the Stipulation and also approved by the'BPU. The primary changes were the term was extended by five years and the default provision was changed from three days to one day.
| |
| PSE&G made its 2006/2007 BGSS filing on May 26, 2006. In this filing, PSE&G requested a reduction in annual BGSS gas revenues~of approximately $19.7 million (excluding losses. and New Jersey Sales and Use Tax) or approximately a 1.0% decrease to be implemented for service rendered on and after October 1, 2006 or earlier. Additionally, PSE&G requested an increase in its Balancing Charge. The combined impact of both changes for the class average residential heating customer is an increase in the winter monthly bills of approximately 0.1%; however, on an annual basis the impact is a decrease of approximately 0.2%.
| |
| The parties entered into a Stipulation to make the filed BGSS rate effective October 1, 2006 on a provisional basis. However, since the time of the filing, prices of gas futures have dropped significantly and as a result, additional BGSS data has been requested by and'provided to the BPU. Settlement discusgions with the BPU Staff were completed and a new Stipulation, dated October 27, 2006, was executed by the parties.
| |
| This*new 'Stipulation was approved by the BPU and results in a decrease in annual BGSS revenues of approximately. $120 million, which is approximately a 6% reduction in a typical residential gas customer's bill. The new BGSS rate becam6 effective on November 9, 2006. The Stipulation did not include any change in the Balancing Charge.
| |
| 'The parties entered into a second, Stipulation, which addresses the Balancing Charge only. The BPU Staff recommended a lower Balancing Charge than proposed by the Company and received agreement from Rate Counsel. The parties executed the Stipulation for the lower rate and BPU approval was received on January 17, 2007.
| |
| Remediation Adjustment Clause (RAC) Filing PSE&G is engaged in a program to address potential environmental concerns regarding its former Manufactured Gas Plant (MGP) properties in cooperation with and under the supervision of NJDEP. The 23
| |
| | |
| costs of the program are recovered through the Remediation Adjustment Clause (RAC). The RAC addresses costs in annual periods ending July 31st of each year. The expenditures in each RAC period are recovered over seven years. 'The costs of the program, including interest, are deferred and amortized as collected in revenues. .
| |
| On December 5, 2005 the BPU approved for recovery $18 million for the RAC-12 remediation expenditures incurred from August 1, 2003'through July 31, 2004. No change in the RAC recoveryfactor was required.
| |
| In February 2007, PSE&G submitted its RAC-13 and RAC-14 filings' with the BPU. In these filings, PSE&G seeks an order finding that the $71 million of RAC program costs incurred during the two-year period, August 1, 2004 through July 31, 2006, are reasonable and are available.for recovery. PSE&G proposes that the current gas and electric RAC rates be reduced by approximately $18 million annually, effective July 1," 2007.
| |
| *Gas Base Rate Case On September 30, 2005, PSE&G filed a petition with the BPU seeking 'an overall 378% increase in 'ifs gas base rates to cover the cost of gas delivery to be effective June 30, 2006. Approximately $55 million of the $133 million requesi was for an increase in book depreciation rates.
| |
| 'On November 9, 2006, the BPU approved a settlement agreement. reached by the parties :to the proceeding: The agreement provides for an annual increase in gas revenues of $40 million or approximately" 1.1%. In addition, the settlement provides for an adjustment to lower book depreciation and' amortization expense for PSE&G -by approximately $26 million annually and the amortization of. accumulated cost of removal that will further reduce depreciation and amortization expense by $13 million annually for five years.
| |
| The settlement includes a restriction against any further base rate changes becoming effective before November 15, 2009. In addition, PSE&G must file a joint electric and.gas petition for any future base rate increases.
| |
| Societal Benefits Clause (SBC) Filing On August 12, 2005, PSE&G filed a motion with the BPU seeking approval of changes in its electric and gas SBC rates and its electric non-utility generation transition charge (NTC) rates. For electric customers, the rates proposed were designed to recover approximately $106 million in SBC revenues offset by lower NTC rates of $93 million beginning January 1,- 2006. For gas, the rates proposed were designed to recover approximately $10- million in SBC revenues. In 2006, 'PSE&G filed updates to its filing, modifying its requested changes to electric SBC/NTC rates and gas SBC rates. Public hearings'were held and settlement discussions began on outstanding issues.-On January 19, 2007, settlement documents were filed with the ALJ, which upon approval, would result in an annual increase of approximately $16 million in electric SBC/NTC revenues and $12 million in gas SBC revenues. "
| |
| 'DeferralAudit
| |
| .The BPU Energy and Audit Division conducts audits of deferred balances. *A draft Deferral Audit-Phase II report relating to the 12-month period ended JulIy 31, 2003 was released by the consultant to the BPU in April 2005. The draft report addressed the SBC, Market Transition Charge (MTC),and Non-Utility Generation (NUG) deferred balances. 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. For additional information regarding PSE&G's Deferral Audit, see Note 12. Commitments and Contingent Liabilities*'of the Notes.
| |
| Gas PurchasingStrategies Audit In January 2007, the BPU has issued an RFP to solicit bid proposals to engage a'contractor to perform an analysis of 'the gas purchasing practices and hedging strategies of the four New Jersey gas distribution companies (GDC's), including PSE&G. The primary focus will be to examine and compare the financial anid 24
| |
| | |
| physical hedging policies and practices of each GDC, and to provide recommendations for improvements to these policies and practices. PSE&G cannot predict the.outcome of this process.
| |
| New Jersey Clean Energy Program In December 2004, the BPU has approved a funding requirement for each New Jersey utility applicable to Renewable Energy and Energy Efficiency programs for the years 2005 through 2008. The State of New Jersey has awarded contracts' to two market managers, TRC Energy Services and Honeywell Utility Solutions to take over program management functions from ihe'utilities. This transition isnow expected to take place in the first half of 2007. For additional information regarding PSE&G's Clean Energy Program, see Note 12.
| |
| Commitments and Contingent Liabilities of the Notes.
| |
| Power Connecticut Legislation has 'been introduced in the Connecticut General Assembly 'that would impose. a tax' on electric generators of 50% on earnings above a 20% return on equity. Proceeds from this proposed "Windfall profits tax'. would be used to provide consumer rate relief. Legislation also has been introduced that would allow the state's electric utility companies to build 'and place into rate base up to 300 megawatts of peaking electric generation'.
| |
| Neither PSEG nor Power is able to predict whether any of such proposals will be enacted into law or their, impact, if any,.or whether similar initiatives may be considered in other jurisdictions.
| |
| Connecticut Department of Public Utility Control (DPUC)
| |
| To reduce the impact.,of federally-mandated congestion charges on Connecticut ratepayers, Connecticut has launched a procurement -process to facilitate :the development of incremental generation capacity, as authorized by legislation which permits the DPUC to establish a competitive procurement process intended to encourage new supply-side and demand-side resources. Specifically, the DPUC is required.to develop and issue a request for proposals (RFP) to solicit the development of long-term projects, with local distribution companies serving as the counterparties to these contracts. The impact of this RFP process on Power Confnecticut's agsets is unclear at the present time.
| |
| Energy Holdings Texas Global's generation business in Texas (TIE) is a merchant generation business that participates, through its subsidiaries,' Odessa-Ector Power Partners, -L.P. (Odessa) and Guadalupe Power, Partners, LP (Guadalupe), in the Texas wholesale energy market administered by ERCOT. Underthe regulation of the Public Utility Commission Of Texas, ERCOT performs three main roles in managing the electric power grid and marketplace: ensuring that the grid can accommodate scheduled energy transfers, ensuring grid reliability, and overseeing retail transactions. While neither TIE, Odessa nor Guadalupe are public utilities subject to the jurisdiction of FERC, they are subject to FERC jurisdiction for purposes of complying with NERC's Reliability Standards (see discussion in Federal Regulation-Compliance--Reliability Standards).
| |
| Like other energy markets, energy prices in' ERCOT have risen over the past few years due, in large measure, to higher fuel costs. In an attempt to lower electricity prices, the legislature in Texas is. currently examining proposals, for draft legislation that could affect the Texas market. PSEG does not know at this time if a'ny legislation will ultimately pass, or if it does, what its effect will be on Global's generation business in Texas.
| |
| International Regulation Energy Holdings Global Global's electric distribution facilities in South America are rate-regulated enterprises. Rates charged to customers are established by government authorities and are viewed by Global as currently sufficient to 25
| |
| | |
| cover operating costs and provide a return on its investments. Global can give no assurances that future rates will be established at levels sufficient to cover.such costs;.provide a return, on its investments or generate adequate cash flow to pay principal and interest on its debt or to enable it to comply with the terms of its debt agreements.
| |
| Chile , "' .
| |
| Distribution companies in Chile, including. Chilquinta -Energia S.A. (Chilquinta) and associated companies, Sociedad Austral de Electricidad S.A. (SAESA) and other membersof the.SAESA Group, are subject to rate regulation by. the Comision Nacional . de Energia (CNE), a national governmental regulatory authority. The Chilean regulatory framework .has been in existence since.1982, with rates set every four years based on a model company for each typical concession area. The tariff which, distribution companies charge to regulated customers consists of two components: the actual cost of energy purchased and an additional amount to compensate for the value added in distribution (DVA tariff). The DVA tariff considers allowed losses incurred in the distribution of electricity, administrative costs of providing .service to customers, costs of maintaining and operating the distribution systems and, an annual return on investment between 6% to 14% over inflation applied to the replacement cost of distribution a's'sets. Changes in electricity distribution companies' cost of 'energy are passed through to 'ustdmefs, with no impa ct 'on t he distributors' margins (equal to 'the, D'A tariff). Therefore,. distributors, including members of the SAESA Group and Chilquinta, should not' be affected by changes'in thie generation sector which affect prices..The most recent tariff adjustments for members of the SAESA Group and Chilquinta occurred in"2004 and have been reviewed and'approved by the CNE. ' ' .- ..
| |
| In addition, the first auction for long-term supply contracts for Chilean distribution companies was simultaneously conducted during 2006. SAESA and Chilquinta were, successful in contracting for approximately 2,900 Gwh/yr and 800 Gwh/yr respectively from various generaiion co .'ipanies to' supply their regulated cus'tomers needs starting in. 2010 and continuing through 2020 and .2025 for SAESA and Chilquinta, respectively. A second auction process for additional needs for Chilquinta, (approximately 1,800 Gwh/year) will be held during 2007. '-
| |
| Peru .
| |
| Distribution 6ompanies in Peru, including Luz del Sur S.A.A. (LDS), are subject to tariff regulation by the Organismo Supervisor de la Inversion en Energia, a national governmental regulatory authority. The Peruvian regulatory framework has been in existence since 1992, with tariffs set ,every four years based on a model company. The tariff which distribution companies charge to regulated customers 'consists of two components: the actual cost of energy purchased plus an additional amount to compensate for the .DVA tariff. The DVA tariff considers allowed losses incurred in the distribution of electricity, administrative costs of providing service to customers, costs of maintaining and 'perating the distribuion' syst"ms and an.annual return on investment of 8'% to '16% over 'ihflation, based on- the replacement cost of: distribution' 'assets.
| |
| Changes in electricity distribution c6mpaniesý cost 0f energy are passed through to 'customdrs,:with no impact on the distributors' margins (equal to'the DVA tariff). Therefore, distributors, including LDS, should riot be affected'by lchange*'in the generation" seIctor, which: affect prices. The most redent' tariff adjustments for LDS occuri'ed'in connection with the 2005 tariff-setting process. Ne~v tariffs were effectiVe 'as of November 1, 2005.
| |
| In addition, in accordance with local regulations,' an auction was conducted 'at the end of December 2006 for prospective energy supply requirements for LDS. The total amount bid by Peruvian.power producers was 650 MW of capacity. This supply combined with the contracts still in force are"expected to be suffi'cien~t to meet LDS's energy supply needs for 2007. in 'order to secure the grow.ing stpply needs'for 2008 and beyond, management plans to conduct additional energy supply auctions, as necessary,. during'2007. Management is concurrently exploring the feasibility of other -forms of bilateral supply 'contracts, as well as advocating the extension of a law beyond December 2007, which currently allows LDS and other distribution companies without supply contracts, to draw energy from the grid, as required, at regulated prices to satisfy the regulated market's demand.
| |
| SEGMENT INFORMATION Financial information with respect to the 'business segments of' PSEG, PSE&G, 'Power and Energy Holdings is set forth in Note 18. Financial Information by Business, Segment of the Notes.
| |
| 26
| |
| | |
| ENVIRONMENTAL MATTERS PSEG, PSE&G, Power and Energy Holdings Federal, regional, state and local authorities regulate the environmental impacts of PSEG's operations within the U.S. Laws and regulations particular to the region, country or locality where PSEG's operations are located..govern the environmental impacts associated with its foreign operations. For both domestic, and foreign operations, areas of regulation may include air quality, water quality, site remediation, land use, waste. disposal, aesthetics, impact on global climate and, other matters.
| |
| To the extent that environmental requirements are more stringent and compliance more costly.in certain states where PSEG operates compared to other states that are part of the same market, such rules may impact its ability to compete within that market. Due to evolving environmental regulations, it is difficult to project expected costs of compliance and its impact on competition. For additional information related to environmental matters, see Item 3. Legal Proceedings. .
| |
| PSEG, Power and Energy Holdings Air Pollution Control " .
| |
| The Federal Clean, Air' Act (CAA) and'its implementing regulations reqftire controls of emissions from sources of air pollution and also impose record keeping; reporting and permit requirements. Facilities in'the U.S. that Power and "Energy? Holdings operate'or in 'which thei have an ownership interest are subject to these Federal requirements, as well as requirements established under slate And local 'air pollution laws applicable where those facilities are located. 'Capital costs Of complying with' air pollution control requirements through 2010 are included in Power's- estimate of construction expenditures in Item 7.
| |
| .MD&A-Capital Requirements.
| |
| Prevention of Significant Deterioration (PSD)INew 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 coa1-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. Undei 'that agreement, over the course of 10 years, Power agreed to install advanced air pollution controls to reduce emissions of Sulfur Dioxide (S02),
| |
| 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 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, 200.6, Power, reached an, agreement with the EPA and NJDEP on an amendment to its 2002 agreement intended to achieve the 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 will allow 'Power to continue operating Hudson and extend for four .'ear's 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,: and carbon injection), plant modifications, and operating procedure changes at Hudson and Mercer designed to meet targeted reductions in emissions of NOx, S02, particulate matter, and mercury.
| |
| 27
| |
| | |
| In addition, Power has agreed to notify the EPA and NJDEP by the endl of 2007. whether it lWill 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 Selective' CatalyticR.eduction Systems (SCRs) at Mercer at a cost of approximately $113 million: The cost of: implrmenting the balance of theamended agreement at.
| |
| Mercer and' Hudson is 'estimated at $400' million to $500 million for Mercer and- at $600 million to $750 million fdr Hudson and will -be incurred in the 2007-2010 timeframe. As part of the agreement,'Fossil has agreed to pur~hase and 'retire emissions allowances, 'contribute apprdximately $3 million for programs to reduce particulate emissions from diesel engirnes in*New Jersey, and pay a $6 million civil penalty.
| |
| - S0 2 /NO.
| |
| To reduce emissions .of S02 for acid rain prevention, the CAA sets a cap on total S02 emissions from affected units and allocates S02 allowances (each allowance authorizes the emission of one ton of S02) to those units. Generation units with emissions greater than their allocations can obtain allowances from sources that have excess allowances. At this time, Power does not expect to incur material expenditures to continue complying with the acid rain S02 emissions program.
| |
| The EPA has issued regulations (commonly known as the NOx State Implementation Plan (SIP.) Call) requiring 19 states in the eastern half of the .U.S. and, the District of Colombia to reduce and cap NOx emissions from power plant and industrial s6urces. The NOx reduction requirements are consistent with requirements already in place in New Jersey, New York, Connecticut and.Pennsylvania, and.therefore have not had an additional impact on. the capacity available from Power's facilities in those states. Power has been implementing measures to reduce NOx emissions at several of its units (including the installation of sele~ctive catalytic reduction systems .at the Mercer Generating Station), which has reduced the impact of any further increases to the costs of allowances.
| |
| In 1997,' the EPA adopted a new air quality standard for fine particulate matter and a revised air quality standard for ozone. In 2004, the. EPA identified and designated areas of the U.S..that fail to meet the revised federal health standard for ozone or the new federal health standard for fine particulates. States are expected to develop regulatory 'measures necessary to achieve and maintain the health standards, which' may'require reductions in NOX and S02 emissions. Additional NOx'and SO2 reductions 'alsd may be required to-satisfy requirements Of an EPA rule protecting: visibility "in 'many of the, nation's:Class 1 (pristine) environmental areas. Most of' Power's fossil facilities would be' affected by this initiative. -
| |
| In May 2005, the EPAI published the final Clean. Air Interstate Rule (CAIR) .that identifies 28 states and the District of Columbia as contributing significantly to the levels of fine particulates and/or eight-hour ozone in downwind'states. New Jersey, New York, Pen*Asylvahia; Indiana, Texas and Connecticuti are among the states the'EPA' lists in the CAIR. 'Based on. state 'obligations to address int'erstate transport of pollutants under the CAA, the EPA has proposed a tv'6-phased emission reducti6n progriam ' fr NOx and S02, with PhAiSe 1 beginning'in 2009 (NOx) and 2010 ($02) and Phase 2 beginning'in 2015. Th.e'EPA is recommendifng that. the program be' implemented -through a cap-and-trade program, although sta'tes' are:"hot required to proceed in this manner. '. ' ' " ' ' '
| |
| In. December 2005, the EPA. proposed new, National- Ambient Air Quality .Standards for .particulate m atter. . ,.* . .. ,,. , . ..
| |
| Power is unable to determine whether any costs it may incur to comply with the-.above standards would be material. , *. " "
| |
| %Carbon Dioxide (C0 2) Emissions "'
| |
| Several states, primariiy 'in' thC'Northeastern U.S., are devel6pifig state-specific' or' iegional legislative
| |
| -initiatives to stimulate CO2 'emissions reductions in the' electric power industry. New York 'initiated the
| |
| 'Regional' Greenhouse' Gas Initiative' (RGGI) 'in. April 2003. Currently', in the RGGI, Sgven Northeastern states have signed a memoranduim'of understanding (MOU) intended to cap and reduce CO 2 emissions from the electric power sector in the RGGI region. A final model rule was issued on 'August 15, 2006 that iicltides MOU commitments 'and makes recommendationts for states to, move forward: The model rule. contemplates the creation of 'a CO 2 allowance allocation iand, auction whereby CO 2 generators in the. electric power industry would be expected to acquire through allocation, or.,purchase through an auction, CO 2 Ilowances in an amount corresponding to each facility's 'emissions. Facilities with an insufficient number. of allowances would-be required to purchase .additional allowances. New; York has publicly announced its intent to subject 28
| |
| | |
| 100% of the allowances to auction, and other states, including New Jersey, may do the same. States are expected-to enact legislation and/or regulation representing, at least; the minimum requirements stipulated in the MOU. The RGGI program is scheduled to start.in 2009. The NJDEP* in 2005 finalized amendments-to its regulations governing air pollution control,.that would designate CO 2 as .an air contaminant subject to regulation. In February 2007, the Governor of New Jersey issued an-executive order committing the State to reduce emissions of greenhouse gasses 20% by 2020 and 80% by 2050. The outcome of this initiative cannot be determined at this time; however, adoption of stringent CO 2 emissions reduction requirements in the Northeast, including the allocation of allowances to PSEG's facilities and the prices of allowances available through auction, could. materially impact Power's operation of its fossil fuel-'fired electric generating units.
| |
| Other Air Pollutants , ..
| |
| In March 2005, the EPA promulgated two rules: one revising its December 2000 determination that Hazardous Air Pollutants from coal-fired and'-oil-fire'd Electric Generating, Units (EGUs) should be regulated Under section 112 of *the CAA and, on that -basis, removing those units from the section 112(0) source category list (known as the delisting rule); the second- establishifhg a Newv Source Performiance Standard limit for nickel emissions from oil-fired EGUs, and a cap-and-trade program'f6r mercury-emissions from coal-fired EGUs, with a first phase cap of-38tons per year (tpy)'in 2010 and a second phase cap of 15 tpy in 2018 (the 'cap-and-trade rule'). The EPA determined -that it would not regulate other emissions'from coal-fired and oil-fired EGUs. - ... . - ..-
| |
| A number of environmental and medical groups, the city of Baltimore and a total of 16 states*(all six New England states, New Jersey, California, Delaware, Illinois, New Mexico, New York, Minnesota, Pennsylvania, Michigan and Wisconsin) have sued the EPA challenging that the rules should be more restrictive. The environmental petitioners, but not the states, also sought a stay of the rules from both the agency and the court, but the request was denied. The outcome of these litigations cannot be determined at this tim e.- ........
| |
| New Jersey and Connecticut have adopted standards for the reduction of emissions of mercury from coal-fired electric generating units. The Connecticut legislation requires coal-fired power plants in Connecticut to achieve either an emissions limit or a 90% mercury removal efficiency through technology installed to control mercury emissions effective in July 2008. The regulations in New Jersey require coal-fired electric generating units in New Jersey. to meet 'certain "emission limits- or reduce emissions by ;90% by December 15, 2007. Companies that are parties to- multi-pollutant reduction agreements are'pei-mitted to postpone such reductions on half of- their coal-fired electric generating capacity- until 'December 15, 2012t Power has a multi-pollutant reduction agreement with the. NJDEP as a -result of a consent-decree .that resolved issues arising out of the PSD and NSR air pollutioncontrol programs at the.Hudson, Mercerand Bergen; facilities. Substantial uncertainty- exists regarding the feasibility of achieving the reductions-,in mercury emissions required by the New Jersey regulations and Connecticut statute; however, the estimated costs of technology believed to be capable of meeting these emissions limits- at- Power's coal-fired unit in Connecticut by July 2008 and at its-Mercer Station by December-15, 2007 are included in Power's 'capital expenditure forecast. , - * .
| |
| Water Pollution Control..-
| |
| The Federal Water Pollution Control Act (FWPCA) prohibi-ts the discharge..of poliutants to waters of the U.S. from point sources, except pursuant to a National Pollutant Discharge. Elimination System (NPDES) permit issued by the EPA or by a state under a federally authorized state program. The FWPCA authorizes the, imposition'of technology-based and water quality-based effluent -limits to regulate the discharge of pollutants into surface waters and ground waters. The EPA has delegated authority to aýnumber of state agencies, including the NJDEP, to administer the NPDES program through state acts. The NewJersey Water Pollution Control Act (NJWPCA) aufthorizes the NJDEP- to implement regulations and to administer the NPDES program with EPA oversight, and to issue and enforce New Jersey Pollutant Discharge Elimination System (NJPDES) permits. Power and Energy Holdings also have ownership*interests in domestic facilities in other jurisdictions that have their own laws and implement regulations to control discharges to their surface waters and ground waters that directly govern Power's or Energy Holdings' facilities in these jurisdictions.
| |
| The EPA promulgated regulations under FWPCA Section 316(b), which requires that-cooling'water intake structures reflect the best technology available (BTA) for minimizing 'adverse environmental-impact.'
| |
| Phase I of the rule covering new facilities became effective on January- 17, 2002. None of the projects that 29
| |
| | |
| Power currently has under construction .or in development is subject to the'Phase I rule. The Phase II rule covering large existing power plants became effective on September 7, 2004;,. The Phase II regulations provided five alternative methods by which a-facility can demonstrate that it complies'with the requirement for BTA for minimizing adverse environmental impacts associated with cooling water.intake structures.
| |
| "'On January 25, 2007, the U.S. Court of Appeals for the Second Circuit issued its'decision in litigation of the Phase II rule brought by several environmental groups, the Attorneys General of six Noitheastern states, the Utility Water.Act Group and Several of. its members, including Power. The court remanded major portions -ofthe rule' and determined that Section 316(b) of the Cleah Water Act doeg not support the use of restoration and the site specific'cost-ben&it test. Among' the plrovisions thie coiuirt'remanded back to EPA for further consideration and rulemaking, the court instructed EPA to reconsider the definition of BTA without comparing the costs of the best performing technology to its benefits. Prior to this decision,'Power has used restoration and site-specific cost benefit tests in applications it. has filed to. renew the NJPDES permits .at its once-though, cooled plants; including Salem, Hudson and Mercer. Although the rule applies to all of Power's electric generating units that use surface waters for once-through cooling purposes, the impact of the rule and the decision of the court cannot be determined at this time for all of Power's facilities. Depending on.the outcome of any appeals, or actions by EPA to repromulgate 'the rule, this decision could have a material impact on Power's ability to renew,its NPDES permits at its, larger once-through cooled plants, including Salem., Hudson, Mercer,::New Haven and Bridgeport, without .making significant upgrades to their existing intake structures and cooling systems. The costs of those upgrades could be material to one or more ,of Power's once-through cooled plants.
| |
| Power Permit Renewals For information on permit renewals for Salem, see Note 12, Commitments and Contingent Liabilities of the Notes. *- . i . , , . + T PSE&G and Power ,
| |
| FederalComprehensive EnvironmentalResponse, Compensation and Liability Act of 1980 (.CERCLA) and New Jersey Spill Compensation,.and Control Act (Spill Act)
| |
| CERCLAand the Spill Act authorize Federal and state trustees for natural resources:to assess damages against persons who have discharged a hazardous substance, causing an injury to natural resources. Pursuant to the Spill Act, the. -NJDEP requires persons conducting remediation to characterize injuries, to natural resources' and to. address those injuries through restoration or damages. The. NJDEP adopted.regulations 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. In -2003, the NJDEP issued 'a policy directive memorializing its efforts, to recover, natural resource damages and its intent to continue to pursue the recovery of natural resource damages. The NJDEP also issued guidance, to assist parties in calculating their natural resource damage liability for settlement purposes, but has stated that those calculations are applicable only for those parties that volunteer to settle a claim for natural resource damages before a claim is asserted by the NJDEP.. PSE&G and Power cannot assess the magnitude of the potential financial impact' of'this regulaf'ory 'change. See Note 12. Commitments- and Contingent Liabilities' of the Notes for additional information: " ' * ' . "
| |
| Because of the nature of PSE&G's and Power's respective businesses, including the production- and delivery of electricity, the distrib~ution of gas and, formerly, the manufacture of gas, various by-products and substances are or were produced or handled that contain constituents classified by Federal and state authorities as hazardous. For discussions.ofthese hazardous substance issues and a discussion of potential liability for remedial. action regarding the Passaic River,. see Note. 12. Commitments and Contingent Liabiliti.es of the Notes. For a. discussion of remediation/clean-up actions inyolving PSE&G and Power, see Item 3. Legal Proceedings. . ,,
| |
| Uranium Enrichment Decontaminationand Decommissioning Fund In accordance with .the EP Act, 'domestic.entities that own nuclear generating stations are required -to pay into a decontamination and decommissioning fund, based on their -past purchases of U.S. government 30
| |
| | |
| enrichment services. Since these amounts are being collected from PSE&G's customers over a period of 15 years, this obligation remained with PSE&G following the generation asset transfer to Power in 2000.
| |
| PSE&G's obligation for the nuclear generating stations in which it had an interest was $76 million (adjusted for inflation). As of December 31, 2006, PSE&G. and Power had both paid their remaining obligations.
| |
| New Jersey Operating:Permits'
| |
| 'The New Jersey Air Pollftion Control Act requires that, certain sources of air emissions obtain operatirng permits issued.by NJDEP. All of Power's generating facilities, in New Jersey are requited to have such operating permits. The costs of compliance hssociated with .an' *new requirements that may be imposed by these pbrmits'in the future are not known at this time and' are not included in capital expenditures, but may be material. "
| |
| Power Nuclear Fuel Disposal, Under.the Nuclear-WastePolicy Act Of 1982, as amended (NWPA), the Federal government has entered into contracfs' with -thel operators of nuclear power plants for transportation find ultimate disposal of sp'nt nuclear' fuel. To pay for this service, nuclear plant 'owners are required. to cohtribute: to a 'Nuclear Waste Fund at 'a 'rate of one mil ($0.001) 'per kWh of nucleatJ'generation, subject to such escalation as may be required ,to assure full cost recovery by the Federal government. Under the NWPA, the U.S. Department Of Energy (DOE)' was 'required' to begin taking possession of the spent nuclear fuel by no later than 1998. The DOE has announced that it' does not expect a facility~for such purpose to'be available earlier than 2017:
| |
| Pursuant' to NRC rules, spent nuclear fuel generated in any reactor can. be stored, in. reactor facility storage pools or in independent spent fuel storage installations located at reactors o0r away-from- reactor sites for at least 30 years beyond the licensed life for reactor operation (which may include the term of a revised or renewed license). Adequate spent fuel storage capacity is estimated to be available through 2011 for Salem 1 and 2015 for Salem 2. Power completed, in August 2006, construction of an on-site storage facilitythat will satisfy the spent fuel.storage needs of Hope Creek through the end of its current license. Exelon Generation has advised Power that it has 'a licensed and oper'atiofial on-site storage facility at Peach Bottom that will satisfy Peach Bottom's spent fuel storage requirements until at least 2014.
| |
| Exelon Generation had previously advised Power that it had signed an agreenient with the DOE, applicable to Peach Bottom, under which Exelon Generation would be reimbursed for costs incurred resulting from the DOE's delay in accepting spent nuclear fuel for permanent storage. Future costs incurred resulting from the DOE delays in accepting spent fuel will be reimbursed annually until the DOE fulfills its obligation to accept spent nuclear fuel. In addition, Exelon Generation and Nuclear are required to reimburse the DOE for. the previously receiyed. credits from the. Nuclear Waste Fund, plus lost .earnings.
| |
| Under this settlement, Power received approximately $27 million for its share of previously incurred storage
| |
| .costs for Peach Bottom, $22 million of which was used for the required reimbursement to the Nuclear Waste Fund. Exelon Generation paid Power approximately $5.4 million for its portion of the spent fuel storage costs reimbursed-by the DOE in 2005 for costs incurred between October 1, 2003 and June 3.0, 2005.
| |
| In September 2001, Power filed a complaint in the U.S. Court of Federal Claims seeking damages for Salem and Hope Creek caused by the DOE not taking possession of spent nuclear fuel in 1998. On October 14, 2004, an, order, to show cause was issued regarding whether the U.S. Court of Federal Claims has jlirisdiction over the matter. Power resp'onded to this order in November 2004. On January 31, 2005, the Court dismissed the, breach-of-contract claims of Power and three other, utilities. Power moved for reconsideration in the U.S. Court of Federal Claims and jointly petitioned for permission to appeal the January 31, 2005 order to the U.S. Court of Appeals for the Federal Circuit. On September 29, 2006, the U.S..
| |
| Court of Appeals for the Federal Circuit *reversed the adverse U1.S. Court of Federal Claims jurisdictional
| |
| .ruling and reinstated Power's claims in the U.S. Court of Federal Claims. No fissurances can be given as to any damage recovery or the ultimate availability of a disposal facility.
| |
| Spent Fuel Pool ' '' .
| |
| The spent 'fuel pool at each 'Salem unit'has an installed'leakage collection system1 ' This system was found to be obstructed at Salem Unit 1. Power developed a solution to maintain the designmfuhction'of the leakage 31
| |
| | |
| collection system at Salem- Unit 1 and investigated the existence of any structural degradation that might have been caused by the obstruction. The concrete and reinforcing steel laboratory tests results were completed in March 2006. Test results that have been collected as part of the ongoing testing indicate that no repairs are anticipated. The NRC issued Information Notice 2004-05 in March 2004 concerning this 'emerging industry issue and Power cannot predict what further actions the NRC may take on this matter.
| |
| Elevated concentrations of tritium in the shallow groundwater at Salem Unit 1 were detected in early 200.3. This information was reported to the, NJDEP and the, NRC, as required. Power conducted a comprehensive investigation in accordance with NJDEP site remediation.'regulations to determine the, source and extent of the tritiumn in the groundwater. 'Power is conducting 'remedial actions to address the contamination in accordance with a remedial action workplan approved by the NJDEP in November 2004.
| |
| The remedial actions are expected to be ongoing for several years. The costs necessary to address this on-site groundwater contamination issue are not expected to be material.
| |
| Low Level Radioactive Waste (LLRW)
| |
| As a by-product of their operations, nuclear generation units produce LLRW.. Such wastes "include paper, plastics, protective clothing, water purification materials and other materials.: LLRW materials are accumulated on-site and disposed of at licensed permanent disposal. facilities. New Jersey, Connecticut and South Carolina have formed the Atlantic Compact, which gives New Jersey nuclear generators,, including Power, continued access. to the Barnwell LLRW disposal, facility which is, owned by South Carolina. Power believes that the Atlantic Compact will provide,for adequate LLRW .disposal for Salem and Hope Creek through the end of their current licenses, although:no assurances can begiven. Both Power'.and Exelon have on-site LLRW storage facilities for Salem, Hope Creek and Peach Bottom, which have the capacity for at least five years of temporary storage for each facility. For information regarding Nuclear Spent Fuel Pool, see Note 12. Commitments and Contingent Liabilities of the Notes.
| |
| PSE&G MGP Remediation Program For 'information' regardihng PSE&G's MGP Remediation Program, see Note 12. Commitments aiid Contingent Liabilities of the Notes.
| |
| ITEM 1A. RISK FACTORS PSEG, PSE&G, Power and Energy Holdings The following factors should be considered when reviewing the businesses of PSEG, PSE&G, Power and Energy Holdings. These factors could significantly impact the businesses and cause results to differ materially from those expressed in any statements made by, or on; behalf of PSEG, PSE&G;'Power or Energy Holdings herein. Some or all of these factors may apply to each of PSEG,' PSE&G, Power, Energy Holdings and their respective subsidiaries.
| |
| Generation operating performance may fall below projected levels.
| |
| Power and Energy Holdings ' : '
| |
| Operating generating stations below expected capacity levels, especially at low-cost ''nuclear and' coal facilities, may result in lost revenues and increased expenses, including replacement power costs: Factors that could cause generating station operations to'fall below expected levels include, but are not limited to, the following: , '
| |
| * breakdown or failure of equipment, processes or management effectiveness;
| |
| * disruptions in the' transmission of electricity*;
| |
| * labor disputes;
| |
| * fuel supply interruptions or transportation constraints; limitations which may be imposed by environmental or other regulatory. requirements; permit limitations; and 32
| |
| | |
| *., operator error or. catastrophicevents such as fires, earthquakes, 'explosions, 'floods, acts.of terrorism or other similar occurrences.
| |
| The potential 'lost revenues and. increased expenses could result in a case where' sufficient cash 'may not be available to service debt. In addition, any prolonged operating performance issues could potentially result in an impairment'of the value of the' affected- facility.'
| |
| Failure to obtain adequate and timely rate relief could negatively impact results PSE&G As* a public utility, PSE&G's rates are regulated. These rates are' designed to allow PSE&G :the opportunity' to recover its' operating xkpenses and earn a fair' return on its rate base,'"which primarily consists of 'its property:, plant and 6 quipment. These rates include -its electric and gas tariff rates that are subject 'to regulation by the BPU as Well 'as its transmission rates that are subject to regulation by FERC. PSE&G's base rateg are set by the BPU for electric'distribiution and gas'distribution and are effective until the time a new rate' case is brought to th6'eBPU: These' base iate cases generally' take place when equity returns fall below reasonable levels. Some categories of costs', such as energy costs,'are recovered through adjustment charges that' "*re 'periodically reset to reflect actual costs. If 'these costs exceed 'the 'amount included in PSE&G's adjustment'charge's, there may be a'negative impact on cash flows.
| |
| If PSE&G does not obtain ad.equate rate treatment on a timely basis in order to meet,its operating expenses, there may be a negative impact on earnings and operating cash flows.' PSE&G can give no assurances' that 'tariff relief will be'timely 'or sufficient for it to recover its costs an.d provide a sufficient return for. its investors. '.' ' '. ..
| |
| Energy Holdings Global's distribution facilities are rate-regulated enterprises. Governmental authorities establish rates charged to customers. While these rates are designed to cover all operating costs and provide a return on ihvestment,: Energy Holdings can give no assurances that rates will, in the future, be sufficient to cover Global's costs and provide a sufficidnt return on its 'investments. In additiori, future 'rates may not be adequate to provide c'ashl flow 'to lliy principal and interest on ihe debt of Global's subsidiaries and affiliates or to enable its subsidiaries and affiliates to comply with the terms of debt agreements. '
| |
| Inability to balance energy obligations, available supply.and trading risks could negatively impact results Power and Energy Holdings The revenues' genefated by' th'eoperation of the genbrating stations 'are subjec't'to market iisks that a re beyond each company's 'control. Generation "output will ei~her be'used to satisfy (vholesale. contract requirements, other bilateral contracts or be sold into other competitive power markets. Participants in the competitive power markets are not guaranteed any specified ' rate of return on: their capital 'investments through recovery of mandated rates payable by purchasers of electricity.
| |
| Generation revenues and'results of operations are dependent upon prevailing market prices for energy, capacity, ancillary services and fuel supply in the markets 'served.; ' '
| |
| Power ' '
| |
| Power's energy trading and marketing activities frequentlfyinvolvethe establishment of-forward sale positions in the wholesale energy markets on long-term.and Short-term bases, :To the extent that Pqoer has produced .or purchased energy in excess of its contracted 'obligations a reduction in market ,prices could reduce profitability. ' - , : '
| |
| Conversely, to"the extent that Power has 6ohiracted obligations in excess of energy it has produced or purchased, an increase .in market prices could reduce profitability.'
| |
| If the strategy Power utilizes to hedge its exposures to these various risks is not effective;' it could incur significant'losses. Power's substantial market'positions can also. be adversely' affected by the level, of volatility in the energy'markets that; in turn;-depends on varioug factors, including weather in various geographical 33
| |
| | |
| areas, short-term supply and demand imbalances. and pricing differentials at various geographic locations, which cannot be predicted with any certainty:
| |
| Increases in market prices also affect Power's ability to hedge generation output- and fuel requirements as the obligation to post . margin increases with increasing prices and, resultingly, could require the maintenance of liquidity resources that would be prohibitively expensiv~e.
| |
| Environmental regulations could limit operations PSEG, PSE&G, Power and Energy Holdings PSEG, PSE&G, Power and Energy Holdings are required to comply with numerous statutes, regulations and ordinances relating to the safety. and health of employees and the..public, the protection of the environment and land use. These statutes,. regulations and ordinances are constantly changing... While management :believes that PSEG, PSE&G, Power and Energy Holdings have obtained all material approvals currently required to own and operate their respective facilities and that approvals will-be issued in a timely manner, significant additional costs could be incurred in order to comply with these requirements. In some cases, the cost of. compliance could exceed the marginal value of the facility. Failure-to comply with environmental statutes,, regulations and ordinances, could have a material effect on PSEG; PSE&G, Power and Energy Holdings, including potential civil or.criminal liability, the imposition of cleanup hiens or fines and expenditures of funds to bring facilities into compliance or possible impairment of the value of the affected facility.
| |
| .PSEG, PSE&G, Power .and Energy Holdings can give no assurance, that they will be able to:
| |
| * obtain all required environmental' approvals .not yet received or that may be required in the future;
| |
| * obtain any necessary modifications to existing environmental approvals;
| |
| * maintain compliance with all applicable environmental laws, regulations and approvals;, orr
| |
| * recover any resulting costs through future sales.
| |
| Delay in obtaining or failure to-obtain and maintain in full force and effect any environmental approvals, or delay, or failure to satisfy any. applicable environmental regulatory requirements, could prevent construction of new facilities, operation of existing facilities or sale of energy. from these facilities or could result in significant additional costs.*
| |
| Power Many of Power's, generating, facilities are located in the State of New Jersey where environmental programs are generally considered to be more stringent in comparison to similar prbgrams~in other states. As such, there may be instances'where. the facilities located. in New Jersey are subject to more stringent and, therefore, more costly pollution control requirements than -competitive facilities in other -states.,
| |
| Regulatory issues significantly impact operations and profitability PSEG, PSE&G, Power and Energy Holdings Federal, state and local authorities impose substantial 'regulation and permitting requirements on the electric power generation business. Power and Energy Holdings are required to comply with numerous laws and regulations and to obtain numerous governmental permits in order to operate generation stations. In addition, PSE&G's and certain of Global's distribution facilities could be subject to financial penalties if reliability., performance standards are not met.
| |
| PSEG, PSE&G, Power and Energy Holdings -can give no assurance that existing regulations will not be revised 'or reinterpreted, that new laws and regulations 'will not be adopted or,'become applicable ,or that future changes in laws and regulations, including the possibility of reregulation in some deregulated markets, will not have a detrimental effect on,their .respectiye businesses. '
| |
| Power and Energy Holdings Power and Energy Holdings' believe that they have obtained all material energy-related federal, state and local approvals- currently required to operate their respe'ctive generation stations and.sell energy output, 34
| |
| | |
| including MBR' authority from, FERC. Although not currently required, additional regulatory approvals may be required in the future due to changesin laws and regulations.or' for other reasons. No assurance can be given that Power and Energy Holdings will be able to obtain any required regulatory approval inthe future, or that they will be able to. obtain any necessary extensions in receiving any required regulatory approvals.
| |
| Power is also subject to pervasive regulation by the .NRC with respect,to the operation of nuclear generation stations. This regulation involves testing, evaluation and modification of all. aspects of plant operation in light of NRC_ safety, environmental and personnel management. requirements. The NRC also requires continuous demonstrations that plant operations meet applicable requirements. The NRC has the ultimate authority. to determine whether any nuclear generation unit may operate.
| |
| Any failure t6 obtain' or comply With any required regulatory approvals could materially adversely affect Power's and Energy Holdings' ability to operate -generation stations or sell electricity to third parties.
| |
| In addition, there is also a risk to Power and Energy Holdings if states decide to turn away from competition and allow regulated utilities, to continue to own or reacquire and operate generating stations in, a regulated and potentially uneconomical manner, or to encourage rate-based treatment for the construction of new base-load generating units. This has already occurred in certain states. The lack of consistent rules in markets outside of PJM can negatively impact the competitiveness of Power's plants.
| |
| Moreover, current rules being developed at FERC, at DOE *nd at PJM with respect to the access to and construction of transmission and the allocation of .costs for such construction may have the effect of altering the'.level playing field between transmission options and generation options, which could have a competitive impact upon PSEG and Power.
| |
| Availability of adequate power transmission'facilities' PSEG, PSE&G, Power and Energy Holdings The ability to sell and ýdeliver electric energy products 'may 'be adversely impacted and the ability to generate revenues may be' limited if:
| |
| * transmission is' disrupted;
| |
| * transmission capacity is inadequate; or
| |
| * a region's power transmission infrastructure is inadequate.
| |
| Inability to access sufficient capital in the amounts and at the times needed PSEG, PSE&G, Power and Energy Holdings Capital for projects and investments has been provided by internally-generated cash flow, equity issuances by PSEG and borrowings by PSEG, PSE&G, Power, Energy. Holdings and. their respective subsidiaries. Continued access to debt capital from outside sources is required in order to efficiently fund the caslh flow needs of the businesses. Th6 abily'to arrange'financing and .thecosts of capital depend on numerous factors including, among'other things,-general ecofiomic and market conditions, the availability of credit from banks and.'other financial institutions, investor confidence, the success'of current projects and the quality of new projects.
| |
| The ability to access sufficient capital in, the .bank and debt capital marketsis dependent upon current and future capital structure, performance, financial condition and.-the availability of capital at a reasonable economic. cost. As a result, no assurance can'be given that PSEG, PSE&G, Power or Energy Holdings will be successful in obtaining financing for projects and investmen.ts or funding, the equity, commitments required for such projects and investments in the future.,,
| |
| Counterparty credit risks or a deterioration of credit quality PSEG, PSE&G, Power and Energy Holdings As market prices for energy and'fuelfluctuate, Power's forward energy sale and forward fuel purchase contracts could require substantial collateral' requiring Power to source additional liquidity during periods when Power's ability to source such -liquidity may be limited. Also, in connection with'its energy trading activities, Power must meet credit quality standards required ,by counterparties. Standard industry contracts generally require trading counterparties to maintain investment grade ratings: These same contracts provide reciprocal benefits to Power. If Power loses its investment grade credit rating,. ER&T Would have to provide 35
| |
| | |
| additional collateral in the form of letters of credit or cash, *which would significantly impact' the energy trading business. This would increase Power's costs of, doing business and limit its ability to successfully conduct energy trading operations:
| |
| Power sells generation output through the execution of bilateral contracts. These contracts are subject to credit risk, which relates to the ability of counterparties to meet their contractual obligations. Any failure to perform on'the part of these counterparties could have a material impact on PSEG's and Power's results, of operations, cash flows and financial position. As market prices rise above contracted price levels, Power -is requited to post collateral with purchasers. Collateral posting requirements for BGS contracts in particular are one-sided. If market prices fall below BGS contracted price levels for a single contract, power purchasers are not required to post collateral with Power. However, such margin positions can be netted against margin due from Power -in other BGS contracts with the same counterparty.
| |
| Substantial competition from well-capitalized participants in the worldwide energy, markets PSEG, PSE&G, Power and Energy Holdings Restructuring of worldwide energy markets is creating opportunities for, and substantial competition from, well-capitalized entities that may adversely affect the ability of PSEG, PSE&G, Power and Energy Holdings to make investments on favorable terms and achieve growth objectives. Increased competition could contribute to a reduction in prices offered for power and could result in lower returns which may affect PSEG's, PSE&G's, Power's and Energy Holdings' ability to service their respective outstanding indebtedness, including short-term debt. Some of the competitors include:
| |
| * merchant generators;
| |
| * banks, funds and other financial entities;
| |
| * domestic and multi-national utility generators;
| |
| * energy marketers; e fuel supply companies; and e affiliates of other industrial companies.
| |
| As a holding company, the ability to service debt could be limited PSEG and Energy Holdings PSEG and Energy Holdings are holding. companies with no material assets, other than the stock or membership interests of their subsidiaries and project affiliates. As such, PSEG and Energy Holdings depend on their respective subsidiaries' and project affiliates' cash flow and their respective access to capital in order to service' their indebtedness. Each of PSEG's and Energy Holdings' respective subsidiaries. and project affiliates are separate and distinct legal entities that have no obligation, contingent or otherwise, to pay any amounts when dde 'oh PSEG's or Energy Holdings' debt or to make any funds available to pay such amounts.
| |
| As a result, PSEG's and Energy Holdings' debt will effectively be subordinated to- all existing and future debt, trade creditors, and other liabilities of their respective subsidiaries and project affiliates and PSEG's and Energy Holdings' rights' and hence the rights of their respective creditors to participate in any distribution of assets of any subsidiary or project affiliate upon its'liquidation or reorganizati6n or otherwise would be subject to the prior claims of that subsidiary's or project affiliate's creditors, except to the. extent that PSEG's or Energy Holdings' claims as a creditor of such subsidiary or project' affiliate may be recognized.
| |
| In addition, Energy Holdings' .subsidiaries' project-related debt agreements generally restrict the subsidiaries' ability to pay dividends, make cash distributions or otherwise transfer funds. These restrictions may include achieving, and maintaining fihancial performance or debt- coverage- ratios, absence of events of default, or priority'ý in payment of other cuIrrent or prospective. obligations. Also, Energy Holdings is structurally designed to be able to meet its obligations without any support from its parent, PSEG. These restrictions could further restrict Energy Holdings' ability to service its outstanding indebtedness.
| |
| 36
| |
| | |
| Adverse international developments could negatively impact results Energy Holdings A,.component of PSEG's and Energy Holdings business 'is international distribution and generation, primarily in Chile and Peru. The economic and political conditions in certain countries where Global has interests present 'risks that may be different than those found in the U.S. which could affect the value of its investments, cash flows from projects and make it more difficult to obtain non-recourse project refinancing on suitable terms or could impair Global's ability to enforce'its rights under agreements relatingto such projects. Such risks include:
| |
| " expropriation or nationalization of energy assets;
| |
| * renegotiation or abrogation of existing contracts; and.
| |
| " changes in law or tax policy.
| |
| Operations in foreign countries also present rigks associated with' currency exchange rates and convertibility,' inflation aind repatriation of earnings. In some countries, economic and monetary coniditions and other factors could affect Global's ability to convert its Cash distributions to U.S. Dollars or other freely convertible currencies, or to move funds offshore from these countries. Furthermore, the central bank of any of these countries may have the authority to suspend, restrict or otherwise impose conditions on foreign exchange transactions or to approve distributions to foreign investors.
| |
| Inability to realize tax benefits Energy Holdings Through its leveraged lease investments, Resources acquired 'ah asset by investing equity representing approximately 15% to 20% of the cost of the asset and incurring non-recourse lease debt for the balance. As the owner, Resources is entitled to depreciate the asset under applicable federal and state tax guidelines and receives income from the tax benefits associated with interestand depreciation deductions with respect to the leased*.property. The ability of Resources to realize, these tax benefits is dependent on operating- income generated by its affiliates and allocated pursuant to PSEG's consolidated tax sharing agreement. A reduction of operating income could impair,. Resources' ability to receive such benefits, which, would result in a reduction of earnings and cash flows. In addition, during 2006, the IRS disallowed certain deductions associated with some of the leveraged leases which have been designated by the IRS as listed transactions.
| |
| For additional information see Note 12. Commitments and Contingent Liabilities of the Notes. Any material disallowance of deductions could impact Energy Holdings' earnings and ability to service its outstanding indebtedness.
| |
| Decreases in the value of the pension and other postretirement assets could require additional funding PSEG, PSE&G, Power and Energy Holdings Adverse changes in the rates of return or performance of the investments in which the pension and other.
| |
| postretirement trust assets are held could lower the value of the funds and the trust assets. Such a decline in value c6uld result in additional funding obligations to meet the applicable legal and regulatory requirements.
| |
| To the extent that these additional funding obligations are significant, this could impact PSEG's, PSE&G's, Power's and Energy Holdings' ability to service debt.
| |
| Changes in technology may make power generation assets less competitive Power and Energy Holdings A key element of the business plan is that generating power at central power plants produces electricity at relatively low cost. There are alternative technologies to produce electricity that continue to attract capital for research and development, most notably fuel cells, microturbines, windmills and photovoltaic (solar) cells.
| |
| It is possible that advances in technology will reduce the cost of alternative methods of producing electricity to a level that is competitive with that of most central station electric production. If this were to happen, Power's and Energy Holdings' market share could be eroded and the value of their respective power plants could be significantly impaired. Changes in technology could also alter the channels through which retail electric customers buy electricity, which could affect financial results.
| |
| 37
| |
| | |
| Insurance coverages may not be sufficient PSEG, PSE&G, Power and Energy Holdings PSEG, PSE&G, Power and Energy Holdings have insurance for their respective facilities, including:
| |
| . all-risk property damage insurance;
| |
| * commercial general public liability insurance;
| |
| * boiler and machinery coverage;
| |
| * nuclear liability; and
| |
| * for nuclear generating units, replacement power and business interruption insurance in amounts and with deductibles that management considers appropriate.
| |
| PSEG, PSE&G, Power and Energy Holdings can give no assurance that this insurance coverage will be available in the future on commercially reasonable terms or that the insurance proceeds received for any loss of or any damage to any of their respective facilities will be sufficient -to fund. future payments on debt.
| |
| Additionally, some properties may not be insured in .the. event of an act of terrorism.
| |
| Recession, acts of war or terrorism PSEG, PSE&G, Power and Energy Holdings The consequences of a prolonged recession and adverse market conditions may include the continued uncertainty of energy prices and the capital and commodity markets. Management cannot predict the impact of any continued economic slowdown, reduced growth rate in energy usage or fluctuating energy prices; however, such impact could have a material adverse effect on PSEG'sý PSE&G's, Power's and Energy Holdings' financial condition, results of operations and net cash flows.
| |
| Major industrial facilities, generation plants, fuel storage facilities and transmission and distribution facilities may be targets of. terrorist activities that could result in disruption of PSE&G's, Power's or Energy Holdings' ability to produce or distribute some portion of their respective energy products. Any such disruption could result in a significant decrease in revenues and/or significant additional costs to repair,.which could have a-material adverse impact on the financial condition, results of operation and net cash flows of PSEG, PSE&G, Power and Energy Holdings.
| |
| ITEM lB. UNRESOLVED STAFF COMMENTS PSEG None.
| |
| PSE&G, Power and Energy.Holdings Not Applicable.
| |
| t.4 38
| |
| | |
| ITEM 2. PROPERTIES PSEG and Services PSEG does not own any property. All property is owned by PSEG's subsidiaries.
| |
| .Services leases, a 25-story office tower for PSEG's corporate headquarters at 80 Park Plaza, Newark, New Jersey, together with an adjoining three-stofy building. In addition, Services owns the Maplewood Test Services Facility in Maplewood, New Jersey.
| |
| PSEG believes that it and its-subsidiaries maintain adequate insur~ance-coverage against loss or damage to plants and properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost.
| |
| PSE&G,.
| |
| PSE&G's First and Refunding Mortgage (Mortgage), securing the bonds issued thereunder, constitutes a direct first mortgage lien on substantially all of PSE&G's; property.'
| |
| PSE&G's electric lines and gas mains are located over or under public. highways, streets, alleys or lands, except where they are located over or under property owned by PSE&G or occupied. by it under easements or other rights. These easements and other.rights are deemed by PSE&G to be adequate for the purposes for which they are being used. " .
| |
| PSE&G believes that it maintains adequate insurance coverage against loss or damage to its principal properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost.
| |
| Electric Transmission and Distribution. Properties As of December 31, 2006, PSE&G's transmission and distribution system included approximately 21,745 circuit -miles, of which approximately 7,710 circuit miles were underground, and approximately 804,936 poles, of which approximately 538,811 poles were jointly-owned. Approximately 99% of this property is located in New Jersey.
| |
| In addition, as of December 31, 2006, PSE&G owned four electric distribution headquarters. and five subheadquarters in four operating divisions, all located in New Jersey..
| |
| Gas Distribution Properties As of December 31, 2006, the daily gas capacity of PSE&G's 100%-owned peaking facilities (the maximum daily gas delivery available during the three peak winter months) consisted of liquid petroleum air gas (LPG).and liquefied natural gas (LNG) and aggregated 2,973,000 therms (approximately 2,886,000 cubic' feet on an equivalent basis of 1.030 Btu/cubic foot) as shown in the following table:
| |
| Daily Capacity Plant Location (Therins)
| |
| Burlington LNG ...... .............................. .Burlington, NJ 773,000 CamdenLPG ......................................... Camden, NJ 280,000 Central LPG ................................... Edison Twp., NJ 960,000 Harrison LPG ........................................... Harrison, NJ 960,000 T otal ................................................ 2,973,000 As of December 31, 2006, PSE&G owned and operated approximately 17,556 miles of gas mains, owned 12 gas distribution headquarters and two subheadquarters, all in three operating regions located in New Jersey and owned one meter shop, in New Jersey serving all .such areas. In addition, PSE&G operated 62 natural gas metering or regulating stations, all located in Ne'w Jersey, of which 28 were located on land owned by customers or natural. gas pipeline suppliers and were. operated under lease, easement or other similar arrangement. In some instances, the pipeline companies owned portions of the metering and regulating facilities.
| |
| 39
| |
| | |
| Office Buildings and Facilities PSE&G rents office space from Services as its headquarters in Newark, New Jersey. PSE&G also leases office space at various locations throughout New Jersey for district offices and offices for various corporate groups and services. PSE&G also owns various, other sites for training, testing, parking, records storage, research, repair and maintenance, warehouse facilities and for other purposes related to its business.
| |
| SIii addition to. the Ifacilities discussed above; as of December. 31,'2006, PSE&G owned 42 switching stafions in New Jersey with an aggregate installed capacity of 22,809 megavolt-amperes and 244 substations with an aggregate installed capacity of 7,790 megavolt-amperes. In addition, four substations in New"Jersey having an; aggregate installed capacity. of 109 megavoltramperes were operated on leased property.
| |
| Power .
| |
| Power rents office space from Services as its headquarters in Newark, New Jersey. Other leased properties include* office, warehouse, classroom and storage space, primarily located in New Jersey. Power also owns. the Central Maintenance Shop at Sewaren, New Jersey.
| |
| Power has a 57.41% ownership interest in approximately 13,000 acres in the Delaware River Estuary region to satisfy the condition of the NJPDES permit issued for Salem. Power also owns several other facilities, including the on-site Nuclear Administration and Processing Center buildings.'
| |
| Power* has a 13.91% ownership interest in the 650-acre Merrill Creek Reservoir in Warren' County, New Jersey and approximately 2,158 acres of land surrounding the reservoir. The reservoir was constructed to store water for release to the Delaware River during periods of low flow. Merrill Creek is jointly-owned by seven companies that have generation facilities along the Delaware River or its tributaries and use the river water in theif- operations.
| |
| Power believes -that it maintains adequate insurance coverage against loss or damage' to its plants and properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost. For a discussion of nuclear insurance, see Note 12. Commitments and Contingent Liabilities of the Notes.
| |
| S.....
| |
| 40
| |
| | |
| As.of December 31; 2006, Power's share of installed generating capacity was 14,639 MW, as shown in the following table:
| |
| OPERATING POWER PLANTS Total Owned Principal Capacity % Capacity Fuels
| |
| .Name Location (MV) Owned (My) Used Mission Steam:
| |
| Hudson ...................................... NJ 991 100% 991 Coal/Gas Load Following M ercer .................................................. NJ 648 100% '648 Coal/Gas Load Following Sewaren ................... .................. NJ 453 100% 453 Gas/Oil Load Following Keystone(A)(B) ..................................... PA 1,700 23% 388 Coal Base Load Conema.ugh(A )(B) ...................................... PA 1,700 23% 382 Coal Base Load Bridgeport Harbor ...................................... CT 518 100% 518 Coal/Oil Base Load New Haven Harbor ..................................... CT 455 100% 455 Oil/Gas Load Following T otal Steam ....................... a................ 6,465 3,835 Nuclear:
| |
| Hope C reek ............................................. NJ 1,061 100% 1,061 Nuclear Base Load Salem 1 & 2(A ) ........................................... NJ 2,304 57% 1,323 Nuclear Base Load Peach Bottom 2 & 3(A)(C)1 ............................ PA 2,224 50% 1,112 Nuclear Base Load T otal N uclear ...................................... 5,589 3,496 Combined Cycle:
| |
| Bergen ............... ....................... NJ 1,225 100%. 1,225 Gas/Oil : Load Following Linden.... ." . ........ ................. NJ 1,186 100% 1,186 Gas Load Following Lawrenceburg(F) ................. ............... : ...... IN 1,080 100% .1,080 Gas' Load Following B ethlehem ........... ................................... NY 793 100% 793 Gas Load Following Total Combined Cycle .............................. 4,284 4,284 Combustion Turbine:
| |
| Essex ............ : ...................................... NJ 617 100% 617 Gas/Oil Peaking Ed ison .................................................. NJ 504 100% 504 Gas/Oil Peaking K earny ................................. :... ............. NJ 443 100% 443 Gas/Oil Peaking Burlington ............................................... NJ 557 100% 557 Gas/Oil Peaking L inden .................................................. NJ 340 100% 340 Gas/Oil Peaking M ercer .................................................. NJ 129 100% 129 Oil Peaking Sew aren .... ........... : ................................. NJ 129 100% 129 Oil Peaking Bergen ...................................... NJ 21 100% 21 Gas Peaking N ational Park ........................................... NJ 21 100% 21 Oil Peaking K earny .................................................. NJ 21 100% 21 Gas Peaking Salem(A) .................................... NJ 38 57% 22 Oil Peaking Bridgeport H arbor ......... : ............................ CT 15 100% 15 Oil Peaking Total Combustion Turbine ................... 2,835 2,819 Internal Combustion:
| |
| Conem augh(A )(B) ....................................... PA 11 23% 2 Oil Peaking K eystone(A )(B ) ........................................... PA 11 23% 3 Oil Peaking Total Internal Combustion ......................... 22 5 Pumped Storage:
| |
| Yards Creek(A )(D )(E) .................................. NJ 400 50% 200 Peaking Total Operating Generation Plants ................. 19,595 14,639.
| |
| (A) Power's share of jointly-owned facility.
| |
| (B) Operated by Reliant Energy.
| |
| (C) Operated by, Exelon Generation.
| |
| (D) Operated by JCP&L.
| |
| (E) Excludes energy for pumping and synchronous condensers:
| |
| (F) On December 29, 2006, Power entered into an agreement to sell Lawrenceburg. See Note 4.
| |
| Discontinued Operations, Dispositions, Acquisitions and Impairments of the Notes.
| |
| 41
| |
| | |
| As of December 31, 2006; Power had generating capacity in construction or advainced. development, as shown in the following table:
| |
| POWER PLANTS IN ADVANCED DEVELOPMENT Total Owned Principal Scheduled I
| |
| Capacity % Capacity Fuels In Service Name Location (MW) Owned (MW) Used Date Nuclear Uprates ........... .................................... NJ/PA 160 V arious 142 Nuclear 2007-2008 Total Advanced Deve lopm ent.............................. 160 142 Total Owned Capacity Projected Capacity (MW)
| |
| Total Owned Operating Generation Plants.................. 14,639 Advanced D evelopm ent ................................. ......... 142 Less: Planned Sales ................................................ (1,080)
| |
| Projected Capacity ..................................................... 13,701 Energy Holdings .
| |
| . Energy Holdings rents office space from Services as its headquarters in Newark, New Jersey.
| |
| Energy Holdings believes that it maintains adequate. insurance coverage for properties in- which its so subsidiaries have an equit'y interest, subject to certain exceptions, to the extent such property'is usually insured and insurance is available at a reasonable cost. " .
| |
| 42
| |
| | |
| Global has invested in the following generation facilities that were in operation as of December 31, 2006:
| |
| OPERATING POWER PLANTS Total* Owned Principal Capacity, Capacity Fuels Name Location (MW) Owned (MW) Used United States(A)
| |
| Texas Independent Energy, L.P. (TIE) Guadalupe Power Partners' LP (Guadalupe) '..* .... *'... :.. ... s ........... TX 1,000 100% 1,000 Natural gas Odessa-Ector Power Partners, L.P. (Odessa) ................. TX 1,000 .100% 1,000. Natural gas Total TIE .................................. 2,000 2,000 Kalaeloa Partners L.P. (Kalaeloa) ............................... HI 208 50% 104 Oil GWF Power Systems, L.P. (GWF) . ........................ CA 105 50% 53 Petroleum coke Hanford L.P. (Hanford) ........ ........................... CA 27 50%, 13 Petroleum coke GWF Ehergy, LLC-(GWF Energy); " .
| |
| Hanford-Peaker ,Plant .................................... CA 95 60% 57 Natural gas Henrietta-Peaker Plant ......... ...................... CA 97 60% 58 Natural gas Tracy-P-.eaker Plant; ................ ........ ...... CA 171 60% 103' Natural gas 363 218 Total GWF Energy .............. . .......... 16 Bridgewatei ...... ..... ..........: ............ .......... NH 40% 6 Biomass Conerfnaugh............ . : ................................. ...... PA .15 .4% 1 Hydro 2,395 Total U nited States .......................................... 2,734 International PPN Power Gehndrahing Company Limited (PPN) ............... India 330 20%o" 66 Naphtha/Natural gas Prisma '
| |
| C rotone .'. ... ............ ....... ......... Italy. 20 .43%. 9 Biomass Bando D'Argenta I .. ............. .. I .................... Italy 20 85% 17 Biomass Stroilgoli.......... ................... ............. . Italy 46 43% 17 Bioma~s Total Prisma .................................. 80 100 143 E lectroandes ...................................................... Peru 180 100% 180 Hydro Turboven M aracay .............................................. .......
| |
| I V ene zuela 60 50% 30 Natural gas C agua ........................................................ V ene zuela 60 50% 30 Natural gas
| |
| :120 60 Total, Turboven ........ ................ :.......
| |
| Turbogen~ado'rels de.Maracay (TGMJ ............................ Vene zuela 40 9% 4 Natural gas Natural gas/
| |
| SA ESA G roup ,.. ..... .......................... ..... ............. : -C hile *120.* 100% 120 Gas/Oil/Hyoro/Wind Total International .. .................. 870 473 2,868 Total Operating Power Plants ........................... 3,604 (A) On'December'22, 2006, Global'entered into an agreement'to sell its 34.5% interest in Thermal Energy Developmefit Partnership, L.P. which owns the 21 MW biomass-fueled Tracy project in California and therefore, has been excluded. The sale closed in January 2007. See Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments of the Notes.
| |
| I 43
| |
| | |
| Domestic Generation TIE Global owns 100% of TIE which owns and operates two electric generation facilities, one in Guadalupe County in south central Texas (Guadalupe) and one in Odessa in western Texas (Odessa). Approximately 30% of the total expected output of TIE for 2007 has been sold via bilateral agreements -and additional bilateral sales for peak and off-peak services will be signed as the year progresses. Any temaining uncommitted output is sold in the Texas spot market. Included in the amounts above is a,350 MW daily capacity call option at'Odessa that expires on December 31, 2010.
| |
| Kalaeloa Global's 50% partner in Kalaeloa is a power fund managed by Harbertr Power Corporation (Harbert).
| |
| All of the electricity generated by the Kalaeloa power plant is sold to the Hawaiian Electric, Company, Inc.
| |
| (HECO) under a PPA expiring in May 2016. Under a steam purchase and sale agreement expiring in May
| |
| .2016, the Kalaeloa power plant supplies steam to the adjacent Tesoro refinery. The primary fuel, low sulfur fuel oil, is provided from the adjacent Tesoro refinery under a long-term all requirements contract; 'The refinery is interconnected to the power plant by a pipeline and preconditions the fuel oil prior to delivery.
| |
| Back-up fuel supply.is provided by HECO.
| |
| The two combustion turbines of Kalaeloa were upgraded in 2004 resulting in both an increase in the net plant output by. approximately 20 MW and an improvement in the efficiency of consuming fuel. As a result of r
| |
| the upgrades, Kalaeloa and HECO: entered into two amendments to'the PPA. The amendments were effective upon final approval, from the Public Utility Commission of the State of Hawaii in September 2005:
| |
| The amendments increased Kalaeloa's firm capacity'and associated energy sales to.HECO.from 180 MW to 208 MW.
| |
| GWF and Hanford Global and an affiliate of Harbert. each own 50% of GWF. PPAs for the five GWF Bay Areaplants' net Output are in place with Pacific Gas and Electric Company (PG&E) ending in 2020 and 202.1. GWF acquires the petroleum coke used to fuel its plants through contracts with three local oil refineries with minimum volumes nominated by GWF annually and price negotiated between the'parties either semi-annually.or annually. Three of the five GWF plants have been modified to burn a wider variety of petroleum coke products to mitigate fuel supply and pricing risk. F Global and an. affiliate of Harbert each own 50% of Hanford. A PPA for the plant's net output is in place with PG&E ending in August 2011. Hanford acquires the petroleumn coke fired in its plant through a contract with a refinery with price negotiated semi-annually.
| |
| Hanford, Henrietta and Tracy Peaker Plants GWF Energy, which is 60% owned by Global and 40% owned by a power fund managed. by Harbert, owns and operates three peaker plants in California. Global owned approximately 75% of GWF Ener gy until February 2004 when it sold a 14.9% interest to Harbinger for approximately $14 million. The output of these plants is sold under a PPA with the California Department of Water Resources (DWR) with maturities in 2011 and 2012. DWR has the right to schedule energy and/or reserve capacity from each unit of the three plants for a maximum of 2,000 hours each year. Energy and capacity not scheduled by DWR is available for
| |
| .sale by GWF Energy. DWR supplies the' natural gas when the units are scheduled for dispatch by DWR.
| |
| GWF Energy obtains the natural gas used to fuel its plants for non-DWR sales from the spot market on a non-firm basis.
| |
| International. Generation India PPN Global owns a 20% interest in PPN located in Tamil Nadu, India. Global's partners include the Apollo Infrastructure Company Ltd., with a 46.9% interest, Marubeni Corporation, with a 26% 1interest, Housing 44
| |
| | |
| Development Finance Corporation (HDFC) and HDFC Life Insurance Corporation, with a 5% and 2.1%
| |
| interest respectively. PPN has entered into a PPA for the sale of 100% of its output to the State Electricity Board of Tamil Nadu (TNEB) for 30 years, with an agreement to take-or-pay equal to a plant load factor of at least 68.5%.
| |
| Italy
| |
| 'Prisma Global owns'an 85% interest in Prisma which indirectly owns 'and operates three biomass generation plants in Italy through its ownership of 1.00% of San Marco Bioenergie S.p.A., which owns a 20 MW plant, and 50% of Biomasse, a partnership with Api Holding S.p.A., which owns two plants totaling 60 MW. Global records Prisma's investment in Biomasse as an equity method investment due to Global's approximate 43%
| |
| indirect ownership in Biomasse. The output of the plants is sold under. power purchase agreements with the Italian national 'grid. (CIP contracts), which include a premium for the renewable energy output. These contracts expire from 2009 through 2012: For additional information relating. to Prisma, see Note. 12.
| |
| Commitments and 'Contingent Liabilities of the Notes. -
| |
| Peru Electroandes Global owns a 100% interest in Electroandes located in Peru. Electroandes" main -assets include four hydroelectric facilities, with a. combined installed capacity of 180 MW and.437 miles of transmission lines located in the central Andean region east of Lima. Electroandes' revenues were obtained through various PPAs, denominated in U.S: Dollars. Electroandes has contracted for 95% and 91% in 2007 and'2008, respectively, and over 50% for 2009 and 201.0. Approximately 75% of the PPAs.in 2007 are with unregulated customers with a more balanced split between regulated and unregulated in 2008 and. :beyond.
| |
| Venezuela Turboven The facilities in Maracay and Cagua are owned and operated by Turboven, an entity which is jointly-owned by Global (50%) and Corporacion Industrial de Energia (CIE). PPAs expiring between 2007 and 2011 have been entered into for the sale of approximately 40% of the output of Maracay andCagua to various industrial customers. The PPAs are structured to provide energy only with minimum take provisions. Fuel costs are passed through directly to customers and the energy tariffs are calculated in U.S. Dollars and paid in local currency. See Note 4. Discontinued. Operations, Dispositions, .Acquisitions and' Impairments of the Notes for a discussion of recent events in Venezuela.
| |
| TGM Global has a 9% indirect interest in TGM through a partnership' with CIE. TGM sells all of the energy produced under a PPA with Manufacturas del Papel (MANPA), a paper manufacturing concern located in Maracay. MANPA and CIE have common controlling shareholders. See Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments of the Notes for a discussion of recent events in Venezuela.
| |
| Electric Distribution Facilities Global has.invested in the following major distribution systems:
| |
| Global's Number of Ownership Name Location Customers Interest SAESA Group '..........................................
| |
| Chile 617,000 100%
| |
| Chilquinta ................................................. Chile 534,000 50%
| |
| LD S ...................................... ................ Peru 788,000 38%
| |
| T otal . . . . . . . . . .. . . . I.. . . . . . . ....
| |
| . " 1,939,000 ' _
| |
| 45
| |
| | |
| Chile and Peru SAESA Group Global owns a 99.99% equity interest in SAESA, 98.99% of Empresa Electrica de la Frontera S.A.
| |
| (Frontel) and 100% of PSEG Generacion y Energia Chile Limitada (Generacion), collectively known as the SAESA Group. The SAESA Group consists of four distribution companies and one transmission company that provide electric service to 390 cities and towns over 900 miles in southern Chile and a generating corrmpany. The SAESA Group has 120 MW of installed generating capacity in operation (46 MW of natural gas-fired peaker capacity, 51 MW oil-fired, 21 MW hydro and 2 MW wind). The transmission company, Sistema de Transmision del Sur S.A. (STS), provides transmission services to electric generation facilities that have PPAs with distributors in Regions VIII, IX and X and has installed transformation capacity of 918 megavolt-amperes.
| |
| The SAESA Group also owned a 50% interest in an Argentine distribution company, Empresa de Energia Rio- Negro S.A., which. provides generation, transmission and distribution services to approximately 1.47,000 customers in the Province of Rio Negro, Argentina, but was sold in the last quarter of 2006. The management of the SAESA Group is organized and administered according to a centralized administrative structure designed to maximize operational synergies. For additional information related to the SAESA Group, see Item 1. Business-Regulatory Issues.
| |
| Chilquinta and LDS Global and Sempra Energy (Sempra), each own 50% of the shares of Chilquinta, an energy distribution company with numerous, energy holdings, based in Valparaiso, Chile. Following the sale in 2004 of 12% of the shares of. LDS to the public, Global and Sempra own 75.9% of LDS, an electric distribution company located in Lima, Peru. As part of the Chilquinta and LDS investments, Global and Se'mpra also own Tecnored and Tecsur, located in Chile and Peru, respectively. These companies provide procurement and contracting services to Chilquinta, LDS and others.
| |
| As equal partners, Global and Sempra share in the management of Chilquinta and LDS. However, Sempra has assumed lead operational responsibilities at Chilquinta, while Global has assumed lead operational responsibilities at LDS. The shareholders' agreement provides for important veto rights over major partnership decisions including dividend policy, budget approvals, management appointments and indebtedness. ! I:
| |
| Chilquinta' operates under a nonmexclusive perpetual franchise within Chile's Region V which is located just north and west of Santiago. Global believes that direct competition for distribution customers would be uneconomical for potential competitors. LDS operates under an -exclusive, perpetual franchise in the southern portion of the city of Lima and in an area just south' of the city along the coast serving a population of approximately 3.2 million. Both Chilquinta and LDS purchase energy for distribution from' generators in their respective markets on a contract basis. For additional information related to Chilquinta and LDS, see Item 1. Business-Regulatory Issues.
| |
| ITEM 3. LEGAL PROCEEDINGS PSE&G In November 2001, Consolidated Edison Company of New York, Inc. (Con Edison) filed a complaint against PSE&G, PJM and NYISO with FERC asserting a failure to comply with agreements between PSE&G and Con Edison covering 1,000 MW of transmission. PSE&G denied the allegations set forth in the complaint. An Initial Decision issued by an ALJ in April 2002 upheld PSE&G's claim in part but also accepted Con Edison's contentions in part. In December 2002, FERC issued an order modifying the Initial Decision and remanding a number of issues to the ALJ for additional hearings, including issues related to the development of protocols to implement the findings of the order and regarding Phase II of the complaint.
| |
| The ALJ issued an Initial Decision on the Phase II issues in June 2003 and in August 2004, FERC issued its decision on Phase II issues. While those decisions were largely favorable to PSE&G, PSE&G sought rehearing as to certain issues, as *did Con Edison. Those rehearing applications are currently pending.
| |
| The August 2004 order required that PJM, NYISO, Con Edison and PSE&G meet for the purpose of developing operational protocols to implement FERC's directives. On February 18, 2005, NYISO, PJM and 46
| |
| | |
| PSE&G submitted a joint compliance filing pursuant to FERC's August 2004 decision. FERC approved the joint proposals on May 18, 2005 and they took effect on July 1, 2005. In subsequent. filings to FERC regarding the efficacy of these protocols, Con Edison continues to claim that the obligation's under the agreements as interpreted, by the FERC's orders are not being met. In December 30, 2005 and January 19, 2007 filings with FERC, Con Edison claims to have incurred $111 million in damages, and has requested FERC to require refunds of this amount. To the extent that this claim is directed at PSE&G, PSE&G believes that the claim has no legal basis and that, in any event, PSE&G has meritorious defenses to: the claim. PJM, NYISO, Con Edison and PSE&G have agreed to a work plan under which they will attempt, during the Spring of.2007,, to address operational. issues associated with the protocols and to address Con Edison's refund claim. Con Edison has also requested that, if these settlement discussions are not successful, that FERC convene judge-mediated settlement discussions, to be followed by hearings if necessary. The scope of the discussions envisioned under the work plan are not currently expected, however, to encompass a comprehensive review of all matters raised in the November 2001 complaint or the pending rehearing requests of the FERC's orders. As this matter is currently pending before FERC, PSEG and PSE&G are unable to predict the outcome of this proceeding.
| |
| Energy Holdings India Global has a 20% ownership interest in PPN, which sells its output under a long-term PPA with the TNEB. TNEB has not made full payment to PPN for the purchase of energy under the PPA. Resolution of the past due receivables against which PPN has established reserves was expected to be achieved in 2005 by a joint working group including.the Central Electric Authority (CEA), PPN and TNEB. However, in the latter part of 2005, the CEA reportedly stated that it had no jurisdiction in the matter and. referred the parties to the Tamil Nadu Electric Regulatory Commission (TNERC). Neither PPN nor Global believe that TNERC has jurisdiction over Capital Cost Approval, a significant component of the receivables reserve. An adverse outcome concerning the disputed Capital Cost Approvals could result in impairment of this investment.
| |
| On March 26, 2004, Global and El Paso Energy Corporation (which sold its ownership interest in PPN in 2005) filed a notice of arbitration on behalf of PPN against TNEB under the arbitration clause of the PPA, asserting that they have the right as minority shareholders to protect the contractual rights of PPN where PPN* has failed to exercise those rights itself. In response, PPN filed a petition for an anti-suit injunction against the arbitration. Global successfully defended against the petition in two lower courts. PPN has filed its final appeal in the Supreme Court of India (SLP Civil No. 23169). Hearings that began on January 24, 2005 have resulted in a stay of PSEG's continued actions in the arbitral court pending a decision by the Indian Supreme Court, which is expected in due course.
| |
| On December 30, 2006, Global petitioned the Company Law Board (Law Board) in Chennai, India to withdraw, without prejudice, its case against certain other members of PPN's Board of Directors, PPN management and certain other PPN shareholders for failure to act in PPN's best interest and other assertions.
| |
| The Law Board issued the order as requested and the other parties did not object. The withdrawal of the Law Board case is expected to result in an eventual dismissal of the injunction against the arbitration described above.
| |
| As of December 31, 2006, Global's total investment in PPN was approximately $34 million.
| |
| Turkey From about 1995 through 2001, Global and its partners expended approximately $12 million towards the construction of a power plant in the Konya-Ilgin region of Turkey In 2001, Turkey passed legislation and otherwise deprived Global of rights and fair and equitable treatment and expropriated Global's Concession contract for the power plant project without compensation, despite the Turkish Government's.,obligation to compensate Global for its costs under the existing contract and Turkish law. In 2002, Global initiated arbitration before the International Centre for Settlement of International Disputes seeking return of sunk costs, lost profits, interest and attorney fees and costs. A decision in this matter was made in January 2007 under which the Turkish Government will be required to pay Global and its partners approximately $20 million for sunk costs, interest and arbitration fees. After legal contingency fees, Global expects to receive approximately $7 million, after tax, for its share of the project. Global expects to receive payment in the second quarter of 2007. .. .
| |
| 47
| |
| | |
| PSEG, PSE&G, Power and Energy Holdings In addition to matters discussed above, see information on the following 'proceedings at the pages indicated for PSEG and each of PSE&G, Power and Energy Holdings as noted:
| |
| (1) Page 16. (PSEG, PSE&G and Power) FERC proceedings with MISO and PJM relating to RTOR and SECA methodology, Docket No. ER05-6-000 et al.
| |
| (2) Page 16. (PSEG, PSE&G and 'Power) FERC proceeding relating to PJM Long-Term Transmission Rate Design, Docket No. EL05-121-000.
| |
| (3) Page 18. (Power) PSEG Power Connecticut's filing with FERC on November 17, 2004, Docket No. ER05-231-000, to request RMR compensation.
| |
| (4) Page 18. (PSEG, PSE&G and Power) PJM Reliability Pricing Model filed with FERC on August 31, 2005, Docket Nos. ERO5-1410-000 and EL05-148-000.
| |
| (5) Page 22. (PSEG and PSE&G) BPU proceeding on August 1, 2005 relating to ratepayer protections due to repeal of PUHCA under the Energy Policy Act of 2005. Docket No. AX05070641.
| |
| (6) Page 23. (PSE&G) BPU proceeding relating to Electric Base Rate Case financial review, Docket No. ER02050303.
| |
| (7) Page 23. (PSE&G) PSE&G's BGSS Commodity filing with the BPU on May 28, 2004, Docket No. GR04050390.
| |
| (8) Page 24. (PSE&G) Remediation Adjustment Clause filing with the BPU on April 25, 2005, Docket No. GR05040383.
| |
| (9) Page 24. (PSE&G) PSE&G Petition for increase of gas base rates filed with BPU on September 30, 2005, Docket No. GR05100845.
| |
| (10) Page 24. (PSE&G) Deferral Proceeding filed with the BPU on August 28, 2002, Docket No.
| |
| EX02060363, and Deferral Audit beginning on October 2, 2002 at the BPU, Docket No. EA02060366.
| |
| (11) Page 25. (PSE&G) BPU Order dated December 23, 2003, Docket No. E002120955 relating to the New Jersey Interim Clean Energy Program.
| |
| (12) Page 29. (Power) Power's Petition for Review filed in the United States Court of Appeals for the District of Columbia Circuit on July 30, 2004 challenging the final rule of the United States Environmental Protection Agency entitled "National Pollutant Discharge Elimination System-Final Regulations to Establish Requirements for Cooling Water Intake Structures at Phase II Existing Facilities," now transferred to and venued in the United States Court of Appeals for the Second Circuit with Docket No. 04-6696-ag.
| |
| (13) Page 31. (Power) Filing of Complaint by Nuclear against the DOE on September 26, 2001 in the U.S.
| |
| Court of Federal Claims, Docket No. 01-0551C seeking damages caused by DOE's failure to take possession of spent nuclear fuel. The complaint was amended to include PSE&G as a prior owner in interest.
| |
| (14) Page 152. (PSE&G) Investigation Directive of NJDEP dated September 19, 2003 and additional investigation Notice dated September 15, 2003 by the EPA regarding the Passaic River site. Docket No. EX93060255.
| |
| (15) Page 153. (Power) PSE&G's MGP Remediation Program instituted by NJDEP's Coal Gasification Facility Sites letter dated March 25, 1988.
| |
| (16) Page 155 (Energy Holdings) Italian government investigation regarding allegations of violations of Prisma's air permit for the San Marco facility.
| |
| PSE&G and Power In addition, see the following environmental related matters involving governmental authorities. PSE&G and Power do not expect expenditures for any such site relating to the items listed below, individually or for all such current sites in the aggregate, to have a material effect on their respective financial condition, results of operations and net cash flows.
| |
| (1) Claim made in 1985 by the U.S. Department of the Interior under CERCLA with respect to the Pennsylvania Avenue and Fountain Avenue municipal landfills in Brooklyn, New York, for damages to 48
| |
| | |
| natural resources. The U.S. Government alleges damages of. approximately $200 million. To PSE&G's knowledge there has been no action on this matter since 1988.
| |
| (2) Duane Marine Salvage Corporation Superfund Site is in Perth. Amboy; Middlesex County, New Jersey. The EPA had named PSE&G as one of several potentially responsible parties. (PRPs) through' a series of administrative orders between December 1984 and March 1985. Following work performed by the PRPs, the EPA declared on May 20, 1987 that all of its administrative orders had been satisfied. The NJDEP, however, named PSE&G as a PRP and issued its own directive dated October 21, 1987. Remediation is currently ongoing.
| |
| (3) Various Spill Act directives were issued by NJDEP to PRPs, including PSE&G with respect to the PJP Landfill in Jersey City, Hudson County,' New Jersey, ordering payment of costs associated with operation and maintenance, interim remedial measures and a Remedial Investigation and Feasibility Study (RI/FS) in excess of $25 million. The directives also sought reimbursement of NJDEP's past and future oversight costs and the costs of any future remedial action.
| |
| (4) Claim by. the EPA, Region III, under CERCLA with respect to a Cottman Avenue Superfund Site, a former non-ferrous scrap reclamation facility located in Philadelphia, Pennsylvania, owned and formerly operated by Metal Bank of America, Inc. PSE&G, other utilities and other companies are alleged to be liable for contamination at the site and PSE&G has been named as a PRP. A Final Remedial Design Report was submitted to the EPA in September of 2002. This document presents the design details that will implement the EPA's selected remediation remedy. The costs of remedy implementation are estimated to range from
| |
| $14 million to $24 million. PSE&G's share of the remedy implementation costs are estimated between $4 million and $8 million.
| |
| (5) The Klockner Road site is located in Hamilton Township, Mercer County, New Jersey, and occupies approximately two acres on PSE&G's Trenton Switching Station property. PSE&G entered into a memorandum of agreement with the NJDEP for the Klockner Road site pursuant to which PSE&G conducted an RI/FS and remedial action at the site to address the presence of soil and groundwater contamination at the site.
| |
| (6) The NJDEP assumed control of a former petroleum products blending and mixing operation and waste oil recycling facility in Elizabeth, Union County, New Jersey (Borne Chemical Co. site) and issued various directives to a number of entities, including PSE&G, requiring performance of various remedial actions. PSE&G's nexus to the site is based upon the shipment of certain waste oils to the site for recycling.
| |
| PSE&G and certain of the other entities named in NJDEP directives are members of a PRP group that have been working together to satisfy NJDEP requirements including: funding of the site security program; containerized waste removal; and a site remedial investigation program.
| |
| (7) The EPA sent PSE&G, Power and approximately 157 other entities a notice that the EPA considered each of the entities to be a potentially responsible party (PRP) with respect to contamination in Berry's Creek in Bergen County, New Jersey and requesting that the PRPs perform a Remedial Investigation/Feasibility Study (RI/FS) on Berry's Creek and the connected tributaries and wetlands. Berry's Creek flows through approximately 6.5 miles of areas that have been used for a variety of industrial purposes and landfills. The EPA estimates that the study could be completed in approximately five years at a total cost of approximately $18 million. PSE&G and Power are unable to predict the outcome of this matter; however, the related costs of this study are not expected to be material.
| |
| (8) The EPA sent PSE&G and three other entities a notice that the EPA considered each of the entities to be a PRP with respect to contamination in the Newark Bay Study Area, which it defined as Newark Bay and portions of the Hackensack River, the Arthur Kill, and the Kill Van Kull..The notice letter requested that PSE&G participate and fund the EPA-approved study in the Newark Bay Study Area and encouraged*
| |
| PSE&G to contact Occidental Chemical Corporation (OCC) to discuss participating in the RI/FS that OCC is conducting in the Newark Bay Study Area. EPA considers the Newark Bay Study Area, along with the Passaic River Study Area, to be part of the Diamond Alkali Superfund Site. The notice states EPA's belief that hazardous substances were released from sites owned by PSE&G and located on the Hackensack River.
| |
| The sites included two operating electric generating stations (Hudson and Kearny Sites), and one former MGP. PSE&G's costs to clean up former MGPs are recoverable from utility customers through the SBC. The Hudson and Kearny Sites were 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 Hudson and Kearny Sites. Power has provided notice to insurers concerning this potential claim. PSE&G and Power are unable to estimate the cost of the investigation at this time.
| |
| 49
| |
| | |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF -SECURITY HOLDERS PSEG's Annual Meeting of Stockholders was held on November 21, 2006. Proxies for the 'meeting were solicited pursuant to Regulation 14A under the Securities Act of 1934. There.was no solicitation of proxies in opposition to management's nominees -as listed, in the proxy statement and- all of. management's nominees were elected to the Board of Directors. Details of the voting are provided:below:
| |
| Votes Votes For, - Withheld Proposal:
| |
| Election of Directors Caroline D orsa ......................... ............ 209,520,856 10,007,648 E . Jam es Ferland .. .............................
| |
| I .... 207,098,164 12,430,340 A lbert R . G am per, Jr .................................... 209,440,773 10,087,731..
| |
| R alph Izzo .............................................. 208,006,028 11,522,476 Votes Broker Votes For Against Abstentions Non-Votes Proposal:
| |
| Ratification' of Appointment of Deloitte &
| |
| Touche LLP as Independent Auditor ........ 214,052,603 '3,273,939 2,210,538 Proposal:
| |
| Stockholder Proposal................... .. .............. 31,230,349 144,720,275, 4,552,843 I
| |
| 50
| |
| | |
| PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES PSEG PSEG's Common Stock is listed on the New York Stock Exchange, Inc. As of December 31, 2006, there were 94,972 holders of record.
| |
| The graph below shows a comparison of the five-year cumulative return assuming $100 invested on December 31, 2001 in PSEG common stock, the S&P Composite Stock Price Index, the Dow Jones Utilities Index and the S&P Electric Utilities Index.
| |
| 2001 2002 2003 2004 2005 2006 PSEG ..... ..... ..................... 100.00 80.66 115.97 143.91 187.34 198.28 S& P 500 ...................................... 100.00 77.95 100.27 111.15 116.59 134.96 D J U tilities .................................... 100.00 76.68 98.97 128.72 160.85 187.61 S& P E lectrics ................................. 100.00 84.92 105.17 132.94 156.24 192.43 200.00 150.00
| |
| *--PSEG 100.00 -*-S&P 500
| |
| -a--DJ Utilities 50.00
| |
| --- S&P Electrics 0.00 2001 2002 2003 2004 2005 2006 The following table indicates the high and low'sale prices for PSEG's Common Stock and dividends paid for the periods indicated:
| |
| Dividend Common Stock High Low Per Share 2006:
| |
| First Q uarter ..................................................... $72.45 $63.97 $0.57 Second Q uarter ................................................... $67.63 $59.00 $0.57 T hird Q uarter ............................................ ; ....... $72.61 $60.47 $0.57 Fourth Q uarter ................................................... $68.10 $59.12 $0.57 2005:
| |
| First Q uarter ..................................................... $56.23 $49.32 $0.56 Second Q uarter ................................................... $61.66 $52.00 $0.56 Third Q uarter ..................................................... $68.47 $59.09 $0.56 Fourth Q uarter ................................................... $67.58 $56.05 $0.56 In January 2007, PSEG's Board of Directors approved a one and one half-cent increase in its quarterly common stock dividend, from $0.57 to $0.585 per share, for the first quarter of 2007. This increase reflects an indicated annual dividend rate of $2.34 per share. For additional information concerning dividend payments, dividend history, policy and potential preferred voting rights, restrictions on payment and common stock repurchase programs, see Item 7. MD&A-Overview of 2006 and Future Outlook and Liquidity and Capital Resources and Note 9. Schedule of Consolidated Capital Stock and Other Securities of the Notes.
| |
| 51
| |
| | |
| The following table indicates the securities authorized for issuance under equity compensation plans as of December 31, 2006:
| |
| Number of Securities to be Issued Upon WeightedTAverage Number of Securities Exercise of Exercise Price of Remaining Available Outstanding Outstanding for Future Issuance Options, Warrants Options, Warrants Under Equity and Rights and Rights Compensation Plans Plan Category (#) ($) (#)
| |
| Equity compensation plans approved by security h old ers .................... ....................... 1,623,169 42.42 11,851,709 Equity compensation plans not approved by security holders ................................... 192,833 44.37 1,909,235(A)
| |
| T otal .................... .............. ...... 1,816,002 42.63 13,760,944 (A) Shares issuable under. the PSEG Employee Stock Purchase Plan, Compensation Plan for Outside Directors and Stock Plan for Outside Directors.
| |
| For additional discussion of specific plans concerning equity-based compensation, see Note 17. Stock Options and Employee Stock Purchase Plan of the Notes.
| |
| PSE&G All of the common stock of PSE.&G is owned by PSEG. For additional information regarding PSE&G's ability to continue to pay dividends, see Item 7. MD&A-Overview of 2006 and Future Outlook.
| |
| Power All of Power's outstanding limited liability company membership interests are owned by PSEG. For additional information regarding Power's ability to pay dividends, see Item 7. MD&A-Overview of 2006 and Future Outlook.
| |
| Energy Holdings All of Energy Holdings' outstanding limited liability company membership interests are owned by PSEG. For additional information regarding Energy Holdings' ability to pay dividends, see Item 7. MD&A-Overview of 2006'and Future Outlook. "
| |
| 52
| |
| | |
| ITEM 6. SELECTED FINANCIAL DATA PSEG The information presented below should 'be read in conjunction with the Management's Discussion and Analysis (MD&A) and the Consolidated Finaricial Statements -and Notes to Consolidated Financial Statements (Notes).
| |
| For the Years Ended December 31, 2006 2005 2004 2003 2002 (Millions, where applicable)
| |
| Operatirig Revenues(A) ............. .................. $12,164 $12,164 $10,610 .$10,839. $ 8,037 Income from Continuing Operations(B) .............. $ .752 $ 886 $ 795 $ 855 $ :403 N et Incom e ............. ................................... .$., .739 $ .661 $ 726 $ 1,160 $ .235 Earnings per Share:
| |
| .Income from Continuing Operations:
| |
| B asic(B ) .... . ............. ........ .................. $ 2.99 $ 3.69 $ 3.35 $ 3.75 $ 1.94 Diluted(B) .................. $, 2.98, $ 3.63 $ -3.34 $ 3.75 $ 1.94 Net Income:
| |
| B asic ..... ...... ...... ................. ......... .$ 2.94 $ 2.75. $ 3.06 $ 5.68 $ 1.13 D iluted ... ....... ............ .. .......... $ 2.93 $ 2.71 .$ 3.05 $ 5.07 $ 1.13 Dividends Declared per Share .......... ...... I .. 2.28 $ 2.24 $ 2.20 $ 2.16 $ 2.16 As of December 31:
| |
| Total Assets ...................... ....... $28,570 .$29,821 $29,260 $28,132 $26,113 Long-Term Obligations(C) ..................... $10,417 $11,329 $12,663 $12,729 $10,889 (A) Includes adjustments to net revenues and expenses for prioryears related. to one of PSE&G's contracts that had previously been recorded on aigioss basis. For'the years ended December 311, 2005, 2004, 2003 and 2002, the adjustments reduced Operating Revenues by $214 million, $162 million, $142 million and
| |
| $90 million, respectively, with no impact on Operating Income. See Note. 1. Organization and Summary
| |
| *of Significant Accounting Policies for additional information.
| |
| (B) Income from Continuing Operations for 2006 include an after-tax charge of $178 million, or $0.70 per share related to the sale of RGE. Income from Continuing Operations for 2002 include.aftertax charges of $368 million, or $1.76 per share,,related to losses from Energy Holdings' Argentine investments.
| |
| (C) Includes capital lease obligations.
| |
| PSE&G The information presented below. should be read in conjunction with.,the MD&A, the Consolidated Financial Statements and the Notes.
| |
| For the Years. Ended December 31, ,
| |
| 2006 2005 2004- 2003 2002 (Millions) "
| |
| Operating Revenues(A) ........ ..................... .$ 7,569 $ 7,514. $ 6,810 $ 6,598 $ 5,829 Income Before Extra&rdinary Item ...... ........ .. $ 265 $ 348 $ 346 $ 247 $ 205 Net Incom e ......... ....... , .... ........ ... :........... $ 265 $ 348 $ 346 .$ 229- $ 205 As of December 31:*
| |
| Total Assets ......... '....... ....... $14,553 $14,297 '$13,586. $13,177 $12,867 Long-Term Obligations ..:.... ............. $ 4,711 $ 4,745 $ 4,877 ..$ 5,129 $ 5,050 (A) .Includes adjustments to net revenues and expenses for prior years related toone of PSE&G's contracts that had previously been recorded on a gross basis. For the years ended December 31, 2005, 2004, 2003 and 2002, the adjustments reduced Operating Revenues by $214 million, $162 million, $142 million and
| |
| $90 million, respectively, with no impact on.Operating Income. See Note 1. Organization and Summary of Significant Accounting Policies for additional information.
| |
| Power Omitted pursuant to conditions set forth in;General Instruction I of Form 10-K.
| |
| Energy. Holdings . .
| |
| Omitted 15ursuant to conditions set forth in General Instruction I of Form 10-K.
| |
| 53
| |
| | |
| ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL' CONDITION AND RESULTS OF OPERATIONS (MD&A)
| |
| This combined MD&A 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 other representations. výhatsoever as to any other company.
| |
| OVERVIEW OF 2006 AND FUTURE OUTLOOK PSEG, PSE&G, Power and Energy Holdings .-
| |
| PSEG's business consists of four reportable segments, which are PSE&G, Power and .the. two direct subsidiaries of Energy Holdings: PSEG .Global L.L.C. (Global) and PSEG Resources L.L.C. (Resources).
| |
| The following discussion relates to the markets in which PSEG's subsidiaries compete, the: corporate strategy for the conduct of PSEG's businesses within these. markets and significant events that have occurred during 2006 and expectations for 2007 for PSE&G, PoWer and Energy Holdings, as well as the key factors that will drive the future performance of these businesses.
| |
| Termination of Merger Agreemint 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' Exeion a formal notice terminating the Merger under the provisions of the Merger Agreeme'nt.-
| |
| PSE&G PSE&G operates ýis an electric and .gas public utility in New Jersey under cost-based regulation by ,the New Jersey.Board:of Public Utilities (BPU) for -its distribution operations and by the Federal Energy Regulatory Commission (FERC) for 'its electric transmission 'and wholesale sales operations.
| |
| Consequently, the earnings of PSE&G are largely determined by 'the regulation of its rates, by thoge agencies. In February 2007, the BPU'approved the results of New Jersey's annual Basic Generation Service (BGS)-Fixed Price (FP) and BGS-Commercial and Industrial Energy Price (CIEP) auctions and PSE&G successfully secured contracts 'to provide the electricity requirements for the majority of its customers' needs.
| |
| Overview of 2006ý'-- .. ..
| |
| During 2006 PSE&G:
| |
| reached a settlement agreement inthe Gas Base. Rate Case with the BPU'Staff, New Jersey'Public Ratepayer. Advocate (RPA) and other intervetfing' parties which was approved by the BPU. on November 9, 2006 and provides for an annual increase in gas revenues of'$40 million, an adjustment to lower book 'depreciation expense 'for. PSE&G by approximately $26. million annually and the amortization of'accumulated cost of removal that will further reduce depreciation and amortization expense by $13 million annually for five years.
| |
| * reached a settlement agreement in the Electric Distribution Financial Review with 'the BPU Staff, RPA and other intervening parties concerning the excess depreciation rate credit which was approved by the BPU on November 9, 2006,and authorizes a reduction in' the credit to' $22.million, resulting in additional revenue to PSE&G of approximately $47 million annually based on current sales volumes.
| |
| Future Outlook PSE&G believes that the decisions in November 2006 for both gas. and electric base rates positions it to earn reasonable returns on investment in the future. The full year impact of these decisions combined with an anticipated return to more normal weather conditions is expected to improve PSE&G's margins for 2007 and beyond......''
| |
| 54
| |
| | |
| The risks to 'PSE&G's business generally relate to the treatment of the various rate and other issues by the state and federal regulatory agencies, specifically the BPU and FERC. PSE&G's success will depend, in part, on its abilityto attain a reasonable rate of return,' continue cost containment initiatives, maintain system reliability and safety levels and continued recovery, with an adequate return, of the regulatory assets it has deferred and th'e investments it plans to make in its electric and gastransmission and distribution system.
| |
| Since PSE&G earns no margin on the commodity 'portion of its electric and gas sales,-through tariff agreements, there is no anticipated commodity. price volatility for PSE&G.
| |
| Power . ,
| |
| Power is an electric generation and wholesale energy marketing and trading company that is focused on a generation market in the Northeast and Mid Atlantic U.S. Power's..principal operating subsidiaries, PSEG Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy Resources & Trade LLC (ER&T) are regulated by. FERC. Through its, subsidiaries, 'Power seeks to balance its generation production, fuel requirements and supply obligations through integrated energy marketing and trading, enhance its ability to produce. low-cost energy through efficient nuclear and coal operations 'and pursue modest growth based on market conditions. Changes in the operation of Power's generating facilities, fuel and capacity prices, expected contract prices, capacity factors or other assumptions could materially affect, its ability to meet earnings targets and/or liquidity requirements. In addition to the electric generation business described above, Power,'s revenues include gas supply sales under- the Basic Gas Supply :$ervice (BGSS) contract with PSE&G.
| |
| As a merchant generator, Power's profit is derived from selling under contract or on the spot' market a range', of diverse products such as energy, capacity, emissions credits, congestion credits, and a series of energy-related products that the system operator uses to optimize the operation Of the energy grid, known as ancillary services'. Accordingly, the prices of commodities,'such as electricity, gas, coal and emissions, as well as the availability of Power's diverse, fleet of generation units to produce these 'products, can have a material effect on Power's -profitability. In recent years, the prices at which transactions are entered into.for future delivery of these products, as evidenced through the market for forward contracts at points such as PJM Interconnection, L.L.C. (PJM) West, have escalated considerably over historical prices. Broad market price increases. such as these are expected to'have a positive effect on Power's results. Historically, Power's nuclear and coal-fired facilities have produced over 50% and 25% of Power's production, respectively. With the vast majority of its power sourced from lower-cost units, the rise in electric prices is anticipated to yield higher near-term margins' for Power*.Power afiticipates recognizing these higher near-term margins, especially on the portion of its output that was more recently contracted or sold on the spot market. Over a lohger-term horizon, if. these higher prices are sustained at prices reflective of what the current forward markets indicate, it would yield an attractive environment for Power to contract the sale of its anticipated output, allowing for potentially sustained higher profitability than recognized in prior years. These'escalated prices..also increase the cost of replacement power, thereby placing incremental risk on the operations of the generating units to produce these products. - : "
| |
| Power seeks to mitigate volatility in its results by. contracting in advance for a significant portion of its anticipated electric output and fuel needs. Power believes this contracting strategy increases stability of earnings and cash flow. By keeping some portion of its output uncontracted, Power is able to retain some exposure to' market chariges as well as provide s'ome. Protecti6n in' the e', ent. of 'unexpected 'generation outages.-
| |
| Power seeks to sell a. portion of its anticipated low-cost nuclear and coal-fired generation over.a multi-year forward horizon, normally over a period of approximately two to four years. As of February 14, 2007, Power has contracted for approximately 100%' of its finticipated 2007.niclear and coal-*fired generation, with 90% to 100% contracted for 2008 and 35% to 50% contracted'for 2009, with a modest amount contracted beyond 2009. '
| |
| .Power has also entered into contracts for the futuredelivery of nuclear fuel and coal to~support its contracted sales discussed above. As of February 1, 2007, Power had contracted 'for.1.00% ,of its anticipated nuclear uranium fuel needs through :2011, and approximately 70% of its average anticipated coal needs, including transportation, through. 2009. These estimates are.. subject to, change: based, upon the level of operation, and in particular for coal,. are subject to market.demands and.pricing..
| |
| By. contrast, Power takes a more opportunistic approach in. hedging its anticipated natural gas-fired generation. The generation from these 'units is less predictable, as these units 'are generally dispatched only 55-
| |
| | |
| when aggregate market demand has exceeded the supply provided by lower-cost units. The -natural gas-fited units generally provide a lower contribution to-'the- margin of Power than either the nuclear or coal units.
| |
| Power will generally purchase natural. gas as .gas-fired generation is'i required. to supply forward sale commitments.
| |
| In a changing nlarket environmient, this hedging strategy may cause Power's reaii'ed prices to be materi'ally different than current market prices. At the present time, some of Power's existing contractual obligations, entered into 'during lower-priced periods, ale anticipated to result in lower margins'than would have been the case if no or little hedging activity had been conducted. Alternatively, in a falling -price environment, this hedging strategy will tend to create margins in excess of those implied by the then current' market. .
| |
| Overview of 2006 During 2006, FERC issued certain orders related to market design that have changed the nature of capacity payments in the New England Power Pool. (NEPOOL) and are schetduled to change the nature:of payments in PJM. In PJM, the Reliability Pricing Model (RPM) will provide generators with differentiated capacity payments based upon the '6cation of their respective facilities. Similarly, the Forward Capacity Market (FCM) settlement in NEPOOL'provides for locational, capacity payments.. FERC has approved the market changes inh each of these markets, with the anticipated start date for RPM set for'June '1,'.2007 and FCM transition'period having begun on December 1, 2006. Power currently receives fixed Reliability-Must-Run (RMR) payments in PJM and NEPOOL for certain of its facilities which are provided to ensure the.
| |
| continued availability'of those facilities.
| |
| Also during 2006 Power: ' "
| |
| * commenced commercial operations of its 1,186 MW, natural gas-fired combined cycle, power generation plant in Linden, New. Jersey;
| |
| * reached an agreement with- the EPA and.'NJDEP that will allow the continued operation of the
| |
| 'Hudson facility and extends for four years the deadline for installing environmentall controls beyond the previous December 31, 2006 deadline;
| |
| .! anniounced its plans to resume direct management of the Salem and Hope Creek facilities before the expiration of the Operating Service .Contract With Exelon Geneiation and to. have the senior management team at those facilities to become employees of Power effective January 1, 2007; 'ard 9.entered into an agreement to sell its Lawrenceburg Energy Center, a 1,080 MW gas-fired combined cycle electric generating plant in Lawrenceburg, Indiana.
| |
| Future Outlook Power expects margin improvements in 2007 as higher prices for its nuclear and coal output are realized due to the rolling nature of its forward hedge positions and the expiration of its contract in Connecticut. The sale of Lawrenceburg and anticipated 'improvements in' margins on serving the BGSS contract 'are also expected to benefit future' results. .
| |
| In, addition, Power-believes that the redesign in capacity markets, discussed above, could lead tochanges in the value of the majority of'its generating capacity and result in incremental margin of $100 million to $150 million in 2007, with higher increases in future years as the full year impact is realized and existing capacity contracts expire. ' . . '
| |
| A key factor in Power's ability to achieve its objectives is. its capability to operate its nuclear and fossil stations at sufficient capacity factors to' limit the need to purchase higher-priced electricity to, satisfy its obligations. Power's ability to achieve its objectives will also depend on the implementation of reasonable capacity markets. Power must also be able to effectively manage its construction projects and continue to economically operate its generation facilities under increasingly stringent environmental requirements. In addition,. with an increase in competition and market complexity and constantly changing forward prices, there is no assurance that Power will' be able to contract it's output at attractive prices. While these increases may have 'a potentially sign'ificant beneficial impact on margins, they 'could also' raise any replacement 'power costs that Power may incur in the event of unanticipated outages, and could also further increase liquidity requirements as a result of contract obligations. Power could also be impacted by the lack of consistent rules in markets. outside of PJM, including, rate-regulated utility ownership of generation and other regulatory
| |
| . 56
| |
| | |
| actions favoring, non-competitive markets. For additional information on liquidity requirements, see Liquidity and Capital Resources..
| |
| Energy Holdings Energy Holdings' operations are principally conducted through its subsidiaries Global, which -has invested in international, rate-regulated distribution companies and domestic and international generation companies, and Resources, which primarily invests in energy-related levieraged leases.
| |
| Global Global has reduced its international risk by opportunistically monetizing investments that no' longer had a strategic fit. During the past three years, Global has reduced its overall investments from $2.6 billion to $1.9 billion, driven by sales of over $1 billion of investments in China, Brazil, 'Poland, -India, Africa and the Middle East. See Note 4. Discontinued Qperations, Acquisitions, Dispositions and Impairments of the Notes, for a discussion of these sales. The decrease in Global's portfolio size due to the above, sales was partially offset by strong earnings from its Texas merchant generation business and its electric distribution companies in Chile and Peru. Approximately 65% of Global's remaining investments are in Chile and Peru with another 27% in the United States. Other modest sized investments in Italy, India and Venezuela comprise the remaining 8% of Global's portfolio.
| |
| As a result of the investment sales, approximately 50% of Global's future earnings is expected to be derived from its domestic generation business, of which over half is' from' its' 2,000 MW gas-fired combined cycle merchant generation business in Texas with the'balance from its 12 fully contracted generating facilities in which Global's ownership percentage equates to nearly 400 MW. The other 50% of Global's earnings is expected to be essentially from three rate-regulated electric distribution businesses in Chile and Peru which serve approximately two million customers and a 183 MW hydro generation facility in Peru. The regulatory environment in both Chile and Peru has generally been constructive since Global acquired these investments.
| |
| Chile maintains an investment grade rating and Peru's rating, althouch non-investment grade, has improved.
| |
| Energy Holdings continues to review Global's portfolio, with a focus on its international investments. As part of this review, Energy Holdings considers the returns of its remaining investments against alternative investments across the PSEG companies, while considering the strategic fit and relative risks of these businesses. Energy Holdings is also considering the impact of any potential sales of its investments on its targeted credit metrics and' debt service requirements and at present, Global anticipates that it will take into consideration an appropriate balance of the use of proceeds from any sales with returns of equity to PSEG and debt repayments.
| |
| Resources Resources primarily has invested in energy-related leveraged leases. Resources is focused on maintaining its- current investment portfolio and does not expect to make any new investments.
| |
| Overview of 2006 During 2006, Energy Holdings had over $600 million of proceeds from the sales of Global's investments in two generating stations in Poland, the sale of its interest in RGE, a distribution company in Brazil and from its sale of its remaining 46% interest in Dhofar Power.
| |
| Energy Holdings used this cash as well as funds on hand at December 31, 2005 and cash from operations to return $520 million of capital to PSEG, redeem all $309 million of its 7.75% 2007 Senior Notes in January 2006 and redeem $300 million of its 8.625% 2008 Senior Notes in October 2006.
| |
| Future Outlook Energy Holdings expects decreased margins at Global in 2007 primarily relating to the absence of mark-to-market gains, a slight reduction in spark spreads and anticipated maintenance outages at Texas Independent Energy L.P. (TIE)'s plants. Also contributing to the expected decrease are higher taxes, the impact of adopting FIN 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109" (FIN 48) and related standards and lower earnings due to asset sales partly offset by the impact of early adoption of FAS 157.
| |
| 57
| |
| | |
| As discussed above, Global's earnings are primarily derived from its investments in the, United States, Chile and Peru. As such, Global's success will depend on continued strong energy markets in Texas and the economic and efficient operation of its electric distribution companies in Chile and Peru, including its ability to achieve reasonable rates and meeting expected growth in usage. The success of Global's foreign investments will also depend on stable political, regulatory and economic policies, including foreign currency exchange rates and interest rates, particularly for Chile and Peru.
| |
| Resources' ability to realize tax benefits associated with its leveraged lease investments is dependent upon taxable income generated by its affiliates. Resources' earnings and cash flows are expected to decrease in the future as the investment portfolio matures. Resources faces risks with regard to the creditworthiness of its counterparties; the weighted average credit rating of its lessees at December 31, 2006 was A-/A3. Certain lessees' ratings are below investment grade. Theý lease structures have various credit enhancement mechanisms. Resources monitors the credit rating of the lessees very closely; calling letters of credit and taking. other measures when appropriate.
| |
| Energy Holdings also faces risks related to the tax treatment of uncertain tax positions which will be impacted by new accoun.ting guidance under FIN.48 and FASB Staff Position 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", both of which are effective as of January 1, 2007. Based on its evaluation of this new guidance, Energy Holdings estimates that it will record a reduction to Retained Earnings of approximately $190 million to $215 million, effective January 1, 2007. In addition, this new guidance will 'have an impact on Energy Holdings' future revenues and earnings, including an anticipated earnings reduction of
| |
| $25 million to $35 million in 2007, as compared to 2006, which'represents the majority of the anticipated impact on PSEG. See Note.2. Recent Accounting Standards of the Notes for further discussion.;-
| |
| 58
| |
| | |
| RESULTS OF OPERATIONS PSEG, PSE&G, Power andEnergy Holdings Net' Income for the year ended December 31,"2006 was $739 million or $2.93 per share of common stock, diluted, based on approximately 252 million average shares 'outsiandihg. Net' Income for 'the 'year ended December 31, 2005 was $661 million or $2.71 per share of common stock, diluted, based on. approximately 244 million average shares outstanding. Included in 2006 Net Income was.a $208 million after-tax estimated loss on disposal related to an agreement to sell Lawrenceburg. Included in 2005 Net Income was a $178 million, after-tax loss from the sale of Power's Waterford generation facility. See Note 4. Discontinued Operations, Acquisitions, Dispositions and Impairments of the Notes. Net Income for the year ended December 31, 2004 was approximately $726 million or $3.05 per share of common stock, diluted, based on approximately 238 million average shares outstanding.
| |
| Earnings (Losses)
| |
| Years Ended December 31, 2006 , 2005 2004 (Millions)
| |
| PSE&G ............. ............................... . ................... $265 $ 348 $346 Power ... :....................................................................... 515 434 367 Energy Holdings:
| |
| G lob al .............................. .......... .... ........................ (11) 112' 93 R esources .................................................................... 63 92 68 O th er(A ) .................................................................... (3) (5) (10)
| |
| T otal E nergy H oldings ........................................................... 49 199 151 O ther(B) ............... ......................................... (77) (95) (69)
| |
| PSEG Income from Coitinuing Operations(C) ... ........ 752 886 795 Loss from Discontinued Operations, including Gain (Loss) on Disposal(D) ...... (13) (208) (69)
| |
| Cumulative Effect of a Change in Accounting Principle(E) ...................... -- (17)
| |
| PSEG Net Income ...................... ............................ $739 $ 661 $726 Contribution to Earnings Per Share (Diluted)(F) ,
| |
| Years Ended December 31, 2006 2005 2004 PSE &G ...... ........................................... ...................... $ 1.05 $1.42 $ 1.45 Pow er .................................. ........................................ 2.04 1.78 .1.55 Energy Holdings:
| |
| Global ............. ... .................... (0.04) 0.46 0.39 R esources ................................................................ 0.25 0.38 0.28 Other(A ) .......... .................. ...................... (0.01) (0.02) (0.04)
| |
| Total Energy Holdings. .......................................... 0.20 0.82 0.63 O th er(B ) ...................................................................... (0,31) (0.39) (0.29)
| |
| PSEG Income from.Continuing Operations (C) .......... :..... 2.98 3.63 3.34 Loss from Discontinued Operations, including Gain (Loss) on Disposal(D)... (0.05) (0.85) (0.29)
| |
| Cumulative Effect of a Change in Accounting Principle(E).............. (0.07),
| |
| PSEG Net Income ......... .. .............................. $ 2.93 $2.71 $ 3.05 (A) Other activities include non-segment amounts of Energy Holdings and its subsidiaries and intercompany eliminations. Non-segment amounts include interest on certain.financing transactions and certain other administrative and general expenses at Energy Holdings.
| |
| (B) Other activities include non-segment amounts of PSEG (as parent company) and intercompany eliminations. Specific amounts include interest on certain financing transactions, Merger expenses and certain administrative and general expenses at PSEG (as parent company).
| |
| (C). Global's Income from Continuing Operations for 2006 includes the $178 million after-tax loss on the sale of Rio Grande Energia S.A. (RGE) in' June 2006.
| |
| 59
| |
| | |
| (D) Includes Discontinued Operations of Lawrenceburg, Skawina and Elcho in 2006, 2005 and 2004, Waterford in 2005 and 2004 and Carthage Power Company (CPC) in 2004 as well as an estimated loss in 2006 on the disposal of Lawrenceburg, the gain on disposal of Elcho and Skawina in 2006, the loss on disposal of Waterford in 2005 and the gain on disposal of CPC in 2004. See Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments of the Notes.
| |
| -(E) Relates. to the adoption of FASB Interpretation (FIN) No.' 47, "Accounting for Conditional Asset Retirement Obligations.'? in 2005. See Note 3. Asset Retirement Obligations of the Notes.
| |
| (F) Earnings Per Share of any segment does not represent a direct legal interest in the assets and liabilities allocated to any one' segment but rather represents'a direct interest in PSEG's assets and liabilities as a whole.
| |
| The year over year changes in PSEG's Net Income primarily relates to changes in Net Income for PSE&G, 'Power and Energy Holdings, discussed below. Also included in PSEG's results for each of the periods were financing costs at the parent level and Merger and Merger-related costs. For the year ended December 31,.2006, PSEG's after-tax costs were $77 million, a decrease $18 million as compared to 2005. For the year ended December 31, 2005, PSEG's after-tax costs were $95 million, an increase of $26 million as compared to 2004. The primary reason for these changes was the change in after-tax Merger and Merger-related costs which amounted to $8 million, $32 million and $4 million for the years ended December 31, 2006, 2005 and 2004, respectively.
| |
| PSEG For the Years Ended December 31, 2006 vs 2005 2005 vs 2004 Increase Increase 2006 2005 2004 (Decrease) % (Decrease) %
| |
| (Millions) ' (Millions)
| |
| Operating Revenues ..................... $12,164 .$12,164 $10,610 $ - - $1,554 15 Energy Costs ........................ $ 6,769 $ 7,040 $ 5,824 $(271) (4) $1,216' 21 Operation and Maintenance ............. $ 2,297 $ 2,282 $ 2,147 $ 15 1 $ 135 6 Write-ddwn of Assets .................... $ 318 $ - $ - $ 318 N/A $ -
| |
| Depreciation and Amortization .......... $ 832 $ 731 $ 683 $ 101 14 $ 48 7 Income from Equity Method
| |
| 'Investments ............................ $ 120 $ 124 $ 119 $ (4) (3) $ 5 4 Other Income and Deductions ........... $ 83 $ 140 $ 121 $ (57) (41) $ 19 16 Interest Expense ......................... $ (808) $ (784) $ (774) $ 24 3 $ 10 .1 Income Tax Expense .................... $. (454) $ (560) $ (484) $(106) (19) $ 76 ' 16 Loss from Discontinued Operations, including Gain (Loss) on Disposal, net of tax ......................... $ (13) $ (208) $ (69) $(195) (94) $ 139 N/A Cumulative Effect of a Change in Accounting Principle, 'net of tax ....... $ - $ (17) $ - $ 17 ' N/A $ (17) N/A PSEG's results of operations are 'primarily comprised of the results of operations Of its operating subsidiaries, PSE&G, Power and Energy Holdings, excluding changes related to intercompany transactions, which are eliminated in consolidation. It also includes certain financing costs at the parent company. For additional information on intercompany transactions, see Note 21. Related-Party Transactions of the Notes.
| |
| For a discussion of the causes for the variances at PSEG in the table above, see the discussions for PSE&G, Power and Energy Holdings that follow.
| |
| PSE&G For the year ended December 31, 2006, PSE&G had Net Income of $265 million, a decrease of $83 million as compared to the year ended December 31, 2005. This decrease was primarily due to delayed decisions in its electric and gas base rate cases combined with the decline in electric and gas delivery volumes. Gas delivery volumes dropped 10% in 2006 as compared with 2005 and electric delivery volumes were down 3%. The weather was the primary cause of these declines with a drop of.16% in the number of degree days impacting gas. Gas commodity prices were extremely high early in 2006, which also contributed 60
| |
| | |
| to a decline in weather 'normalized' sales. THI hours were normal in 2006 but 18% less than 2005 negatively impacting electric sales.
| |
| For the year ended December 31, 2005, PSE&G had Net Income of $348 million, 'a $2 million increase as compared to the year ended December 31, 2004. This slight increase resulted primarily from higher margins, due to favorable weather conditions, and reduced interest expense being substantially offset by higher Operation and Maintenance costs.
| |
| The year-over-year detail for these variances for these periods are discussed in more detail below:
| |
| For the Years Ended December 31, 2006 vs 2005 2005 vs 2004 Increase Increase 2006 2005, 2004 (Decrease) % (Decrease) %
| |
| (Millions) (Millions)
| |
| Operating Revenues ............................ $7,569 $7,514 $6,810 $ 55 1 $704 10 Energy Costs ................................... $4,884 $4,756 $4,122 $128 3 $634 15 Operation and Maintenance .................... $1,160 $1,151 $1,083 $ 9 1 $ 68 6 Depreciation and Amortization ................ $ 620 $ 553 $ 523 $ 67 12 $ 30 6 Other Income 'and Deductions ................. $ 22 $ 12 $ 11 $ 10 83 $ 1 9 Interest Expense ........................... $ (346) $ (342) $ (362) $ 4 , 1 $(20) (6)
| |
| Income Tax Expense ........................... $ (183) $ (235) $ (246) $(52) (22) $ (11) (4)
| |
| Operating Revenues PSE&G has three sources of revenue: commodity revenues from the sales of energy. to customers and in the PJM spot market; delivery revenues from the transmission and distribution of energy through its system; and other operating revenues from the'provision of various services.
| |
| PSE&G makes no margin on gas commodity sales as the costs are passed through to customers. The difference between the gas costs paid under the requirements contract for residential customers and the revenues received from residential customers is deferred and collected from or returned to customers in future periods. Gas commodity prices fluctuate monthly for commercial and .industrial customers and annually through the BGSS tariff for residential customers. In addition, for residential gas customers, PSE&G has the ability to adjust rates upward two additional times and downward at any time, if warranted, between annual BGSS proceedings.
| |
| PSE&G makes no margin on electric commodity sales as the costs are passed through to customers.
| |
| PSE&G secures its electric commodity through the annual BGS auction. Electric commodity supply prices are set based on the results of these auctions for residential and smaller industrial and commercial customers, and are translated into seasonally-adjusted fixed rates. Electric supply for larger industrial and commercial customers is provided at a rate principally based on the hourly PJM real-time energy price. Customers may obtain their electric supply through either the BGS. default electric supply service or through competitive third-party electric suppliers, and the majority of the customers subject to hourly pricing are currently receiving electric supply from third-party suppliers. Any differences between amounts paid by PSE&G to BGS suppliers for electric commodity, and the amounts of electric commodity revenue collected from customers is deferred and collected or returned to customers in subsequent months.
| |
| The $55 million increase for the year ended December 31, 2006, as compared to 2005 was due to increases of $78 million in commodity revenues and $3 million in other operating revenues offset by a decrease of $26 million in delivery revenues.
| |
| The $704 million increase for the year ended December 31, 2005, as compared to 2004 was due to increases of $624 million in commodity revenues, $74 million in delivery revenues and $6 million in other operating revenues.
| |
| Commodity The $78 million increase in commodity revenues for the year ended December 31, 2006, as compared to 2005, was due to an increase in electric commodity revenues -of $213 million offset by a decrease of $135 million in gas commodity revenues. The increase in electric revenues was primarily due to $299 million in higher BGS revenues (higher auction-prices of $346 million offset by reduced sales of $47 million) offset by
| |
| $85 million in lower Non-Utility Generation (NUG) revenues (lower prices of $82 million and by $3 million 61
| |
| | |
| for lower volumes). The decrease in gas revenues was primarily due to $317 million in lower volumes due to weather and $58 million due to the expiration of the Third Party Shopping Incentive Clause in July 2005.
| |
| There is a corresponding $58 million increase in delivery revenues. These were offset by $240 million in higher BGSS prices.
| |
| The $624 million increase in commodity revenues for the year ended December 31, 2005, as compared to 2004, was due to increases in electric and gas revenues of $313 million and $311 million, respectively. The increase in electric revenues was primarily due to $216 million in.higher BGS revenues (higher auction prices of $148 million and increased sales of $68 million) and $97 million in higher NUG revenues (higher prices of
| |
| $98 million offset by $1 million for lower volumes). The increase in gas revenues was primarily due to $291 million in higher BGSS prices and $62 million in higher volumes due to weather offset by the decrease of $42 million- due .to the expiration of the Third Party Shopping Incentive Clause in July 2005. There is a corresponding $42 million increase in, delivery revenues.
| |
| Delivery The $26 million decrease in delivery revenues for the year ended December 31, 2006, as compared to 2005, was due to a $27 million decrease in gas and a.$1 million increase in electric revenues. The.gas decrease was due to $101 million in lower volumes primarily due to weather offset by $74 million in increased prices,
| |
| $58 million of which was due to the expiration of the Third Party Shopping Incentive Clause in July 2005, described above in commodity revenues, $8 million due to rate relief effective November 9, 2006 and $8 million due to the Societal Benefits Clause (SBC) November 1, 2006 rate increase. The electric increase was due primarily to $13 million in higher securitization tariff rates and $8 million from a rate increase effective November 9, 2006, offset by $20 million in lower volumes due to weather.
| |
| The $74 million increase in delivery revenues for the.year ended.December 31, 2005, as compared to 2004, was due to increases in electric and gas revenues of $67 million and $7 million, respectiVely. The electric increase was due primarily to $55 million in higher volumes due to .weather and $12 million in higher rates. The gas increase was due to the expiration of the Third Party Shopping Incentive in July 2005, resulting in an increase of $42 million in delivery revenues. with a corresponding offset in commodity revenues, described above, and a $12 million increase in SBC revenues (offset in Operation and Maintenance Costs below). This was offset by $9 million in lower volume and demand revenues due to weather and $37 million due to the expiration of the Gas Cost Underrecovery Adjustment (GCUA) clause in January 2005.
| |
| Operating Expenses Energy Costs The $128 million increase for the year ended December 31, 2006, as compared to 2005, was comprised of an -increase of $211 million in -electric costs offset by a decrease of $83 million in gas costs. The increase in electric costs was caused by $255 million or 16% in higher prices for BGS and NUG purchases offset by $47 million in lower BGS volumes due to weather. The decrease in gas costs was caused by a $362 million or '17%
| |
| decrease in sales volumes due primarily to weather and $8 million due to the expiration of the GCUA clause in January 2005, offset by $287 million'or 11% in higher prices. -
| |
| The $634 million increase for the year ended December 31, 2005, as compared to 2004, was comprised of increases of $319 million- in electric costs and $315 million in gas costs. The increase in electric costs was caused by a $264 million or 8% increase due to higher prices for BGS and NUG purchases and a $67 million increase due to higher BGS volumes, partially offset by a decrease of $12 million due to lower-NUG volumes. The increased gas costs were due to a $271 million or 16% increase in-gas prices and an $81 million increase in sales volumes due- primarily to higher sales to cogenerators. These were offset by a $37 million decrease due to the expiration of the GCUA clause in January 2005.
| |
| Operation and Maintenance The $9 million increase for the year ended December. 31, 2006, as compared to 2005,. was due primarily to $9 million in increased labor and fringe benefits due to increased wages and Other Postretirement Benefits (OPEB) costs and $7 million in increased bad debt expense. These increases were offset by decreases of $3 million in injuries and damage claims and $2 million in write offs and $2 million in Net Operating Loss (NOL) purchases.
| |
| 62
| |
| | |
| The $68 million increase for the year ended December 31, 2005, as compared to 2004, was due to increased SBC expenses of $27 million ($15 million electric, $12 million gas); $23 million in labor and fringe benefits; $6 million for increased injuries and damages reserves; $4 million for Merger-related expenses; $3 million for higher regulatory commission expenses; $2 million for higher bad debt expenses and $2 million for the purchase of NOL. SBC costs are deferred when incurred and amortized to expense when recovered in revenues.
| |
| Depreciationand Amortization The $67.million increase for the year ended December 31, 2006, as compared to 2005, was comprised .of increases of $70 million from the expiration of an excess depreciation credit, $6 million due to ,amortization of regulatory assets and $3 million due to additional plant in service. These increases were offset by decreases of $5 million due to revised plant depreciation and cost of removal rates, $3 million due to software amortization and $3 million due to the amortization of the Remediation Adjustment Clause (RAC).
| |
| The $30 million increase for the year ended December 31, 2005, as compared to 2004, was due primarily to a $33 million increase in the amortization of securitized regulatory assets, a $4 million increase due to additional plant in service and a $4 million increase in the amortization of the RAC. These were offset by an
| |
| $8 million decrease in software amortization and a $3 million increase -in excess depreciation reserve amortization.
| |
| Other Income and Deductions The $10 million increase for the year ended December 31, 2006, as compared to 2005,- was primarily due to an $8 million income tax gross-up on contributions. in aid of construction (CIAC) in 2006. CIAC are taxable and PSE&G recognizes the gross-up as income when collected. Also included are increases of $1 million of short-term interest income and $1 million in gains on the sale of excess property.
| |
| Interest Expense The $20 million decrease for the year ended December 31, 2005, as compared to 2004, was primarily due to decreases of $22 million due to lower average interest rates and lower amounts of long-term debt outstanding, primarily offset by $5 million in higher short-term debt balances outstanding and higher interest rates.
| |
| Income Taxes The $52 million decrease for the year ended December 31,; 2006, as compared to 2005, was primarily due to $55 million in lower pre-tax income offset by $3 million in various flow-through adjustments.
| |
| The $11 million decrease for the year ended December 31, 2005, as compared to 2004, was primarily due to decreases of $4 million in prior period adjustments, $3 million in various flow-through benefits and $3 million in lower pre-tax income.
| |
| Power For the year ended December 31, 2006, Power had Net Income of $276 million, an increase of $84 million as compared to the year ended December 31, 2005. The increase primarily resulted from higher BGS contract prices and higher sales volumes in the various power pools, supported by improved nuclear operations and the commencement of commercial operations at Linden in May 2006 and at the Bethlehem Energy Center (BEC) in July 2005 and lower generation. costs due to lower pool prices and lower demand under the BGS contract. Power also had lower non-trading mark-to-market losses, which were' approximately
| |
| $1 million, after-tax, in 2006 as compared to $8 million, after-tax, in 2005. Power's increased earnings were partially offset by reduced margins on BGSS, as market prices for natural gas declined from historically high price levels experienced in the second half of 2005 while the cost of gas in inventory was reasonably stable, and lower demand in 2006 due to a warmer winter heating system and customer conservation. Power's earnings were also offset by a $44 million write-down of four.gas engine turbines which are planned for sale in 2007, a $30 million after-tax decrease in Income from the NDT Funds and higher Operation and Maintenance Costs, Depreciation and Amortization and Interest Expense related to operation of the Linden and BEC facilities..
| |
| 63
| |
| | |
| For the year ended December 31, 2005, Power had Net Income of $1.92 million, a decrease of $116 million as compared to the year ended December 31, 2004. Theprimary reason for the decrease was the $178 million Loss on Disposal of Waterford and the $16 million Cumulative Effect of a Change in Accounting Principle recorded in 2005. Power's Income from Continuing Operations for the year ended December 31, 2005 was $434 million, an increase of $67 million as compared to 2004. This increase reflected- higher pricing and increased sales in the various power pools and new wholesale contracts and reduced Operation and Maintenance costs associated with the outage at Hope Creek in 2004. Marked improvement in Power's nuclear operations provided additional low-cost energy to satisfy Power's contractual obligations and to sell into the market at higher prices. The increases at Power were partially offset by interest and depreciation costs related to facilities in Albany, New York, which commenced operation in July 2005 and Lawrenceburg, Indiana, which commenced operation in June 2004.
| |
| The year-over-year detail for these variances for these periods are discussed in more detail below:
| |
| For the Years Ended December 31, 2006 vs 2005 2005 vs 2004 Increase Increase 2006 2005 2004 (Decrease) % (Decrease) %
| |
| , (Millions) (Millions)
| |
| Operating Revenues ............. I .6,057 $6,027 '$5,166 $ 30 - $861 1.7 E nergy C osts ................................ 3,955 $4,266 $3,553 $(311) (7) $713 20 Operation and Maintenance ................ 958 $ 939 $ 948 $ 19 2 $ (9) (1)
| |
| W rite-Down of Assets ...................... S44 $ - $ - $ 44 N/A $ - N/A Depreciation and Amortization ............. 140 $ 114 $ 98 $ 26 23 $ 16 16 Other Income and Deductions.......... I 66 $ 144 $ 117 $ (78) (54 ) $ 27 23 Interest Expense ....................... ....... (148) $-(100) $- (90) $ 48 48 $ 10 11 Income Tax Expense .... .................... (363) $ (318) $ (227) $ 45. 14 '$ 91 40 Loss from Discontinued Operations, including Loss on Disposal, net of tax .... (239) $ (226) $ (59) $ 13 6 $1.67 N/A Cumulative Effect of a Change in Accounting Principle, net of tax .......... $ - $ (16) $ - $ 16 N/A $(16) N/A Operating Revenues The $30 million increase for the year ended December 31, 2006 as compared to 2005 was due to increases of $239 million in generation revenues ,and $27 million in trading revenues, which were partially offset by a decrease of $236 million in gas supply revenues.
| |
| The $861 million increase for the year ended. December 31, 2005, as. compared to 2004, was due to increases of $543 million in generation revenues and $368 million in gas supply revenues, which were partially offset by a decrease of $50 million in trading revenues.
| |
| Generation The $239 million increase in generation revenues for the year ended December 31, 2006, as compared to 2005, was primarily due to an increase of $238 million from higher sales volumes in the various power- pools; supported by improved nuclear operations and the commencement of the commercial operations of Linden in May 2006 and BEC, in July 2005, partially offset by lower pool prices. Also conitributing to the increase was
| |
| $92 million of higher BGS contract revenues due to higher contract prices which were partly 6ffset by a reduction in load being served under the fixed-price BGS contracts and termination of BGS hourly contracts in May 2006. The'increases were partially offset '.by a decrease of $58 million due to certain wholesale contracts en.ing in 2005 and earlS' 2006 and $33 million of unrealized losses on asset-backed electric forward contracts.
| |
| The $543 million increase in generation revenues, for the year ended December 31, 2005,'as compared to 2004, was primarily due to higher revenues of $226 million from higher pricing and increased, sales in the various power pools supported by improved nuclear capacity,, partially offset by reduced load being served under the fixed-priced BGS contracts. Also contributing to .the increase were increases of $103 million from new wholesale contracts, $74 million from operations in New York; largely due to- the -commencement of BEC's operations, $65 million from RMR revenues, which Power began -receiving in 2005 for certain of its generating facilities, and $75 million from increased ancillary services and operating reserves.
| |
| 64
| |
| | |
| Gas Supply
| |
| *The $236 million decrease in gas supply revenues' for the, year ended December 31; 2006, as compared to 2005, was primarily due to decreases of $334 million due to lower demand under the BGSS contract in 200 6 due to a warmer winter .heating season and improved customer conservation in 2006 and a $94: million in decreased prices and gas volumes and pipeline capacity sold to other gas distributors. The decreases were partially offset by an increase of. $i88 million due to higher prices under the BGSS contract.
| |
| The $368 million increase.in.gas supply revenues for the year ended December 31, 2005,.as compared to 2004, was principally due to higher prices under the. BGSS contract for gas and pipeline capacity partially offset by.lowerdemand, largely regulting from a warmer winter heating'season in 2005 as compared to 2004.
| |
| Trading The $27 million increase in trading revenues for the year ended December 31, 2006,-as compared to 2005, was principally due to higher realized gains related to emissions credits.
| |
| The $50 million decrease in trading revenues for the year ended December 31., 2005, as compared to 2004, resulted principally from reductions in realized gains related. to emission credits."
| |
| Operating Expenses
| |
| " Energy Costs Energy Costs' represent the cost of generation, which includes fuel purchases for. generation 'as well as purchased energy' in the market, and gas purchas'es to meet Power's obligation under its BGSS contract with PSE&G.
| |
| The $311 million decrease for the year ended December 31, 2006, as compared to 2005, was primarily due to decreases of $267 million from lower pool prices and lower"-.demand under the BGS cofitract, $144 million.from a reduced volume of gas purchased to satisfy. Power's BGSS obligations, somewhat offset by higher gas prices related to inventory for the 2005/2006 winter-heating season, and $58 million .due to favorable pricing of fuel-related asset-backed transactions in 2006. These decreases were partially offset by
| |
| $80 million of losses realized on gas hedges in 2006, an increase of $42 million in fuel costs and an increase of
| |
| $35 million in transmission fees. The increase in fuel costs. 'waslargely due :to higher volumes of gas purchased to meet increased production by the gas-fired plants, including Linden and BEC, and higher oil prices, partially offset by lower gas prices during 2006 and a lower volume of oil purchases due to reduced running times of certain of the oil-fired plants in 2006.
| |
| The $713 million increase for the year ended December 31, 2005, as compared to 2004,;was primarily due to increased generation costs, reflecting higher fossil fuel prices and higher prices on an increased-volumn' of purchased power for new contracts and higher -prices for gas purchased. to .satisfy Power's BGSS obligations.' . .
| |
| Operation and Maintenance The $19 million increase for the year ended December 31, 2006, as'compared to 2005, was principally due to higher maintenance costs of'$60 million related to certain of the fossil plants and scheduled outages at the 'nuclear units. These increases were partially' offset by the absence of a $14 million restructuring., charge recorded in 2005 related to Nuclear's workforce realignment plan, 'a decrease of$10 million in payroll and benefits due to a reduction in employees and a decrease of $14 million in fees paid to Services, for information technology, and various administrative 'services..
| |
| The $9 million decrease for the year ended December 31, 2005, as compared to'2004,'was primarily d-ue to a decrease of $36 million in equipment repair costs related to outages at the nuclear facilities, $9 million of lower real estate taxes, $5 million of lower transmission fees in the power pools, $4 million 6f lower expenses related to reduced trading activities in'2005 .and an. $8 million settlement of co-owner billings in 2004:'related to Power's jointly-owned facilities.' The, decreases were substantially offset by an increase of $11 million in pension, postretirement and other employee benefits, a $16 million increase attributable to. repairs for outages at the fossil generation plants, the aforementioned $14 million restructuring charge and a.$12 million settlement with the U.S. Department of Energy (DOE) in 2004. "
| |
| 65
| |
| | |
| Write-Down of Assets The $44 million write-down of assets recorded in 2006 related to fourturbines for which Power has no immediate use and intends to sell. For additional information, see Note 4. ,Discontinued Operations, Dispositions, Acquisitions and *Impairments of the Notes.
| |
| Depreciation and Amortatiaon The $26 million increase for the' year ended December 31, 2006, as comhpared to"2005, 'wasprimarily due to the Linden and BEC'plants being placed into-service in May 2006 and July 2005, respectively.
| |
| The $16 million increase for the year'ended December 31', 2005, as compared to 2004, was primarily due to the BEC facility being placed into service and a higher depreciable asset base in 2005 at Nuclear.
| |
| Other Income and Deductions' The $78 million decrease for the year ended December 31, 2006, as compared to 2005, was primarily due to decreased net realized income of $29 million and increased -realized losses of $19 million related to the NDT Funds. Also contributing to the decIrease were charges recorded in 2006 of $14 million, fo'-an other-than-temporary impairment of certain NDT Fund securities and $14 million for 'penalties related to negotiations concerning environmental concerns and an alternate pollution reduction plan for Power's Hudson unit.
| |
| The $27 million increase for the year ended December 31, 2006, as compared to 2004, was primarily., due to increased realized gains and income of $13. million related to the NDT Funds, lower realized losses of $8 million in 2005 'on NDT Funds and, a $5 million gain .from the sale in September 2005 of four gas turbine generators located in Burlington, New Jersey.
| |
| Interest Expense
| |
| . The $48 million increase for the year ended. December 31, 2006, as compared to 2005, was due primarily to lower capitalized interest costs in 2006 related to commencement of operations of the Linden and BEC facilities.
| |
| The $10 million increase for the year ended December 31, 2005, as compared to 2004, was due primarily to $8 million of lower cdpit-alized interest costs !in 2005 related to- comfmencement of opefations of BEC.
| |
| Income Taxes The $45 million increase for the year ended December 31, 2006, as compared to 2005, was primarily due to higher pre-tax income...
| |
| The $91 million increase for the' 2)ear ended, December 31, 2005, as compared to 2004, was primarily due to an increase of $63 million in taxes on pre-tax income, the recording in 2005 of $15 million of taxes for the NDT Funds and the reversal in 2004 of $16 million of contingency reserves and other prior period adjustments.
| |
| Loss from Discontinued Operations, including Loss on Disposal, nei of tax On December. 29, 2006, Power entered into' an agreement to sell its Lawrenceburg generation. facility for approximately $325 million .and recognized an estimated loss on disposal of $208 million, net of tax, in December 2006, for the initial write-down of.its carrying amount of.Lawrenceburg to'its fair value less cost to
| |
| .sell. The transaction is anticipated to close in the second quarter of 2007. Losses from Discontinued Operations of Lawrenceburg, not. including the estimated Loss of Disposal, were $31 million, $28 million and
| |
| $25 million for the, years ended December 31, 2006, 2005 and 2004, respectively, On May 27, .2005, Power reache@d an agreement to sell its Waterford generation facility, for approximately $220 Million and recognized an.-estimated loss on disposal of $177 million, net of tax, for the' initial write-down of its carrying amount of Waterford to its fair value less cost to sell. On September 28, 2005; Power completed the sale of, Waterford and recognized an additional loss of $1. million. .-Losses. from Discontinued Operations of Waterford, not including the Loss of Disposal, were $20 million and $34 million for the years ended December 31, 2005 and 2004, respectively. " -
| |
| 66
| |
| | |
| See Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments of the Notes for additional' information'..
| |
| Cumulative *Effect of a" Change in Accounting Principle, For the year ended December 31, 2005, Power recorded an after-tax loss in the, amount of $.16 million due to the required recording of a liability for the fair value of asset-retirement costs primarily related to its.
| |
| generation plants under FIN 47, Which was adopted in December 2005. See Note 3. Asset Retirement Obligations of the Notes for additional information. ' .
| |
| Energy4 Holdings,-
| |
| For the year ended December 31, 2006, Energy Holdings had Net Income of $275 million, an increase of
| |
| $58 million as comipared to the year ended December 31; 2005. Included in Energy. Holdings' Net Income.for 2006,was a $178 million after-tax loss on the sale of RGE; which was more than offset by the $226 million after-tax gain on disposal of Elcho and Skawina. Strong operations combined with approximately $29 million of after-tax mark-to,-market gains, on forward gas contracts in 2006 as compared to $3.million of.. after-tax mark-to-market losses in 2005 -at. TIE and higher sales volumes at .Sociedad Austral. de Electricidad S.A.
| |
| (SAESA) also contributed to the increase. Theincreases were partially offset, by the absence of an after-tax gain of: $43. million,-from the sale.of Resources' leveraged lease .investment in Generation Station Unit 2 (Seminole)-, in December 2005'. . . '
| |
| For the year ended December 31, 2005, Energy'Holdings had Net Income of $217 million; an inicrease Of
| |
| $76 million as.'compared to. theyear ended December 31, 2004. This increase was primarily duejto higher earnings due.'to-improved operationsat TIE and in South America and the aforementioned gain on the sale of-Seminole in December2005.
| |
| ' The year-over-year detail for these variances for these periods are discussed in more detail below:
| |
| " For December Ended the Years 31, 2006 vs 2005
| |
| . .. 2005 vs 2004
| |
| *Increase . Increase, -
| |
| 2006 .2005 2004 (Decrease) . % (Decrease). , %
| |
| (Millions) ., . . (Millions)
| |
| Operating Revenues ..... .............. $1,357 $1,302 $ 836 $ 55 4 $466 56 Energy Costs ........................... $ 739 $ 675 $ 322 $ 64 9 $353 N/A Operation and Maintenance ................. $ 208 $ 215 $ 171 $ (7) ' (3')' $ 44 26 Write-Down of Assets ....................... $ 274 $ - $ - $274 N/A $ -- N/A Depreciation and Amortization .............. $ 52 $ 46. $ 44 $ 6 13 $ "2 5 Income from Equity Method Investments.... $ 120 $ 124 $ 119- $ (4) (3) $ 5 4 Other Income"and Deductions...: ...... $. 11- $ (8) $ 3 - $ 19 N/A- $(1I) N/A Interest Expense:. .... ..... :... ....... ... $ (203) $.(213) $(223),. $(10)-. (5)- $(10) (4)
| |
| Income Tax Benefit (Expense) ............. $ 39 $ (69) $ (45) -.$108 N/A $ 24 53 Income (Loss) from Discontinued ,
| |
| Operations, incuding Gain (Loss), on Disposal.'. .......................... $ 226 $ '18 $ (10). $208W- N/A $ 28 N/A The classification of the results of: Global's investments on Energy Holdings' Consolidated Financial Statements is dependent upon Global's ownership percentage in the underlying investment which determines whether the investment is consolidated into Energy Holdings' Consolidated Financial Statements or if it is accounted for under, the equity method of accounting. Global owns 100% of TIE, SAESA and Electroandes S.A. (Electroandes) and 85% of Prisma 2000 S.p.A. (Prisma). As a result, the reven'ues, expenses, assets and liabilities of those investments are reflected on Energy Holdings' Consolidated Financial Statements. Global's investments in Chilquinta Energia (Chilquinta), Luz del Sur S.A.A. (LDS), .GWF, Kalaeloa Partners L.P. (
| |
| Kalaeloa) and several other smaller investments are accounted for under, the equity method of accounting.
| |
| Therefore, Energy Holdings only records its share of the, net income from'these projects as Income from Equity Method Investments on its Consolidated Statements of Operations.
| |
| The variances in:Operatiing Revenues, Energy Costs; Operation and Mainteihance, Depreciation and Amortization and Income from Equity Method Investments were primarily attributed to Global's increased revenues at 'TIE in 2006, as-compared to same period in .2005, primarily due to unrealized gains on forward!
| |
| contracts and .a stronger market and stronger spark, spread (the difference between the market price of 67
| |
| | |
| electricity and the cost of natural gas fuel), the consolidation of Prismain May 2006; which generated $32 million -of revenue, and Global's sale of a 35% interest in Dhofar Power Company S.A.O.C. (Dhofae Power) through a public offering on the Omani Stock Exchange in April 2005 and sale of its remaining interest of 46% in November 2006, receiving net proceeds after-tax of approximately $31"million, the approximate book value of the investment. The variances are. also related to favorable foreign currency exchange rates and highetr energy sales volumes at SAESA.
| |
| Operating Revenues" The increase of $55. million for the year ended December 31, 2Q006 as compared to 2005, was. due to higher revenues at Global of $128 million, which was primarily related to a $79 million increase at TIE due to higher unrealized gains on .forward contracts which were slightly offset by a reduction in .gas sales. Also contributing tothe increase at Global was a $78 million increase*at SAESA in Chile due to higher energy sales volumes as well as tariff increases and favorable'foreign currency exchange rates, a $24 million increase due to the consolidation of Prisma and $10 million of increased revenue from Electroandes due .to volume and price increases. These increases were partly offset by a $37 million decrease due to the absence of a gain from -withdrawal from the Eagle Point Cogeneration Partnership in the prior year and the absence of $20 million'of revelnue due to the deconsolidation of Dhofar Power:' Offsetting the increases at Global were lower revenues at Resources of.$73.million primarily due to the absence of a $71 million pre-tax gain from tlie sale of Resources' interest in Seminole Generation in December -2005 coupled with the absence of $20 million of leveraged lease income in 2006 due, to the Seminole sale, partially offset by a $21'million write-off, of-a leveraged lease.investment with United Airlines in 2005.
| |
| The'increase of $466 million for 'the year ended 'December 31, 2005,. as 'compared to 2004, was due to higher revenues at Global of $406 million, including a $279 million increase.related to the consolidation of TIE commencing July 1, 2004 and $136 million due to higher revenues.at TIE in the second half of 2005 and a $62 million increase related to SAESA due-tohigher energy.sales .volumes offset by a $43 million. decrease related to the deconsolidation of Dhofar Power and the absence of a $35 million gain on the sale of Meiya Power Company Limited (MPC) in 2004. ;Also' contributing to the increase were 'higher revenues at Resources of $60 million primarily due to the $71 million pre-tax gain recognized in 2005 from the sale of its interest in Seminole offset. by the' absence of an $11 million pre-tax charge recorded due to the termination of the lease investment in the Collins generating, facility in 2004.
| |
| Operating Expenses Energy Cosis The increase of $64 million for..the year ended December 31, 2006, as compared, to .2005; was primarily due to a $59 million increase at SAESA' due to increased volume and higher spot prices for energy and an $8 million increase due to the consolidation of Prisma. in May 2006, partially offset by a: $5 million decrease related to the deconsolidation of DhofarPoxver.
| |
| The increase of $353 million for the year ended December 31, 2005, as compared to 2004, was primarily due to a $219 million increase related to. the consolidation, of TIE commencing July 1, 2004, a' $99 million increase in energy costs at T'IE. in the second half of 2005 and a $44 million increase'related to SAESA'due to significant increases in Energy Costs; offset by a $13 million decrease related to the deconsolidation of Dhofar Power.
| |
| Operation and Maintenance.
| |
| The decrease of $7 million for the year ended December 31, 2006, as compared to 2005, was primarily due to a reduction of $9 million. at Resources mainly due to a reduction of operating lease expense. The decrease is also due* to a $4 million reduction 'in administrative expenses related to lower corporate assessments, wages and benefits, and legal and consulting expense. These decreases are offset by an $8 million increase at Global due to a $17 million increase related to the operations of SAESA, a $5 million increase due to the'consolidation of Prisma, partially offset by a $9 million decrease at TIE and a $4 million decrease from the deconsolidation of Dhofar Power. . .
| |
| The increase of $44 million for the year ended December 31, 2005, as compared to 2004, was primarily due to a $41 million increase 'related to the, consolidation of TIE commencing. July 1, 2004 and a $14 million 68
| |
| | |
| increase related to SAESA offset by a $6 million decrease related to the deconsolidation of Dhofar Power and a $7 million decrease in energy costs at TIE in the second half of 2005.
| |
| Write-Down of Assets
| |
| ,The $274 million write-down of~assets is primarily related to a $263 million pre-tax loss on Global's sale.
| |
| of its 32% indirect ownership interest in RGE, $4 million pre-tax loss related to the sale of. Global's interest in Magellan Capital Holdings Corporation (MCHC), and a $7 million pre-tax loss on the impairment of Global's generation projects in Venezuela. See Note 4. Discontinued Operations,: Dispositions, Acquisitions and Impairments of the Notes.
| |
| Depreciation and Amortization The increase of $6 million for the year ended December 31, 2006, as compared to 2005, was primarily due to a $3 million increase at Resources and a $3 million increase at Global due to a-$4 million increase related to the consolidation of Prisma and an increase of $3 million at- SAESA, offset by a $4 million decrease resulting from the deconsolidation of Dhofar Power.
| |
| The increase of $2 million for the year ended December 31, 2005, as compared to 2004, was primarily due to an $8 million increase related to the consolidation of TIE commencing July 1, 2004 and a $2 million increase related to Resources due to the conversion of the Delta and Northwest leases from leveraged leases to operating leases, offset by a $9 million decrease related to the deconsolidation of Dhofar Power.
| |
| Income from Equity Method Investments The decrease of $4 million for the year ended December 31, 2006, as compared to 2005, was primarily driven by the absence of $12 million of earnings due to the sale of RGE in 2006 partially offset by the absence of foreign currency losses in 2005 from Prisma of $8 million.
| |
| The increase of $5 million for the year ended December 31, 2005, as compared to 2004, was primarily due to a $20 million increase due to stronger results in South America (RGE and Chilquinta) offset by an
| |
| $11. million decrease related to the loss of earnings associated with the sale of Global's equity interest in MPCin December 2004 and a $3 million decrease related to Global's investment in Prisma.
| |
| Other Income and Deductions The increase of $19 million for the year ended December 31, 2006, as compared to 2005, :was primarily due to an increase in interest and dividend income of approximately $1.0 million and lower losses in foreign currency transactions due to favorable currency fluctuations mainly for Prisma operations in Italy.
| |
| The decrease of $11 million for the year ended December 31, 2005, as compared to 2004, was primarily due to a loss on early -extinguishment of debt of $7.million and foreign currency transaction losses of $9 million primarily on notes receivables from Prisma, partially offset by interest income from PSEG related to inter-company loans.
| |
| Interest Expense The decrease of $10 million for the year ended December 31, 2006, as compared to 2005, was mainly due to a decrease in Energy Holdings' debt outstanding and a net decrease of $2 million resulting from the consolidation of Prisma and the deconsolidation of Dhofar Power.
| |
| The $10 million decrease for the year ended December 31, 2005,.as compared to 2004, was primarily.due to an $1.1 million decrease related to the deconsolidation of Dhofar Power in May 2005 and an $8 million decrease related to Resources due to a reduction in intercompany interest charges offset by a $9 million increase related to the consolidation of TIE commencing on July 1, 2004.
| |
| Income Taxes The decrease of $1.08 million for the year ended December 31, 2006, as compared to 2005, was primarily attributable to a tax benefit resulting from Global's sale of its 32% indirect ownership interest in RGE and sale of SAESA's 50% interest in Empresa de Energia Rio Negro S.A. (Argentine utility operation).
| |
| 69
| |
| | |
| The $24 million increase for the year ended December 31, 2005, as compared to 2004, was primarily due to the recording of $11 million of U.S. tax associated with repatriation of funds under the American Jobs Creation Act of 2004 (Jobs Act), an increase in the mix of domestic earnings for Global due to improved results at TIE, taxes recognized of $28 million from the sale of Seminole and additional benefits resulting from revisions to Resources' lease runs performed in the fourth quarter of 2005. For further information on lease runs, see below'in Resources' forecast of state taxable income and tax liability over the relevant lease terms. This forecast was embedded in the lease reruns and led to an income tax benefit of $43 million in 2004 to reflect, the cumulative benefit of this adjustment. This benefit was largely offset by the tax impact associated with a $31 million decrease in leveraged lease revenue.
| |
| Income (Loss) from Discontinued Operations, including Gain (Loss) on Disposal, net of tax Elcho and Skawina In 2006, Global sold 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.
| |
| Income (Loss) from Discontinued Operations related to Elcho and Skawina for the years ended December 31, 2006, 2005 and 2004 was $227 million, $18 million and $(10) million, respectively. See Note
| |
| : 4. Discontinued Operations, Dispositions, Acquisitions and Impairments of the Notes for additional information.
| |
| LIQUIDITY AND CAPITAL RESOURCES The following discussion of liquidity and capital resources is on a consolidated basis for PSEG, noting the uses and contributions of PSEG's three direct operating subsidiaries, PSE&G, 'Power and Energy Holdings.
| |
| Financing Methodology PSEG, PSE&G, Power and Energy Holdings Capital requirements for PSE&G, Power and Energy Holdings are met through liquidity provided by internally generated cash flow and external financings. PSEG expects to be able to 'fund existing commitments, reduce debt and meet dividend requirements using internally generated cash. PSEG, Power and Energy Holdings from time to time make equity contributions or otherwise provide credit support to their' respective direct and indirect subsidiaries to provide for part of their capital and cash requirements, generally relating to long-term investments. PSEG does not intend to contribute additional equity to Energy Holdings.
| |
| At times, PSEG utilizes intercompany dividends and intercompany loans (except however, that PSE&G may not, without prior BPU approval, and Fossil, Nuclear and ER&T may not without prior FERC approval make loans to their affiliates) to satisfy various subsidiary or parental needs and efficiently manage short-term cash. Any excess funds are invested in 'short-term liquid investments.
| |
| External funding to meet PSEG's, PSE&G's and Power's needs and a majority portion of the requirements of Energy Holdings consist of corporate finance transactions. The debt incurred is the direct obligation of those respective entities. Some of the proceeds of these debt transactions may be used by the respective obligor to make equity investments in its subsidiaries.
| |
| As discussed below, depending on the particular company, external financing may consist of public and private capital market debt and equity transactions, bank revolving credit and term loans, commercial paper and/or, project financings. Some of these transactions involve special purpose entities (SPEs), formed in accordance with applicable tax and legal requirements in order to achieve specified financial advantages, such as favorable legal liability' treatment. PSEG consolidates SPEs, as applicable, in accordance with FIN No. 46, "Consolidation of Variable Interest Entities (VIEs)" (FIN 46). See Note 2. Recent Accounting Standards of the Notes.
| |
| The availability and cost of external capital is affected by each entity's performance, as well as by the performance of their respective subsidiaries and affiliates. This could include the degree of structural separation between PSEG and its subsidiaries and the potential impact of affiliate ratings on consolidated and unconsolidated credit quality. Additionally, compliance with applicable financial covenants will depend upon future financial position, earnings and net cash flows, as to which no assurances can be given.
| |
| 70
| |
| | |
| Over the next several years, PSEG, PSE&G, Power and Energy Holdings may be required to extinguish or refinance maturing debt and, to the extent -there is not sufficient internally generated funds, may incur additional debt and/or provide equity to fund investment activities. Any inability to ,obtain required additional external capital or to extend or replace maturing debt and/or, existing agreements at current levels and reasonable interest rates may adversely affect PSEG's, PSE&G's, Power's and Energy .Holdings' respective financial condition, results of operations and net cash flows.
| |
| From time to time, PSEG, PSE&G, Power and Energy Holdings may repurchase portions of their respective debt securities using funds from operations, asset sales, commercial paper, debt issuances, equity issuances and other sources of funding and may make exchanges of new securities, including common stock, for outstanding securities. Such repurchases may be at variable prices below, at or above prevailing market prices and may be conducted by way of privately negotiated transactions, open-market purchases, tender or exchange offers or other means. PSEG, PSE&G, Power and Energy Holdings may utilize brokers or dealers or effect such repurchases directly. Any such repurchases may be commenced or. discontinued at any time without notice.
| |
| Energy Holdings A portion of the financing for Global's investments, is normally provided by non-recourse financing transactions. These consist of loans.from banks and other lenders that are typically secured'by project assets and cash flows. Non-recourse transactions generally impose no material obligation on the parent-level investor to repay any debt incurred by the project borrower. The consequences of permitting a project-level default include the potential for loss of any invested equity by the parent. However, in some cases, certain obligations relating to the investment being financed, including additional equity commitments, may be guaranteed by Global and/or Energy Holdings for their respective subsidiaries. PSEG does not provide guarantees or credit support to Energy Holdings or its subsidiaries.
| |
| Operating Cash Flows PSEG, PSE&G, Power and Energy Holdings, PSEG expects strong cash from operations primarily driven by earnings from Power supported by improved energy margins and capacity markets. Operating cash flows are expected to be sufficient to fund capital expenditures and shareholder dividend payments, with excess cash available to invest in the business, reduce debt and/or repurchase common stock.
| |
| PSEG For the year ended December 31, 2006, PSEG's operating cash flow increased by approximately $959 million from $970 million to $1.9 billion, as compared to 2005, due to net increases from its subsidiaries as discussed below.
| |
| For the year ended December 31, 2005, PSEG's operating cash flow decreased by approximately $635 million from $1.6 billion to $970 million, as compared to 2004, primarily due to net decreases at Power for its working capital requirements, discussed below.
| |
| PSE&G PSE&G's operating cash flow increased approximately $115 million from $689 million to $804 million for the year ended December 31, 2006, as compared to 2005, primarily due to a decrease in customer receivables, reflecting lower sales volumes due to a warmer winter heating season and lower gas prices in 2006.
| |
| PSE&G's operating cash flow decreased approximately $7 million from $696 million to $689 million for the year ended December 31, 2005, as compared to 2004.
| |
| Power Power's operating cash flow increased approximately $907 million from $136 million to $1 billion for the year ended December 31, 2006, as compared to 2005, due to a significant reduction in margin requirements and fuel inventories, largely resulting from decreases in commodity prices.
| |
| 71
| |
| | |
| Power's operating cash flow decreased approximately $371 million from $507 million to $136 million for the year ended December 31, 2005, as compared to 2004 primarily due to increased margin requirements and an increase in fuel inventory because of significantly increased commodity prices.
| |
| Energy Holdings Energy Holdings' operating cash flow decreased approximately $114 million from $273 million to $159 million for the year ended December 31, 2006, as compared to 2005. The decrease was mainly due to taxes paid related to the sale of Elcho, Skawina and RGE in 2006. The proceeds from the these sales are included in Cash Flows from Investing Activities on Energy Holdings' Consolidated Statements of Cash Flows.
| |
| Energy Holdings' operating cash flow decreased approximately $130 million from $403 million to $273 million for the year ended December 31, 2005, as compared to 2004, due primarily to a decrease in Resources' cash flows, which was driven by the timing of receipt of tax benefits, and the monetization of the remaining receivables of PETAMC in 2004.
| |
| Common Stock Dividends Dividend payments on common stock for the year ended December 31, 2006 were $2.28 per share and totaled approximately $574 million. Dividend payments on common stock for the year ended December 31, 2005 were $2.24 per share and totaled approximately $541 million. Future dividends declared will be dependent upon PSEG's future earnings, cash flows, financial requirements, alternative investment opportunities and other factors. On January 17, 2007, PSEG announced an increase in its dividend from
| |
| $0.57 to $0.585 per share for the first quarter of 2007. This 'quarterly increase reflects an indicated annual dividend rate of $2.34 per share.
| |
| Short-Term Liquidity PSEG, PSE&G, Power and Energy Holdings In December 2006, PSEG and Power established new credit facilities, which are available for letters of credit and short-term funding, replacing their previous credit facilities. PSEG's new facility also provides liquidity backup for its $1 billion commercial paper program. Also in December 2006, PSE&G amended its
| |
| $60.0 million credit facility to update the terms and extend the expiration date to June 2011.
| |
| PSEG, PSE&G, Power. and Energy Holdings each believe that sufficient liquidity exists to fund their respective short-term cash needs.
| |
| As of December 31, 2006, PSEG and its subsidiaries had a total of approximately $3.7 billion of committed credit facilities with approximately $3.3 billion of available liquidity under these facilities. In addition, PSEG and PSE&G. have access to certain uncommitted credit facilities. Each of the facilities is restricted to availability and use to the specific companies as listed below.. As of December 31, 2006, PSEG has no loans outstanding under its uncommitted facility and PSE&G had $31 million of loans outstanding under its uncommitted facility.
| |
| 72
| |
| | |
| Available Usage Liquidity as of as of Expiration Total Primary December 31, December 31, Company Date Facility Purpose 2006 2006 (Millions)
| |
| PSEG:
| |
| 5-year Credit Facility ....... Dec 2011 $1,000 CP Support/Funding/ $354 $ 646 Letters of Credit Uncommitted Bilateral Agreement ............... N/A $ N/A Funding $ N/A PSE&G:
| |
| 5-year Credit Facility ....... June 2011 $ 600 CP*Support/Funding/ $ 600 Letters of Credit Uncommitted Bilateral Agreement............... N/A N/A Funding $ 31 $ N/A PSEG and Power:(A)
| |
| Bilateral Credit Facility .... June 2007 $ 200 Funding/Letters of $ 19(C) $ 181 Credit Power:
| |
| 5-year Credit Facility ....... Dec 2011 $1,600 Funding/Letters of $ 20(C) $1,580 Credit Bilateral Credit Facility .... March 2010 $ 100 Funding/Letters of $ -$ 100 Credit Energy Holdings:
| |
| 5-year Credit Facility(B) ... June 2010 $ 150 Funding/Letters of $ 6(C) $ 144 Credit (A) PSEG/Power joint and several co-borrower facilities.
| |
| (B) Energy Holdings/Global/Resources joint and several co-borrower facility.
| |
| (C) These amounts relate to letters of credit outstanding.
| |
| Power As of December 31, 2006, Power had borrowed $54 million from PSEG in the form of an intercompany loan.
| |
| During the year ending December 31, 2006, Power's required margin postings for sales contracts entered into in the normal course of business decreased as commodity pricesdeclined. The required margin postings will fluctuate based on volatility in commodity prices. Should .commodity prices rise, additional margin calls may be necessary relative to existing power sales contracts. As Power's contract obligations are fulfilled, liquidity requirements are reduced.
| |
| In addition, ER&T maintains agreements that require Power, as its guarantor under performance guarantees, to satisfy certain creditworthiness standards. In the event of. a deterioration of Power's credit rating to below investment grade, which represents at least a two level. downgrade from its current ratings, many of these agreements allow the counterparty to demand that ER&T provide performance assurance, generally in the form of a letter of credit or cash. Providing this support would increase Power's costs of doing business and could restrict the ability of ER&T to manage and optimize Power's asset portfolio. Power believes it has sufficient liquidity to meet any required posting of collateral resulting from a credit rating downgrade. See Note 12. Commitments and Contingent Liabilities of the Notes for further information.
| |
| Energy Holdings Energy Holdings and its subsidiaries had $98 million in cash, including $38 million invested offshore as of December 31, 2006. In addition, as of December 31, 2006, Energy Holdings had an outstanding demand loan receivable from PSEG of $28 million. See External Financings-Energy Holdings below for Energy Holdings' additional use of its excess cash.
| |
| 73
| |
| | |
| External Financings PSEG On September 1, 2006, PSEG began using treasury stock to settle the exercise of stock.options. Prior to September 1, 2006, PSEG had purchased shares on the open market to meet the exercise of stock options. As of December 31, 2006, PSEG issued 410,365 shares of its common treasury stock in connection with settling stock options for approximately $15 million.
| |
| For the year ended December 31, 2006, PSEG issued approximately 1 million shares.of its common stock under its Dividend Reinvestment Program and its Employee Stock Purchase Program for approximately $68 million.
| |
| In October 2006, PSEG repaid $49 million of its 6.89% Senior Notes which are due in equal installment payments through 2009.
| |
| In February 2006, PSEG redeemed $154 million of its Subordinated Debentures underlying $150 million of Enterprise Capital Trust II, Floating Rate Capital Securities and its common equity investment in the trust.
| |
| PSE&G On June 23, 2006, PSE&G repaid at maturity $175 million of its Floating Rate Series A First and Refunding Mortgage Bonds.
| |
| On March 1, 2006, PSE&G repaid at maturity $1.47 million of its 6.75% Series UU First and Refunding Mortgage Bonds.
| |
| In December 2006, PSE&G issued $250 million of 5.70% Secured Medium Term Notes Series D due 2036. The proceeds were used to replace in part the aforementioned matured Floating Rate Series A and 6.75% Series UU First and Refunding Mortgage Bonds.
| |
| For the year ended December 31, 2006, PSE&G Transition Funding LLC (Transition Funding) and PSE&G Transition Funding II LLC (Transition Funding II) repaid approximately $155 million and $8 million, respectively, of their transition bonds.
| |
| On January 2, 2007, PSE&G repaid at maturity $113 million of its 6.25%. Series WW First and Refunding Mortgage Bonds.
| |
| Power In April 2606, Power repaid at maturity $500 million of its 6.875% Senior Notes.
| |
| Energy Holdings In January 2006, Energy Holdings redeemed all $309 million of its 7.75% Senior Notes due in 2007.
| |
| On February 17, 2006, the.maturity of the Odessa-Ector Power Partners; L.P. (Odessa) debt was extended .to December 31, 2009. Interest onthe debt is based on a spread (currently 2.25%) above ILIBOR.
| |
| On September 29, 2006, an interest-rate swap. took effect which converted the floating LIBOR interest rate on approximately 80"% of. Odessa's debt to a fixed rate of 5.4275% through December 31, 2009.
| |
| On October 23, 2006, Energy Holdings redeemed $300 million of its $507 million outstanding 8.625%
| |
| Senior Notes due in 2008.
| |
| During 2006, Energy Holdings made cash distributions to PSEG totaling $520 million in the form of returns of capital.
| |
| Also during 2006, Energy Holdings' subsidiaries repaid approximately $51 million oflnoh-recourse debt, of which $43 million primarily' related'to SAISA and TIE, $6 million by Resources and $2 million by 'EGDC.
| |
| Debt Covenants PSEG, PSE&G, Power and Energy Holdings PSEG's, PSE&G's, Power's and Energy Holdings' respective credit agreements may contain maximum debt to equity ratios, minimum cash flow tests and other restrictive covenants and conditions to borrowing.
| |
| Compliance with applicable financial covenants will depend upon the respective future financial position, level, of earnings and~cash flows of PSEG, PSE&G, Power and Energy Holdings, as to.which no assurances can be given. The ratios presented below are for the.benefit of the investors of the related securities to which the covenants apply. They are not intended as financial performance or liquidity measures. The debt 74
| |
| | |
| underlying the preferred securities of PSEG, which is presented in Long-Term Debt in accordance with FIN 46, is not included as debt when calculating these ratios, as provided for in the various credit agreements.
| |
| Energy Holdings' credit agreement also contains customary provisions under which the lender could refuse to advance loans in the event of a material adverse change in the borrower's business or financial condition.
| |
| PSEG Financial covenants contained in PSEG's credit facilities include a ratio of debt (excluding non-recourse project financings, securitization debt and debt underlying preferred securities and including commercial paper and loans, certain letters of credit not related to collateral postings for cbmmodity/energy contracts and similar instruments) to total capitalization (including preferred securities outstanding and excluding any impacts for Accumulated Other Comprehensive Income adjustments related to marking energy contracts to market and equity reductions from the funded status of pensions or benefit plans associated with SFAS No.
| |
| 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans") covenant. This covenant requires that such ratio not be more than 70.0%. As of December 31, 2006; PSEG's ratio of debt to capitalization (as defined above) was 51.6%.
| |
| PSE&G Financial covenants contained in PSE&G's credit facilities include a ratio of long-term debt (excluding securitization debt, long-term debt maturing within one year and short-term debt) to total capitalization covenant. This covenant requires that such ratio will not be more than 65.0%. As of December 31, 2006, PSE&G's ratio of long-term debt to total capitalization (as defined above) was 48.5%.
| |
| In addition, under its First and Refunding Mortgage (Mortgage), PSE&G may issue new First and Refunding Mortgage Bonds against previous additions and improvements, provided that ;its ratio of earnings to fixed charges calculated in accordance with its- Mortgage is at least 2 to 1, and/or against retired Mortgage Bonds. As of December 31, 2006, PSE&G's Mortgage coverage ratio was 4.1 to 1 and the Mortgage would permit up to approximately $2.1 billion aggregate principal amount of new Mortgage Bonds to be issued against previous additions and improvements.
| |
| Power Financial covenants contained in Power's credit facility include a ratio of debt to total capitalization covenant. The Power ratio is the same debt to total capitalization calculation as set forth above for PSEG except common equity is adjusted for the $986 million Basis Adjustment (see Consolidated Balance Sheets).
| |
| This covenant requires that such ratio will not exceed 65.0%. As of December 31, 2006, Power's ratio of debt to total capitalization (as defined above) was 38.4%.
| |
| Energy Holdings Energy Holdings' bank revolving credit agreement has a covenant requiring the ratio of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to fixed charges to be greater than or equal to 1.75. As of December 31, 2006, Energy Holdings' coverage of this covenant was 3.53. Additionally, Energy Holdings must maintain a ratio of net debt (recourse debt offset by funds loaned to PSEG) to EBITDA of less than 5.25. As of December 31, 2006, Energy Holdings' ratio under this covenant was 2.59. Energy Holdings is a co-borrower under this facility with Global and Resources, which are joint and several obligors.
| |
| The terms of the agreement include a pledge of Energy Holdings' membership interest in Global, restrictions on the use of proceeds related to material sales of assets and the satisfaction of certain financial covenants.
| |
| Net cash proceeds from asset sales in excess of 5% of total assets of Energy Holdings during any 12-month period must be used to repay any outstanding amounts under the credit agreement. Net cash proceeds from asset sales during any 12-month period in excess of 10% of total assets must be retained by Energy Holdings or used. to repay the debt of Energy Holdings, Global or Resources.
| |
| Energy Holdings' indenture with respect to its senior notes ddes not permit liens securing indebtedness in excess of 10% of consolidated net tangible assets as calculated under the terms of the indenture. The terms of Energy Holdings' Senior Notes allow the holders to demand repayment if a transaction or series of related transactions causes the, assets of Resources to be reduced by 20% or more and as a direct result there is a downgrade of ratings.
| |
| 75
| |
| | |
| Cross Default Provisions PSEG, PSE&G, Power and Energy Holdings The PSEG bank credit agreement contains default provisions under which a default by it in an aggregate amount of $50 million or greater would result in the potential acceleration of payment under this agreement.
| |
| Under certain conditions, a default by PSE&G or Power in an aggregate amount of $50 million or greater would also result in potential acceleration of payment under this agreement. PSEG has removed Energy Holdings from all cross default provisions.
| |
| PSEG's bank credit agreement and note purchase agreements related to private. placement. of debt (collectively, Credit Agreements) contain cross default provisions under which certain payment defaults by PSE&G or Power, certain bankruptcy events relating to PSE&G or Power, the failure by PSE&G or Power to satisfy certain final judgments or the occurrence of certain events of default under the financing agreements of PSE&G or Power, would each constitute an event of default under the PSEG Credit Agreements. Under the note purchase agreements, it is also an event of default if PSE&G or Power ceases to be wholly-owned by PSEG. Under the bank credit agreement, both PSE&G and Power would have to cease to be wholly-owned by PSEG before an event of default would occur.
| |
| PSE&G PSE&G's Mortgage has no cross defaults. The PSE&G Medium-Term Note Indenture has a cross default to the PSE&G Mortgage. the PSE&G credit agreement has a provision under which a default by PSE&G in the aggregate of $50. million or greater would result in an event of default and the potential acceleration of payment under that agreement.
| |
| Power The Power Senior Debt Indenture contains a default provision' under which a default by Power, Nuclear, Fossil or ER&T in an aggregate amount of $50 million or greater would result in an event of default and the potential acceleration of payment under the indenture. There are no cross defaults within Power's indenture from PSEG, EnergyHoldings or PSE&G.
| |
| The Power credit agreement also has a provision under which a default by Power, Nuclear, Fossil or ER&T in an aggregate amount of $50 million or greater would result in an event of default and the, potential acceleration of payment under that agreement.
| |
| Energy Holdings Energy Holdings' credit agreement and Senior Note Indenture contain default provisions under which a default by it, Resources or Global in an aggregate amount of $25 million or greater would result in an 'event of default and the potential acceleration of payment under that agreement or the Indenture.
| |
| Ratings Triggers PSEG, PSE&G, Power and Energy Holdings The debt *indentures and, credit agreements of PSEG, PSE&G, Power andEnergy Holdings .do not contain any material 'ratings triggers' that would cause an acceleration of the required interest and principal payments in the event of a ratings downgrade. However, in the event of a downgrade, any one or more.of the affected companies may be subject to increased interest costs on certain bank debt and certain collateral requirements.
| |
| PSE&G In accordance with the BPU approved requirements under the BGS contracts that PSE&G enters into with suppliers, PSE&G is required to maintain an investment grade credit rating. If PSE&G were-to lose its investment grade rating, PSE&G would be required to file with the BPU a plan to assure continued payment for the BGS requirements of its customers.
| |
| .'PSE&G is the servicer for the bonds issued by-Transition Funding and Transition Funding II. If PSE&G were to-lose its investment grade rating, PSE&G would be required to remit collected cash daily to the bond trustee. Currently, cash is remitted monthly.
| |
| 76
| |
| | |
| Power In connection with the management and optimization of Power's asset portfolio, ER&T maintains underlying agreements that require Power, as its guarantor, under performance guarantees, to satisfy certain creditworthiness standards. In the event of a deterioration of Power's creditrating to below an, investment grade rating, many of these agreements allow the counterparty to demand that*ER&T provide performance assurance, generally in the form of a letter of credit or cash. As of December 31, 2006, if, Power were to lose its investment grade rating and assuming all the counterparties to agreements in which ER&T is "out-of-the-money" were contractually entitled to demand,. and demanded, performance assurance,'ER&T could be'
| |
| .required to post collateral in-an amount eqdial to approximately $578 million. See Note 12. Commitments and Contingent Liabilities of the Notes.
| |
| Credit Ratings PSEG, PSE&G, Power. and Energy Holdings.
| |
| Following the termination of the Merger Agreement in September 2006; credit ratings remained unchanged as shown in the table below. Standard & Poor's (S&P) affirmed its "BBB" corporate credit *rating for. PSEG, Power, and PSE&G. S&P , revised, its outlook from watch developing, to negative. Moody's Investors Service (Moody's) affirmed its credit ratings for PSEG and PSE&G while revising the outlooks from stable to negative. The ratings and outlooks -for Power and Energy Holdings were unchanged by Moody's. Fitch Ratings (Fitch) announced there would be no immediate impact on ratings and outlooks for PSEG and its subsidiaries. At that time, the agencies noted that the ratings below were predicated on continued improvement in financial metrics, specifically operating cash flows and ongoing deleveraging, as well as continued strong operating performance from Power's generating units and reasonable outcomes to PSE&G's pending electric and gas rate cases.
| |
| If the .rating agencies' lower or withdraw the credit ratings, such revisions may adversely affect the market price of PSEG's, PSE&G's, Power's and Energy Holdings' securities and serve to materially increase those companies' cost of capital and limit their access to capital. Outlooks assigned to ratings are as follows:
| |
| stable, negative.(Neg) or positive (Pos). There is no assurance that the ratings will continue for any given period of time or. that they will not be revised by the rating agencies, if, in their respective judgments, circumstahces so warrant. Each rating given by an agency should be evaluated independently of the other agencies' ratings. The ratings should not be construed as an indication to buy, hold or 'sell any security.
| |
| Moody's (A) S&P (B) Fitch (C)
| |
| PSEG:
| |
| Outlook........ .... ................. Neg Neg Pos Preferred Securities ............................................ Baa3 BB+ BBB-Commercial Paper......................... ................. P2 A3 F2 Senior Unsecured Debt ............................................... Baa2 BBB- BBB PSE&G:
| |
| Outlook ......... .......
| |
| s ........... ... ................... ' Neg Neg Stable M ortgage Bonds .......................... .... ....................... A3 A- A Preferred. Securities ........................................... Baa3 BB+ BBB+.
| |
| Commercial Paper.. . ... ........................... P2 A3 F2 Power:
| |
| Outlook . .................................................... Stable Neg Pos Senior Notes .............. .................. Baal BBB BBB Energy Holdings:
| |
| Outlook ................................. .................... Neg Neg Neg Senior. Notes ................................................... Ba3 BB- BB (A) Moody's ratings range from Aaa (highest) to C (lowest) for long-term securities and P1 (highest) to NP (lowest) for short-term securities. /I 8iuok Op (B) S&P ratings ranige from AAA (highest) to D (lowest) for long-term securities and Al (highest) to D (lowest) for short-term securities.
| |
| (C) Fitch ratings range from AAA (highest) to D (lowest) for long-term securities and Fl (highest) to D (lowest) for short-term securities'.
| |
| 77
| |
| | |
| Other Comprehensive Income PSEG, Power and.Energy Holdings For the yeir ended De~ember 31; 2006, PSEG, PSE&G, Power' and -Energy Holdings had Other Comprehehsive Income 'of $706 million,. $5 million, $483 million and $217 million; respectively, due orimarily to a reduction in the net unrealized losses on derivatives accounted for as hedges in accordance with SFAS 133 at Power-and foreign currericy translation adjustments at'Energy Holdings.
| |
| 'During the yeai ended December 31,.2006, Power's Accumulated Ofher'C6niprehensive Loss'dec'ased from $487 million to $177 million. The primary cause was a decrease of approximately $310rmillion- related to energy and related contracts that qualify for hedge accounting that were entered"into by Power'in the normal course of business. During the year ended December 31, 2006, the decrease in gas and electric prices resulted in a reduction in unrealized losses on many of those contracts, which are recorded in Accumulated Other Comprehensive Loss. This, decrease was partially offset by a $173 million adjustment recorded at Power in connection with the adoption of SFAS. 158, "Employers' Acc6u~iting for Defined Benefit Pension and Other Postretirement Plans"' (SFAS 158)..
| |
| As of December 31, 2006, Energy Holdings had Accumulated Other Comprehensive Income of $103 million. The primary reasons for the improvement, as 'compaied to the Accumulated Other, Comprehensive Loss of $110 million as of December 31, 2005, were the realization of losses on Brazilian currency as a result of the sale of RGE and the unwinding of an interest rate swap due to the sale of Global's facilities in Poland.
| |
| 78
| |
| | |
| CAPITAL REQUIREMENTS
| |
| *PSEG, PSE&G, Power and Energy Holdings It is expected that the majority of 'each 'subsidiary's capital irequire'ments over the next five years will come, from internally generAted funds!'Projected construction and investment expenditures, excluding nuclear.
| |
| fuel piuichases, for PSEG's subsidiaries for the next five, years are presented in the table' below. 'These amounts are subject to change, based on' various faciors. "
| |
| 2007 2008 .. 2009 2010 2011-(Millions)
| |
| PSE&G:
| |
| Facility Support ............... ......................... $ 41 $ 77 $ 76 $ 45 $ 48 Environmental/Regulatory ......................... 44 30 31 28 28 Facility Replacement.. .................................... 173 175. 178 -165 .,*179 System Reinforcement ........................................... . 183 183 185 165 - 161 New Business .... ........................................ 164 163 161 157 ' 159 Total PSE&G .................................................. 605 628 631 560 575 Power:
| |
| Hudson Environmental ........................................ ... 68 143 229 '263 8 Mercer Environmental ..... ........ ....................... 126 132 110 83 -
| |
| Other Non-Recurring ...................................... 264 220 64 '. ,5J. 45 Recurring..,....... i.............. .... ........................... . 126 131 113 130 145 Total Power ..................... ........................ 584 626 .516 -527 1198 Energy Holdings ........................................... 37 31 40 '30'..' 31 Other .................. ............................................. 35 28 24 24 22 Total PSEG ......... ........................................... $1,261 $1,313 .$1,211 $141 $826 PSE&G In 2006, PSE&G made 'approximately $528 million, of, capital expenditures, primarily for reliability of transmission and distribution systems. The $528 million does not include approximately $33 million Spent on cost of removal. PSE&G's projections. for future capital expenditures include additions' arid replacements to its transmission and distribution systems to meet expected growth and to manage reliability. The6,current projections do not include investments required as a result of PJM's approval of the Regional Triansinissiori Expansion Plan (RTEP) in December 2006. As project scope and cost estimates develop,. PSE&G will modify its current, projections to include these required investments.
| |
| Power in 2006, Power made approximately $325 million of capital expenditures (excluding $93 million for nuclear fuel), primarily related to installation of emissions'control equipment 'at the Bridgeport Harbor and Mercer stations, completion of construction at the Linden station, in New Jersey. and various other projects at Nuclear and Fossil. The projections above include estimates for Hudson and Mercer related to the agreement reached with the EPA and the NJDEP. They do not include the costs, if any, assocated with cooling towers for Salem; if required. For additional discussion of the potential costs related Hudson, Mercer and Salem, see.
| |
| Note 12. Commitments and Contingent Liabilities of Notes. 4*
| |
| EnergyHoldings '
| |
| In 2006, Energy Holdings incurred approximately $64 million of capital expenditures, primarily related to upgrades and expansion of SAESA's transmission and distribution systems.
| |
| Energy Holdings' capital needs in 2007 will be -limited to 'fulfilling existing contractual and potential contingent commitments. The balance of the forecasted expenditures relates to capital 'requirements of consolidated subsidiaries, which will primarily be financed from internally generated cash flow within the projects and from local sources on a non-recourse basis or limited discretionary investments by Energy Holdings: Such capital requirements include organic growth in SAESA's service territory and' other capital improvements at Global's consolidated subsidiaries. ..., .. ' . .
| |
| 79
| |
| | |
| Disclosures about Long-Term Maturities, Contractual and Commercial Obligations and Certain Investments The following. table reflects PSEG's and its subsidiaries'" contractual cash obligations and- other commercial commitments in the respective periods in which they are due. In addition, the table summarizes anticipated recourse and non-recourse debt maturities for the years shown. The table below does not reflect any anticipated cash payments for pension obligations.. The table also does not reflect .debt.'maiurities of Energy Holdings' non-consolidated investments. If those obligations were not able to be.refinianced by the project, Energy. Holdings may elect to make additional contributions in these investm'ents.: For additional information, see Note 10. Schedule of Consolidated Debt of the Notes.
| |
| Total Less Amount. Than 2-3 4-5 Over Contractual Cash Obligations Committed 1 year years .years 5 years (Millions)
| |
| Short-Term Debt Maturities P SE G ................ ....................... .......... '$ 353 $ 353 $ -I- $" $ -
| |
| PSE&G.............. 31 31 - --
| |
| Long-Term Debt Maturities Recourse Debt Maturities PSEG(A) .................................... 1,376 523 673 -- 180 P S E & G ... ...
| |
| ..................................
| |
| ... 3,116 113 310 2,693 Transition* Funding (PSE&G).......... 1,784 161 347 38.1 895 Traffsition Funding Ir (PSE&G) .................. 95 10 20 21 .44 Power. .............................. 2,818 250 .800 1,768
| |
| .Energy Holdings ....... ....................... 1,149 607 542 .. .
| |
| Non-Recourse Project Financing Energy Holdings .............................. 881 42 467. 181 191 Interest on Recourse Debt P S E G ................ ............... .................... 96 45 51 P SE & G . .......................... 2,477 165. 313 295, .1,704
| |
| ...................
| |
| . 150 Transition Funding (PSE&G) ............................... 596 114 196 136 Transition Funding, II (PSE&G) ....... ....... 20 4 7 5 4 1,917 192 379. 334 1,012 P o w er ...................................................
| |
| E nergy H oldings ......................................... 250 56 100 35 59 Interest on Debt Supporting Trust PreferredSecurities
| |
| 'PSEG ......................... ......... ........... .41 41 Interest on Non-Recourse Project Financing Energy Holdings ...............................
| |
| * 355 104 181 70 Capital Lease Obligations PSE!3......... .................... 73 '8 14 14 37 Po~ver . ....... : ....................... ...... .. .. . ... 15 2 3 '2 "8 Energy Holdings ...................................... 57 12 24 '12 9 OperatingLeases 3 2 3 PSE&G ............ ......................... 9 Energy Holdings. .............................. '6 3 2 Energy-Related Purchase Commitments Power. ...................................... 2,496 64 714 943 451 388 Energy) Holdings ................. ............. 64 _ -
| |
| Total Contractual Cash Obligations .................. $9,129
| |
| $20,075 $2,760 $4,889 $3,297 Standby Letiers of Credit*
| |
| Power.. ...... ..... . ..... ...... . .. .... ."..... $ 78 $ 78 .4 Energy Holdings ...... ........................ 6 2 Guarantees and Equity Commitments $ . -
| |
| Energy Holdings .............................. 7.1 21 50 Total Commercial Commitments ..................... $ 155 $ 101 $ 54 (A) Includes debt supporting trust preferred securities .of $660 million.
| |
| See Note 12. 'Commitments and Contingent Liabilities of the Notes for. a discussion of' contractual commitments for a variety of services for which annual amounts are not quantifiable.
| |
| 80
| |
| | |
| OFF-BALANCE SHEET ARRANGEMENTS Power Power issues guarantees in conjunction with certain of its energy trading activities. See Note 12.
| |
| Commitments and Contingenit Liabilities of the Notes, for 'further discussion.
| |
| PSEG and Energy Holdings Global h~as certain investments that are 'accounted for under the equity method in accordance with accounting principles generally accepted ini'the United States (GAAP). Accordingly, amounts recorded on the Consolidated* Balance Sheets for such investments represent Global's equity investment, which is increased for Global's pro-rata share of earnings less any. dividend distribution from such investments. The companies in which Global invests that are accounted for under the equity method have an aggregate $878 million of debt, on their combined; consolidated financial statements. PSEG's pro-rata share of such debt is
| |
| $414 million. This debt is non-recourse to PSEG, Energy Holdings and Global. PSEG is generally not required to support the debt service obligations of these companies. However, default with respect to this non-recourse debt could result in a loss of invested equity.
| |
| -Resources has investments in leveraged leases that are.accounted for in accordance with SFAS No. 13, "Accounting for Leases." Leveraged lease investments generally involve three parties: an owner/lessor, a creditor and a-lessee. In a typical leveraged 'lease financing, the lessor purchases an asset to be leased. The purchase'price is typically financed 80% with debt provided by the creditor and the balance comes from equity funds provided by the lessor. The creditor provides long-term financing to the transaction secured by the property subject to the lease. Such long-term financing is non-recourse to the lessor and is not presented on Energy Holdings' Consolidated Balance Sheets. In the event of default, the leased asset, and in some cases the lessee, secure the loan. As a lessor, Resources has ownership rights to the property and rents the property to the lessees for, use in their business operation. As of December 31, 2006, Resources' equity investment in leased assets' was approximately $924 million, net of deferred taxes of approximately $1.9 billion. For additional information, see Note 8. Long-Term Investments of the Notes.
| |
| In the event that collectibility of the minimum lease payments to be received by the lessor is no longer reasonably assured, the accounting treatment for some of the leases may change. In such cases, Resources may deem that a lessee has a high probability of defaulting on the lease obligation, and would reclassify the lease from a leveraged lease to an operating lease and would consider the need to record an impairment of its investment. Should Resources ever directly assume a debt obligation, the fair value of the underlying asset and the associated debt would be recorded on the Consolidated Balance Sheets instead of the net equity investment in the lease.
| |
| Energy Holdings has guaranteed certain obligations of its subsidiaries or, affiliates' related to certain projects. See Note 12. Commitments and Contingent Liabilities of the Notes for additional information.
| |
| CRITICAL ACCOUNTING ESTIMATES PSEG, PSE&G, Power and Energy Holdings Under GAAP, many accounting standards require~the use of estimates, variable inputs and assumptions (collectively referred to as estimates) that are subjective in nature. Because of this, differences between the actual measure realized versus the estimate can have a material impact on results of operations, financial position and cash flows. The managements of PSEG, PSE&G, Power and Energy Holdings have each determined that the following estimates are considered critical to the application of rules that relate to their respective businesses.
| |
| Accounting for Pensions PSEG, PSE&G, Power and Energy Holdings account for pensions under SFAS No. 87, "Employers' Accounting for Pensions" (SFAS 87)..Pension costs under SFAS 87 are calculated using various economic and demographic assumptions. Economic assumptions include the discount rate and the long-term rate of return on trust assets. Demographic assumptions include projections of future mortality rates, pay increases and. retirement patterns. In 2006, PSEG and its subsidiaries recorded pension expense of $97 million, compared to $109 million in 2005 and $1.02 million in 2004. Additionally, in 2006, PSEG and its-respective 81
| |
| | |
| subsidiaries contributed cash of approximately $50 million, compared to cash contributions of $155 million in 2005 and $96 million in 2004.
| |
| PSEG's discount rate assumption, which is determined annually, is based on the rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. The discount rate used to calculate pension obligations is determined as of December 31 each year, PSEG's SFAS 87 measurement date. The discount rate used to determine year-end obligations is also used to develop the following year's net periodic pension cost. The discount rates used in PSEG's 2005 and 2006 net periodic pension costs were 6.00% and .5.75%, respectively. PSEG's 2007 net periodic pension cost was developed using a discount rate of 6.00%.
| |
| PSEG's expected rate of return on plan assets reflects current asset allocations, historical long-term investment performance and an estimate of future long-term returns by asset class using input from PSEG's actuary and investment advisors, as well as long-term inflation assumptions. For.2005 and 2006, PSEG assumed a rate of return of 8.75% on PSEG's pension plan assets. For 2007, PSEG will continue the rate of return assumption of 8.75%.
| |
| Based on the above assumptions, PSEG has estimated net period pension costs of approximately $43 million and contributions of up to approximately $66 million in 2007. As part of the business planning process, PSEG has modeled its.future costs assuming an 8.75% rate of return and a 6.0% discount rate for 2008 and beyond. Actual future pension expense and funding levels will depend on future investment performance, changes in discount rates, market conditions, funding levels relative to PSEG's projected benefit obligation and accumulated benefit obligation (ABO) and various other factors related to the populations participating in PSEG's pension plans.
| |
| The followinig chart reflects the sensitivities associated with a change in certain actuarial assumptions.
| |
| The effects of the assumption changes shown below solely reflect the impact of that specific assumption.
| |
| As of December 31,2006 Impact on Increase to Change/ Pension Benefit Pension Expense Actuarial Assumption Current (Decrease) Obligation in 2007.
| |
| (Millions)
| |
| Discount Rate ...................................... 6.00% (1.00%) $555 $52 Rate of Return on Plan Assets ...................... 8.75% (1.00%) $- $33 Accounting for Deferred Taxes PSEG, PSE&G, Power and Energy Holdings provide for income taxes based on the liability method required by SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as net operating loss and credit carryforwards.
| |
| PSEG, PSE&G, Power and Energy Holdings evaluate the need for a valuation allowance against their respective deferred tax assets based on the likelihood of expected future taxable income. PSEG, PSE&G, Power and Energy Holdings do not believe a valuation allowance is necessary; however, if the expected level of future taxable income changes or certain tax planning strategies become unavailable, PSEG, PSE&G, Power and Energy Holdings would record a valuation allowance through income tax expense in the period the valuation allowance is deemed necessary. Resources' and Global's ability to realize their deferred tax assets are dependent on PSEG's subsidiaries' ability to generate ordinary income and capital gains.
| |
| Hedge and Mark-to-Market (MTM) Accounting SFAS 133 requires an entity to recognize the fair value of derivative instruments held as assets or liabilities on the balance sheet. SFAS 133 applies to all derivative instruments held by PSEG, PSE&G, Power and Energy Holdings. The fair value of most derivative instruments is determined by reference to quoted market prices, listed contracts, or quotations from~brokers. Some of these derivative contracts are long term and rely on forward price quotations over the entire duration of the derivative contracts.
| |
| In the absence of the pricing sources listed above, for a small number of contracts, PSEG and its subsidiary companies utilize mathematical models that rely.on historical data to develop forward pricing information in the determination of fair value. Because the determination of fair value using such models is 82
| |
| | |
| subject to significant assumptions and estimates, PSEG and its subsidiary companies developed reserve policies that are consistently applied to model-generated results to determine reasonable estimates of value to record in the financial statements.
| |
| PSEG and its subsidiaries have entered into various derivative instruments in order to hedge exposure to commodity price risk, interest rate risk and foreign currency risk. Many such instruments have been designated as cash flow hedges. For a cash flow. hedge, the change in the value of a derivative instrument is measured against the offsetting. change in the value of the underlying contract or business condition the derivative, instrument is intended to hedge. This is known as the measure of derivative effectiveness. In accordance withSFAS 133,, the, effective portion of the. change in the fair value of a derivative instrument designated.as a cash flow hedge -is reported in Accumulated Other Comprehensive Loss, net of tax, or as a Regulatory Asset (Liability). Amounts in Accumulated Other Comprehensive Loss are ultimately recognized in earnings when the related hedged forecasted transaction occurs. During periods of extreme price volatility, there will be significant changes in the value recorded in Accumulated Other Comprehensive Loss. The changes in the fair value of the ineffective portions of derivative instrument de'signated as cash flow hedges are recorded in earnings.
| |
| For Power's and Holdings' wholesale energy businesses, many of the forward sale, forward purchase and other option contracts are derivative 'instruments that hedge commodity price risk,, but for ,which the businesses are. not able to apply the hedge accounting guidance in SFAS 133. The. changes in value of such derivative contracts are marked to market through earnings as commodity prices fluctuate. As a result, the earnings of PSEG, Power and Holdings may experience significant fluctuations depending on the volatility of commodity prices. .. . .. ..
| |
| -For Power's energy trading activities, all changes in the'fair value' of energy trading derivative contracts are recorded in earnings.
| |
| For additional information regarding Derivative Financial Instruments, see Note 11. Financial Risk Management Activities of the Notes.
| |
| PSE&G Unbilled Revenues Electric and gas revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues for the estimated amount customers will be billed for services rendered from the time meters were last read to the end of the respective accounting period. Unbilled usage is calculated in two steps. The initial step is to apply a base usage per day to the number of unbilled days in the period. The second step estimates seasonal loads based upon the time of year and the variance of actual degree-days and temperature-humidity-index hours of the unbilled period from expected norms. The resulting usage is priced at current rate levels and recorded as revenue. A calculation of the associated energy cost for the unbilled usage is recorded as well. Each month the prior month's unbilled 'amounts are reversed and the current month's amounts are accrued. Using benchmarks other than those used in this calculation could have' a material effect on the amounts accrued in a reporting period. .The resulting revenue and expense reflect the service rendered in the calendar month.
| |
| PSE&G SFAS No. 71, "Accounting for the Effects' of Certain Types of Regulation" (SFAS 71)
| |
| PSE&G prepares its Consolidated Financial Statements in accordance with the provisions of SFAS 71,'
| |
| which differs in certain respects from.the application of GAAP by non-regulated businesses. In general, SFAS 71 recognizes that accounting, for rate-regulated enterprises should reflect the economic effects of regulation. As a result, a regulated utility is required to defer the recognition of costs (a regulatory asset) or recognize obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in future rates. Accordingly, PSE&G has deferred certain costs, which will be amortized over various future periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G's competitive position, the.
| |
| associated regulatory asset or liability is charged or credited to income. See Note 5. Regulatory Matters of the Notes for additional information related to these and other regulatory issues.
| |
| 83
| |
| | |
| Power NDT Funds Power accounts for the assets in the NDT Funds under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). The assets in the NDT Funds are classified as available-for-sale securities and are marked to market with unrealized gains and 'losses recorded in Accumulated Other Comprehensive Loss unless securities with such unrealized losses are deemed to be.
| |
| other-than-temporarily-impaired. Realized gains, losses and dividend and- interest income are recorded on Power's and PSEG's Statements of Operations under Other Income and Other Deductions. Unrealized losses that are deemed to be other than temporarily impaired, as defined under SFAS 115, and related interpretive guidance, are charged against earnings rather than Accumulated Other Comprehensive Loss.
| |
| Power and Energy Holdings Accounting for Goodwill Power and Energy Holdings evaluate their respective goodwill for impairment at least annually or when indications of impairment. exist. An impairment. may exist when the carrying amount of goodwill exceeds its implied fair value.
| |
| Accounting estimates related to goodwill fair value 'are highly susceptible to change from period to period because they require management to make cash flow assumptions about future sales, operating costs, economic conditions and discount rates over an indefinite life. The impact of recognizing an impairment could have a material impact on financial position and results of operations.
| |
| Power and Energy Holdings perform annual goodwill impairment tests and continuously monitor the business environment in which they operate for any impairment issues that may arise. As indicated above, certain assumptions are used to arrive at a fair value for goodwill testing. Such assumptions are consistently employed and include, but are not limited to, free cash flow projections, interest rates, tariff adjustments, economic conditions prevalent in the geographic regions in which Power and Energy Holdings do business, local spot market prices for energy, foreign exchange rates and the credit worthiness of customers. If an adverse event were to occur, such an event could materially change the assumptions used to value goodwill and could result in impairments of goodwill.
| |
| PSEG and Energy Holdings Foreign Currency Translation Energy Holdings' financial statements are prepared using.the U.S. Dollar as the reporting currency. In accordance with SFAS No. 52, "Foreign Currency Translation", for foreign operations whose functional currency is deemed to be the local (foreign) currency, asset and liability accounts are translated into U.S.
| |
| Dollars at current exchange rates and revenues and expenses are translated at ,average exchange rates prevailing during the period. Translation gains and losses (net of applicable deferred taxes) are not included in determining Net Income but are reported in Other Comprehensive Income. Gains and losses on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
| |
| The determination of an entity's functional currency requires management's judgment. It is based on an assessment of the primary currency in which transactions in the local environment are conducted, and whether the local currency can be relied upon as a stable currency in which to conduct business. As economic and business conditions change, Energy Holdings is required to reassess the economic environment and determine the appropriate functional currency. The impact of foreign currency accounting could have a material adverse impact on Energy Holdings' results of operations.
| |
| 84
| |
| | |
| ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK PSEG, PSE&G, Power and Energy Holdings The market risk inherent in PSEG's, PSE&G's, Power's and Energy Holdings' market-risk sensitive instruments and positions is the potential loss arising from adverse changes in foreign currency exchange rates, commodity prices, equity security prices and interest rates as discussed in the Notes to Consolidated Financial Statements (Notes). Itris the policy of each entity to use derivatives to manage risk consistent with its respective business plans and prudent practices. PSEG, PSE&G, Power and Energy Holdings have a Risk Management Committee (RMC) comprised of executive officers who utilize an independent risk oversight function to ensure compliance with corporate policies and prudent risk management practices.
| |
| Additionally, PSEG, PSE&G, Power and Energy Holdings are exposed to counterparty credit losses in the event of non-performance or non-payment. PSEG has a credit management process, which is used.to assess, monitor and mitigate counterparty exposure for PSEG and its subsidiaries. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on PSEG and its subsidiaries' financial condition, results of operations or net cash flows.
| |
| Foreign Exchange Rate. Risk Energy Holdings Global is exposed to foreign currency risk and other foreign operations risk that arise from investments in foreign subsidiaries and affiliates. Primarily, Global is impacted by changes in the U.S. Dollar to Peruvian Nuevo Sol and the Chilean Peso exchange rates and to a much lesser extent, the Euro. Whenever possible, these subsidiaries and affiliates have attempted to limit potential foreign exchange impacts by entering into revenue contracts that adjust to changes in foreign exchange rates. Global also uses foreign currency forward, swap and option agreements to manage risk related to certain foreign currency transactions, when appropriate.
| |
| Global's investment balances are also impacted by foreign currency changes through tra'nslation adjustments. Foreign currency has strengthened on a net basis since Global's acquisitions and investments in Chile'and Peru. A foreign currency fluctuation of 10% in such foreign currencies would result in an aggregate change in Accumulated Other Comprehensive Income of $92 million. As of December 31, 2006, Energy Holdings' net gain in Accumulated Other Comprehensive Income from currency fluctuations was approximately $111 million.
| |
| Commodity Contracts PSEG and Power The availability and price of energy commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market rules and other events. To reduce price risk caused by market fluctuations, Power enters into supply contracts and derivative contracts, including forwards, futures, swaps and options with approved counterparties. These contracts, in conjunction with demand obligations help reduce risk and optimize the value of owned electric generation capacity.
| |
| Normal Operations and Hedging Activities Power enters into physical contracts, as well as financial contracts, including forwards, futures, swaps and options designed to reduce risk associated with volatile commodity prices. Commodity price risk is associated with market price movements resulting from market generation demand, changes in fuel costs and various other factors.
| |
| Under SFAS 133, changes in the fair value of qualifying cash flow hedge transactions are recorded, in Accumulated Other Comprehensive Loss, and gains and losses are recognized in earnings when the underlying transaction occurs. Changes in the fair value of derivative contracts that do not meet hedge criteria under SFAS 133 and the ineffective portion of hedge contracts are recognized in earnings currently.
| |
| Additionally,, changes in the fair value attributable to fair value hedges are similarly recognized in earnings.
| |
| 85
| |
| | |
| Many non-trading contracts qualify for the normal purchases and normal sales exemption under SFAS 133 and are accounted for upon settlement.
| |
| Trading
| |
| ,Power maintains a strategy of entering into trading positions to optimize the value of its portfolio 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 to mitigate the effects of adverse movements in the fuel and electricity markets. In addition, Power has non-asset based trading activities, which have significantly decreased.. These contracts also involve financial transactions including swaps, options and futures. These activities are marked to market in accordance with SFAS 133 with gains, and losses recognized in earnings.
| |
| Value-at-Risk (VaR) Models Power Power uses VaR models to assess the market risk of its commodity businesses. The portfolio VaR model for Power includes its owned generation and physical contracts, as well as fixed price sales requirements, load requirements and financial derivative instruments. VaR represents the potential gains-or losses, under normal market conditions, for instruments or portfolios due to changes in market factors, for a specified time period and confidence level. Power estimates VaR across its commodity businesses.
| |
| Power manages its exposure at the portfolio level. Its portfolio consists of owned generation,, load-serving contracts (both gas and electric), fuel supply contracts and energy derivatives designed to manage the risk around generation and load. While Power manages its risk at the portfolio level, it also monitors separately the risk of its trading activities and its hedges. Non-trading MTM VaR consists of MTM derivatives that are economic hedges, some of which qualify for hedge accounting. The MTM derivatives that are not hedges are included in the trading VaR.
| |
| The VaR models used by Power are variance/covariance models adjusted for the delta of positions with a 95% one-tailed confidence level and a one-day holding period for the MTM trading and non-trading activities and a 95% one-tailed confidence level with a one-week holding period for the portfolio VaR. The models assume no new positions throughout the holding periods, whereas Power actively manages its portfolio.
| |
| Reduced trading activities by Power during 2006 have resulted in less trading risk. As of December 31, 2006, trading VaR was immaterial. As of December 31, 2005, trading VaR was approximately $1 million.
| |
| - Non-Trading For the Year Ended December 31, 2006 Trading VaR MTM VaR (Millions) 95% Confidence Level, One-Day Holding Period, One-Tailed:
| |
| Period E nd ..................................... . .................... -$38 Average for the Period.............................. ......... $46 High ..................................................... ...... $ --* $55 L ow ............. .............. .. ......................... .* $38 99% Confidence Level, One-Day Holding Period, Two Tailed:
| |
| Period. End.. ............................................. $* $59 A verage for the Period ............................................ $ -* $73 H igh ................................................... I...". ......... . $.* $87 L ow .................................................................. * .$59
| |
| * less than $1 million 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. It is the policy of PSEG, PSE&G, Power and Energy Holdings to manage interest 86
| |
| | |
| rate risk through the use of fixed and floating rate debt, interest rate swaps and interest rate lock agreements.
| |
| PSEG, PSE&G, Power and Energy Holdings manage their .respective interest rate exposures by maintaining a targeted ratio of fixed and floating rate debt. As of December 31, 2006, a hypothetical 10% change in market interest rates would result in a $7 million, $3 million, $1 million and an insignificant change (less than
| |
| $500 thousand) in annual interest costs related to debt at PSEG, PSE&G, Power and Energy Holdings, respectively. In addition, as of December 31, 2006, a hypothetical 10% change in market interest rates would result in a $7 million, $77 million, $105 million and $32 million change in the fair value of the debt of PSEG, PSE&G, Power and Energy Holdings, respectively.
| |
| Debt and Equity Securities PSEG, PSE&G, Power and Energy Holdings PSEG has approximately $3.4 billion invested in its pension plans. Although fluctuations in market prices of securities within this portfolio do not directly affect PSEG's earnings in the current period, changes in the value of these investments could affect PSEG's future contributions to these plans, its financial position if its ABO under its pension plans exceeds the fair value of its pension funds and future earnings as PSEG could be required to adjust pension expense and its assumed rate of return.
| |
| Power Power's NDT Funds are comprised of both fixed income and equity securities totaling $1.3 billion as of December 31, 2006. The fair value of equity securities is determined independently each month by the Trustee. As of December 31, 2006, the portfolio was comprised of approximately $785 million of equity securities and approximately $471 million in fixed income securities. The fair market value of the assets in the NDT Funds will fluctuate primarily depending upon the performance of equity markets. As of December 31, 2006, a hypothetical 10% change in the equity market would impact the value of'the equity securities in the NDT Funds. by approximately $79 million.
| |
| Power uses duration to measure the interest rate sensitivity of the fixed income portfolio. Duration is a summary statistic' of the effective average maturity of the fixed income portfolio. The benchmark for the fixed income component of the NDT Funds is the Lehman Brothers Aggregate Bond Index, which currently has duration of 4.46 years and a yield of 5.34%. The portfolio's value will appreciate or depreciate by the duration with a 1% change in interest rates. As of December 31, 2006, a hypothetical 1% increase in interest rates would result in a decline in the market value for the fixed income portfolio of approximately $7.8 million.
| |
| Credit Risk PSEG, PSE&G, Power and Energy Holdings Credit risk relates to the risk of loss that PSEG, PSE&G, Power and Energy Holdings would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. PSEG, PSE&G, Power and Energy Holdings have established credit policies that they believe significantly minimize credit risk. These policies include an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which may-allow for the netting of positive and negative exposures associated with a single counterparty.
| |
| PSE&G BGS suppliers expose PSE&G to credit losses in the event of non-performance or non-payment upon a default of the BGS supplier. Credit requirements are governed under BPU approved BGS contracts.
| |
| Power Counterparties expose Power's trading operation to credit losses in the event of non-performance or non-payment. 'Power has a credit management process, which is used to assess, monitor and mitigate counterparty exposure for Power and its subsidiaries. Power's counterparty credit limits are based on a 87
| |
| | |
| scoring model that considers a variety of factors, including leverage, liquidity, profitability, credit ratings and risk management capabilities, Power's trading operations have entered into payment netting agreements or enabling agreements that allow for payment netting with the majority of its large counterparties, which reduce .Power's exposure to counterparty risk by providing the offset of amounts payable to the counterparty against amounts receivable from the counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power's and its subsidiaries' financial condition, results of operations or net cash flows. As of December 31, 2006, approximately 97% .of the credit exposure (MTM plus net receivables and payables, less cash collateral) for Power's trading operations was with investment grade counterparties. The majority of the credit exposure with non-investment grade counterparties was with certain companies that supply fuel (primarily coal) to Power. Therefore, this exposure relates to the risk of a counterparty performing under its obligations rather than payment risk. As of December 31, 2006, Power's trading operations had over 121 active counterparties.
| |
| Energy Holdings' Global Global has credit risk with respect to its counterparties to power purchase agreements (PPAs) and other parties.
| |
| Resources As of December 31, 2006, Resources has a remaining gross investment in three leased aircraft of approximately $41 million, all with Northwest airlines. Resources successfully restructured the leases and converted them from leveraged leases to operating leases. Energy Holdings expects to recover its investment through cash flows from the operating leases.
| |
| Resources has credit risk related to its investments in leveraged leases, totaling $924 million, which is net of deferred taxes of $1.9 billion, as of December 31, 2006. These investments are largely concentrated in the energy industry. As of December 31, 2006, 67% of counterparties in the lease portfolio were rated investment grade by both S&P and Moody's. As of December 31, 2006, the weighted average credit rating of the lessees in Resources' leasing portfolio was A-/A3 by S&P and Moody's respectively.
| |
| Resources is the lessor of domestic generating facilities in several U.S. energy markets. Several of these lessees have credit ratings below investment grade. Resources' investment in such transactions was approximately $264 million, net of deferred taxes of $510 million as of December 31, 2006. The credit exposure to the lessees is partially mitigated through various credit enhancement mechanisms within the lease transactions. These credit enhancement features vary from lease to lease. Some of the leasing transactions include covenants that restrict the flow of dividends from the lessee to its parent, over-collateralization of the lessee with non-leased assets, historical and forward cash flow coverage tests that prohibit discretionary capital expenditures and dividend payments to the parent/lessee if stated minimum coverages are not met and similar cash flow restrictions if ratings are not maintained at stated levels. These covenants are designed to maintain cash reserves in the transaction entity for the benefit of the non-recourse lenders and the lessor/equity participants in the event of a market downturn or degradation in operating performance of the leased assets.
| |
| In any lease transaction, in the event of a default, Energy Holdings would exercise its rights and attempt to seek recovery of its investment. The results of such efforts may not be known for a period of time. A bankruptcy of a lessee and failure to recover adequate value could lead to a foreclosure of the lease. Under a worst-case scenario, if a foreclosure were to occur, Resources would record a pre-tax write-off up to its gross investment, including deferred taxes, in these facilities. Also, in the event of a potential foreclosure, the net tax benefits generated by Resources' portfolio of investments could be materially reduced in the period in which gains associated with the potential forgiveness of debt at these projects occurs. The amount and timing of any potential reduction in net tax benefits is dependent upon a number of factors including, but not limited to, the time of a potential foreclosure, the amount of lease debt outstanding, any cash trapped at the projects and negotiations during such potential foreclosure process. The potential loss of earnings, impairment and/or tax payments could have a material impact to PSEG's and Energy Holdings' financial position, results of operations and net cash flows.
| |
| 88
| |
| | |
| Other Supplemental Information Regarding Market Risk Power The following table describes the. drivers of Power's, energy trading and marketing. activities and
| |
| 'Operating Revenues included in its Consolidated Statement of Operations. for the year ended December 31, 2006. Normal operations and hedging activities represent the marketing of electricity available from Power's owned or contracted. generation sold into the wholesale market. As the information in this table highlights, MTM activities represent a small portion of the total Operating Revenues for Power. Activities accounted for' under the accrual method, including normal purchases and sales, account for the majority of.the revenue. The MTM activities reported here, are those relating to changes in, fair value due to external movement in prices.
| |
| For additional information, see Note 11. Financial Risk Management Activities of the Notes.
| |
| Operating_ Revenues For the Year Ended December 31, 2006 Normal Operations and Hedging(A) . Trading Total (Millions)
| |
| MTM Activities:
| |
| Unrealized MTM Gains (Losses)
| |
| Changes in Fair Value of, Open Position ............................ $ 13 $ 23 $ 36 Realization at. Settlement of Contracts ................................ (32) (27) (59)
| |
| Total. Change in Unrealized Fair Value.. .......................... (19) - " (4) (23)
| |
| Realized Net Settlement of Transactions Subject to MTM ................... 32 27 59 Net M TM G ains ........................... .................... 13 23 '." 36 Accrual Activities:
| |
| 'Accrual Activities-Revenue, Including Hedge Reclassifications ....... 6,021 .- 6,021 Total Operating Revenues ....... .......................................... $6,034 $ 23 -$6,057 (A) Includes derivative contracts that Power enters into to hedge anticipated exposures related to its owned and "contracted generation 'supply, all -Asset backed transactions (ABT) and hedging activities,, but excludes owned and contracted generation assets. -
| |
| The following table indicates Power's energy trading assets and liabilities, 'as well' as Power's hedging activity related to ABTs and derivative instruments that qualify for hedge accounting under SFAS 133. This table' presents amounts segregated by portfolio which -are then netted for those counterparties with whom Power has the right to set off and theref6're, are not necessarily indicative of amounts presented on the Consblidated Balance Sheets since balances with many counterparties ate subject to offset and are shorwn net on the Consolidated Balance Sheets regardless of the portfolio in which they are included.
| |
| 89
| |
| | |
| Energy Contract Net Assets/Liabilities.
| |
| As of December 31, 2006
| |
| *
| |
| * Normal '
| |
| Operations and Hedging . Trading Total (Millions)
| |
| MTM Energy Assets. ,- .
| |
| C urrent A ssets .. ...... .....................
| |
| .. ........... .$ 80. $44 $ 124 Noncurrent Assets. ........... . .............
| |
| 23 .. 5 28 103 49 -.152 Total MTM Energy Assets................ ...... .......
| |
| MTM Energy Liabilifies Current Liabilities. .... ....................... $(271) $'(54) $(325)
| |
| N oncurrent Liabilities .................................................. (166) (3) (169)
| |
| Total MTM Energy Liabilities .... ............
| |
| . ........ (437) (57) (494)
| |
| Total MTM Energy Contract Net Liabilities. ........................ $(334) $ (8) $(342)
| |
| The following table presents the maturity of net fair value of MTM energy trading contracts.
| |
| Maturity of Net Fair Value of MTM Energy Trading Contracts As of December 31, 2006 Maturities within 2009-2007 2008
| |
| * 2011 Total (Millions) .
| |
| Trading.. ..................................................... . $ (10) $ 2 $- $ (8)
| |
| Normal. Operations and Hedging ..................................... (191) (166). 23 (334)
| |
| Total Net Unrealized Losses on MTM Contracts ................... .......... ..$(01) $(164): *$23 $(342)
| |
| Where'Ver possible, fair values for these contracts were obtained from qu6ted market sources. For contracts where no quoted market exists, modeling techniques were 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 Pdwer's financial results.
| |
| PSEG, Power and Energy Holdings.
| |
| The following table identifies losses on cash flow hedges that are currently in.: Accumulated. Other Comprehensive Loss., a separate component of equity. Power uses forward sale and purchase contracts, swaps and firm transmission rights contracts, to hedge forecasted energy sales from its generation statioins,.and its contracted supply obligations. Power also enters into swaps, options' and futures. transactions to hedge the price of fuel to meet its fuel purchase requirements, for generation. PSEG, Power and Energy Holdings are subject to the riskof fluctuating iQterestrates in the normal course. of business, PSEG'spolicy is to manage interest rate risk thr6ugh'the use, of fixed rate debt, floating rate'debt and interest rate derivatives. The table also provides an estimate of the losses, net of taxes that are expected to be reclassified out of Accumulated Other Comprehensive Loss and into earnings over the next twelve months.
| |
| Cash Flow Hedges Included in Accumulated Other Comprehensive Loss As of December 31 2006 Accumulate ed Other Portion Expected Comprehensiive to be Reclassified Loss in next 12 months (Millions)
| |
| C om m odities ..................................... $(108) $(27)
| |
| Interest Rates ........................... (5) (1)
| |
| Net Cash Flow Hedge Loss Included in Accumulated .$(28)
| |
| Other Comprehensive Loss ................... $ 113) 90
| |
| | |
| Power Credit Risk The following table provides information on Power's credit exposure, net of collateral, as of December 31, 2006. Credit exposure' is defined as any positive results of netting accounts receivable/accounts payable and the forward value on open positions., It further delineates that exposure: by.,the credit rating of the counterparties and-provides guidance on the concentration of credit risk ,tO individual :counterparties and an indication of the maturity of a company's credit risk by credit rating of the, counterparties.
| |
| 2 Schedule of Credit Risk Exposure on. Energy Contracts Net Assets As of December 31, 2006 Securities Number of Net Exposure of Current Held Net Counterparties Counterparties I- Rating . Exposure, as Collateral Exposure >10% >10%
| |
| (Millions) (Millions)
| |
| $619 Investment Grade-External Rating ...... $619 $79 1(A) $393 Non-Investrnidnt Grade--Exter~nal Rating ...
| |
| 1 Inivestment Grade-No External Rating.. 23 ' 23 Non-Inv'estminnr Grade-No External Rating ........................... 22 22 I.
| |
| Total........................... $665 $79 $665 $393 (A) Counterparty is PSE&G.
| |
| The net 'exposure listed ,above,in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more collateral than the outstanding exposure, in which case there would not be exposure.
| |
| ITEM 8. 'FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This combined Form 10-K is separately filed by Public Service Enterprise Group Incorporated, (PSEG),
| |
| Public Service Electric and Gas Company (PSE&G), PSEG -Power LL.C (Power) and PSEG Energy Holdings L.L.c. (~n~rgy Holdings).. Information contained fihrein relatinig to any¢ individual company is filed by such company on its own behalf. PSt&G, Power and Energy Holdings each make representations only as to itself and make no representations 'as to anyother company. .
| |
| 91
| |
| | |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED:
| |
| We have audited the accomplanying consolidated balance sheets of. Public Service Enterprise Group Incorporated and subsidiaries., (the "Company."),as of December 31', 2006 and 2005, and the related consolidated ,statements. of operations; common stockholders'. equity and cash flows for 'each of the .three years in the period ended December 31, 2006. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and.consolidated, financial statement schedule based on our audits.
| |
| * We conducted our audits in accordance with the standards of the Public Company Accounting 'Oversight Board .(United States). Those standards"r'equirie"that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting. the amounts and disclosures in the financial statements. An audit also includes assessing the, accounting principles used and significant estimates 'made by man'agement, as well as evaluating the overall financial statement presentation. We" believe 'that our audits provide a reasonable basis for our opinion..
| |
| In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005i and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial'statements taken as a whole, presents fairly in all material respects, the information set forth therein.
| |
| .As discussed in Note 2 to the consolidated financial statements, on December '31, 2006, the, Company adopted Statement of Financial. Accounting Standards No.- 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.
| |
| As discussed in Note 3 to the consolidated financial statements, on December 31, 2005, the Company adopted Financial Accounting Standards Board Interpretation "No. 47,, Accounting for Conditional Asset Retirement Obligations. " .. ' '
| |
| We have' also'aidited,' in accordance with the standards of the Public Company Accounting" Oversight Board (United States), the effectiveness of th6 Company's internal conttroi 'over 'financial reporting dis of D~cember 31, 2006,' based on the'criteria' established in' Internal"Control--Integrated'Framework issued by the Committee of Sponsoring Organizations of the Treadwayy Commission and 6ur report dated 'February 27, 2007 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an 'unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
| |
| DELOIHtE '& TOUCHE LLP Parsippany, New Jersey February 27, 2007 92
| |
| | |
| REPORT .OF 'INDEPENDENT REGISTERED: PUBLIC ACCOUNTING FIRM To the Sole Stockholder and Board of Directors of PUBLIC SERVICE ELECTRIC AND GAS COMPANY:
| |
| We have Audited the accompanying consolidated *balaiice sheets of Public Service Electric and Gas ComInpany, and sub~idiaries (the "Company") as of December 31, 2006 and 2005, and the 'related consolidated Statemehts of operations, common stockholder's equity and 'cash floWs for each of the .thire years 'in the period ended December 31, 2006. Our audits also included the consolidiit~d financial statement schedule listed in "the 'Index at Item 15. Th'se consolidated finahcial statements and the consolidated financial statem'ent §chiedule are & responsibility of the Company's management. Our responsibility is to' express an opinion on thle co~1lidated financial statements and consolidated financial stateme'ij schedule based on our audits. '. .
| |
| We conducteddour audits in accordance with the, standards of the Public Cdinpany Accounting Oversight Board (United 'Siates). Those standards require that we plan and rperforn the 'audit to obtain r easdndble assurance about whether the financial Statements are free of' 'material misstatement. The Company ishOt
| |
| .required to have, nor were we engaged to perform, an audit of its internal control over finaiicial' reportfing.
| |
| Our audits included con'sideration 6f internal control over financial reporting as a basis for designing audit procedures that are appropriate in th* circumstances; -but not for the purpose of expressing an ppinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on A test basis, evidence supporting the amoui01nts and disclosures in the fifiahiiai statements, assessing the accounting principles iised and significant estimates`made by management, as well as evaluating the overall financial statement presentation. We believelthat our audits provide a' reasonable basis for our opinion.: '
| |
| In our opinioni" sudh consolidated financial statements present fairly, in all material respects,. the financial position of the Company as of Decemnber 31, 2006 and 2005, and the results of its operations and its cash flows for each '0f the'three years'in the period' ended Decemb'&r 31, 2006, in confoirmity with accounting principles generally accepted in' the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as'awholej jresents fairly in all material' respects,' the information set forth therein'.
| |
| As discussed in Note '2 to the 'consolidated financial statements, on' December 31, 2006, thI6 Company adopted Statement of Financial Accounting Standards No. '158, Employers Accounting for 'Definkd Benefit Pension and Oth'er PostretirementPlans.* '
| |
| DELOITTE & TOUCHE LLP Parsippany, New Jersey February 27, 2007 93
| |
| | |
| REPORT,'OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Sole Member and Board of Directors of PSEG POWER LLC:
| |
| We have audited the accompanying consolidated balance sheets of PSEG Power LLC and subsidiaries (the "Conipany') as of December 31, 2006 and 1005, and the related consolidated'statements of operations, capitalization anid member's equity and cash flows for each of the three years in'the period ended December 31, 2006.'Our audits also included the consolidated.financial statement schedule lisfed in the Index at Iterh
| |
| : 15. These -consolidated financial statements and th6 consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statement's' and the consolidated financial" statement schedule based on our audits.
| |
| We conducted our audits in accordance with the standards of the Public Company Accounting Oversight' Board (United State~s). Those standards require that we. plan and perform the audit to obtain reasonable assurance about wvh'ether 'thefinancial staterments are fre& of mraterial niisstatement.'The' Company is not reqiiieud "to havý_e, nor were we engaged to perform, an audit of its inte'rnal control over financial reporting.
| |
| Our audits included consideration Of internal control over financial reporting as a basis for.designing audit procedures that are appropriate in the circumstances, 'but not for the pirpose of expressing an opinion" on the effectiveness 'ofthe Comlany's 'inteinal conirol over financial reporting. Accordingiy," we express no such opinion. An.'audit also.includeg examining, on a test basis, evidence supporiing the amounts and disclosures in the' financial statements, assessing the accounting piinciples used and significant estimates made by management, as. well as evaluating the overall financial statement presentation. We believe,. that our audits pr*ovide a reasonable'basis for our opinion: . ' ' ' '
| |
| In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position, of: the Company as of.December 31,"2006 and 2005, and the results of its operations and its cash flows-for ~ea'ch of the thre ea - "i'" h 06end 205 an the reutwt as th in e period ended December 31, 2006, in conf6imity with accounting principle§ generally accepted ini the United States of America. 'Also, in our 6pinion', such consolidated financial statement schedule, when"confsidered in relation to the basic consolidated financial stAteients t.ken' as a whole, presents"fairlyin all material respects, the information set forth therein.
| |
| As discussed in Note 2 to the.consolidated. financial statements, on December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158, Employers' Accounting for 'Defined Benefit Pension afid Other Postretirement Plans.'
| |
| As discussed in Note 3 to the consolidated financial statements, on December 31, 2005, the ,Company
| |
| 'adopted Financial Accounting Standards Board Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations.
| |
| DELoiTrE & TOUCHE LLP Parsippany; New Jersey February 27, 2007 94
| |
| | |
| U REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Sole Member and Board of Directors of PSEG ENERGY HOLDINGS L.L.C.:
| |
| We have audited the accompanying consolidated balance sheets of PSEG Energy Holdings L.L.C. and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of operations, member's equity and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15.
| |
| These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.
| |
| We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
| |
| Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
| |
| In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth'therein.
| |
| DELOITrE & TOUCHE LLP Parsippany, New Jersey February 27, 2007 95
| |
| | |
| LEFT BLANK]
| |
| [THIS PAGE INTENTIONALLY
| |
| | |
| PUBLIC SERVICE -ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (Millions, except lfor share data)
| |
| For The Years Ended December 31, 2006 2005 2004 OPERATING REVENUES ............................................... $ 12,164 $ 12,164 $ 10,610 OPERATING EXPENSES
| |
| . E nergy C osts ......................................................... .6,76.9 7,040 5,824 Operation and Maintenance ................................ 2,297 2,282. 2,147 Write-down of Assets... . .................................. 318 D epreciation and A m ortization ........................................... 832..: 731 , 683 Taxes Other Than Income Taxes ........................................ 133 141 139 Total O perating Expenses .......................................... .10,349 10;194 8,793 Income from Equity Method Investments ......................... 120 i24; " 119 OPERATING INCOME............ ..................... ..... 1,935 2,094 1,936
| |
| * Other Income............. 209 233 186 Other Deductions. ........................................ (126) (93) (65)
| |
| Interest E xpense ...................................................... (808) (784) (774)
| |
| Preferred -Stock D ividends ............................................ (4) (4) (4)
| |
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES................................. ............ ........ 1,206 1,446 1,279 Incom e Tax Expense-............................. .............. (454) (560) '(484) 752 INCOME FROM CONTINUING OPERATIONS ....... ........... 886 795 Loss from Discontinued Operations, including Gain (Loss) on Disposal, net of tax benefit of $24, $154, and $44 for the years ended 2006, 2005 and 2004, respectively ................................................... (13).. (208) (69)
| |
| INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ........................................... 739 ,. 678 726 Cumulative Effect of a Change in Accounting Principle, net of tax benefit of $11 in 2005 ....................................... --____ (17) -
| |
| NET INCOME .. ' .................... $ 739 $ 661 .$ 726 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
| |
| ... (THOUSANDS):
| |
| BA SIC . ............. ;.................................. .. 251,678 240,297 236,984 DILUTED ................................................... 252,314 244,406 238,286 EARNINGS PER SHARE: ...............................................
| |
| BASIC INCOME FROM CONTINUING OPERATIONS ................ $ 2.99 $ 3.69 $ 3.35 N E T IN C O M E ................................................... $ 2.94 $ 2.75 $ 3.06 DILUTED INCOME FROM CONTINUING OPERATIONS........... $ 2.98 $ 3.63 $ 3.34 N E T IN C O M E ................................................... $ 2.93 $' 2.71 $ 3.05 DIVIDENDS PAID PER SHARE OF COMMON STOCK .............. $ 2.28 $ 2.24 $ 2.20 See Notes to, Consolidated Financial: Statements.
| |
| 96
| |
| | |
| PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED, BALANCE' SHEETS (Millions)
| |
| December 31, 2006 .2005 ASSETS CURRENT ASSETS Cash a'nd Cash Equivalents................................................... $ 141 $ 288 Accounts Receivable, net of allowances of $52 and $44 in 2006 and 2005,1 respectively................................ I................................ *.1,368 1,936 Unbilled Revenues ........................................................ 328 394 Fuel ............................................................ :............ *847 '812 Materials and Supplies ......................................................... *290 269
| |
| -Prepayments .......................................................... I...... 72 128 Restricted Funds ........................................................... .79 *76 Derivative Contracts..................................... *ý................... 127 ;377 Assets of Discontinued Operations........................................... 325 '1,175 Assets Held for Sale....................................................... 40 -
| |
| Other........................................................................ 45 41 Total Current Assets .......... ** **-................................... 3,662 5,496 PROPERTY, PLANT AND EQUIPMENT....................................... 18,851 '18,209 Less: Accumulated Depreciation and Amortization .................... .......... (5,849) (5,533)
| |
| Net Property, Plant and Equipment ........ I ........... 13,002 12,676 NONCURRENT ASSETS.
| |
| Regulatory Assets ........................................................... 5,64 5,059 Long-Term Investments ..................................................... 3,868 4,077 Nuclear Decommissioning Trust (NDT)rFunds ...................... I............ 1,256 1,133 Other Special Funds....................... ....................... . 147 '559 Goodwill ..................................... .......................... 539 554 Intangibles ..................................................... 46 46 Derivative Contracts................................. *......................... 55 42 Other ................................... .................................... 301 179 Total Noncurrent Assets .................................................. 111,906 11;649 TOTAL ASSETS................................ .......... I....... :... $28,570 $29,821 See Notes -to Consolidated Financial 'Statements.
| |
| 97
| |
| | |
| PUBLIC'SERVICE ENTERPRISE. GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS:
| |
| (Millions)
| |
| December 31, 2006 2005 LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES .
| |
| Long-Term Debt Due Within One Year ............................ ......... . $ 849 38.1-
| |
| $ 1,536100 Commercial Paper and Loans...............................
| |
| A ccounts Payable ...................... .............................. ... ......... .... , 964, 1,154 Derivative Contracts........ ................................ 1243 625 Accrued Interest .................. ........................ 124' 152 Accrued Taxes................. ............. .. 152 141 Clean.'E nergy Program .................................................. . :120 96 Liabilities of Discontinued Operations...*..:.................... ......... 436 O ther . .............................. ..... ........ 481 515 Total Current Liabilities .......-.. ............................ 3,406 4,755 NONCURRENT LIABILITIES .
| |
| Deferred Income Taxes and InvestmentTax 'Creditsý (ITC)...................... ' -4*462 4,248 Regulatory Liabilities.............. ............... 646 726 Asset Retirement Obligations ................... .. ................... 509 585 Other Postretirement Benefit (OPEB) Costs ........................................ .1,089 597 Accrued Pension Costs .............................................. 327 67 Clean Energy Program . ............. 133 233 Environm ental Costs ... ........................................................... 421 420 Derivative Contracts................................................ 204 656 O ther ....... ...............
| |
| ...... . .............................. ........ 176. J153 Total Nohcurrent Liabilities .......... 7,967 '7,685 COMMITMENTS AND CONTINGENT LIABILITIES (See Note 12)
| |
| CAPITALIZATION LONG-TERM DEBT ., .
| |
| Long-Term Debt.............. .................................... ................ 7,636 '7,849
| |
| *Securitization Debt................................ . ................ -.1,708 ' .1,879 Project Level, Non-Recourse Debt ........................... .......... 840 891 Debt Supporting Trust Preferred Securities .......................................... 186 660 Total Long-Term Debt ... ......... .................... ........... 10,370 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; 2006-266,372,440 shares; 2005---265,332,746 shares .............. ............... ...... . 4,661 4,618 Treasury Stock, at cost; 2006-13,727,032 shares; 2005-14,169,560 shares ........... (516): (532)
| |
| Retained Earnings. ... ... .. .............. 2,710 2,545 Accumulated Other Comprehensive Loss ................................ (108) (609)
| |
| Total Common Stockholders' Equity. ................................ 6,747 64022
| |
| - Total Capitalization .......................................... 17,197 17,381 TOTAL LIABILITIES AND CAPITALIZATION ..... ......... $28,570. $29,821.
| |
| See Notes to Consolidated Financial Statements.
| |
| 98
| |
| | |
| PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED -STATEMENTS OF CASH FLOWS (Millions)
| |
| For The Years Ended December 31, 2006 2005 2004 CASH FLOWS FROM OPPERATING ACTIVITIES $ .739. $ 661 $: 1726 N et Inco m e .................................................................. .......
| |
| Adjustments to Reconcile Net Income to Net Cash Flows from ;, -: ~'. ." :. . .
| |
| S;.Operating Activities:
| |
| (Gain) Loss on Disposal of Discontinued Operations, net of tax. .. ........ {i ":'.ý178
| |
| ) "17 (5)
| |
| * Cumulative Effect of a Change.in Accounting Principle, net of tax .................
| |
| Gain (Loss) on Disposition of Property, Plant and Equipment, ....... . (5).. (8) 1 Write-Down of Property, Plant and Equipment .................................. 44.
| |
| Write7Down of Project Investments .......... "......................... *" : ' 22 Depreciation and.Amortization ........................................ 850' 767 721 Amortization of Nuclear Fuel . ..............................................
| |
| . 97,'' -'94 80 Provision for Deferred Income Taxes (Other than Leases) and ITC........... (111) . 224 167 Non-Cash Employee Benefit Plan Costs'..."....................... 237 235 ,* 217 Leveraged Lease Income, Adjusted for Rents Received and Deferred Taxes .... 64 (27) (92)
| |
| * Loss (Gain) on Sale of Investments ................ ................... . 260 (122) (79)
| |
| Undistributed Earnings from Affiliates ......................................... (44) (46) (12)
| |
| Foreign Currency Transaction Loss (Gain) ........................ .............. .26 Unrealized (Gains) Losses on Energy Contracts and, Other Derivatives. '(30) . 20 ., (4)
| |
| Over Recovery of Electric Energy Costs (BGS and NTC) and Gas Costs ....... 111 109 80 Under Recovery of Societal Benefits Charge (SBC).... ...... ....... (140) (120) (158)
| |
| Net Realized Gains and Income from NDT Funds ............................ (63) (125) (105)
| |
| O ther N on-Cash Charges ............................... ........... .......... '62-,. 61 57 Net Change in Certain Current Assets and Liabilities .......................... 173.., (655) 25 Employee Benefit-Plan Funding and RelftIed Payments.. ...................... (148) (240) (174)
| |
| Proceeds from the Withdrawal of Partnership Interests and Other Distributions: 10 64 126 Other ..................................... ................... (163)' .. (139) 8 Net Cash Provided By Operating .Activities ................................. '1,929 - " *970 1,605 CASH FLOWS FROM INVESTING ACTIVITIES
| |
| *"Additions to Property, Plant andEquipment......................................... (1,015) (1,053)
| |
| (1,247)
| |
| Investments in Joint Ventures, Partnerships and Capital Leases................ (14)
| |
| Proceeds from Collection of Notes Receivable... .................. .. ............. '120 Proceeds from Sale of Discontinued Operations ...................................... 494 43 Proceeds from Sale of Property, Plant and Equipment ............................... . 5 229 13 Proceeds from the Sale ofInvestments and Return of Capital from Partnerships ' 246. .315 ''399 Proceeds~from NDT Funds Sales....... .................................. ' 1,405 - 3,223 2,637 Investment in NDT*Funds ....... . .... ........... (1,427) (3,232) (2,647)
| |
| Restricied Funds ......... ......... . ......-................ : ....... . ...... .: . .. .' (5) '(54), 54
| |
| .NDT Funds Interest and Dividends ...................................................... . ' (45 '35 28 Other.................. ....... ...... ....................................
| |
| , '< 16 .12 (22)
| |
| Net Cash Used In Investing Activities ..................................... (241) (405) (756)
| |
| CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Commercial Paper and Loans............... ...
| |
| ,................ 281 (538) 339 Issuance .of Long-Term Debt,...: ... .... ......... '..250 .728. 1,410 Issuance of Non-Recourse Debt ...... .... I ....... ..... . , -I, 18 19 Issuance of Comm on Stock .................................................. 83 5.533 83 Redemptions of Long-Term Debt ......................... ...... '594)'
| |
| (1 (271) (2,232)
| |
| Repayment of Non-Recourse.Debt:.'. ... :.............
| |
| . ....... .. (51) (37) (70)
| |
| Redemption of Debt Underlying Trust Securities ............................... (203) (387)
| |
| Cash Dividends Paid on Common Stock ................... ;................... . J (574) (541) (522)
| |
| Contributions from Minority Shareholders ................................. '(1)
| |
| O ther .. ........ .......................... ...... ................................... .(26)' (46) (56)
| |
| * Net Cash Used In Financing Activities.'.................... .......... ' '(1!834) -- (542) (1,029)
| |
| Effect of Exchange Rate Change ......................... : __(I) '2 1 Net (Decrease) Increase in Cash and Cash Equivalents ........... .................. .. (147). 25 (179)
| |
| Cash and Cash 'Equivalents at Beginning of Period................................... 288 263 442 Cash and. Cash Equivalents at End of Period ..... '... $ 141 $ 288 $ 263 Supplemental Disclosure of Cash Flow Information:
| |
| Income T axes Paid ............. ................................................... $ 386 $ 103 $ 104 Interest Paid, Net of Amounts Capitalized ........................................... '$ 773 $ 793 $ 852 See- Notes, 'to, Consolidated Financial Statements.
| |
| 99
| |
| | |
| PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (Millions)
| |
| Accumulated Common Treasury Other Stock Stock Retained Comprehensive Shs. Amount Shs. Amount Earnings Loss Total*
| |
| Balance as of January 1, 2004 ........................... 262 $4,490 (26) $(981) $2,221 $(192) $5,538 N et Incom e ......................................... 726 726 Other Comprehensive Income (Loss), net of tax:
| |
| Currency Translation Adjustment, net of tax... 64 64 Available for Sale Securities, net of tax ........ (16) (16)
| |
| Change in Fair Value of Derivative Instruments, net of tax ............. e ......... (167) (167)
| |
| Reclassification Adjustments for Net Amounts included in Net Income, net of tax .......... 46 46 O ther .......................................... (3) (3)
| |
| Minimum Pension Liability Adjustment, net of tax ............................. ...... (6) (6)
| |
| Change in Fair Value of Equity Investments.;. 2 2 Other Comprehensive Loss ................ (80)
| |
| Comprehensive Income ............................. 646 Cash Dividends on Common Stock ................. -- (522) (522)
| |
| Issuance of Common Stock .......................... 2 83 83 Issuance Costs and Other ........................... (4) 3 (1)
| |
| Balance as of December 31, 2004 ....................... 264 $4,569 (26) $(978) $2,425 $(272) $5,744 Net Incom e ....................................... 661 661 Other Comprehensive Income (Loss), net of tax:
| |
| Currency Translation Adjustment, net of tax... .. ...- 84 84 Available for Sale Securities, net of tax........ (30) (30)
| |
| Change in Fair Value of Derivative Instruments, net 'of tax ....................... --- -- (573) (573)
| |
| Reclassification Adjustments for Net Amounts included in Net Income, net of tax .......... .. ... 182 182 Settlement Adjustments Related to Projects Under Construction... ......... -- . 7 '--- (2) (2)
| |
| Minimum Pension Liability Adjustment, net of tax .................................... .. .. 2 2 Other Comprehensive Loss ................ (337)
| |
| Comprehensive Income ............................. 324 Cash Dividends on Common Stock ................. (541) (541)
| |
| Issuance of Common Stock ......................... 1 104 12 429 533 Issuance Costs and Other .......................... (55) 17 (38)
| |
| Balance as of December 31, 2005................. 265 $4,618 (14) $(532) $2,545 $(609) $6,022 Net Income ....................................... 739 739 Other Comprehensive Income (Loss), net of tax:...
| |
| Currency Translation Adjustment, net of 154 tax ........................................... 154 Available for Sale Securities, net of tax......, 37 37 Change in Fair Value of Derivative Instruments, net of tax ....................... 343 343 Reclassification Adjustments for Net Amounts included in Net Income, net of tax .......... 114 114 Sale of Investm ents ............................ 55 55 Minimum Pension Liability Adjustment, net of tax ........................................... 3 3 Other Comprehensive Loss ................ 706 Comprehensive Income....................... 1,445 Adjustment to initially apply FASB Statement 158, net of tax ........................................ (205) (205)
| |
| Cash Dividends on Common Stock............ (574) (574)
| |
| Issuance of Common Stock ......................... 1 68 -- 15 83 Issuance Costs and Other ........................... (25) - 1 (24)
| |
| Balance as of December 31, 2006 ....................... 266 $4,661 (14) $(516) $2,710 $(108) $6,747 See Notes to Consolidated Financial Statements.
| |
| 100
| |
| | |
| [THIS PAGE INTENTIONALLY LEFIT BLANK]
| |
| PUBLIC SERVICE ELECTRIC- AND GAS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (Millions)
| |
| For The Years Ended December 31, 2006 2005 2004 OPERATING REVENUES .......................................... $7,569 $7,514 $6,810 OPERATING EXPENSES Energy Costs ............................. 4,884.: ,,.14,756 *4,122 Operation and Maintenance. . I 1,160 1,083 Depreciation and Amortization .................... 620 553. 523 Taxes Other Than Income Taxes ................... 133. 141 .,.139 Total Operating Expenses ........................................... 6,797, 6,601: 5,867 OPERATING INCOME........ ,............................................. .772 '913 943 O ther Incom e .;....,.... ............. ...................................... 25 - 12 O ther D eductions .......................................... ............. (3), (3) (1)
| |
| Interest Expense ........... ..... ......................... . 346) (342) (362)
| |
| INCOME BEFORE INCOME TAXES...., ..................... 448 f 583 592
| |
| -Income Tax Expense ..... ). (246)
| |
| NET INCOME ... ....... "..................... .265- .348-ý 346 Preferred Stock Dividends ............................................. (4) i (4)
| |
| EARNINGS AVAILABLE TO PUBLIC SERVICE.
| |
| ENTERPRISE GROUP INCORPORATED........ .............. $ 261 $344. ;$ 342 See disclosures regarding Public Service, Electric and Gas-Company included in the, Notes 'to'Consolidated Financial Statements.
| |
| 101
| |
| | |
| PUBLIC,SERVICE ELECTRIC AND GAS COMPANY
| |
| - CONSOLIDATED BALANCE SHEETS (Millions)
| |
| December 31, 2006 2005 ASSETS, .
| |
| CURRENT'ASSETS "Cash and Cash Equivalents. ........................................... $ 2. $ 159
| |
| 'Accounts Receivable, net of allowances of $46 in 2006 and $41 in!2005:*....-. 805' - 959 U nbilled R evenues ...................... ................. ................. :.... 328 394 M aterials and Supplies.'. ........................................................ 50 -49 Prepaym ents ........ ................................................. ...........- 14
| |
| * 49 R estricted Funds ................................................................. , 12 14 O ther ................................................................ 38 32 Total Current A 'sets. ......................................................... 12. 1,656 PROPERTY, PLANT AND. EQUIPMENT ....................................... 11,061 10,636 Less: Accumulated Depreciation and Amortization .................... ....... (3,794) . (3,627)
| |
| Net Property, Plant and Equipment ...... ............. 7....................7,009
| |
| '726, NONCURRENT ASSETS, Regulatory Assets .. ........... ",: 5,694 ` 5,059 Long-Term Investm ents ............................ .. ........ . .........
| |
| ... 149:- 144 Other Special Funds..... ..... , * .. :- 3......
| |
| 315, Other ................................. .............I .......... 115. .114 Total Noncurrent Assets ...................................... 6,011 5,632 TOTAL ASSETS....... .......... .................... ... $14,553 $14,297 See disclosures regarding Public. Service Electric and Gas'-Company included in the Notes to Consolidated Financial Statements.
| |
| 102
| |
| | |
| PUBLIC.SERVICEý ELECTRIC AND GAS' COMPANY
| |
| " CONSOLIDATED BALANCE SHEETS (Millions)
| |
| December 31, 2006 2005 LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES Long-Term Debt Due Within ,One Year........ ,..... . *........ $ 284 ... $, 485 Commercial Paper and Loans ................................... 31 -% -
| |
| A ccounts Payable ........................................... . 254 286 Accounts Payable- Affiliated Companies, net .... '.*.....,.....,.....'........: ...... 645 391 Accrued Interest................... .............. 55 59 Clean Energy Program . . ......................... 120-- 96 O then... Contracts Derivative ..........
| |
| tracts..... ............ ........ . ................ ...: ...........
| |
| .. I...
| |
| 3224 6 O ther: .. .. ' .* ......... "' - " '
| |
| 370
| |
| "'1;713 Total Current Liabilities ....................... : ..... 1,693 NONCURRENT LIABILITIES Deferred Income Taxes and ITC ............... .. ......... ...... .2,517, 2,608' Other Postretirement Benefit (OPEB) Costs,!.......... ............. 898 561 Accrued Pension Costs ..................... ; .. ...- . ..... 133 19 R egulatory Liabilities ......................................... ... . . . 1. , . . 646 726 Clean Energ'yProgram ........................................... . 133 233 Environmenial Costs ................................................................. 367 365 Asset Retirement Obligations ............... ............. .. 221 .210 Derivative Contracts... .................... . ........... . 18 6 O th er ...... .................. .... .. ....... ......... -.. ... :... ... .. .... 6 8 Total Noncurrent Liabilities ..................... .................... 4,939 4,736 COMMITMENTS AND CONTINGENT LIABILITIES (See Note ,12)
| |
| CAPITALIZATION , ... . ..
| |
| LONG-TERM DEBT "
| |
| .Long-Term D ebt ................ ... . .... .... ......... 3,003 2,866 Securitization Debt ...................... 1,708 ..1,879
| |
| -Total Long-Term Debt............... ..................... ............... 4,711 4,745 PREFERRED SECURITIES Preferred Stock Without. Mandatory Redemption, $100 par value, 7,500,000:.
| |
| authorized; issued and outstanding, 2006 and 2005-795,234 shares............... 80 80 COMMON STOCKHOLDER'S EQUITY Common Stock; 150,000,000 shares authorized, 132,450,344 shares issued arid .
| |
| outstanding ........ ................................ .... . ..... ,.... . 892., 892 Contributed. Capital ..................... ,........................ 170. 170 Basis Adjustment..............................................I .. ...... ,986 986 R etained Earnings ................. ............................................... .1,061 1,000 Accumulated Other Comprehensive Income (Loss). .... ........... 1 (5)
| |
| Total Common Stockholder's Equity..... . ........... 3,110 3,043
| |
| ,.Total Capitalization ........................... .. ...... ...................... 7,901 7,868
| |
| -$i4,297
| |
| - TOTAL LIABILITIES AND CAPITALIZATION ... ..... *...." *....... $14,553, See disclosures:regarding Public Service. Electricand Gas Company included in the Notes -to-Consolidated Finaficial Statements.
| |
| 103
| |
| | |
| PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions)
| |
| For the Years Ended December 31, 2006 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES N et Incom e .......................... ................. ....................... . $265, $ 348 $ 346 Adjustments to Reconcile Net Income to Net. Cash Flows from Operating' Activities:
| |
| Depreciation and Amortization............................ , 620' 553. 523 Provision for Deferred Income Taxes and ,ITC ..................... (112) (52) (80)
| |
| Non-Cash Employee Benefit Plan Costs ...........................
| |
| * 169 .166 155 Gain-on Sale of Property, Plant and Equipment ............................ .. , (4). (3)
| |
| Non-Cash Interest Expense. .................................... 18 16 24 Employee Benefit Plan Funding and Related Payments .............. (97) (154) (115)
| |
| Over Recovery of Electric Energy Costs (BGS and NTC) ........ .... 24 117 10 Over '(Under) Recovery of Gas Costs ............................ 87 (8) 70 U nder Recovery of SBC ........................................... ...... ,(140)' (120) (158)
| |
| Other Non-Cash Charges ........................ . .............. - 4. 3 Net Changes in Certain Current Assets and Liabilities:. .... ,
| |
| Accounts Receivable and-Unbilled Revenues .................... 220 (268) (20)
| |
| Materials and Supplies ..... ............................................... * (1) (4) 5 Prepayments ............................................ c::, 35. 12 (17)
| |
| A ccrued T axes ........................................................... .. (23). 18 Accrued Interest .................. ... .................... (4). (12)
| |
| A ccounts, Payable ..................... ................................ .(32) 36 (3*6)
| |
| Accounts Receivable/Payable-Affiliated Companies, net......... (72) 79 20 Other Current Assets and Liabilities .......................... (57) 77 58 Other... .,.................. ........................ (98) (110) (98)
| |
| Net Cash Provided By Operating Activities .................... 804 689 696 CASH FLOWS FROM INVESTING ACTIVITIES Additions to Property, Plant and Equipment. .................. '(528) (498)". (420)
| |
| * Proceeds 'from the Sale of Property, Plant and Equipment................ 2 3 13 Restricted Funds ............................................. ... 1 (11)' (4)
| |
| Net Cash.Used In Investing Activities .......................... (525) (506) (411)
| |
| CASH FLOWS FROM FINANCING ACTIVITIES Net Change in Short-Term Debt .......................... *31 (105) 105 Issuance of Long-Term D ebt ................... ................... .......... 250 250 710 Redemption of Securitization Debt ................... ........... (163)"' (146) (137)
| |
| Redemption of Long-Term Debt ......................... (322) .(125) (984)
| |
| * Issuance-of Securitization Debt ........................... 103 D eferred Issuance Cos ts ........... .................................. (2) '(3) (9)
| |
| Cash Dividends Paid on Common Stock.'....: ........................ (200) (100)
| |
| Preferred, Stock D ividends,.. ..................... ............... .............. ýý (4) (4) (4)
| |
| Net Cash Used In Financing Activities ................ (410), (30) (419)
| |
| '(131) 153 (134)
| |
| Net (Decrease) Increase In Cash .and.Cash Equivalents ....................
| |
| Cash and Cash Equivalents at Beginning, of Period ............................ 159. $ 6 140 Cash and Cash Equivalents at End of Period -... ............................. $ .28- $ 159 $ 6 Supplemental Disclosure of Cash Flow Information:
| |
| Income Taxes Paid............................. $ 237 $ 313 $ 355 Interest Paid, Net of Amounts Capitalized ........................ $ 312 $ 316 $ 348 See disclosures regarding. Public.Service Electric and Gas Company included in the Notes to Consolidated Financial Statements" 104
| |
| | |
| PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (Millions)
| |
| Accumulated Contributed Other Common Capital from Basis Retained Comprehensive
| |
| *Stock PSEG Adjustment Earnings Loss Total Balance as of January 1, 2004 ........... $892 $170 $986 $ 414 $'(2) $2,460 Net Incom e ............................. 346 346 Other Comprehensive Loss, net of tax:.
| |
| Minimum Pension Liability Adjustment, net of tax ........... - '(2) _(2)
| |
| Comprehensive Income ............ 344 Cash Dividends on Common Stock ..... (100) (100)
| |
| Cash Dividends on Preferred Stock ..... (4) (4)
| |
| Balance as of December ,31, 2004 ........... $892 $170 $986 $ 656 $(4) $2,700 N et Incom e ............................. 348 348 Other Comprehensive Loss, net of tax:
| |
| Minimum Pension Liability Adjustment, net of tax ........ -- -- (1) (1)
| |
| Comprehensive Income ............ 347 Cash Dividends on Common Stock .....
| |
| Cash Dividends on Preferred Stock ..... - ) (4)
| |
| Balance as of December 31, 2005 ........ $892 $170 $986 $1,000 $(5) $3,043 N et Incom e ............................. -- 265 - 265 Other Comprehensive Income, net of.
| |
| tax : ...................................
| |
| Minimum Pension Liability Adjustment, net of tax........ 5 5 Comprehensive Income ......... 270 Adjustment to initially apply FASB Statement 158, net of tax ............. 1 1 Cash Dividends on Common Stock ..... -- (200) (200)
| |
| Cash Dividends on Preferred Stock ..... $986 $ 4) (4)
| |
| Balance as of December 31, 2006 ........... $892 $170 $986 $1,061 $1 $3,110 See disclosures regarding Public Service Electric and Gas Company included in the Notes to Consolidated Financial Statements.
| |
| 105
| |
| | |
| .i* , ,> t I
| |
| [THIS, PAGE INTENTIONALLY LEFT BLANK]
| |
| | |
| PSEG POWER LLC CONSOLIDATED STATEMENTS OF OPERATIONS (Millions)
| |
| For The Years Ended December 31, 2006 2005 2004 OPERATING REVENUES ..................................................... $6,057 $6,027 $5,166 OPERATING EXPENSES 3,955 E nergy C osts ................................................................ 4,266 3,553 O peration and M aintenance ................................................. 958 939 948 Write-Down of Assets ................ .......................... -44 Depreciation and Amortization.. ................................. 140 114 98 Total Operating Expenses. ................................... 5,097 5,319 4,599 OPERATING INCOME .................................................. 960 708 567 Other Income ................................................ 157 187 167 Other Deductions. ............................................. (91) (43) (50)
| |
| Interest Expense................ .............................. (148) .100) (90)
| |
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME..
| |
| T AX ES ........................................................................ 878 752 594 Incom e T ax E xpense ............................................................. (363) (318) (227)
| |
| INCOME FROM CONTINUING OPERATIONS ..... .................. . 515 .434 367 Loss from Discontinued Operations, Including Loss on Disposal, net of tax benefit of $166, $156 and $41 for the years ended 2006, 2005 and 2004,
| |
| .respectively .................................................................... (239) _ (59)
| |
| INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ................................................. 276 208 308 Cumulative Effect of a Change in Accounting Principle, net of tax benefit of
| |
| $11 for the year ended 2005 ................................................... (16) -
| |
| EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED ................................................ $ 276 $ 192 $ 308 See disclosures regarding PSEG Power LLC included in the Notes to Consolidated Financial Statements.
| |
| 106
| |
| | |
| PSEG POWER LLC CONSOLIDATED BALANCE SHEETS (Millions)
| |
| December 31, 2006 2005 ASSETS CURRENT ASSETS.
| |
| Cash and C ash E quivalents ............................................................... $ 13 430 $. 8 Accounts Receivable .................................................. 862 Accounts Receivable - Affiliated' Companies, net ............... 495 288 Fuel .............................................................. 846 811 M aterials and Supplies ................................................... ......... ....... 202 193 Energy Trading Contracts .. ............................................................ 55. 327 Derivative Contracts ............................................................... 56 50 Assets of Discontinued Operations ..................................... : ............. ,325 677 Assets Held for Sale ................................................................... 40 Other ............................................................. 26 26 Total Curre'nit Assets............................................... 2,488 3,242
| |
| 'PROPERTY, PLANT AND EQUIPMENT....... ............ 5,868 5,771 Less: Accumulated.Depreciation and Amortization....". ..................... (1,638) (1,550) 4,230' S4,221 Net Property, Plant and Equipm ent..................... ............ .......... ..
| |
| NONCURRENT ASSETS 70 Deferred Income Taxes and Investment Tax Credits (ITC)......................
| |
| Nuclear Decommissioning Trust (NDT) Funds ............................... 1,256 1,133 Goodwill ..... ..................
| |
| I........ ........................... 16 35 16 Intangibles ...................................................... ........... 39 42 143 O ther Special Funds ...................................... .............. .................. .
| |
| Energy Trading Contracts ............ .................................. 10 42 Derivative Contracts ................................................... 19 Other ......................................................................... 50 39 Total N oncurrent A ssets ............. : ....................................
| |
| .. . 1,428. 1,482 T OTA L A SSETS ................................................................ $ 8,146 $ 8,945 LIABILITIES AND MEMBER'S EQUITY "
| |
| CURRENT LIABILITIES Long-Term Debt Due Within One Year ................................................. $ - $ 500 A ccounts P ayable ........................... ; ............................................ 589 745 Short-Term Loan from Affiliate ............................................ 54 202 E nergy Trading Contracts ............................................... ................ 222 200 D erivative Contracts ..................................................................... 90 403 Accrued Interest ..................................................... 34 41 O th e r ........................................................... ......................... 95 86 Total C urrent Liabilities .......................................... ................... 1,084 2,177 NONCURRENT LIABILITIES Deferred Income Taxes and Investment Tax Credits (ITC) .............................. 48 A sset Retirem ent Obligations ............................................................ 287 373 Other Postretirement Benefit (OPEB) Costs ............................................. 138 25 E nergy T rading Contracts ............................................................... 19 19 D erivative C ontracts ..................... ................................................ 151 597 A ccrued Pension C osts ................................................................. .. 1.06 17 E nvironm ental Costs ..................................................................... 54 55 O th er ..................................................................................... 18 28 Total N oncurrent Liabilities ......................................................... 821 1,114 I COMMITMENTS AND CONTINGENT LIABILITIES (See Note 12)
| |
| LONG-TERM DEBT Total Long-T erm D ebt .............................................................. 2,818 2,817 MEMBER'S EQUITY C ontributed C apital ...................................................................... 2,000 2,000 B asis A djustm ent ......................................................................... (986) (986)
| |
| Retained E arnings .................... .................................................... 2,586 2,310 Accumulated Other Comprehensive Loss ................................................. (177) (487)
| |
| Total M em ber's E quity .............................................................. 3,423 2,837 TOTAL LIABILITIES AND MEMBER'S EQUITY ........................... $ 8,146 $ 8,945 See disclosures regarding PSEG Power LLC included in the Notes to Consolidated Financial Statements.
| |
| 107
| |
| | |
| PSEG POWER LLC CONSOLIDATED STATEMENTS OF CASH, FLOWS (Millions)
| |
| For The Years Ended
| |
| - . December 31, 2006 2005 2004 (Unaudited)
| |
| CASH FLOWS FROM OPERATING ACTIVITIES
| |
| .Net Income ................................................ $ 276 $ -192 .$ 308 Adjustments to Reconcile Net Income to Net Cash Flows, from Operating Activities:
| |
| Loss on Disposal of Discontinued operations, net of tax ............. 208 178 Cumulative Effect of a Change in Accounting Principle....... .16 Write-down of Property, Plant and Equipment ...... ........... -44 Gain on Disposition of Property, Plant and Equipment ............. : (1) 1 (5) 136*
| |
| Depreciation and Amortization ............................. 157 121 94.
| |
| Amortiiation of Nuclear Fuel .................. 97. 80 28
| |
| - Interest Accretion on Asset Retirement Obligations... ................ 33 26 Provision .for Deferred Income Taxes and ITC .............. 34 276 163 Unrealized Losses (Gains) on Energy Contracts and Other Derivatives............... ............................ 5 17 (7)
| |
| Non-Cash Employee Benefit Plan Costs................ 46 .. 46 40
| |
| * Net Realized Gains- and Income from NDT Funds.............. (63) (125) (105)
| |
| Net Change in Certain Current Assets and Liabilities:
| |
| Fuel,. Materials and Supplies .................................. (45) (214). (121)
| |
| Accounts Receivable.. ........................... 432 (122) (123) 181)
| |
| Accounts Payable ................................... (247) 206 Accounts Receivable/Payable-Affiliated Companies, net ....... 122 (91) '(71)
| |
| Other Current Assets and Liabilities ............................ " .. (27) (67)
| |
| Employee Benefit Plan Funding and Related Payments .... ...... (37) (58) (39)
| |
| Other ............... ".'42 95
| |
| ..................... (79.)
| |
| Net Cash Provided By Operating Activities.. 1,043 :136 507 CASH FLOWS FROM INVESTING ACTIVITIES Additions 'to Property, Plant and Equipment .......... ......... (418) (476) (725)
| |
| Sales of Property, Plant and Equipment ..................................... 226,,
| |
| Proceeds from NDT Funds Sales ........................................... 1,405 3,223 2,637 NDT Funds.Interest and Dividends ...... ....................... 40 35 28
| |
| -Investment 'in NDT FUnds....... ...................................... (1,427) '(3,232) ' (2;647)
| |
| Short-Term Loan'-Affiliated. Company, net ....................... 77 Change in Restricted .Cash....................
| |
| 39 Other ........ ................... .......................... 9 (18) 1 (19)
| |
| Net Cash Used-In Investing Activities ................. (390)
| |
| (242) (610)
| |
| CASH FLOWS FROM FINANCING ACTIVITIES Issuance of Recourse Long-Term Debt .................. 500 Redemption of Long-Term Debt ................................. (500) (800)
| |
| Proceeds from Contributed Capital .................................... * -- 300 Short-Term Loan-Affiliated Company, net ............... ......... (148) 104 98 O th e r " " . ...................................... : ................ .- (12)
| |
| Net Cash (Used In) Provided by Financing Activities ...... (648) 104 86 Net Increase (Decrease) in Cash and Cash Equivalents.............. (2) (17)
| |
| *Cash and Cash Equivalents at Beginning of Period ....................... '8 10:` 27 Cash. and Cash Equivalents at End of Period ...................... $ 13 $ ' $ 10 Supplemental Disclosure of Cash Flow Information:
| |
| Income Taxes Paidn.. ts C..................... . $ 251 $ (23) "$ 12 Interest Paid, Net of Amounts Capitalized ........................... $ .173 $ 139 $ 233 See disclosures regarding PSEG Power LLC included: in the Notes to Consolidated Financial Statements.
| |
| 108
| |
| | |
| PSEG POWER.LLC CONSOLIDATED STATEMENTS OF CAPITALIZATION ANDMEMBER'S EQUITY (Millions)
| |
| Accumulated Other Total Contributed Basis Retained ComprehensivE Member's Capital Adjustment Earnings Income (Loss) Equity Balance as of January 1, 2004............. $1,700 $(986.). $1,810 $ -90 $2,614 N et Incom e ................................. 308 ".;308 Other Comprehensive Income (Loss), net of tax:
| |
| Available for Sale Securities, net of tax ................................... --* ... . (16).* (16)
| |
| Change in Fair Value of Derivative Instruments, net of tax .......... - "(166) (166)
| |
| Reclassification Adjustments for Net Amount included in Net Income, net of tax ........................... - .' 43 43 Other Comprehensive Loss ............ (139)
| |
| Comprehensive Income .................... 169 Contributed Capital .......................... 300 300
| |
| ,$3,083 Balance as of December 31, 2004........... $2,000 I $(986) '$2,118 (49)
| |
| Net Income ......... :192 192 Other Comprehensive Income (Loss), net.
| |
| of tax:
| |
| Available for Sale Securities, net of tax ..... ......... ............ * ,, . (30) (30)
| |
| Minimum Pension Liability Adjustment, net of tax.......... 1 Change in Fair Value of Derivative Instruments, net of tax.......... - ,,(589) (589)
| |
| Reclassification Adjustments for Net Amount included in Net Income, net of tax ..................... -- . ,180,, 180 Other Comprehensive Loss ............. (438).
| |
| .Comprehensive 'Income............... :, ""(246)
| |
| Balance as of December 31, 2005........... $2,000 $(986_) $2,310 $(4'87) $2,837 Net Income........... ............. , *276 276 Other Comprehensive Income (Loss), net of tax:
| |
| Available for Sale Securities, net of tax .................... .............. 37 37 Minimum Pension Liability
| |
| . Adjustment, net of tax ............... (4) ' (4)
| |
| Change in Fair Value of Derivative Instruments, net of tax ............... '343 343 Reclassification Adjustments for Net Amount.. ................
| |
| included in Net Income, net of tax .... -- ; 107 107 Other Comprehensive Loss......... ,483.
| |
| Comprehensive Income .................... 759 Adjustment to initially apply FASB
| |
| -Statement 158, net of tax............ (173 Balance as of December 31, 2006 ................ $2%000 $(986) '$2,586 $(.7__7))' $3ý,423 See disclosures regarding. PSEG Power LLC included in the Notes to Consolidated Financial Statements:
| |
| 109
| |
| | |
| PSEG ENERGY HOLDINGS L.L.C.
| |
| CONSOLIDATED STATEMENTS OF OPERATIONS (Millions)
| |
| For The Years Ended December 31, 2006 2005 2004 OPERATING REVENUES Electric Generation and Distribution Revenues ......... ....... $1,171 $1,005 '$ 559
| |
| '151 Income from Leveraged and Operating Leases .......................... : ..... 175' 165 O th e r ......................................................................... 35 122 113 Total Operating Revenues .................................... 1,357 1,302 836 OPERATING EXPENSES Energy Costs.................................................. 739 .*675 322 Operation and M aintenance........................................ 208 215. 171 W rite-dow n of A ssets ..................................... ................... 274 Depreciation and Amortization. .................................... ,52, 46; 44 Total O perating Expenses.................................................... 1,273, 936 537 Income from Equity Method Investments ....................................... 120, 124. 119 OPERATING INCOME. .................. 204 490 418 Other Income ......... : .............................................. 39 23 14
| |
| * O ther D eductions ................................................................... (28) (31) (12)
| |
| Interest E xpense ................................... ............... ........... (203) ()223)
| |
| INCOME FROM CONTINUING OPERATIONS BEFORE -
| |
| INCOME TAXES AND MINORITY INTEREST .............................. 12 269 .198
| |
| - Income Tax Benefit (Expense) .................................... 39 (69) (45)
| |
| Minority Interests in Earnings of Subsidiaries , (2) (2)
| |
| INCOME FROM CONTINUING OPERATIONS ................................. 49 199. 151 Income (Loss) from Discontinued Operations, including Gain (Loss) on.
| |
| Disposal, net of tax (expense) benefit of ($142), ($2) and $3 for the years ended 2006, 2005 and 2004, respectively 226 18", (10)
| |
| NET INCOME................................................... 275 217 141 Preference Units Distributions .............. ...... .................. -- (3) (16)
| |
| EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED .............................................. $ 275 $ 214 $125 See disclosures regarding PSEG Energy Holdings L.L:C. included in the Notes to Consolidated Financial Statements.;
| |
| 110
| |
| | |
| PSEG ENERGY HOLDINGS L.L.C.
| |
| CONSOLIDATED BALANCE SHEETS (Millions)
| |
| December 31, 2006 2005
| |
| " "ASSETS CURRENT ASSETS.
| |
| Cash and Cash Equivalents ............................................. $ 98.$ 68 Accpunts Receivable:
| |
| Trade-net of allowances of $6 and $3 in 2006 and 2005; respectively ......... 29 14 Other Accounts Receivable ........................ ..............
| |
| Notes Receivable:
| |
| Affiliated C ompanies ......-............................................... 28 409 5
| |
| O ther ..... I
| |
| . :.. ....................................... ..............
| |
| I Inventory .... ....................................... .......... ....... 41 27 R estricted Funds....................................... ......... ......... 67- 62 Assets of Discontinued Operations ......................... ...... ........... - . 498 Derivative Contracts ......... ...... ................... 14 -
| |
| Other ........................................................ .................. 8 '7 Total Current Assets ......................................... 388 1,191 PROPERTY, PLANT AND EQUIPMENT ............ ................... 1,706. 1,560 Less: Accumulated Depreciation and Amortization .................................. (307). (237)
| |
| Net Property, Plant and Equipment ...... .................................... *1;399 '1,323 NONCURRENT ASSETS .............................. ... ....................
| |
| .....
| |
| Leveraged Leases, net .. ............................... . .............. 2,810 2,720 Corporate Joint Ventures and Partnership Interests ........... 868" "1,180 Goodwill .................................................. ............... .523 538 Intangibles .................... ................ ................. 11 , 2 Derivative Contracts ................................ ...... ...... . ;............. 26 3 Other-................................... . "....................... 139 98 Total Noncurrent Assets..."................................. 41377 4,541 TOTAL ASSETS ......................... ........... .... $6,164 $7,055
| |
| :4 See disclosures regarding PSEG Energy Holdings L.L.C. included in the Notes to Consolidated Financial, Statements.
| |
| 1:11
| |
| | |
| PSEG ENERGY. HOLDINGS L.L.C.
| |
| CONSOLIDATED BALANCE SHEETS (Millions)
| |
| 'December 31, 2006 2005 LIABILITIES AND MEMBER'S EQUITY CURRENT LIABILITIES" ..
| |
| Long-Term Debt Due Within One Year...........
| |
| $ 42 $ 348 Accounts Payable:
| |
| Trade ........ .................................................. 54 50 Affiliated Companies ..................... ! ......................... 12 11 D erivative Contracts.................................. . ................... . 16 13 A ccrued Interest ......... .................... ......... . . ........ 27 42 Liabilities of Discontinued Operations................ ............... ..... 436 O th er ........................................................ ...... . . ........... 72 83 Total Current Liabilities.. ............................ ......... .223 983 NONCURRENT LIABILITIES Deferred Income Taxes and Investment and Energy Tax Credits ............... 1,925 1,705 Derivative Contracts..................... .................................. 11 27 Other ................................................................ 102 66 Total Noncurrent Liabilities ................. .............. 2,038 1,798 COMMITMENTS AND CONTINGENT LIABILITIES (See Note,*i2)
| |
| MINORITY INTERESTS.. ...-. ......................
| |
| 26 15 LONG-TERM DEBT 840 .891
| |
| * Project Level, Non-Recourse Debt ".............. ......................
| |
| S en io r Notes ................................................... ..................... 1,149 "1,448 Total Long-Term Debt.'.....:.% ' ........... 1,989. 2,339 MEMBER'S EQUITY ....
| |
| Ordinary Unit ....................................................... 1,193. 1,713 R etained E arnings ...... ......................................... ......... .......... *592 . 317 Accumulated Other Comprehensive Income (Loss) .......................... 103 (110)
| |
| T otal M em ber's E quity ........................................................ 1,888 1,920 TOTAL LIABILITIES AND MEMBER'S EQUITY .............. $6,164. $7,055 See disclosures regarding PSEG Energy Holdings L.L.C. included in the Notes to Consolidated Financial Statements.
| |
| 112
| |
| | |
| PSEG ENERGY HOLDINGS L.L.C.
| |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions)
| |
| For The Years Ended" December 31, 2006 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES Net Income. .................................................... $ 275 $'217 $ 141 Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
| |
| Gain on Disposal of Discontinued Operations, net of tax ..................... (227) (5)
| |
| Depreciation and Amortization .... ............ :.: ................... 54 60 59 Demand Side Management Amortization .............. ........... ;... 3 7 Investment W rite-off and W rite-down ............................................. 22 Deferred Income Taxes (Other than Leases) ................................... 4, 83 Leveiaged Lease Income, Adjusted for Rents Received and Deferred Incom e Taxes ................................. ............ 64 (27) (92)
| |
| Undistributed Earnings from Affiliates ......................................... (44) (46) (12)
| |
| Loss (Gain) on Sale of Investm ents ............................................ 260 (122) (79)
| |
| Unrealized Loss on Investments ........................ ... ............... --
| |
| 5 7
| |
| Foreign Currency Transaction Loss ............................... -
| |
| ... 26 Change in Fair Value of Derivative Financial Instruments ...................... (35) 3 3 Other Non-Cash Charges ....................................... .2 6 4 Net Changes in Certain Current Assets and Liabilities:
| |
| * Accounts Receivable ..................................................... (26)- (15) 183 Inventory............................................... (10) - (9)
| |
| A ccounts Payable ........ ...... ............ ... .......................... (1[81) 19 (43)
| |
| Other Current Assets and Liabilities ............ ........................... 3 81 7 Proceeds from Withdrawal of Partnership Interests and Other Distributions .. 10. 64 126 O th er .... : .................................................................... 2 (3) 3
| |
| *1 Net Cash Provided By Operating Activities.... .............. [59 273 403 CASH FLOWS FROM INVESTING ACTIVITIES
| |
| * Additions to Property, Plant and Equipment ............................ (64) (67) (86)
| |
| Investments in Joint Ventures, Partnerships, and Leveraged Lease Agreements ... (14)
| |
| Proceeds from the sale of Discontinued Operations .............................. 494 - 43 Proceeds from the Sale of Investments and Return of Capital from Partnerships.. 246 28 *152 Proceeds from Termination of Leveraged Leases ................................... - 287 247 Changes in Notes Receivable-Affiliated Company, net ................... 381 (294) 185 Restricted Funds ................................................ (5) (43) 19 Proceeds from Collection of Notes Receivable . .......................... - 120 Other ......................................... 1 16
| |
| *, , Net Cash Provided By Investing Activities.,.... .............. )53 47 546 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Non-Recourse Long-Term Debt. .......................... - 18 19 Repayment of Senior Notes ........................................ i09) - (267)
| |
| Repayment of Non-Recourse Long-Term Debt ................ I........... (51) (37) (70)
| |
| Repayment of M edium-Term Notes .............................................. (44)
| |
| Return of Capital Contributed.. ..................................... 520). (100) (75)
| |
| Redem ptions of Preference U nits .................................................. - (184) (325)
| |
| Ordinary U nit D istributions ............................................. ......... - (125) (75)
| |
| Cash Distributions Paid on Preference Units ............................ -- (3) (1.6)
| |
| Paym ents to M inority Shareholders ................................................ -- (1) (1)
| |
| Other ........................................................ (1) (5), (7)
| |
| Net Cash Used In Financing Activities. ...................... (1,181) (437) (861). t Effect of Exchange Rate Change ....................................... (1) 2 1 Net Increase (Decrease) In Cash and Cash Equivalents ....... ................ 30 (115) 89 Cash and Cash Equivalents at Beginning of Period ..................................... 68 183 94 Cash and Cash Equivalents at End of Period ............................................ $ 98 $ 68 $183 Supplemental Disclosure of Cash Flow Information:
| |
| Incom e Tax Benefits Received .................................................... $ (97) $ (82) $(197)
| |
| Interest Paid, Net of Amounts Capitalized. ............................. $ 187 $ 199 $247 See disclosures regarding PSEG Energy Holdings L.I.C. included in the Notes to Consolidated Financial Statements.
| |
| 113
| |
| | |
| PSEG- ENERGY HOLDINGS L.L.C. "
| |
| CONSOLIDATED STATEMENTS OF MEMBER'S EQUITY (Millions)
| |
| . Other Total Member'sI Ordinary Preference Retained Comprehensive Stockholder's Unit Units Earnings. Income (Loss) Equity Balance as of January 1, 2004................... $1,888 .$ 509 $178' $(271) $2,304 N et Incom e ...................................... 141 141 Other'Comprehensive Income (Loss), net of tax:
| |
| Currency Translation Adjustment, net of tax __ 64 ". 64''
| |
| Current Period Declines in Fair Value of Derivative Instruments, net of tax ........ (2) ' (2)
| |
| Reclassification Adjustments for Net Amounts Included in Net Income,
| |
| 'net of tax ........... :. .....
| |
| 3 Settlement Adjustnriefits related to projects
| |
| -: -- under construction .. ................. -7 (3)
| |
| Other Comprehensive Income ............... .- 62' Comprehensive .Income .......................... 203 Ordinary Unit Distributions ...................... (75) (75)
| |
| ,(75) -
| |
| Return of Contributed Capital ................... '(75)
| |
| Preference Units Redemption .............. (325) (325)
| |
| Preference 'Units Distribution ................ (16) (16)
| |
| 'Balance as 'of December 31, 2004............... $11,813 $ *184 $ 228 $(209) $2,616'"
| |
| N et Incom e ......... ........................... 217 217 Other Comprehensive Income (Loss), net of tax:
| |
| Currency Translation Adjustment, net of tax ' t 84 .84 Reclassification Adjustments for Net Amounts Includedlin Net Income, net of-tag .. . : .............................. . '16, 16.
| |
| Minimum Pension Liability Adjustment,, net * (1)'" (1) of'ta'x '............. .........................
| |
| Other Comprehensive Income........... 99 Comprehensive Income ................... 316 Ordinary Unit' Distributions ...................... (125) (12-5)
| |
| Return of Contributed Capital ............. $(100) (100)
| |
| Preference Units Redemption ................... (184) (184)
| |
| ,ýPreference Units Distribution .............. (3)'. (3)..
| |
| Balance. as of December 31, 2005 ........... ..
| |
| $1,713 $i- !,$:. 317:- .$(110) $1,920 Net income.............................. ,275 '275 Other Comprehensive Income (Loss), net of tax:
| |
| -Currency'Translation Adjustment, net of tax; - ,.154 154:
| |
| Reclassification Adjustments for Net Amounts 'Included in Net In'come, net of tax ................. 7 7 Sale of Investm ents .......................... 55 55 Minimum Pension Liability Adjustment, net of tax ....... .................... 1 1 Other (Comprehensive Income '.......... S'2i7 Comprehensive Income ................... 492 Adjustment to initially apply FASB Statement S '158;- net bf tax ............. . ............ (4)
| |
| $- $ 597$--. "
| |
| Return-of Contributed Capital.............. (520) (520)
| |
| Balance as of December 31, 2006 .............. $1,193 $ -- $ 592 $103 $1,888 See disclosures regarding.PSEG Energy Holdings L.L.C. .included in thie . .
| |
| Notes to Consolidated 'Financial Statements. '* ' .. " -
| |
| 114
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization and Summary of Significant Accounting Policies Organization Public Service Enterprise Group Incorporated (PSEG)
| |
| PSEG has four principal direct wholly owned subsidiaries:. Public Service, Electric and Gas Company (PSE&G), PSEG Power LLC (Power), PSEG Energy HoldingsL.L.C. (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), a public utility holding company headquartered in Chicago, Illinois, providing .for a merger of PSEG with and into. Exelonf. 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 hatural gas in certain areas of New Jersey. PSE&G is subject to regulation.
| |
| by the New Jersey Board of Public Utilities (BPU) and theFederal'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 irrev6cabl'e 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),
| |
| whichowns 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, financial risk management, law, tax communications, planning, development, human resources, corporate secretarial, information technology, investor relations, stockholder services, real estate, insurance, library, records and information services, security 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. ..
| |
| 115
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Principles of Consolidation PSEG, PSE&G, Power and Energy Holdings, PSEG's, PSE&G's, Power's -and Energy Holdings' consolidated financial statements include their respective accounts and consolidate those entities in which they have, a controlling interest or are the primary beneficiary, except for certain of PSEG's capital trusts which were deconsolidated in accordance with Financial Accounting~ Standards Board (FASB) Interoretation No."(FIN) 46 '(revised December 2003),
| |
| "Consolidation of Variable Interest Entities (VIE)" (FIN 46). Entities over which PSEG, PSE&G, Power and Energy Holdings exhibit significant influence, but do not have a controlling interest and/or are not the primary beneficiary are accounted for under the equity method of accounting. ,For investments in which significant influence does not exist and thle investor is not the primary beneficiary, the cost method of accounting is applied. All significant intercompany accounts and transactions are eliminated in consolidation.
| |
| , .PSE&G and.Power PSE&G' and P6wer each have undivided: interests in certain jointly-owned facilities and each is responsible for paying their respective ownership share of' additional construction costs, fuel inventory purchases' and operating expenses. All revenues and expenses related to these facilities are consolidated at their respective pro-rata ownership share in the appropriate revenue and expense categories on 'the Consolidated Statements of Operations. For additional information regarding these jointly-owned facilities, see Note 19. Property, Plant and Equipment, and Jointly-Owned Facilities of the Notes.
| |
| Accounting for the Effects of Regulation PSE&G PSE&G prepares its financial statements in' accordance 'with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain .Types of Regulation" (SFAS 71). In general, .SFAS 71 recognizes that accounting' for rate-regulated enterprises should reflect the economic effects of regulation. As a result, a regulated utility is required to defer .the recognition of costs (a regulatory asset) or record the recognition of obligations (a regulatory liability) if it is probable that, through the rate-making process,' there .will be 'a corresponding increase or decrease in 'future rates. Accordingly, PSE&G has deferred 'certain costs and recoveries, which are being amortized over various future periods. To the extent that collection of any' suchl'costs or payment of liabilities. is no longer probable as a result of changes in regulation and/or PSE&G's competitive position, the associated regulatory asset or liability is charged or'credited to income. -Management believes that PSE&G's transmission and distribution businesses continue to meet the requirements for application of SFAS 71. For additional 'information, see' Note 5.
| |
| Regulatory Matters of the Notes. . " . ' '
| |
| Derivative Financial Instruments PSEG, PSE&G, Power and Energy Holdings PSEG, PSE&G, Power and Energy' Holdings use derivative financial instruments to managerisk from changes in interest rates, congestion credits, emission credits, commodity' prices and 'foreign currency exchange fates, pursuant to their business.planis and prudent 'practices. '
| |
| PSEG, PSE&G, Power and Energy Holdings recognize derivative instruments on the balance sheet at their fair value. Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a fair value hedge (including foreign currency fair value hedges),'along with changes of the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in current-period earnings. Changes in the fair value of a derivative that' is highly' effective as, and that is designated and qualifies as, a cash ,flow hedge (including foreign currency cash flow hedges) are 'recorded in Accumulated Other Comprehensive Income / Loss until earnings are affected by the variability of cash flows of the hedged transaction.. Any,:hedge ineffectiveness is included' in current-period earnings. In certain circumstances, PSEG, PSE&G, Power and/or Energy Holdings enter into derivative contracts that do not qualify as hedges 116
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS or choose not to designate them as normal purchases or sales, or as fair value or. cash flow 'hedges;: in. such.
| |
| cases, changes in fair value are recorded in current-period earnings.
| |
| Many non-trading contracts qualify for the normal purchases and normal sales exemption under SFAS No. 133, "'Accounting 'for 'Derivative Instruments and Hedging Activities," as 'amended and interpreted (SFAS 133) and are accounted for,upon settlement. ... '.
| |
| For additional information regarding derivative financial instruments, see, Note 11.. Financial Risk Management Activities of the Notes.
| |
| Revenue Recognition .
| |
| PSE&G PSE&G's Operating Revenues are recorded based on services rendered to. customers during each accounting period. PSE&G records unbilled revenues for the estimated amount customers',will be billed-for services rendered from the time meters were last read to the -end of the respective accounting period. The unbilled revenue is estimated each month based on usage per day, the number of unbilled days in the period, estimated seasonal loads based upon the time of 'year and,. the variance of actual degree-days- and temperature-humidity-index hours of the unbilled period from expected norms.
| |
| Power The majority of Power's revenues- relate to bilateral contracts, which are accounted for on'the accrual basis as the energy is delivered. Power's revenue also includes'changes in Value of non trading energy derivative contracts that are not designated as normal purchases or sales or as hedges of other positions.
| |
| Power records margins from energy! trading on a net basis pursuant to accounting principles generally accepted in the U.S. (GAAP).. See Note 11. Financial, Risk Management: Activities for. further discussion.
| |
| Energy Holdings Certain of Global's investments are majority owned, controlled. and consolidated. Global, records revenues from its consolidated investments in generation and distribution facilities based on services rendered toa customers, during each accounting period. Revenues from these.,projects are included in' Operating Revenues. Global's Operating Reyenue also includes changes in *value of non trading energy derivative contracts that are not designated as normal purchases or sales' or as hedges of otherrpositions and includes margins from energy trading recorded on a. net basis pursuant~to. GAAP., See Note. 11. Financial Risk Management Activities for further discussion. Other investments are less than majority owned and, are accounted for under the equity or cost methods as appropriate. Income from these investments is recorded as a component of Operating Income. Gains or losses incurred as a result of exiting one of these businesses are typically recorded as, a component of Operating Income.
| |
| The majority of Resources' revenues relates to its investments in leveraged leases and is accounted for under SFAS No. 13, "Accounting for Leases" (SFAS 13). Income on leveraged leases is recognized by a method which produces a constant rate of return on the outstanding net investment in the. lease, net of the related deferred tax liability, in the years in which the net investment is positiye. Any gains or losses incurred as a result of a lease termination are recorded as revenues as these events occur in the ordinary course of business of managing the investment portfolio. See Note 8. Long-Term Investments for further discussion.
| |
| Depreciation and Amortization PSE&G PSE&G calculates depreciation Under the, straight-ine method based on estimated average remaining lives of the several classes of depreciable property. These estimates are reviewed on a periodic basis and necessary adjustments are made as approved by the BPU. The depreciation rate stated 'as a percentage of original cost of' depreciable property was 2.84% for 2006; 3.00%., for 2005 and 3.07% for. 2004. ,'
| |
| 117
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Power Power calculates depreciation on generation-related assets under the straight-line method based on the assets' estimated useful lives which are determined based on planned operations. The estimated useful lives are from three years to 20 years for general plant assets. The estimated useful lives are 30 years to 55'years for fossil production assets, 49 years to 56 years for nuclear generation assets and 45 years for pumped storage facilities. As-of January 1, 2007 the company changed certain of the .estimated useful lives for certain fossil production assets to 67 years, for pumped storage assets to 76 years and for nuclear generation assets to 58 years.
| |
| Energy Holdings Energy Holdings calculates depreciation on property, plant and equipment under the straight-line method with estimated useful lives ranging from threeyears to 40 years.
| |
| Taxes Other Than Income Taxes PSE&G
| |
| ýExcise taxes, transitional energy facilitiesassessment (TEFA) and gross receipts tax (GRT) collected from PSE&G's customers are presented on the financial statements on a gross basis. As a result of New Jersey energy tax reform, effective January 1, 1998, TEFA and GRT are the residual of the prior excise tax, the New Jersey gross 'receipts and franchise taxes. For the years ended December 31, 2006, 2005 and 2004, combined TEFA and GRT of approximately $146 million; $155 million and $153 million, respectively, are reflected in Operating Revenues and $132 million, $141 million and $139 million, respectively, are included in Taxes Other Than Income Taxes on the Consolidated Statements of Operations.
| |
| Allowance for Funds Used During Construction (AFUDC) and Interest Capitalized During Construction (IDC)
| |
| PSE&G AFUDC represents the cost of debt and equity funds used to finance *the construction of new utility assets under the guidance of SFAS 71. The, amount of AFUDC capitalized is reported in the Consolidated Statements of Operations asý a ?reduction of interest charges. PSE&G's average rate usedý for calculating AFUDC in 2006, 2005 and 2004 was 4.99%, 3.17% and 1.33%, respectively. For the years ended December 31, 2006, 2005 and 2004, PSE&G's AFUDC amounted to $2.0 million, $1.2 million and $0.1 million, respectively.
| |
| Power and Energy Holdings IDC represents the cost of debt used to finance construction at Power and Energy Holdings. The amount of IDC capitalized is reported in the Consolidated Statements of Operations as a reduction of interest charges and is included in Property, Plant and Equipment on the Consolidated Balance Sheets. Power's average rate used for calculating IDC in 2006, 2005 and 2004 was 6.81%, 6.74% and 6.81%, respectively. For the years ended December 31, 2006, 2005 and 2004, Power's IDC amounted to $41 million, $95 million and
| |
| $107 million, respectively. Energy Holdings' average rate used for calculating IDC in 2006, 2005 and 2004'was 6.72%, 7.81% and 8.37%, respectively. For the years ended December 31, 2006, 2005 and 2004, Energy Holdings' IDC amounted to approximately $1 million, $3 million and $4 million, respectively.
| |
| Income Taxes PSEG, PSE&G, Power and Energy Holdings PSEG and its subsidiaries file a consolidated Federal income tax return and income taxes are allocated to PSEG's subsidiaries based on the taxable income or loss of each subsidiary. Investment tax~credits were
| |
| ,deferred in prior years and are being amortized over the useful lives of the related property.
| |
| 118
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Foreign Currency Translation/Transactions Energy Holdings A business' functional currency is the currency of the primary economic environment in which the business operates and is generally the -currency in which the business generates and expends cash. In accordance with SFAS No. 52, "Foreign Currency Translation," the assets and liabilities of foreign operations of Energy Holdings, with a functional currency other than the U.S. Dollar, are translated into U.S. Dollars at the current exchange rates in effect at the end of the reporting period. The translation differences that result from this process, and gains and losses on intercompany foreign currency transactions, which are long-term in nature and that Energy Holdings does not intend, to settle in the foreseeable future, are recorded in Accumulated Other Comprehensive Loss as a separate component of member's equity. U.S. deferred taxes are not provided on translation gains and losses where, Energy Holdings expects earnings of a foreign operation to be permanently reinvested. The revenue'and expense, accounts of such foreign operations are translated into U.S. Dollars at the average exchange rates that prevail during the period.
| |
| Gains and losses that arise from exchange rate fluctuations on monetary assets and monetary liabilities denominated in a currency other than the functional currency are included in Other Income or Other Deductions. Gains and losses relating to derivatives designated as hedges of the foreign currency exposure of a net investment in foreign -operations are reported in Currency Translation Adjustment, a separate component of Accumulated Other Comprehensive Loss.
| |
| The determination of an entity's functional currency requires management's judgment. It is based on an assessment of the primary currency in which transactions -in the local environment are conducted, and whether the local currency can be relied upon as a stable currency in which to conduct business. As economic and business conditions change, Energy Holdings is required to reassess the. economic environment and determine the appropriate functional currency. The impact of foreign currency accounting could have a material effect on Energy Holdings' financial statements.
| |
| Cash and Cash Equivalents PSEG, PSE&G, Power and Energy Holdings
| |
| .Cash and cash equivalents consist primarily of Working funds and highly liquid marketable securities (commercial paper and money market funds) with an original maturity of three months or less.
| |
| Materials and Supplies and Fuel PSE&G PSE&G's materials and supplies are carried at average cost consistent with the rate-making process.
| |
| Power and Energy Holdings Materials and supplies and fuel for Power and Energy Holdings are valued at the' lower of average cost or market.
| |
| Property, Plant and Equipment PSE&G PSE&G's additions and replacements to property, plant and equipment that are either retirement units or property record units are capitalized at original cost. The cost of maintenance, repair and replacement of minor items of property is charged to appropriate expense. accounts as incurred.: At the time units of depreciable property are retired or otherwise disposed of, the original cost, adjusted for, net salvage value, is charged to accumulated depreciation. . .
| |
| 119
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Power and Energy Holdings Power and Energy Holdings Only capitalize costs which increase the capacity or extend"the life of an existing asset, represent a newly acquired or constructed asset or represen't ih&'replacement of a retired asset.
| |
| The cost of'maintenance, repair and replacement of minor itenis of property is chaiged to appropriate
| |
| 'expense accounts as incurred. Environmental costs are capitalized if the costs mitigate or prevent future environmental contamination or if the costs improve existing assets' environmental safety or efficiency. All other environmental expenditures are expensed as incurred. Certain subsidiaries of Energy Holdings-that are in the distribution business capitalize all incremental costs associated with construction activities.. These construction costs meet the capitalization criteria described above.
| |
| Other Special Funds PSEG, PSE&G, Power and Energy Holdings Other Special Funds represents amounts deposited to fund the qualified pension plans and to fund a Rabbi Trust which was established to meet the obligations related to three non-qualified pension plans and a deferred compensation plan.
| |
| Nuclear Decommissioning Trust (NDT) Funds Power As.:required under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115), realized gains and .losses on securities in the NDT Funds are.recorded in earnings and unrealized gains and losses-on such securities are recorded as a component of Accumulated Other Comprehensive Loss unless securities with ,such unrealized losses are deemed .to .be other-than-temporarily-impaired. See Note 3.
| |
| Asset Retirement Obligations, for a discussion of SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS. 143) and the impact of its adoption on the nuclear decommissioning.. liability and associated asset retirement costs related to the NDT Funds.
| |
| Investments in Corporate Joint Ventures and Partnerships Energy Holdings Generally, Global's interests in active joint ventures and partnerships are accounted for under the equity method of accounting where its respective, ownership interests are 50% or less,. it is not -the primary beneficiary, as defined under FIN 46, and significant influence over joint ventiire or partnership operating and management decisions exists. For investments, in which, significant influence does notexist and Global is not the primary beneficiary, the cost method of accounting.is applied.
| |
| Deferred Project Costs andDevelopment Coss .ts -
| |
| Power'.
| |
| Power- capitalizes all incremental and, direct external and direct internal costs related to project development once a projectreach.es certain milestones. On Power's Consolidated Balance Sheets, deferred project costs are recorded in Construction Work in Progress. These costs.are amortized, on a straight-line basis over the lives of the related project assets. Suchamortization commences upon the date of commercial operation. Development costs related to unsuccessful projects are -charged to expense,.-
| |
| Basis Adjustment PSE&G and Power PSE&G and Power ha've recorded a Basis Adjustment on theirConsolidated Balance Sheets related to the generation assets that were' transferred from PSE&G to Power inAugust 2000 at the price specified-by.
| |
| the BPU. Because the transfer was between affiliates, PSE&G and Power, the.transaction was recorded at the net book value of the assets and liabilities rather thanthe transfer price. The difference between the total 120
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS transfer price and the net book value of the generation-related assets and liabilities, approximately $986 million, net of tax, was recorded as- a ýBasis ;Adjustment, on PSE&G's and,,Power's Consolidated Balance Sheets..The $986 million is a reduction of Power's Member's Equity and an addition to PSE&G's Common Stockholder's Equity. These amounts are eliminated on PSEG's consolidated financial statements.
| |
| Use of Estimatek PSEG, PSE&G, Power and Energy, Holdings The process of preparing financial statements in conf6rimity with GAAP requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transaction's and events as of the date of the financial statements. Accordingly,' upon settlement, actual results may materially differ from estimated amounts...
| |
| 'Reclassifications PSEG, PSE&G, Power and Energy Holdings Certain reclassifications have.beeh made to the prior years financial statements to conform to the current year presentation. The reclassifications relate primarily to recording revenue and related expenses on certain transactions on a net basis versus gross.
| |
| Duringthe fourth quarter of'2006, based upon the provisions of EITF 99:19, "Reporting Revenue Gross as aPrincipal Versus Net as an Agent"';-PSE&G determined that the revenues and expenses related'to 6ne~of its.contracts thAt'had been recorded on a gross basis would more appropriately be'recorded on a net basis in Operating Revenues.'Therefore, prior' year amounts have' been reclassified- resulting in a reduction of $214 million and $162 million in both Operating Revenues and Energy' Costs 'for the years ended' December 31, 2005 and 2004, respectively, 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), or the SEC but have not yet been adopted by PSEG, PSE&G, Power and Energy Holdings.
| |
| SFAS No. 159, "The Fair'Value Option for Financial Assets and Finanial. Liabilities" (S" AS 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 would report unrealized gains and losses on items for which 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 accountinig provisions. The 'decision about wvhether to elect the fair value'option is applied instrumhent by instrument, with a few 'ekceptions;' the decision is irrevocable;' and it is applied'onlý to 6ntire instruments and not to' portions.of instrumenrts. "
| |
| 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.
| |
| Early adoption is permitted as of the beginning of a fiscal year provided the entity also elects to apply the provisions of SFAS %1,57.Upon implementation, an: entity shall.report the 'effect of the first remeasurement to fair value as a cumulative-effect adjustment to the bpening balance of Retained Earnings:, Since the provisions of SFAS 159 are applied 'prospectively; any potential impact will. depend on' the instruments selected for fair. value mea'surement..at the time of implementation.
| |
| 121
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SFAS No.: 157, "Fair Value Measurements" (SEAS 157)
| |
| PSEG, PSE&G, Power and Energy Holdings In September 2006, the FASB issue'd 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, andsets 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 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." The guidance in footnote 3 applied for derivatives (and other) instruments measured at fair value at initial recognition under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." That guidance precluded 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 wag- determined using significant unobservable inputs. Under 'this guidance, an entity could not recognize an unrealized' gain or loss at inception of a derivative instrument unless the fair value of that instrument wa's obtained from a 'quoted market price in an' active market or was. otherwise' evide'nced by comparison to -other'-obserVable cirrent market transaction or- based on a valuation technique incorporating' observable market data. At December 31, 2006, Energy Holdings has a deferred inception loss of approximately $45 million; which Was being amortized at $11 million pre-tax per year through 2010.
| |
| SFAS;157, is, effective for financial statements issued for fiscal years beginning. aftetrNovember.15, 2007; however, earlier application is encouraged. PSEG early adopted this statement effective January 1, 2007.
| |
| Early adoption resulted in recording, the remaining Energy Holdings deferred inception loss in Retained.
| |
| Earnings and' eliminating any future'aamortization ofthe loss. '
| |
| FIN 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109" (FIN 48)
| |
| PSEG, PSE&G, Power and Energy Holdings In July 2006, the FASB issued FIN 48, which prescribes 'a model for how a company 'should'recognize, measure, present and disclose in its financial statements uncertain tax' positions that the company has taken or expects to take on a tax return: Under FIN 48, the financial statements will reflect expected future tax consequences of such positions, presuming the tax authorities' full knowledge of the position and all relevant.
| |
| facts. FIN 48 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 5,0% 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 is effective as of the beginning of fiscal years that start after December 15, 2006. In general, companies will record the change in net assets that result 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 Would be recorded'as a Regulatory Asset rather than Retained Earnings. The following tabie presents the estimated ranges of impact on the Consolidated Balance Sheets for PSEG and its subsidiaries as a result of implementing FIN 48:
| |
| 122
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Energy' "' PSEG:
| |
| PSE&G Power Holdings Consolidated Balance Sheet . (Millions)
| |
| Increase to Taxes Payable ................. ........ $0-$5 $10-415 $120-$145 $130-$165 Increase to RegulAtory Assets .................. ... $0-$5.' $0 $0 $04$5.
| |
| Decrease to Retained Earnings ........................ $0 $10-$15 $1204$145 $130-$1"60 FASB Staff Position (FSP) No. FAS 13-2, "'Accounting for a Changet or Projected Change in the, Timing of Cash Flows Relating to Income- Taxes Generated by-a Leveraged Lease Transaction" (FSP 13-2)'
| |
| PSEG and Energy Holdings In July 2006, the FASB issued FSP 13-2, which'addresses how a chaahge or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the'aiccounting 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 dichange in timing has occurred, or is 'projected to occur, 'the rate of return and the allocation of incbme to positive investment yea'rs must be recalculated from the inception of-the lease. - - * '" '
| |
| The guidance in this FSP is to be applied to, fiscal years, beginning after December 15, 2006. The cumulative effect of applying. the provisions. of this FSP is to be reported as an adjustment to the beginning balance of Retained Earnings as of the beginning of the period in which this FSP is adopted. As a result of implementing FSP 13-2, upon adoption PSEG and Energy Holdings .estimate that they will each recognize on their Balance Sheets a reduction in their Investment in Leveraged Leases of approximately $70 million with an offsetting reduction; in RetainedEarnings. .. ..
| |
| The anticipated combined earnings impact on PSEG of'adoliting FIN48 and FSP' i3-2 is a reduction of
| |
| $25'million to $35 million in 2007; .as compared to 2006; primarily'related to the'impact onEnergy. Holdings.
| |
| The following new accounting standards were adopted by PSEG, -PSE&G, Power and Energy Holdings during 2006.
| |
| SFAS No. 123R, "Share-Based Payment, revised 2004" (SFAS 123R)
| |
| PSEG;,PSE&G,' Power and. Energy Holdings .
| |
| Effective January 1, 2006, PSEG"adopted 'SFAS 123R,':which'repla(es SFAS No. 123, "'Accounting for Stock-Based Compensation" (SFAS' 123) and. supersedes Accounting Principles Board (APB) Opilion'No.
| |
| '25, "Accounting for Stock Isstied to Employees" (APB 25). SFAS 123R 'focuse's'primarily on aeccouniing for share-based awards' to employees in exchange for services, land it requires"entities to recognii'e compensation expense fof'tfhese awar'ds. The cost for equity-based awards''is expensed Over the .requisite service period based on their grant' dte fair value, and liability awards are expensed based.on theii fair value, which' is re-measured' each reporfing period. The pro forma disclosure previously permitted under SFAS '123 is no longer an alternative to financial statement recognition. " ' '
| |
| Prior to January .1, 2006, PSEG accounted for stock-based awards under the intrinisic value meihod of APB '25. In accordance with.APB .25, PSEG did not record C6mpensation expense related to its stIck'opItion grants b;ecause the strike price was equal to the fair value of the underlying stock on the grant date; however, it did record compensation expense over the requisite service period for' restricted' stock grants and performance unit" awards.
| |
| SFAS 123R is applicable to all of PSEG's outstanding unvested share-based payment awards as of January 1, 2006 and all prospective awards using the modified prospective method. Accordingly, the financial results for prior periods were not retroactively adjusted to reflect the effects of SFAS 123R. The compensation expense recorded as a result of adopting' SFAS 123R was not material. For additional information, see Note 17. Stock-Based Compensation.
| |
| 123
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" (SFAS 158) .
| |
| 'PSEG, PSE&G, P'ower and Energy Holdings' Effective December 31, 2006, PSEG adopted SFAS 158, which requires that companies record the under or over funded positions of defined benefit pension and Other Postretirement Benefits (OPEB) plans on the balance sheet. In addition, the statement requires that the total unrecognized costs for definied benefit pension and OPEB plans be recorded 'as an after-tax, charge to Accumulated Other'Comprehensive Income, a separate. coniponent, of Stockholder's Equity. However, for PSE&G, because 'the amortization., of the unrecognized costs is being collected from customers, the accunmulated unrecognized.costs are recorded as a Regulatory, Asset. . .
| |
| Prior to SFAS 158, accounting. guidance required that unrecognized costs be presented in a footnote-to the financial statements -as part of a reconciliation of a plan's funded status to amounts recorded in the financial statements.
| |
| SFAS 158' is applied prospectively and' the :inciemental impact 6on th6 individual' Balarnce Sheet' line items is disclosed in Note 16.. Pension, OPEB ahd Saviings Plans.!Under'SFAS" 158 there is no chang& to the calculation of annual pension or OPEB expense.
| |
| Note 3. Asset Retirement, Obligations (AROs)
| |
| PSEG, PSE&G, Power and Energy Holdings On December 31, 2005, PSEG, PSE&G, Power and Energy Holdings completed their analyses under FIN 47, "Accounting for Conditional Asset Retirement Obligations" (FIN 47) which was issued in March 2005 to clarify certain guidance set forth in SFAS 143 and quantified conditional AROs identified -that were previously not estimable. As. a result of adopting FIN 47, PSEG recorded an additional ARO liability of approximately $246 million, including $210 million at PSE&G and $35 million at Power. PSEG.also recorded a charge for a Cumulative Effect of a Change in Accounting Principle of $(1.7) million, after-tax, $(16) million of which relates to Power, with the remainder at Energy Holdings and Services.
| |
| During 2006, PSE&G incurred and recorded less than $1 million related to new liabilitiestinderFIN'471 On December. 3.1, 2006, Power made revisions to certain AROs previously recorded under SFAS 143 and FIN 47, resulting in. a decrease to the ARO liability and ARO asset of $119i~million.. ... . ,
| |
| 'The following table "reflects pro forma resusts for theyeafs. ended December 31,'2005 and 2004, excluding the Cumulative Effect"of a Change in Accounting Principle recorded upon the. adoptidn in.2005, and including accretion and depreciation ýxpense-relating to the additional AROs identified under FIN 47, as if it had always been in effect.
| |
| For the Years Ended December 31, 2005 2004 (Millions, except per share data)
| |
| PSEG Net Income- as reported ................................... $ 661 $ 726 Net Income-pro forma .............................. $ 677 $ 725 Earnings per -share:.
| |
| Basic- as reported ..................................... $2.75 $3.06 Basic- pro form a ......................................... $2.81 $3.06 Diluted- as reported ................................... $2.71 $3.05 Diluted-pro forma .............................. $2.77 $3.04 Power Net Income- as reported .............................. $192 $ 308 Net Income'pro forma ................................ $ 207 $ 307 124
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PSEG In addition to amounts recorded at PSE&G, Power and Energy Holdings, discussed below, Services has an immaterial conditional ARO related to its obligation to restore a leased office space to rentable 'condition upon lease termination.
| |
| PSE&G PSE&G has a conditional ARO for legal obligations identified under FIN 47 related to the removal of asbestos and underground storage tanks at certain "industrial establishmhents, removal of wood pbles,'leases and licenses, and the requirement to seal' natural gas pipelines at all sources of gas when the pipelines are no longer in service. PSE&G did not record an' ARO for PSE&G.'s protected steel and poly' based natural gas transmission lines, as management believes that these categories of transmission lines have an indeterminable life.
| |
| Power Power's ARO liability primarily relates to the decommissioning of its nuclear power, plants. -Power maintains an independent external trust to fund decommissioning of its nuclear facilities -upon termination of operation. For additional information, see Note 13. Nuclear Decommissioning. Power also, identified conditional AROs under FIN 47, primarily related to Power's fossil generation units, including liabilities for the removal of asbestos, stored hazardous liquid material and underground storage tanks from industrial power sites, restoration of leased office space to rentable condition upon' lase .termination, pernilts and authorizations, the restoration of an area occupied by a reservoir when the reservoir is no longer needed, the demolition of certain plants and the restoration of the sites at'which they reside when the plants are -no longer in service.
| |
| Energy Holdings Energy Holdings -had identified, an immaterial legal obligation. under FIN 47 for Electroandes' S.A.'s (Electroandes) water and infrastructure easement rights recognition agreement -that expired in December 2006. "
| |
| PSEG, PSE&G -and Power On December 31, 2006, under SFAS 143, Power recorded 'a decrease to the ARO liability and, asset of
| |
| $117 million related to revisions in asslumptions regarding' the timing of the decommissioning of its nuclear facilities and estimated decommissioning cash flows. Also on December 31, 2006, under FIN 47, Power recorded a decrease to the ARO liability and asset of $2' million to reflect an expected life extension of certain' fossil plants. Th, iimpact of these revisions, as well as other changes to the ARO liabilities for PSEG, PSE&G and Power during 2006, are presented in the followving table:
| |
| 125
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Millions)
| |
| PSEG .
| |
| ARO Liability as of January 1, 2006 .................................. $ 585 A ccretion E xpense ..................................................... 46 Liabilities Settled ...................................................... (2)
| |
| Revision to present value of estimated cash flows..............."(119)
| |
| ARO Liability as of December 31, 2006 ............. ............. $ 510 PSE&G ARO Liability as of January 1, 2006 ............................. $210 Liabilities Settled .............. ................................. (2)
| |
| Accretion Expense (A).. ......... ......................... 13,.
| |
| ARO Liability as of December 31, 2006.. ................. $ 221 Power .
| |
| ARO, Liability as. of January 1, 2006: ....... .......... $ 373 Accretion-Expense....... .................................. .. *. 33
| |
| -Revision to present,-value of estihfiated cash flows ....... (11.9)
| |
| ARO Liabil'ity.as of, December 31, 2006 ...... - ... $,287...
| |
| (A) Accretion expense is not reflected on PSE&G's Consolidated Statements of Operations as it is deferred and recovered in rate base.
| |
| Note 4. Disconiinued Operations, Dispositions, Acquisitions and Impairments,.
| |
| Discontinued Operations Power Lawrenceburg Energy Center (Lawrenceburg) * " . "
| |
| On December 29, 2006, Power entered-into an agreement to sell its Lawrenceburg facility located in Lawrenceburg, Indiana 'to AEP' Generating Company,* a !subsidiary of American Electric Power Company, Inc. (AEP). The facility is a 1,080-megawatt, gas-fired combined cycle electric generating plant 'thai entered commercial operation in the summer of 2004. . "
| |
| The sale price for the facility and inventory is $325 million. The proceeds, together with anticipated reduction in tax liability, is expected to be'aP' roximately $425 millioh and will be used to retire debt. Power and PSEG have 'determined the transaction will result in an after-tax charge to PSEG and Power eaifnings of approximately $208 millionf; or about $0.82 cents per share of PSEG common stock and it is reflected as a charge in Discontinued Operations.
| |
| The sale is subject to approval by FERC, the U.S. Securities Exchange Commission, compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and.may also requite certain state regulatory approvals in Indiana. It is anticipated that the transaction will close in the second quarter of 2007.
| |
| Lawrenceburg's operating results for the years ended December 31, 2006, 2005 iand'2004, which -were reclassified to Discontinued- Operations, are summarized below:
| |
| Years Ended December 31, 2006 2005 2004 (Millions)
| |
| O perating Revenues ............................. ............................... $ 41 $ 32 $ 2 Loss Before Income Taxes. .......................................... $(53) $(47) $(43)
| |
| N et L oss ...................................................................... $(31) $(28) $(25) 126
| |
| | |
| NOTES TO CONSOLIDATED: FINANCIAL- STATEMENTS The carrying amounts of the assets of Lawrenceburg as of December 3.1, 2006 and 2005 are summarized in the following table:
| |
| As of December 31; 2006 2005 (Millions)
| |
| Current Assets .... ..................................... $ 10 $10 Noncurrent A ssets....... ........................................ 315 667 Total Assets of Discontinued Operations ..................... $325 $677 Waterford Generation Facility (Waterford)
| |
| In September :2005, Power completed.the sale of its. electric generationr facilit, 1located'in Waterford, Ohio to a subsidiary of AEP. In May 2005, Power recognized an estimated loss on disposal, of $177 million, net of tax benefit of $123 million. In the third quarter of 2005, Power completed. the sale of Waterford and recognized an additional loss on disposal of $1 million, net of tax. The proceeds -of the sale, together with the anticipated reduction in tax liability, Were approximately'$320 million andwere used to retire debt at Power.
| |
| Waterford's :operating results for the years ended December 31, 2005 and.2004, which were reclassified to Discontinued 'Operations, are summarized below:
| |
| Years Ended December31,,
| |
| 2005 2004 (Millions)
| |
| Operating Revenues ........................................... $ 18 $ 4 Loss Before Inco'mrneTaxes .. " $(34) $'(57)
| |
| N et L oss:.... .............................................. $(20) $(34)
| |
| Energy Holdings Elektrocieplownia Chorzow Elcho Sp. Z o.o. (Elcho) and Elektrownia Skawina SA (Skawina)
| |
| On January 31, 2006, Global entered into. an agreement. with CEZ a.s. to sell its interest in two coal-fired plants in Poland, Elcho and Skawina.. The sale was completed on May 29, 2006. Proceeds, net of transaction costs, were $476 million, resulting in a gain ,of $227 million net of tax expense of $142 million. This gain is included in Discontinued Operations. The 2006 operating -results for" Global's assets in, Poland have been reclassified' to Discontinued Operations.
| |
| Elcho,':s and Skawina's operating results for the years ended. December 31, 2006, 2005 and 2004 are summarized below: . '
| |
| S.-- Years Ended December 31,,
| |
| Elcho Skawina 2006 2005' 2004. 2006. 2005 2004
| |
| " . " *(Millions)
| |
| Operating.Revenues .................................... $39 $106 $:94 $44 $125 $98 (Loss) Income Before Income Taxes ....................... $(3) $ 17 $(19) .$ 2 $ 3 .$ 8 Net (Loss) Income ............................. t .... ..... $(2).$ 16 $(20) $1 $ 2 $ 5 127
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The carrying amounts of the assets of Elcho and Skawina as of December 31, 2005 are summarized in the following table:
| |
| As of December 31, 2005 Elcho Skawina (Millions)
| |
| C urrent Assets ................ ............... .......................... $ 41 $ 27 Noncurrent Assets ............................................. 319 111 Total Assets of Discontinued Operations .............................. $360 $138 Current Liabilities ....................... ...................... $ 27 $ 24 Noncurrent Liabilities ........................................... 336 49 Total Liabilities of Discontinued Operations ......................... . $363 $ 73 Carthage Power Company (CPC).
| |
| In December 2003, Global entered into a definitive purchase and sale agreement related to.the sale of its majority interest in CPC, which owns and operates a power plant located in Rades, Tunisia. In .December 2003, Global recognized an estimated loss on disposal of $23 million. In May 2004, Global completed the sale of CPC for approximately $43 million in cash and recognized a net gain on disposal of $3 million.
| |
| The operating results of CPC for the year ended December 31, 2004 are summarized below:
| |
| " , *Year Ended December 31, 2004 (Millions)
| |
| Operating Revenues ................................................ $38 Pre-Tax Income........ . . ...... ................................ $ 2 Net Income ....................................................... $ 2 Dispositions Energy Holdings',
| |
| Global 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).
| |
| Empresa de Energia Rio Negro S.A. ,(Edersa)
| |
| On December 21, 2006, SAESA,.group completed the sale of its 50% indirect interest in Edersa (an Argentinian utility company) for an insignificant amount, and realized.an'after-tax benefit of $18 million.
| |
| Magellan'Capital Holdings Corporation (MCHC)
| |
| During the fourth quarter of 2006, Global sold its interest in the MCHC generation development project for '$1 million, re'sulting in a pre-tax loss of approximately $4 million ($2 million after-tax).
| |
| Rio Grande Energia S A. (RG.)
| |
| On May 10, 2006, Global entered into an agreement with Companhia Paulista de Force Luz (CPFL) to sell its 32%. ownership interest in RGE, a Brazilian electric distribution company. The transaction closed on June 23, 2006 and gross proceeds of $185 million were received. The transaction resulted in a pre-tax write-128
| |
| | |
| NOTES TO CONSOLIDATED. FINANCIAL STATEMENTS down of $263 million ($178 million after-tax), primarily related to the devaluation of the Brazilian Real subsequent to Global's acquisition of its interests in RGE in 1997. "
| |
| Dhofar Power Company S.A. 0. C. (DhofarPower)
| |
| -In April 2005, Global sold a 35% interest in Dhofar Power through a public offering on the Omani stock exchange as required under its Concession Agreement for the project, reducing Global's ownership in Dhofar Power from 81% to 46%. Net proceeds from the sale 'Were approximately $25 million, fesulting in.a pre-tax gain of approximately $3 million ($1 million after-tax). As a result, Global's investment in Dhofar Power was accounted for under the equity method following the sale.
| |
| On May 15, 2006, Global signed an agreement to sell its remaining 46% interest in Dhofar Power to Oman Technical Partners Ltd. (Oman). Global closed the sale in November 2006 and'received net proceeds after-tax of approximately $31 million, the approximate book value of the investment.
| |
| Solar Electric Generating Systems (SEGS) Projects In January 2005, Resources and Global sold their minority limited partner interests in three SEGS projects for proceeds of approximately $7 million resulting in a pre-tax 'gain of $7Smillion ($4 million after-tax).
| |
| Meiya Power Company Limited (MPC)
| |
| In December 2004, Global closed on the sale of its 50% equity interest in MPC to BTU Power Company for approximately $236 million resulting in a pre-tax gain of $35 million ($6 million loss after-tax).
| |
| Luz del Sur S.A.A. (LDS)
| |
| In April 2004, Global sold a portion of its indirect ownership in LDS in the Lima stock exchange, reducing its ownership from 44% to 38% and received gross proceeds of approximately $31 million and realized a pre-tax gain of approximately $7 million ($5 million after-tax).
| |
| GWF Energy LLC (GWF Energy)
| |
| In February 2004, Harbinger GWF LLC (Harbinger) purchased a 14.9% ownership interest in GWF Energy from Global for approximately $14 million, resulting in a pre-tax gain of $2 million ($1 million after-tax). As a result of the sale, Global has a 60% interest in GWF Energy.
| |
| Resources On October 16, 2006, Resources entered into an agreement under which Puget Sound Energy, Inc. will purchase Whitehorn Units' Nos. 2 and 3' from Resources on the cur'rent lease expiration date of, Fehruary'21 2009 for a cash price of approximately $23. million. This transaction is expected to produce approximately $3 million of incremental after-tax income and $3 million of incremental cash flow for Resources, at such time.
| |
| On December 28, 2005, Resources sold its interest in'"the Seminole Generation Station Unit 2 (Seminole), a. 659 MW coal-fired facility in Palatka, Florida, to Seminole Electric Cooperative Inc. for $286 million, resulting in a pre-tax gain of, $71 million ($43, million after-tax). .'
| |
| Resources was the equity investor in a Boeing B767 leased to United Airlines (UAL). In December 2002, UAL filed for Chapter 11. bankruptcy protection. In 2005, Resources received a notice from the Trustee under the UAL lease that the lenders had terminated 'the lease and repossessed the aircraft.. Upon receipt of this notice, Resources recorded a $21 million pre-tax ($15 million after-tax) charge to'write-off the carrying value of this investment.
| |
| Resources was also the equity investor in two operating leases with Northwest Airlines (Northwest) B 757-200 and Delta Airlines (Delta) B 737-200. On September 14, 2005 both Northvwst and Delta filed for protection under Chapter .11 of the US Bankruptcy Code, as, anticipated. In 2004 and 2005, Resources successfully restructured the leases:'and converted' the Delta and- Northwest, leases' from leveraged leases to operating leases. The Delta. aircraft was sold in January 2006 generating a small 'gain for Resources.
| |
| 129
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In January 2005, a KKR Fund, in which Resources had invested, sold its investment in. KinderCare Learning Centers, Inc. and Resources received proceeds of approximately $17 million resuiting in a pre-tax gain of. approximately. $1 million ($1 million after-tax).
| |
| In March 2004, Resources entered into an agreement with Midwest Generation LLC, an indirect subsidiary of Edison Mission Energy, to terminate its lease investment in the Collins generating 'facility in Illinois. Resources received gross proceeds of approximately $184 million, $84 million after taxes, and recorded a pre-tax loss of $17 million ($11 million after-tax).
| |
| In 2004, Resources terminated two lease *transactions with Qantas Airways and China Eastern, Airlines Co., Ltd resulting from the lessees exercising their respective purchase options. Resources received aggregate gross.cash proceeds of approximately $45 million ($9 million after-tax) and recorded a pre-tax gain of $0 ($4 million after-tax).-
| |
| Acquisitions Energy Holdings Prisma 2000 S.p.A. (Prisma)
| |
| In May 2006, Global forgave the guarantees of its partner in 'the Prisma investment of certain loans Global had made to Prisma and converted such loans totaling $38 million into additional equity in Prisma, thereby increasing its ownership interest from 50% to 85% and giving Global voting control of the project.
| |
| As a result, Energy Holdings began consolidating this investment in May 2006 and reclassified the investment balance to Property, Plant and Equipment of approximately $62 million, Long-Term Investments of approximately $13 million, Capital Lease Obligations of approximately $40 million and certain other assets and' liabilities on Energy Holdings' Consolidated Balance Sheet. Energy Holdings recorded certain immaterial purchase accounting adjustments to reflect the plant, contracts and investment in' Biomasse Italia S.p.A. (Biomasse) at fair value. The purchase price allocation has not yet been finalized since, due to recent events, Global has not been able to complete its appraisal of the land or'finalize certain' legal contingencies for the pre-acquisition period. For additional information, see Note 12. Commitments and Contingent Liabilities.
| |
| Impairments Power Power owns four turbines for which it has no immediate use. Power believes that newer technology would be more flexible and efficient for use in new projects. In addition, potential buyers have expressed interest in purchasing the turbines from Power. For these reasons, in December 2006, Power recorded a pre-tax impairment loss of $44 million to write-down the turbines to their estimated. realizable value and has reclassified them to Assets Held For Sale on Power's Consolidated Balance Sheet as of December 31, 2006.
| |
| Energy Holdings Venezuela During Energy Holdings' review of its equity method investments, management concluded that due to the current political situation in Venezuela, it is probable that Energy Holdings would not be able to recover its capitalized costs associated with the investments in Venezuela. Therefore, Energy Holdings,.recorded a pre-tax impairment loss of approximately $7 million to write-down these investments in the fourth quarter of 2006. As of December,31, 2006, the book value of these investments was approximately $35 million.
| |
| 130
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL' STATEMENTS Note 5. Regulatory Matters Regulatory Assets and Liabilities PSE&G PSE&G prepares its financial statements in accordance with the provisions of SFAS 71. A regulated utility is required to defer the recognition of costs (a regulatory asset) or the recognition of obligations (a regulatory liability) if it is probable that, through the'rate-making process, there will be a corresponding increase or decrease in future rates; Accordingly, PSE&G has deferred certain costs, which will be amortized over various future periods. These costs are deferred based on rate orders issued by the BPU' or FERC or PSE&G's experience with prior rate cases. All of PSE&G's regulatory assets and liabilities at December 31, 2006 and 2005 are supported by written rate orders, either explicitly or implicitly through the BPU's treatment of various cost items. Regulatory assets are subject to prudence reviews and can be disallowed in the future by regulatory authorities. PSE&G believes that all of its regulatory assets are probable of recovery.
| |
| To the extent that collection of any regulatory assets or payments of regulatory liabilities is no longer probable, the amounts would be charged or credited to income.
| |
| PSE&G had the following regulatory assets and liabilities on the Consolidated Balance Sheets:
| |
| As of December. 31, 2006 2005 Recovery/Refund Period (Millions)
| |
| Regulatory Assets Securitized Costs... I'....................... $3,059 $3,333 Through December 2015(1)(2)
| |
| Pension and Other Postretirement Plans ............ 671 Various Societal Benefits Charges (SBC) .................. 538 476 To be determined(1)(2)
| |
| Manufactured Gas Plant (MGP) Remediation Costs '.............. ..................... 414 409 Various(2)
| |
| Deferred Income Taxes ......................... 412 398 Various Gas Contract Mark-to-Market .......................... 187 Various(1)
| |
| O PEB-Related Costs .................................... 116 135 Through December 2012(2)
| |
| Unamortized Loss on Reacquired Debt ................ 85 91 Over remaining debt life(l)
| |
| Conditional Asset Retirement Obligation........... 68 55 Various Repair Allowance ....... ...................... 62 69 Through August 2013(1)(2)
| |
| Regulatory Restructuring Costs ............................ 31 35 Through August 2013(1)(2)
| |
| Plant and Regulatory Study Costs... 16 19 Through December 2021(2)
| |
| Gas Margin Adjustment Clause. ........................ 14 6 To be determined(2)
| |
| Asbestos Abatement Costs .............................. 10 10 Through 2020(2) .
| |
| Unrealized Losses on InterestRate Swaps .......... 4 11 Through 2020(2)
| |
| Decontamination and Decommissioning Costs .......... 6 Through December 2006(2)
| |
| O th er ............ ....................................... 7 6 Various Total Regulatory Assets ..................... $5,694 $5,059 Regulatory Liabilities Cost of Removal ......... ........................... 279 $ 345 Various Overrecovered Electric Energy Costs .................... '198 174 To be determined(i)(2)
| |
| Overrecovered Gas Costs ....................... 96 9 Through September '2007(1)(2)
| |
| Excess Costs'6f Removal. ....................... 64 Through November 2011(1)(2)
| |
| Gas Contract Mark-to-Market':......... ............
| |
| 152 Various(l)
| |
| Other ....................................... 9 46 Various(1)
| |
| Total Regulatory Liabilities ........................ $ 646 $ 726 (1) Recovered/Refunded with interest.
| |
| (2) Recoverable/Refundable per specific rate order.
| |
| 131
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All regulatory assets and liabilities are excluded from PSE&G's rate base unless otherwise noted. The descriptions below define certain regulatory items.
| |
| Securitized Costs: This reflects deferred costs, which are being recovered through the securitization transition charge authorized by. the BPU. Funds collected through. the securitization transition charge are remitted to Transition Funding and Transition Funding II and are used for interest, and, principal payments on the transition bonds and related costs and taxes.
| |
| Pension and Other Post Retirement Plans: Pursuant, to the adoption of SFAS 158, PSE&G recorded the unrecognized' costs for defined benefit pension and. OPEB plans on the'balance sheet as a regulatory asset.
| |
| These costs represent actuarial 'ains or losses, prior service costs and transition obligations as a result of adoption, which have not been expensed. These' costs will be amortized and recovered in future' rates.
| |
| SBC: The SBC, as'authorized by the BPU and the New Jersey Electric Discount and Energy Competition Act (EDECA), includes costs related to PSE&G's electric and gas business 'as follows: 1) the universal service fund; 2) Demand Side Management (DSM) programs; 3) social programs which include bad debt expense; 4) "the New: Jerseyl Clean Energy Program' costs payable. in 2007 through' '2008, recorded at discounted present value; and 5) the Remediation Adjustment Clause for incurred MGP remediation
| |
| 'expenditures. All components except for Clean Energy accrue interest. ' ..
| |
| MGP Remediation Costs:' Represents the low end of the range' for the remaining environmental investigation and remediation program. costs that are probable of recovery in future rates.-
| |
| Deferred Income Taxes: This amount represents the portion of deferred income takes that will be recovered through future rates, based upon established regulatory practices, which permit the recovery of current taxes.
| |
| Accordingly, this regulatory asset is offset by a deferred tax liability and is expected to be recovered, without interest, over the period the underlying book-tax timing differences reverse 'and become current taxes.
| |
| Gas Contract Mark-to-Market: The fair value of gas hedge contracts and gas cogeneration supply contracts.
| |
| This asset is offset by derivative liability and an intercompany payable on the balance sheet.
| |
| OPEB-Related Costs: Includes costs associated with the adoption of, SFAS No. 10(6 "Employers' Accounting for. Benefits Other Than Pensions" which were deferred in accordance with EITF Issue No. 92-12, "Accounting for OPEB Costs by Rate. Regulated Enterprises.".
| |
| Unamortized Loss on, Reacquired Debt: Represents'losses on reacquired long-term debt,.which are'recovered through rates over the remaining life of the debt.
| |
| Conditional Asset Retirement. Obligation: These costs represent the differences between rate regulated cost
| |
| .of removal accounting and. asset retirement accounting under GAAP. These costs will be recovered in future rates.'
| |
| Repair Allowance: This represents tax, interest and carrying charges relating to disallowed tax deductiohs-for repair allowance as authorized by the BPU with recovery over 10 years effective, August 1, 2003.
| |
| Regulatory Restructuring Costs: These are costs related to the restructuring of 'the 'energy industry in New Jersey through EDECA and include such items as the system design work necessary' to transition PSE&G to a transmission and distribution only company, as well as costs incurred to trangfer and establish the generation function as a separate corporate entity with'recovery over 10 years beginning August 1, 2003.,
| |
| Plant and Regulatory Study Costs: These'are costs incurred by PSE&G and required by the 'BPU which are related to current and future operations, including safety, planning, management and.construction.,
| |
| Gas Margin Adjustment Clause: PSE&G defers the margin differential received from Transportation Gas Se-vice Non-Firm Customers versus bill credits provided to BGSS-Firm customers..
| |
| Asbestos Abatement Costs: Represents costs incurred.'to remove and dispose of,asbestos insulation at PSE&G's fossil generating stations. Per a BPU order dated December 9, 1992, these costs are treated as Cost of.Removal for ratemaking purposes. -
| |
| Unrealized Losses on Interest Rate Swap: This represents the costs related to Transition Funding's interest rfate swap that are being recovered without'interest over the life of Transition Funding's transition bonds.
| |
| This asset is offset 'by 'a 'derivative liability 'on the balance sheet.
| |
| Decontamination and Decommissioning Costs: These' costs are related to PSE&G's obligation for nuclear decontamination and decommissioning Costs' of U.S. Department of Energy enrichment sites prior to the generation asset transfer to Power in 2000.
| |
| 132
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Regulatory Assets: This includes' deferred consolidated billing start-up and deferred -Energy Information Control Network program costs.
| |
| Cost of Removal: 'PSE&G accrues and collects for Cost of Removal in rates. Pursuant to the adoption, of SFAS 143, the liability for Cost of Removal Was 'reclassified as a regulatory liability. This liabilit; is reduced as removal costs are ineiirted. Cost of'removal is a reduction to the rate base.
| |
| Overrecovered Electric. Energy Costs: This clause was established by the EDECA to account for above market costs related to Non-Utility Generation (NUG) contracts, as approved by the BPU. Costs or benefits associated with the restructuring of these contracts are deferred. This clause also includes Basic Generation Service (BGS),costs .in excess of current rates, as approved by the BPU.
| |
| Overrecovered Gas Costs: Represents PSE&G's gas costs in excess of. the amount included in rates and probable of refund.in the future.;.
| |
| Excess Cost of Removal: The BPU directed PSE&G to refund $66M of excess gas cost of removal accruals over a 5 year period ending November 2011.
| |
| Other Regulatory Liabilities: This includes the following: 1) a retail adder included in the BGS charges beginning on Atugust 1, 2003 that are now paid on a quarterly basis to. the State, of New Jersey; 2),amounts collected from customers in order for Transition Funding to obtain a AAA rating on its transition bonds; and
| |
| : 3) Third party, billing discounts related to the EDECA. , 2 Note 6. Earnings Per Share (EPS)
| |
| PSEG Diluted EPS is calculated by dividing Net Income by the weighted average number of shares of common stock outstandinig, including shares "issuable upon' exercise' of stock optionsoutstanding uridef PSEG's stock option plans, upon payment of p-erformance units and dpon conversion of Participating Units. The following table shows the effect of these stock options, performance units and Participating Units on the .veighted average number of shares outstanding used in calculating diluted EPS:
| |
| Years Ended December 31,
| |
| * ". 2006 2005; 2004
| |
| * Basic Diluted Basic Diluted Basic , : Diluted EPS Numerator:
| |
| Earnings, (Millions)
| |
| Continuing Operatibns.. ... : .... $. 752 $ 752 $ 886 $ 886' $ !795 ,$ -795 Discontinued Operations ......... (13) (13) (208). (208) (69) , (69)
| |
| , Cumulative Effect of a Change, in Accoiriting Principle................. (17) (1.7)
| |
| Net incom e......... ......... ............ $ 739 $ 739 $. 661 $ 661 $ .726 $ -.726 EPS Denominator (Thousands):,
| |
| Weighted Average Common Shares Outstanding............... 251,678 251, 678 240,297 40,297 236,984. 236,984 Effect of Stock Options ............ 545 - '971 - 464 Effect of Stock Performance Units.. 91 87 36
| |
| -Effect of Participating' Units ...... 3,051 ' '802 Total Shares...................... 2.51,678 252, 314 240,297 244,406 236,984 238,286 EPS:
| |
| Contirniing Operations......." $ 2.99 $ .2.98 $ 3.69 $ 3.63 3.35 $ 3.34 Discontinued Operations......... (0.05) (0.05)' (0.87) (0:85) . (0.29) (0.29)
| |
| Cumulative Effect of a Change in Accounting Principle. ;............ (0.07) (0.07) -
| |
| Net Income............ ........... '2.94.' $ 2.93 $ 2.75 $ 2.71 $ 3.06 $ 3.05 133
| |
| | |
| R`
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS There were approximately 2.9 million stock options excluded from the .weighted average common. shares calculation used for diluted EPS due to their antidilutive effect for, the year ended December 31, 2004. No stock options, or Participating Units had an antidilutive effect for. the year ended December 31,, 2006..
| |
| Dividend payments on common stock for the year ended December 31, 2006 were $2.28 per share and totaled approximately $574 million. Dividend payments on common stock for the year ended December 31, 2005 were $2.24 per share and totaled approximately $541 million.'Dividend payments on common stock for the year ended December 31, 2004 were $2.20 per share and totaled approximately $522 million.
| |
| Note 7. Goodwill'and Other Intangibles' PSEG, Power and Energy Holdings PSEG, Power' and Energy Holdings conducted an annual review for goodwill impairment as of November 30, 2006 -and concluded that goodwill was not impaired. There were no -events that occurred subsequent to November 30,- 2006 that required a further review of goodwill for impairment.
| |
| Power and Energy Holdings As of December 31, 2006 and 2005, Power's and Energy Holdings' goodwill and pro-rata share 6f goodwill in equity method investments were as follows:
| |
| - - . ". As of December 31, 2006 2005 (Millions)
| |
| Consolidated Investments -
| |
| .Energy Holdings-Global Sociedad Austral de Electricidad S.A. (SAESA)(A) ...... ...................... $390 - ' $405 Electroandes ........................................ ............- 3.313313 Total Energy Holdings- Global ......................................... 523 538 ,
| |
| Power-RBethlehem Energy Center . ...................................... 16 16
| |
| - Total'PSEG Consolidated Goodwill ...................... ........ 539 554 Pro-Rata Share of Equity Method Investments Energy Holdings-Global . "
| |
| - Rio Grande Energia S.A. (RGE)(B) .....................................- 92 Chilquihta Energia S.A. (Chilquinta)(A) .................................... 193' ' 200
| |
| * LDS ............................................... 55 55 Kalaeloa -Partners L.P. (Kalaeloa) ................. 25 25 Pro-Rata Share of Equity Investment Goodwill ..................... 273 372 Total PSEG Goodwill..... .................................... $812 $926 (A) Changes relate to changes in foreign exchange rates.
| |
| (B) RGE was sold in June 2006. For additional information relating to the sale, see Note 4. Discontinued
| |
| -Operations, Dispositions, Acquisitions and Impairments. ,
| |
| 1*34
| |
| | |
| NOTES.TO CONSOLIDATED FINANCIAL STATEMENTS PSEG, PSE&G, Power and Energy Holdings ..
| |
| In addition to goodwill, as of December 31;2006 and 2005, PSEG, PSE&G, Power, Energy'Holdings, and Services chad.the folloxing-recorded intangible assets:
| |
| Energy' Consolidated PSE&G Power Holdings Services Total (Millions)
| |
| As of December 31, 2006:
| |
| Purchased Power, Agreement(A). ............ $11 _ $11 Emissions Allowances(C) ........... . :35 35,
| |
| /,$46 Total Intangibles .................... ........ $35 As of December 31, 2005:
| |
| Defined Benefit Pension Plan(B) ................. $2 $.2 $-3 $9 Emissions Allowances(C) ................ 37 37 Total Intangibles.*.:...... ......... I.......... '$2 $39, $2 $3 $46 (A) Purchase price allocation of fair value of contracts at Prisma.:
| |
| (B) Not subjectlto amortization. . .
| |
| (C) Expensed when used or sold amounting to approximately $3 million, $5 million and $7 million for the years ended December 31, 2006, 2005 and 2004, respectively.
| |
| Note 8. Long-Term Investments PSEG, PSE&G,'Power and Energy Holdings PSEG, PSE&G, Power and Energy Holdings had the following Long-Term Investments as of December 31, 2006 and 2005: . " .
| |
| AS Of IDecember 31, 2006 2005 (Millions).
| |
| Energy Holdings:
| |
| Leveraged Leases ............................................... ,$2,810 $2,720 Partnerships and Corporate Joint Ventures ........................... 868 1,180 Other investments(A) ..... *.......................................... 4 8 Total Long-Term Investments of Energy Holdings ........
| |
| ..... .... 3,682 . 3,908 PSE &G (B ) ...... .......................................... ..................... 149 , 144 Power(C) .............................................. ...... 17 5 Other Investments(D) ................................ ........... 20 20 Total Long-Term Investm ents ....................... ..................... $3,868 $4,077-
| |
| .(A) Primarily relates to Demand Management Corporation investments at Resources.
| |
| (B) Primarily relates to life insurance and supplemental)benefits of $142 million and $136 million as of December 31, 2006 and 2005, respectively..
| |
| (C) Primarily relates to Power's 23% ownership interest in Keystone Fuels Corporation and Conemaugh Fuels Corporation as of December 31, 2006 and certain emission allowances held for trading purposes as of December 31, 2005.
| |
| (D) Amounts represent investments at PSEG (parent company), primarily related to investments in its
| |
| .Capital Trusts.
| |
| 135
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| .Energy Holdings Leveraged Leases Energy Holdings' net investment, through Resources, in leveraged leases was comprised of the following elements:
| |
| -As of Decenmber 31, 2006 2005 (Millions)
| |
| Lease rents receivable (net of non-recourse debt) .............................. $.2,918" $ 2,967 Estimated residual value of leased assets .... ......... ....... I....... 1......
| |
| i,012 1,021
| |
| $ 3,930 $ 3,988 Unearned: and deferred income ....... ............................... (1,120). (1,268)
| |
| Total investments in leveraged leases .................................... $ 2,810 $ 2,720 Deferred tax liabilities ...................................................... (1,886) (1,718)
| |
| Net investment in leveraged leases ................................... $ 924 $ 1,002 Resources' pre-tax income and income tax effects related to investments in leyeraged leases were as follows,:
| |
| -Years Ended December 31, 2006 2005 2004 (Millions)
| |
| Pre-tax income of leýeraged leases .................... .............. $134 $161 $153 Income tax effect on pre-tax income of leveraged leases ........ ............ $ 41 $ 64. $ 12 Amortization of investment tax credits of leveraged leases ................... $ (1) $ (1) $ (1)
| |
| The $23, million decrease in'income tax effect on pre-tax inconme of leveragel leases ih 2006 as compared to 2005, was primarily due to the absence of the tax expense resulting from the sale of Re'sources' interest in Seminole in 2005. For additional information. regarding the sale.of Seminlole, see Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments.
| |
| The $52 million increase in income tax effect on pre-tax income of leveraged leases in 2005 as compared to 2004,. was primarily due to the sale of Resources' interest in Seminole in 2005 and additional benefits resulting from revisions to the revenue and tax calculations of certain of Resources' leveraged lease investments performed in the fourth quarter of 2005 resulting from changes in certain lease forecast assumptions pertaining to state income taxes. A change in a key assumption which affects the estimated total net income over the life of a leveraged lease requires a recalculation of the leveraged lease, from inception, using the revised information. Any change in the net investment in the leveraged leases is recognized as a gain or loss in the year the assumption is changed. For additional information regarding the sale of Seminole, see Note 4. Discontinued Operations, Dispositions, Acquisitions and Impairments.
| |
| Partnership Investments and Corporate Joint Ventures Energy Holdings' partnership investments and corporate joint ventures are primarily accounted for under the equity method of accounting.
| |
| ,Investments in and Advances to Affiliates Investments in net assets of affiliated companies accounted for under the equity method of accounting by Global amounted to $818 million and $1 billion as of December 31, 2006 and 2005, respectively. During the three years ended December 31,,2006, 2005 and 2004, the amount of dividends from these investments was $72 million, $70 million and $89 million, respectively. Global's share of income and cash flow distribution percentages ranged from 35% to 60% as of December 31, 2006. Interest is also earned on loans made .to various projects. Such loans earn interest that ranged from 5% to 7.5% during 2006.
| |
| As of December 31, 2006, Global's recorded investment in equity method subsidiaries was $818 million as compared to $711 million of underlying equity in net assets of such investments. The difference primarily relates to an approximate $100 million investment in a foreign subsidiary which is classified as an equity 136
| |
| | |
| NOTES TO CONSOLIDATED :FINANCIAL STATEMENTS investment cin..Global's financial statements and recorded as'a loan on tfie-equity method subsidiary:.
| |
| Investment classificatibn is appropriate due to its long-term investment nature.
| |
| Global had the following equity method investments as of December 31, 2Q06:,
| |
| Namne Loiatioin ' Owne Kalae'loa.. ............ !........ .................... HI 50%
| |
| GWFý' C Bay Area I. ......... ...... CA 564 B ay A rea II ....... ...... ... ................................ CA, , 50 .-
| |
| Bay Area III.................................... CA
| |
| * Q%.
| |
| 50%
| |
| Bay Area IV ........... ................................ CA
| |
| ,'I"Bay, Area V ....... .............................. CA. 50%
| |
| Hk afo dd L .P ......... .. ............. *...................... .. ... CA 50%"
| |
| GWF Energy Hariford-Peaker Plant .................... .............. . 60%
| |
| H enrietta-Peaker Plant.. ý.......................... .. ...... CA 60%
| |
| Tracy-Peaker Plant ............................ .......... *CA 60%
| |
| Tracj Biom ass (A) ........................... ....... .. ........ *CA 35%
| |
| Bridgewater ......................................... NH. 400%
| |
| * Turboven Maracay ........................................ Ven6z uela 50%
| |
| Cagua............ ............ ..... ...... ....... Venez uela 5d%
| |
| 'Chiiquinta ............ .. .. ............................. Chile .50%
| |
| P risma ............................... I............ : ............... Italy '43%
| |
| L D S .. .... .... ................. . ...... ................. .. ... Perti, 38%
| |
| (A) In January'2007, Global sold its.34.5% interest in Thermal. Energy. Development Partnership; L.P. which owns the 21 MW biomass-fueled Tracy'project in California. For additional informatioh, see Note 4.
| |
| Discontinued Operations, Dispositions, Acquisitions -and -Impairments of the Notes.
| |
| '-I 137
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| 'Summarized, results of operations and-finanrcial' position -of affiliates in which Global applied the equity method of. accounting are presented below:. - -
| |
| Foreign Domestic Total (Millions)'
| |
| December 31, 2006 Statement of Operations Information ', .. .
| |
| R evenue . ......... ' .. ".-. "' " ". .." . . $" 858 $378 $1,236
| |
| 'Gross -Profit..:., .... ....... .. ..... .......... : ............... .... .. $ 345 $154 $ .499 M inority Interest..... ................... ......... . ......... $, 15 Net Income..................................................... $ 164 $ 86 $ -250 Balance Sheet Information Assets: ,I ... . . ,- .. . . ,
| |
| C urrent A ssets................................................... .............. $ 314 $ 100 $ 414 Property, Plant and Equipm ent ................................................. 1,072 '555 '1,627 G oodwill ....... ;
| |
| ................................................ 497 49 546 O ther N onc&urrent A ssets ........ ................................................ 187 32 '219 Total- Assdts' "........... .. .... ..................................... $2,070 $736 $2,806 Liabilities:
| |
| Current Liabilities ................................................. $ 186, $ 63 $ 249 Debt*............................. 67.5.. 203 878
| |
| ......... .................. 143 60° .203 Other Noncurrent Liabilities ...... *...... .....
| |
| *70 Minority Interest ................................................. :._70 Total Liabilities .................................................. 1,074 326. 1,400 Eqhity;... ................
| |
| . I ...................................... 996 410' '1,406 Total Liabilities and E quity................................. . . ................. $2,070 $736 $2,806 December 31, 2005 "
| |
| Stttement of Operations Information.
| |
| Revenue ........ .................................. ............. $1,773 $366 $2,139 Gross Profit ............................................... ' ". , . " ''I.i s' . . ...... .. . . .$ 513 $133 1$ 646 Minority: Interest................................................. $ 14 $' 1:4 N et Incom e ...................................................................... $ 170 $ 78 $ 248 Balance Sheet Information Assets-Current Assets .. .......-......... .. ............ !-$ 533 $102 $ 635 Property, Plant and -Equipment .... : ......... ...: ............ ..... 1,933 '591 .2,524 Goodwill....................................................... -785 .50 835 Other, _ Noncurrent Ot e ,A on u n Assetsset " ..... .... : ..I ........-....... .... :.. /..... .............. :......".. 330.., 32, 362 Total.Assets .................. ...... ..$3,581
| |
| $775 $4,356 Liabilities: ' ''
| |
| Current Liabilities .. ... ... . ........ ... $ 427' $.62 $ 489 Debt............ ................................... .......
| |
| '1,140' Other Noncurrent Liabilities.......................................... 245 .1,385 M inOrity Interest. L............................................................... 322 51 373 60', 60 T othl L iabilities ....................................... ................ ............ 358 1,949 2,307 Eq iy . . .. . . . . .. . .. ..................... . . . .. . . . . . . . . . 1,632 417 32,049 i$4,356 Total Liabilities and Equity.......... .......... ....... . $3,581 .$775 December 31,' 2004 . . ' '. .
| |
| * Statement of Operations Information -
| |
| R even ue .. *............ ......................... ............ . . ........ .... . .. . ... $1,547 $537 $2,084 G ross P rofit.'. ....................... : ...... ... ........................ $ 510 $130,;. $ 640 M inority Interest ................................................................ $ 7 $7- $' 7 Net Income .............. .......... $ 148 $ 46 $194
| |
| '* Debt is non-recourse to PSEG, Energy Holdings and Global.
| |
| 138
| |
| | |
| NOTES TO ICONSOLIDATED FINANCIAL STATEMENTS
| |
| ,,The differences in the results of operations and the financial position as of and for the year ended December 31, 2006, as compared to 2005, were due to Global's sale of a 35% interest in Dhofar Power in 2005, the sale of Global's 32% ownership interest in RGE and the consolidation of Prisma in 2006. See Note
| |
| : 4. Discontinued Operations, Dispositions, Acquisitions and Impairments for' further details of these transactions.
| |
| Global also has investments in certain companies in which it does not have -the :ability to' exercise significant influence. Such investments are accounted for under the cost method. As of December.31, 2006 and 2005, the carrying value of these investments aggregated $37 million, and $39 million, respectively. Global periodically reviews, these cost method investments for impairment and. adjusts the values of these investments accordingly.
| |
| Note 9. Schedule of Consolidated Capital Stock and Other Securities PSEG and PSE&G
| |
| * Outstanding Shares Current . Book ,Value" As of Redemption As of December 31, ' Price December 31, 2006 Per Share 2006 2005 (Millions)
| |
| PSEG Common Stock (no par value)(A)(B)
| |
| Authorized 500,000,000 shares; (outstanding as of December 31, 2005ý 251,163,186 shares) ...................... 252,645,408 . $44145 $4,086 PSE&G Cumulative Preferred Stock(C) without Mandatory Redemption(D) $100 par value series 4.08% ... ........................................... 146,221 $103.00 $ 15 $ 15 4.18% .............................................. 116,958. $103.00 12 12 4.30% .............................................. 149,478 $102.75 15 . 15 5.05% ....................................................... 104,002 $103.00 10 10 5.28% ............................ 117,864 $103.00 12 12 6.92% .............................................. 160,711 $102.77 16 16 Total Preferred Stock without Mandatory Redemption......... 795,234 $. 80 $ 80 (A) Qn November 16, 2005, PSEG issued approximately 11.4 million shares of its common stock for proceeds of approximately $460 million under the stock purchase obligation provision of the Participating Units issued by PSEG Funding Trust I in September, 2002. See Note 10., Schedule of Consolidated Debt.
| |
| (B) For the years ended December 31., 2006, 2005 'and 2004, PSEG issued approximately 1.0 million, 1'.2 million, and 1.9 million shares, respectively, for approximately $67 million, $72 million and, $83 million, respectively, under the Dividend Reinvestment and Stock PurchasePlan (DRASPP) and the Employee Stock- Purchase Plan (ESPP). Total authorized and unissued shares of common stock available for issuance through PSEG's DRASPP, ESPP and various employee benefit -plans amounted to approximately .3.9 million shares as of December 31, 2006.
| |
| (C).As of December 31, 2006, there was an aggregate of approximately 6.7 million shares bf $100 par vldue and 10'million shares of'$25 par value Cumulative Preferred Stock, which were authorized and unissued and which, upon-issuance, may or may not provide for mandatory sinking fund redemption. If dividends upon any 'shares',of Preferred Stock are in arrears for four consecutive quarters,, holders receive voting rights for the election of a majority of PSE&G's Board of Directors and continue until all accumulated and unpaid dividends thereon have been paid, whereupon all- such voting rights. cease: There are no arrearages in cumulative preferred stock and hence currently no voting rights for preferred shares. No preferred stock agreement contains any liquidation preferences in excess of par values or any 'deemed' liquidation events.
| |
| (D) As of December 3.1, 2006 and 2005, the annual dividend requirement and the embedded dividend rate for PSE&G's Preferred Stock without Mandatory Redemption was approximately $4 million and 5.03%,
| |
| respectively, for each year.. .,. .
| |
| 139
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value of Preferred Securities The estimated fair value of PSE&G's Cumulative Preferred Stock was $72 million and $68 million as .of
| |
| -December 31, 2006 and 2005, respectively. The estimated fair value was determined using market quotations.
| |
| Note 10. Schedule of Consolidated Debt Long-Term Debt As of December 31, Maturity 2006 2005 (Millions)
| |
| PSEG Senior Note- 6.89% ........................................................ 2005-2009 $ 147 $. 1196 Senior Note-,Libor +.375% .. ............................................... 2008 375 375 Senior Note--4.66% ............................................. 2009 200 200 Debt Supporting Trust Preferred Securities(A) ............................ 2007-2047 659 814 O ther(B ) ..................................................................... (6) (4)
| |
| Principal Amount Outstanding .............................................. .1,375 1,581 Amounts Due Within One Year(C) ........................................ (523) (203)
| |
| Total Long-Term Debt of PSEG (Parent) .......
| |
| "..................... $ 852 $1,378 PSE&G First and Refunding Mortgage Bonds:
| |
| 6.75% (D) ..................................................... 2006 $ -- . $ .147 LIBOR p!us 0.125% (E) .... ................. 2006 - 175 6.25% ..................... ................. ! ......... ...................... 2007 113 113 6.75% ........................................................ 2016 171 171 6.45% ........................................................ 2019 .5 5 9.25% ............. 2021 134 134 6.38% .............. 2023 157 157 5.20% . ....................................................... 2025 23 23 3.65% Auction Rate(F) .......................................... 2028 64 64 3.60% A uction Rate(F) .................................................... 2029 93 93 3.50% A uction Rate(F) .................................................... .2030 88 88 3.65% A uction Rate(F) .................................................... 2031 104 104 5A5% ........................................ ........................... 2032 50 50 6140% ............................................. ........... 2032 100 too 3.54% A uction R ate(F) .... :................................................ 2033 50 . 50 3.545% A uction Rate(F) ................................................... 2033 50 50 3.545% Auction Rate(F) ......................... :................. 2033 - 45 45 8.00% ........................................................................ 2037 7 7 5.00% ............ .. ........................................................ 2037 8 8 140
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL. STATEMENTS As of December 31, Maturity 2006 2005 (Millions)
| |
| Medium-Term Notes:
| |
| 4.00% ..................................................... 2008 250 250 8 .16 % ..... *.............................. ........... ............ 2009 16' 16 8.1.0%..................................................... 2009 44 44 5 .12 5 % .................................................................... 2012 300 300 5 .0 0 % ..... ........... ..................................................... 2013 150 150 5 .3 7 5 % ..................................................... ............... 2013 300 300 5.00% ..................................................... 2014 250 250 7.04% .... . ................................................ 2020 9 9 7.18% ........ ............................................. 2023 5 * " 5 7.15% ... 2023 .34 34 2035 250 -250 5.25% ................. ....................................
| |
| 5.70% (G) ........... :................................................... 2036 250 Principal Amount Outstanding .................................. 3,120 3,192 Amounts Due W ithin One Year(C) ....................................... (113) (322)
| |
| ,Net Unamortized Discount .................................... (4) (4)
| |
| Total Long-Term Debt of PSE&G (Parent)........ ......... $3,1003 $2,866 Transition Funding (PSE&G)
| |
| Securitization Bonds:
| |
| 5.98%(H)..... ............................................. 2008 $ -- $ 71 6 .2 9 % ...................................................................... 2011 412 496 6 .4 5 % .. ............ ........................ .............. : ............... 2013 328- 328 6 .6 1% ..................................................................... 2015 454 454 6.75% ..................................................... 2016 220 220 6.89%................... .............................. 2017 370 370 Principal Amount Outstanding .................................. 1,784 1,939 Amounts Due Within One Year(C) .............................. (161) (155)
| |
| Total Securitization Debt of Transition Funding .................. $1,623, $1,784 Transition Funding II (PSE&G)
| |
| Securitization. Bonds:
| |
| :$ 17 $ .25 4.18% (H )......... ......................................... 2006-2 008 4 .34 % ... .................................... ........................... 2008-2 012 35- 35 4.49%.. . . . . . . . . . . . . 2013 20 20 4.57% ..... . ..... . ........................ 2015 23 23 Principal A m ount O utstanding ............................................ 95 1.03 Amounts Due Within On'e Year(C) ..................................
| |
| * _* 10) (8)
| |
| Total Securitization Debt of Transition Funding II........... $ 85 $ 95 Total Long-Term Debt of PSE&G ............................... $4,711 $4,745 141
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31; Mathrity 2006 2005 S .(Millions)
| |
| Power Senior Notes:
| |
| 6.875% (I) .............. ............... : ............ .. .................. 2006 $ 500 3.75% ...................................................... 2009 250 250 2011. 800 800 7:75% ..... ........................... ........ ............................
| |
| 6.95% .......................................... ...................... . . 201 2 600, 600 5.00% ... ..................................... .. .............. 2014 250 250 5.50% ........... .................................... 2015 300 300 8.625% e.'....... ...............................................
| |
| . ; 2031 500 500 T otal Senior Notes ................................................... .. $ 2,700 $ 3,200 Pollution Control Notes:
| |
| 5.00% ................................................. 2012 $ 66 $ 66 5.50% .................. ................................................. 2020 14 1.4 5.85% ................................................. 2027 1.9 19 5.75% ................................................. 2031. '25 25 Total Pollution Coritrol Notes ...... ... ...................... $ 124 $ 124 Amounts Due Within One Year(C)..... .................... (500)
| |
| Net Unamortized Discount. ................................ (7)
| |
| .Total Long-Term Debt of Power ................. ....
| |
| $ 2,818(6) . $ 2,817 Energy Holdings (Parent) $
| |
| Senior Notes:
| |
| 7.75%(J) ................. ...... .......... ................... 2007 *$ 309 8.625%(K) ........ ..................................... 2008 207 507 10.00% ................. .......................... ...................... 2009 400 400 8.50%............................................. I....... 2011 544 544 Principal A m ount Outstanding .......................................... 1,151k 1,760 Amounts Due W ithin One Year(C) ..................................... (304)
| |
| Net Unamortized Discount and Senior Note Rate Swap ... ... -.... '
| |
| (2k) .(8)
| |
| Total Long-Term Debt of Energy Holdings (Parent) ............ $ 1,149 $ .1,448 Global (Energy Holdings)(L)
| |
| Non-Recourse Debt:
| |
| SAESA-4.191% + inflation, factor. ............................. 2005-2029 $ 178 $ 192 TIE (Odessa)-Libor +2.25%-3.25%(M) ........ ................. 2005-2009 194 210 TIE (Guadalupe)-Libor +L875%-2.00%(N) ..................... 2005-2009 181 202 Electroandes-5.880% -6.438% ....................................... .... 2005-2016 105 102 Chilquinta-5.58% -6.62% .......................................... .... 2008-2011 162. 162 Prisma ............................................................ 2026 3 Principal Amount Outstanding ............. ................... 823. 868 (56)
| |
| Amounts Due Within One Year(C) ......................... (37)
| |
| Total Long-Term Debt of Global ..................... $ 786 $ 832 Resources (Energy Holdings)(L) 8.00%-9.30%-Non-Recourse Bank Loan,.......... ........ 2005-2020 $ 40 $ 46 Amounts Due Within One Year(C) ......................... (6)
| |
| Total Long-Term Debt of Resources ............................ $ 37 $ 40 EGDC (Energy Holdings)(L) 8.27%-Non-Recourse Mortgage ................................. ....... 2005-2013 $ 19 $ 2:1 Amounts Due Within One Year(C). ........................
| |
| Total Long-Term Debt of EGDC ...... ...... $-17 19 Total Long-Term Debt of Energy Holdings ................. $ 1,989 $12,339 Total PSEG Consolidated Long-Term Debt ............... $1.0,370 $:11,279 142 -
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (A) As of each of the years ended December 31, 2006 and 2005, the annual dividend requirement of PSEG's Trust Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Deberituires), including those issued in connection with the Participating Units, and their embedded costs was approximately $18. million and $96 million, respectively.
| |
| Enterprise Capital Trust I, Enterprise Capital Trust II, Enterprise Capital Trust III, Enterprise Capital Trust IV, and PSEG Funding Trust II were formed and are controlled by PSEG for the purpose of issuing Quarterly Trust Preferred. Securities (Quarterly Guaranteed Preferred Beneficial Interest. in PSEG's Subordinated Debentures). The proceeds were loaned to PSEG and- are evidenced by Deferrable Interest Subordinated Debentures. If and for as long as payments on the Deferrable Interest Subordinated Debentures -have been deferred, or PSEG had defaulted on the indentures related thereto or its guarantees thereof,, PSEG may not pay any dividends on its common and preferred stock. The Subordinated Debentures support the following Preferred Securities issued by the trusts:
| |
| As of December 31, 2006 2005 (Millions)
| |
| PSEG PSEG Quarterly Guaranteed Preferred Beneficial Interest in' PSEG's Subordinated Debentures Floating Rate. ..................... .................................... $ - $150 8.75% ................................................................................. 180 180 5.38.1% PSEG.Preferred Trust Securities.......... ........ ........ ......... ..... 460 460 Total .................................................................................. $640 $790 PSEG recorded interest expense of $43 million, $80 million and $83 million for the years ended December. 31, 2006, 2005 and 2004, respectively.
| |
| In February 2006, PSEG redeemed $154 million of its Subordinated Debentures underlying $150 million of Enterprise Capital Trust II,. Floating Rate Capital Securities and its common equity investment in the trust.
| |
| (B) Represents .fair value of interest rate swaps.
| |
| (C) The aggregate principal amounts of maturities for each of the five years following December 31, 2006 are as follows:
| |
| Energy PSE&G Holdings Transition Transition Energy Year PSEG .PSE&G Funding Funding I! Power Holdings Global Resources EGDC' Total (Millions) 2007 ................ $ 523 $113 $161 $10 $ - $ - $ 37 $ 3 *$ 2 . $ 849 2008 .................. 424 -i 250 169 10 - 207 105 3 2. 1,170 2009 ................ 249 60 178 10 250 400 350 4 3. 1,504 2010 .................- - 186 11i - - 27 20 3 247 2011 ................. - - 195 10 800 544 128 - .3 1,680
| |
| $1,1.96 . $423 $889 $51 $1,050 $1,151 $647 $30 $13 $5,450 (D) On March 1, 2006,'PSE&G repaid at maturity $147 million of its.6.75% Series UU First and Refunding
| |
| ..' Mortgage Bonds.
| |
| (E) On June.23, 2006, PSE&G repaid at maturity $175 million of its Floating Rate Series A First and Refunding Mortgage Bonds.
| |
| (F) Auction rates are variable. Reflects rates as of December 31, 2006.
| |
| (G) In December.2006, PSE&G issued $250 million of its 5.70% Secured Medium Term Notes Series D due
| |
| -2036. The proceeds were used to replace the aforementioned matured Floating Rate Series A and 6.75% Series UU First and Refunding Mortgage Bonds.
| |
| * 143
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (H) During 2006, Transition Funding and Transition Funding II repaid approximately $155 million and $8 million, respectively, of their transition bonds..
| |
| (I) In April.2006, Power repaid at maturity $500 million of its 6.875% Senior Notes.
| |
| (J) In December 2005, Energy Holdings issued an irrevocable call its $309 million. of 7.75% Senior Notes due 2007 for redemption, on January 30, 2006.
| |
| (K) On October 23, 2006, Energy Holdings redeemed $300 million of its $507 million outstanding 8.625%
| |
| Senior Notes due *in 2008.
| |
| (L) .Non-recourse financing transactions consist of loans from banks and other lenders that are typically secured by project assets and cash flows and generally impose no material obligation on the parent-level investor to repay any debt incurred by the project borrower. The consequences of permitting a project-level default include the potential for loss of any invested equity by the parent. However, in some cases, certain obligations relating to the investment being financed, including additional equity commitments, may be guaranteed by Global and/or Energy Holdings for their respective subsidiaries. PSEG does not provide guarantees or credit support to Energy Holdings or its. subsidiaries.
| |
| During 2006, Energy Holdings' subsidiaries repaid approximately $51 million of non-recourse debt, of which $43 million related to SAESA and TIE, $6 million to Resources and $2 million to EGDC.
| |
| (M) On February 17, 2006, the maturity of the debt was extended to December 31, 2009. On September 29, 2006, 80% of the scheduled outstanding principal became subject to an interest rate swap that converted floating -rate Libor interest to a fixed rate of 5.4275% through December 31, 2009. At December 31, 2006, the Libor rate on the unswapped portion of the debt was 5.375% and the interest spread was 2.25%.
| |
| (N) On April 27, 2006, 80% of the 'scheduled outstanding principal became subject to interest rate swaps that converted floating rate Libor to a weighted average fixed rate of 4.518%. At December 31, 2006, the Libor rate on the unswapped portion of the debt was 5.375% and the interest spread was 1.875%.
| |
| 144
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL.STATEMENTS Short-Term Liquidity PSEG, PSE&G, Power and Energy Holdings As of December 31, 2006, PSEG and its subsidiaries had a total of approximately $3.7 billion of committed credit' facilities with 'approximately' $3.3 billion of available liquidity uhder these facilities. In addition, PSEG and PSE&G have access to certain uncommitted credit facilities. Each df the facilities is restricted to availability and Us& to the specific co'mpanies as listed below. As of December 31,-2006, PSEG had no loans outstanding under its uncommitted facility and PSE&G had $31 million loans outstanding under its uncommitted facility. Available' Usage as of Liquidity as of Expiration Total December 31,. December 31, Company Date Facility Primary Purpose 2006 "2006
| |
| ý(Nlillions)
| |
| PSEG:
| |
| 5-year Credit Facility .................... Dec 2011 $1,000 CP Support/ "$354, $ 646 Funding/
| |
| Letters of Credit' Uncommitted Bilateral Agreement... ........ N/A N/A Funding N/A PSE&G: "4.
| |
| 5-year Credit Facility ................... June 2011 $ 600. CP Support/ $ ,$ 600 Funding/
| |
| Letters of Credit.
| |
| Uncommitted Bilateral Agreement ........ N/A N/A Funding $ 31 N/A PSEG and Power:(A)
| |
| Bilateral Credit Facility ...................... June 2007 $ 206 Funding/ $ 19(C) - $ 181 Letters of Credit Power: .-
| |
| 5-year Credit Facility .................. Dec 2011. $1,600 Funding/ $ 20(C) $1,580 Letters of Credit Bilateral Credit Facility.................... March 201'0 $ 100 Funding/ * $ 100 Letters of Credit Energy Holdings:
| |
| 5-year Credit Facility(B) June 2010 $ 150 Funding/ $ 6(C) $ 144 Letters of Credit (A) PSEG/Power joint and several co-borrower facility.
| |
| (B) Energy Holdings/Global/Resources joint and several co-borrower facility supported with a pledge of Energy Holdings' membership interest in Global.
| |
| (C) These amounts relate to letters of credit outstanding.
| |
| Energy Holdings As of December 31, 2006, Energy Holdings had loaned $28 million of excess cash to PSEG. For information regarding affiliate borrowings, see Note 21. Related-Party Transactions.
| |
| I 145
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair. Value of Debt.
| |
| The estimated fair values were determined using the market quotations or valu&s of instrumnents with similar terms, credit ratings, remaining maturities and redemptions as of December 31; 2006 and 2005; respectively.
| |
| December 31, 2006 December 31, 2005 Carrying Fair Carrying Fair Amount Value Amount Value (Millions)
| |
| Long-Term Debt:
| |
| PSEG .................................................. $ 1,376 -$ 1,369 $ 1,581 $.1,573 PSE &G ................... : .............. ........................... 3,116 3,145 3,188 3,283 Transition Funding (PSE&G) ....................................... 1,784 1,907 1,939 . 2,086 Transition Funding 1I (PSE&G) ............... . . 95 93 103 101 Power ........................................ ........... . 2,818 3,045 3,317 3,609 Energy Holdings:
| |
| Senior N otes ...................................................... 1,149 1,232 1,752 1,869 Project Level, Non-Recourse Debt ........................... 881 888 935 944
| |
| $11,219 $11,679 $12,815 $13,465 Because their maturities are less than one year, fair values approximate carrying hmounts for cashand cash equivalents, short-term debt and accounts payable. For additional informati6n rdlated to interest rate derivatives, see Note 11. Financial Risk -Management Activities.
| |
| Note 11. 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 comrnibodity prices, foreign currency exchange rates, interest rates and eqiity prices that could affect their results of operations and financial conditions. PSEG,,PSE&G, Power and Energy Holdings manage exposufre to these market risks thkough their regula'r operathig 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 piices or rate movemients on certain assets, liabilities 'or anticipated transactions and bý 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 toois consistent with its respective business plan and prudent business practices.
| |
| Derivative Instruments and Hedging Activities . -
| |
| Energy Trading Contracts Power Power actively trades energy and energy-related *products, including electricity, natural. g5, electric capacity, firm transmission rights (FTRs), coal, oil and emission allowances in the spot, forward, and futures markets, primarily in PJM Interconnection, L.L.C (PJM), but also in the surrounding. region, which extends from Maine to the Carolinas and the Atlantic Coast to .Indiana, .and natural gas, in the producing region.
| |
| Power maintains a strategy ofentering into positions to optimize'the value of its portfolio and reduce earnings volatility of generation assets, gas supply contracts and itý electric and gas supply obligations. Power engages in physical and financial transactions in the electricity wholesale markets, and executes an overall risk management strategy seeking to mitigate the effects of adverse movements in the fuel and electricity markets. These contracts also involve financial transactions-including swaps, options and futures. There have been significant decreases in commodity prices over the last year. The resultant changes in market'values for 146
| |
| | |
| NOTES. TO ,CONSOLIDATED FINANCIAL STATEMENTS energy and related cdntracts that qualify for hedge accounting have resulted in significant, decreases. to Accumulated Other Comprehensive Loss. For additional, information, see Note 12. Commitments and Qontingent.Liabilities. Power marks, its derivative energy trading contracts to market in accordance with SFAS 133, with ýhanges in 'fair value charged to the Consolidated'Sfatements 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.
| |
| Commodity Contracts, Power.
| |
| The availability and price of energy commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market conditions, transmission availability and other events. Power manages its risk of fluctuations of energy price and availability through derivative instruments, such as forward purchase or sale contracts, swaps, options, futures and.FTRs. . '
| |
| Cash Flow Hedges Power uses forward sale .and purchase contracts, swaps and, FTR contracts to hedge forecasted energy sales from its generation stations and to hedge related load obligations. Power also enters into swaps and futures transactions to hedge the price of fuel to meet its fuel purchase requirements. These derivative transactions are designated and effective as cash flow hedge~s under SFAS 133. 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 Accumulated Other Comprehensive Loss, resulted in a $(108) million after-tax impact on Accumulated Other Comprehensive Loss. As of 'December 31, 2005, the fair value of these hedges..was
| |
| $(951) million. These hedges, along with realized gains on hedges of $11 million retained in Accumulated Other Comprehenisive LUss, resulted in a $(558) 'million after-tax impact on Accumulated Other Comprehensive Loss. During 2007, $27 million (after-tax) of net unrealized and realized losses on these commodity derivatives is expected to' be recfassified to earnihngs. Approximately $92 million of after-tax unrealized losses on these commodity derivatives in Accumulated Other Comprehensive Loss is expected to be reclassified to earnings for the year" ending December 31, 2008. Ineffectiveness associated with' these hedges, as defined in SFAS 133, was $(3) million at December 31, 2006. The expiration date of the longest dated cash flov.'hedge is in 2009.
| |
| Other Derivatives.
| |
| Power also enters into certain other contracts that are derivatives, but do -not qualify for hedge accounting under SFAS 133. Most of these contracts are used for fuel purchases for generation requirements and for electricity purchases for contractual sales obligations. Therefore, the changes in fair market value of these derivative contracts are recorded in Energy Costs or Operating Revenues, as appropriate, on the Consolidated Statements of Operations. The net fair value of these instruments as of December 31,. 2006 was
| |
| $1 million. The net fair value of these instruments as of December 31, 2005 was not material.
| |
| Energy Holdings
| |
| 'Other Derivatives TIE enters into electri6ity forward and capacity sale contracts to sell its 2,000 MW capacity for portions of the current calendar year, with the balance, sold into. the daily spot market. TIE also enters into gas purchase contracts to specifically match the generation requirements to support the electricity forward sales contracts. Although these contracts fix the amount of revenue, fuel costs and cash flows, and thereby provide financial stability to TIE, these -contracts are, based on their terms, derivatives that do -not meet the specific accounting criteria in SFAS 133 to qualify for the normal purchases and normal' sales exception, or to be designated. as a hedge for accounting purposes. As a result, these contracts must be recorded at fair value.
| |
| 1,47
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The net fair, value of the open positions was. approximately $38 million and $(7) million astof December 31, 2006 and December 31, 2005,' respectively. .
| |
| 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 arefully offset.by. the fair value changes in the underlying debt. As of December 31, 2006 and December 31, 2005, the fair value of the hedge was $(9) million and $(10) million, respectively.
| |
| Cash Flow Hedges .
| |
| * PSEG, PSE&G and Energy Holdings -, ,.
| |
| PSEG, PSE&G and Energy Holdings -use interest rate swaps and other interest rate derivatives to manage their exposures, to the variability of cash flows, primarily. related to variable-rate debt instruments.
| |
| The interest rate derivatives.used are. designated, and effective as cash flow hedges. Except for PSE&G's cash flow hedges, the -fair -value changes of these derivatives are initially, recorded in, -Accumulated Other Comprehensive Loss. As of- December 31; 2006,. the -fair value of- these. cash-. -flow,hedges was $(4) million, primarily at PSE&G. As of December, 31, 2005, thefair value of these cash flow hedges -was $(17) million, including $(11I) million and $(6) million at PSE&G and.Energy Holdings, respectively: The $(4) million and
| |
| $(11) million at PSE&G as of December 31, 2006'and December*31, 2005; respectively, is not included in Accumulated Other Comprehensive, 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 fate derivatives in Accumulated Other Comprehensive Loss.is expected to be reclassified at PSEG. As of D ecember 31, 2006, there was no .hedge ineffectiveness associated. with--these hedges. The amounts aboye do 'not include the fair value of approximately $(60) million asof December 31, 2005 for the cash flow hedges at Elcho, which had been reclassified into Discontinued Operations.
| |
| 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 sojme 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 ,enterted into monetary obligations and maintain receipts/receivables in U.S. Doflars 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 potenti al foreign exchange exposure by entering i.nto revenue con'tracts that adjust for changes in foreign exchange~rates. Global also uses foreign currency-forward, swap and optipn agreements to manage risk related to.certain foreign currency fluctuations.. .. - , ..
| |
| * Although-the Chilean Peso and the.Peruvia n 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.
| |
| 148
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The net cumulative 'foreign currency revaluations had increased the total amount of Energy Holdings' Member's Equity by $134, million as of December 31, 2006.
| |
| Hedges of Net Investments in Foreign Operations . "
| |
| Energy Holdings . ,...
| |
| In March 2004 and April 2004; Enetgy Holdings entered into four'cross currency interest rate swap agreements. The swaps are'designed to hedge the net investment in a fdreign subsidiary associated with the exposure in the U.S. Dollar to Chilean'Peso exchange rate. The fair Value of the" cros's currency swaps was
| |
| $(25) million and $(33) million as of December 31, 2006 and December 31, 2005, respectively. The change in
| |
| 'fair value of the majority of the, swaps is recorded in Cumulative Translation-,'Adjustment within Accumulated Other Comprehensive Loss. As a result, Energy Holdings' Member's Equity was reduced by
| |
| $23 million as of December 31, 2006. A portion of the swap, $(38) million, was dedesignated as a hedge in December 2006.
| |
| Note 12. Commitments and Contingent Liabilities Nuclear Insurance Coverages and Assessments Power Power is a member of an industry mutual insurance company, Nuclear' Electric Insurance 'Limited (NEIL), which' provides the primary, property and' decontamination' liability insurance. at' Salem Nuclear Generating Station' (Salem),. Hope Creek' Nuclear Generating, Stationi ,(Hope -Creek), and Peach Bottom Atomic Power' Statioh (Peach Bottom): NEIL. also' provides- excess property ;insurance. through. its decontamination liability, decommissioning liability and excess property 'policy and replacement power coverage through its accidental 'outage policy. NEIL :policies may make retrospective premium assessments in case of adverse loss, experience:'Power's maximum potential liabilities under these assessments are incliuded in- the table and notes below. Certain provisions in the NEIL policies, provide that -the insurer may suspend coverage with respect to all nuclear units on a site without notice if -the NRC suspends or revokes: the operating license for any unit on that site, issues a shutdown order.-with respect to such unit or',issues a confirmatory order keeping such unit' down...
| |
| The' American Nuclear Insurers (ANI) and NEIL policies both include coverage for claims arising out of acts of terrorism. Both ANI and NEIL- make a distinction between c6+-ified and non-certifie'd ''ats "of terrdrism; as' defined under the Terrorism Risk insurance' Act''(TRIA), ahd thus their' policies respond accordingly. For' non-certified acts of 'terrorism, ANI policies are subject to an industry aggregate limit of
| |
| $300 million, subject to reinstatement at ANI discretion. Similarly, NEIL policies are subject to,an industrt aggregate limit of $3.2 billion 'plus any amounts available through reinsurance or indemnity for non-certified acts of terrorism. For certified acts, Power's nuclear liability ANI and nuclear property NEIL policies will respond similarly to"other covered events.
| |
| The Price-Anderson Act sets the "limit of liability" for claims that could arise from an incident involving any licensed nuclear facifity in the U.S. The ý"limit of liability" is based on the number of licensed nuclear reactors and is adjusted at least "every five years 'based on the Consumer Price Index. The current 'limit 6f liability' is $10.8' billion. All utilities owning a nuclear reactor, including Power,'have provided for this exposure through' a combination of private"-insurance and'mandatory participation 'in a financial protection pool as established by the PriceLAnderson ACtd Under' the Price-Anderson 'Act, each party with an ownership interest in a nuclearreactor can be assessed its share of $101 million per reactor per iiicident, payabie at $15.
| |
| million per reactor p'r incident per year. If'the damages exceed
| |
| 'f the "limit liability," the President is to submit to Congress a plan' for providing additional compensation to the, injured" parties. Congress could impose further revenue-raising measuires on' the nuclear industry to pay claims..Power's maximum aggregate assessment per incident is $317 million (based on Power's ownership iinterests in Hope'Creek, Peach Bottom and Salem) and its maximum aggregate annual assessment per incident is $48 million. This does not include the $11 million that .,could be -assessed under the. nuclear worker. policies. Further, a decision by :the U.S.
| |
| 149
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
| |
| Supreme Court, not involving Power, has held that the Price-Anderson Act did not preclude awards based on.
| |
| state law claims for punitive damages.
| |
| Power's insurance coverages. and maximum retrospective assessments for its nuclear operations are as follows: ,. .
| |
| Total Site Retrospective
| |
| , Coverage Assessments (M.,
| |
| Type and Source of Coverages , . , .;,
| |
| Public and Nuclearr Worker Liability (Primary Layer): .
| |
| ANI " .... $ 300(A) .$ 10.
| |
| Nuclear Liability, (Excess Layer): -
| |
| Price-Anderson Act........................................................... 10,461(B)'
| |
| .317 Nuclear 'Liability Total: ... .. .................. ..... $10,761(C) $327.
| |
| Property Damage*(Piimary Layer): "
| |
| NEIL Primary (Salem/Hope Creek/Peach Bottom) ........ " $-500 $ 17 Property Damage (Excess' Layers): .6 NEIL II (Salem/l-obe Creek/Peacfi Bottom) .. . . . . . 600 8 NEIL Blanket Excess (Salem/Hbp6 Creek/Peach Bottom) ......... 1,Q00(D) 7 Property. Damage Total (Per Site) .$ 2,100 $ 32 Accidental Outage:. ..... .... ...
| |
| NEIL I (Peach Bottom) '.........'.. ..... .. ......-..... ...... $ 245(E) $ 6 N EIL I (Salem )................ .... .......
| |
| ; ........................... . 281.(E) 7 NEIL.I (HopeCreek).. ........ ................. ........................ 490(E) 6
| |
| 'Replacement 'Power 'Total ......... :.....:..... $ 1016 $'19 (A) The' primary limit for Public Liability is a per site, aggregate limit with no p'ýotential for assessment., The Nuclear Worker Liability represents the potential liability from workers claiming exposure to the hazard bf nuclear radiat'i6n. This coverage is subject to an industry aggregate limit that' is subject to reinstatement. at ANI discretion 'and has an assessment potential under former canceled policies.
| |
| (B) Retrospective premium program under the Price-Anderson Act liability provisions of the 'Atomic Energy Act.of 1954, as amended. Power is subject to retrospective assessment with respect to loss from an incident at' any licensed nuclear reactor in.the U.S. that produces greater than 100 megawatts. (MW) of electrical' power.. This retrospective assessment can'be adjusted for inflation every 'five years. The 'last adjustment waseffective as of August. 20, 2003. This retrospective program is in. excess of the Public and Nuclear Worker Liability primary layers. . ..
| |
| (C) Limit of' liability Under the Price-Anderson-Ac`t for each nuclear incident.
| |
| .(D) For property limits.in excess of $1.1 billion, Power participates in: a Blanket Limit policywhere the $1.0 billion limit is shared by Power with Amergen Energy Company, LLC and -Exelon Generation Company, LLC (Exelon Generation) among the Braidwood, Byron, Clinton, Dresden, La Salle, Limerick, Oyster Creek, Quad Cities, TMI-1 facilities owned by Amergen and Exelon and the Peach Bottom, Salem and Hope Creek facilities. This limit is not subject to reinstatement in th e event of a loss.
| |
| Pirticipati'on in 'this 'program materially reduces 'Power's premium and -'the associated p6tential assessment.
| |
| (E) Peach Bottom has an aggregate indemnity limit 'based on a weekly indemnity of $2.3 million for 52 weeks foll6w~d by 80% of the weekly indemnity for 68 weeks. Salem has. an aggregate indemnity limit based on a weekly indemnity of. $2.5 million for 52 weeks followed by 80% of the weekly indemnity for 75 weeks. Hope Creek has an aggregate indemnity limit based on a weekly indemnity of $4.5 million for 52 weeks followed by 80% of the weekly indemnity for 71 weeks.
| |
| 150
| |
| | |
| NOTES TO CONSOLIDATEDWFINANCIAL STATEMENTS Guaranteed Obligations Power Power has unconditionally guaranteed payments by its subsidiaries,'E-R&T and PSEG Power*New" York Inc. (Power New York) in commodity-related transactions in the ordinary course of business. These paymyent guarantees are provided to counterparties in order to obtain.c.redit under physical and financial agreements for gas, power, pipeline capacity, transportation, oil, electricity, and related commodities and services. These payment guarantees support the current exposure, interest and other costs on sums due and payable by ER&T and Power New York. ,Under these agreements, guarantees offered foirtfading' and marketing cover lines of credit between entities and are often reciprocal in nature. The exposure be'tween counterparties can move in -either direction. The face value of the guarantees outstanding as of December 31, 2006 and 2005 was approximately $1.6 billion. In order for Power to incur a liability for the face value of the. oiltstanding guarantees,' ER&T .'and Power New York would have to fully utilize the credit granted to' it' by 'every counterparty to whom Power has provided a guarantee and all of ER&T's and Power New- York's contracts would have to be "out-of-the-money" (if the contracts are terminated, Power would, owe money to the counterparties). The probability of all contracts at ER&T and Power New York being similtaneously "out-of-the-money" is highly unlikely due to offsetting positions within .the portfolio. For this reason,.th& current exposure at any point in time is a more meaningful representatibn of the' potential liability to Power under these guarantees. The current exposure consists of the net of accounts-, receivable and accou'nts payable and the.forward valueo6n open positions,'less any ,iiargins po'sted>.The carre'niexposure from such li"bilities was
| |
| $518 million -and $549 million a's of December 31, 2006' and'2005, respectively. I
| |
| -Power is subject to collateral calls related' t6 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 ýa material impact on margin requirements under such contracts that are entered into in the normal. course' of business. As of December 31; '2006, Power had postedmargin 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, to 'satisfy collateral obligations and support various contractual and environmental bbligations. As of December 31, 2005, Power had posted margin of approximately $1.2 billion, including approximately $1 billion in the form of letters of credit, and received margin of. approximately $168 million, including' approximately $115 million ini the form Wofletters' of credit.'"
| |
| In the event of a deterioration of Power's credit rating to .below .investment grade, which represents a two level downgrade from its-current ratings, many of these agreements allow the counterparty to demand that ER&T provide further performance assurance, generally in the form of a letter of credit or cash. As of December 31, 2006, if Power were to lose its investment grade raiing and, assuming all counterparties 'to which ER&T is "out-of-the-money" were, contractually entitled to demand, and demanded; performance assurance, ER&Tcould be required. to'post additional collateral in: an amount. equal to: approximately $578 million. Power believes that it has sufficientf-liquidity to post such collateral, if:nedessary.
| |
| Power also' routinely' enters into exchange-traded1 futures"aund' options transactions'for electricity and natural gas as part of its operations. Generally, such future contracts require a deposit of cash' mar'gin, the amount of which is subject to change based on market movement and in accordance. with exchangerules. As of December 31, 2006 and 2005, Power had deposited margin of approximately $89 million and $176 million, respectively, related to exchange-traded transactions that are margined and mdnitored separately froni physical trading. activity. "" . ' :' ' ' '
| |
| .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.
| |
| 151
| |
| | |
| NOTES.TO CONSOLIDATED FINANCIAt STATEMENTS
| |
| .The contingentiobligatiohs as of December 31, 2006tand December 31, 2005 are as follows:.
| |
| As of
| |
| . . Expiration December 31,. December 31, Subsidiaries/Affiliates Location Descriipion Date . 2006 , 2005
| |
| .. "(Millions)
| |
| Skawmia(a'.. .. * " Poland Equity commitment ' August 2007 ' $6: $
| |
| PSEG Global Funding II LLC ............... Delaware Contingent guarantee related to debt service April 2011 25 " 25 obligations associated
| |
| * . '- with Chilquinta Elcho(a).............. ............. . Pdlaid Contingent guarantee October 2006 - 32 S- . related to debt service is 200- " * . obligations
| |
| . S.p.A. (Prima).................. Italy Leasing agreement N/A 19 20 guarantee PSEG Energy Technfologies Asset. " . *.''
| |
| Management Company LLC... ......... New Jerseyi Performance N/A , .2 6 guarantee Other ....... ; . ....... :......... : ............... Various Various N/A .30 I 46 Total Contingent Obligations ............... . ., .. , $82 $138 (a) Global sold its investments in Pbland in 2006. Global's obligationj.ofr Elcho was termirated as'a i6esult of the sale, however, it is still obligated for the equity commitment guarantee at Skawina. If payments are required, such paymnents 'are guaranteed by CEZ in accordance With {h*e purchase agreement.
| |
| In September 2003, Ehergy Holdings 'completed the sale of PSEG ne'rgy Technologies Inc. (Energy Techinologies) and nearly 'all of 'its as§ets... Hbwever,' 'Energy Holdings retaiifed certain outstanding construction .and warranty obligations related to' ongoing construction projects. previously' performed 'by Energy T&chnol6gies. These ýonstruction obligations haiie 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 December 31, 2006, there were $14 milliofl of such bonds. outstanding, which are related to uncompleted 'construction projects. These performance bonds are not included in the $82 million of guaranteed obligations above.
| |
| Environmental Matters
| |
| -PSEG, PSE&G and Power. -"
| |
| Hazardous Substances The New, Jersey Department of Environmental. Protection (NJDEP). has regulations. in effect concerning site investigatior' 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 .f environmental investigations and, necessary remediation, particularly at sites situated 'on surface water bodies.' PSE&,G, Power:and respectiye. predecessor companies .own or owned and/or operate or operated certain facilities situated on surface water bodies, certain of which are cturrently the subject ofremedial activities.
| |
| The-U.S. Environmental Protection Agency (EPA) has detefmined that a six-mile stretch of the Passaic kRiver in the area ofVNewarl, New Jersey is a "facility" within the meaning of that term under the. Federal Comprehensive Environmental Response, Comnpensation*and'Lihbility Act of 1980 (CERCLA). PSE&G arid certainof ,its predecessors conducted i'ndustrial operations at p0ioperties adjacentý to the P~assaic River ,fcilify.,
| |
| The operatons included one operating electric generating station' (Essex Site), one former generating station and four f6rmer 'manufdctiired gas plants (MGPs).'PSE&O's costs t6 clean, up former MGPs are recoverable from utility customers th'ough the SBC. PSE&'G has'sold.the site of'the forrergenerating station and obtained releases and. indemnities for' liabilities arising 'oit 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 152
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Jeisey (Harrison Site),
| |
| which also includes fa'cilities 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 $i0 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 restorationýactivities along the lowerPassaic River to approximate $950 million.
| |
| PSE&G and Power have indicated to both theEPA 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.
| |
| The EPA recently hag notified the PRPs that the dokt of the study will greatly exceed the' $20 'million initially estimated and offered to the PRPs the opportunity to conduct the'study themselves rather than reimburse the government for the' additional costs it incurs.'The PRP group is cofisidering the' offer and has engaged 'in discussions with the EPA. Whether the PRP group, or some number of the PRPs, agree to assume responsibility for the study will depend.upon many factors, including a' revised estimated cost of.the study, the number of parties who agree to 1articipate and the manner in which ih6'parties divide the costs among themselves. PSEG, PSE&G and Power cannot predict what further actions, if any, 'or the*costs or the timing there'.of, that may be required with respect to the Passaic River or natural resource damage's. However, such costs could be material. ...
| |
| PSE&G MGP Remediation Program PSE&G is currently working with the NJDEP under a program to assess, investigate and remediate environmental conditions at PSE&G's former MGP sites (Remediation Program);. To. date,. 38 sites' have been identified as 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 ten most significant sites for cleanup.: One 'of the sites identified is a former MGP facility located in Camden. .The Remediation Pr6gram' 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 Re;nediation Progtam in .1988 through December 31, 2006, PSE&G had expenditures of approximately $384 million.
| |
| During the fourth quarter of 2006, PSE&G refined the detailed, site estimates. The cost of remediating all site's to completion, 'as well as the anticipated costs to address MGP-related material discovered in two rivers' adja'cent 'to former MGP sites, could range between $798 million and' $838 million. No amount within the range was considered, to be most likely.. Therefore, $414 million was accrued at December 31, 20061, Which represents the difference between the low end of the t6tal program cost estimat&of $798 n'iillidn and the total incurred costs through December 31, 2006 of $384 million. 'Of this amount, approximately $47. million was recorded in Qther Current Liabilities and $367 million was reflected in Other Noncurrent Liabilities. The coIsts associated 'With the MGP Remediation Program have historically', been' recovered, through 'the SBC charges to 'PSE&G ratepayers. As such, a $414 million RegulatoryAsset was' recorded...
| |
| Costs for the MGP Remediation Program were' apprioximately $42 million' in 2006. PSE&G anticipates spending $47, million in 2007, $50 million in 2008, and aný average, of approximately $40 million'per year each
| |
| ,year thereafter, through 2016..
| |
| 153
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pow ei. ... . .: *.- ..- ... ,
| |
| Prevention of" icant Deterioriation(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 agreemnent, over the course of 10 years, Power agreed to install advanced air pollution controls'to reduce emissions of Sulfur Dioxide (SO 2), Nitrogen Oxide' (NOJ), particulate matter and mercury from the coal-burning units at the Mercer and Hudson gen'erating.stations to ensure compliance with PSD/NSR. Power also agreed to spend at least $6 million on supplemental environmental projects and pay a $1 millioh -civil penalty. The agreement resolving the NSR allegations concernihg 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 igreement with the EPA. and NJDEP on an amendment to its 2002 agreement intended, to achieve the emissions reductions targets of this agreement while providing more time to assess the feasibility of installing additional advanced emissions controls atHudson.
| |
| The amended agreement with the. EPA and the NJDEP will '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, anfd "carbon injection, plant modifications,. and' Operating procedure changes at Hudson and Mercer designed to meet targeted reductions in emissions of NOR, SO 2,'particulate matter, and mercury. In addition, Power has''agreed to notify the EPA and "NJDEP 'by the endý 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 $113 million.
| |
| The cost of implementing the balance of the amended agreemefnt at Mercer and Huidson' is estimated at $400 million'to $500 million for Mekcer'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 pr6'rams to reduc'cparticula te emissions from diesel engiiies inf New Jersey, arid'pay a' $6 million civil p6nalty. ' ' '
| |
| As a result 'of the agreement, Power has increased its, environmental reserves by approximately $14 million to account for civil penalties associated with the amendment to the agreement and other costs. PSEG and Power riecorded the charge in Other Deductions 'on their respective Consolidated Statements of Operations.
| |
| Mercury Regulation New Jersey and Connecticut have adopted standards for the reduction of emissions of mercury from coal-fired electric generating units. In February 2007, Pennsylvania also issued new. requirements for the reduction of mercury' emissions from' coal-fired pvwier planits.<Connecticut requires coal-fired power plants in Conndcticuf to 'achieve either. an' emissions limit or a 902/1o ercury'removal efficiency th~rough technology installed to control mercury emissions effective in July 2b08. 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 154
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS capacity until December 15, 2012. Power has a multi-pollutant reduction agreement with the N-JDEP as a result of a consent decree that resolved issues arising out of the PSD and the NSR air pollution control programs at the Hudson, Mercer and Bergen facilities. The 'estimafed 'costs of technology believed to be capable of meeting these-emissions limits at Power's coal-fired unit in Connecticut and atits Mercer 'Station are included ih:Power's capitar expenditures forecast. Total estimated costs for each project are between $150 miflionfand $200 million. The Mercer expenditures are included in the PSD/NSRdiscussion above.
| |
| On September 12, 2006, Connecticut 'released propose§d revisions to mercury regulations that encompass "Permit Requirements for Mercury Emissions -from :Coal-Fired Electric Generatihg 'Units". Also, Pennsylvania has proposed mercury regulations that would require reductions in mercury emissions at each facility as well as tap'on'total emissions. As proposed" the regulations do not impose requirements that would rriaterially affect the costs already identified in Power's capital expenditures forecast. Impact of any final regulations cannot be determined at this time. - '
| |
| New Jersey Industrial'SiteRecovery' Act (SRA)
| |
| ,Potential environmental liabilities'related to subsurface contamination at certain generating stations have been identified. In the second quarter of 1999,Jin 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.-December, 31, 2006 and December 31, 2005 related to. these obligations, which is included in Other. Noncurrent Liabilities on Power's Consolidated Balance Sheets and Environmental Costs on PSEG's 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 system: A renewal, application -prepared in accordance with FWPCA Section 316(b) and the new Phase II 316(b) rule was filed in February 2006 with the NJDEP, which, allows the station to continue operating under- its existing NJ1PDES permit until a new permit is issued. Power's application to renew Salem's NJPDES permit demonstrates that the station -satisfiesFWPCA 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 tha~t 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 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. if NJDEP were to require t he installation of structures at the Salem facility to reduce-cooling water intake.-flo'w commensurate with closed cycle cooling as a result of the unfavorable decision in the Phase II litigation,, discussed, oi otherwise, P ower's application to renew the .pernit 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 Connecticut Department Iof EInvironmental Protection
| |
| -
| |
| (CTDEP) Were to require installation of closed-c'ycle, cooling or its'equivalent at Powers 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 Prisfma - '
| |
| In May 2006, Global. became the majority shareholder of Prisma, which holds 100% of the stock of San Marco 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. Global's .total investment in Prisma -is approximately
| |
| $84 million. - . .
| |
| Ini 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 155
| |
| | |
| NOTES .TO CONSOLIDATED FINANCIAL STATEMENTS subsequently expanded to include alleged violations of the facility's waste recycling and waste storage permits. Until May 2006, the facility was operated by Carlo Gravazzi Green Power (CGGP) pursuant to a Services Agreement with a Global subsidiary. Alleged violations include exceedances of permit limits for regulated pollutants,' manipuilation'of the facility's continuous monitoring systems, false-reporting and the use of fuels not authorized by the permit. The government has seiied records from' the facility in connection with the investigation including plant design documents and plant operating 'records.-The'Italian government has named fiveindividuals as targets of the criminal investigation, including* three current and former San'Marco*
| |
| employees and miembers'of the facility's board of directors. While San Marco has not been named as a target,'
| |
| there is a potential'risk that it cotild be so named. Global*has retained separate&courisel for San Marco and the named Global. employees.'
| |
| In December 2006 and January 2007, the facility was served with an Order and a Decree, respectively, that prohibit it from conducting operations 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.
| |
| Counsel recently filed an application, that was not objected to by the Prosecuting Attorney, to convert the investigatory proceeding to one supervised by an Investigating Court. The application was filed to expedite efforts by Global to obtairi relief from the Sequestration Orders. Counsel anticipates that the Court will issue orders shortly approving the application 'and naming a court expert to complete the investigation.
| |
| Counsel advises that the court expert will inspect the facility to determine whether the design and construction are appropriate to enable it to operate in compliance with the terms of its air permit. Once the inspection is complete, the expert will issue a report to the Court presenting findings on.this issue. Counsel advises that this process can take from 60 to 90 days to complete. The Deputy Prosecutor recently advised counsel that she will work collaboratively with Global to expedite the inspections and, once they are complete, to work collaboratively to obtain interim relief from the Sequestration Orders in advance of the final report to complete required maintenance. Assuming interim relief is obtained, Global anticipates that the facility will be authorized to resume commercial operations around June 2007, however no assurances can be given.
| |
| 'Global is currently evaluating a potential claim against CGGP under the Services Agreement for damages arising from the alleged wrongdoing.
| |
| 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 December 31, 2006. Electroandes believes it has valid legal defenses to these claims, and has filed an appeal with SUNAT to which it has not yet received a response; however, no assurances can be given regarding the outcome of this matter.
| |
| Luz del Sur In January 2007, SUNAT, filed two tax assessments against LDS totaling approximately $18 million, of which Global's share would be approx. $7 million based on its 38% interest of LDS. The assessments related 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 all' such deductions were appropriate and filed an appeal' in February 2007. LDS has obtained a legal opinion, that it could be successful in most of the major matters, while in some'relatively smaller items SUNAT's views could prevail which could lead to an immaterial amount of exposure. However, no assurances can be given and negative outcomes in any of the major matters could have a material adverse impact on Global's results of operations and cash flows.
| |
| 156
| |
| | |
| NOTES TO. CONSOLIDATED FINANCIAL 'STATEMENTS New Generation and Development Power Power has contracts. with outside parties -to purchase upgraded turbines for Salem Units' 1 and 2 and to purchase upgradedturbines and complete a power uprate. for Hope Creek to modestly increase its. generating capacity. Phase I11 of the.. Salem Unit 2 turtbine replacement is currently scheduled for 2008 concurrent with steam generator replacement and is anticipated.to increase capacity by 26 MW. Phase II of the Hope Creek turbine replacement, is expected to be completed in 2007. along 'with the thermal. power uprate and is expected to add approximately. 125 MW. Power's expenditures to date approximate $220 million (including Interest Capitalized During Construction (IDC) of $21 million) with an aggregate estimated share of total costs for these projects of $245 million (including IDC of $24 million). Timing, costs and results of these projects are dependent on timely completion of work, timely approval from the NRC and various other factors.,
| |
| Completion of the projects' discussed above within the estimated time frames and cost estimates cannot be assured.' Construction delays, cost increases and various other factors colild result in changes iri' the operational dates -or ultimate costs t o complete.
| |
| Power entered into a long-term contractual 'services agreement with a vendor in Septembr .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 rariging from approximately $10 million
| |
| 'to $50 million for.services, parts and materials rendered.
| |
| BGS and Basic Gas Supply Service (BGSS)
| |
| PSE&G and Power PSE&G is required to obtain all electric supply requirements for customers who do not purchase electric supply from third-party suppliers through the annual New Jersey BGS auctions. 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 (LSE) including capacity, energy, ancillary services, transmission and any other services required by PJM.
| |
| BGS suppliers assume any migration risk and must satisfy New Jersey's renewable portfolio standards.
| |
| Through the BGS 'auctions, PSE&G has contracted for its anticipated BGS-Fixed Price load, as follows:
| |
| Term Ending May 2007(a) May 2008(b) May 2009(c) May 2010(d)
| |
| Term
| |
| * 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 trading positions and commitments.
| |
| 157
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 its anticipated BGSS obligations, as permitted by the BPU. The BPU permits recovery of the cost of gas hedging up to 115 billion cubic feet or approximately 8Q%, of PSE&G's residential gas supply annually through the BGSS tariff. For additional information, see Note 21. Related-Party Transactions.
| |
| Minimum Fuel Purchase Requirements
| |
| .rower , ' .
| |
| Power' purchases coal and oil for certain of its fossil generation stations through various long-term commitments. The total minimum, purchase requirements,' included .in these commitments amount to approximately $733 million through 2012.
| |
| Powver has several long-term purchase contracts for the, supply of nuclear'fuel -for the Salem and Hope Creek. Nuclear Generating Stations which include:
| |
| * purchase of uranium (concentrates and uranium hexafluoride), ' .
| |
| e conversion of uranium concentrates to uranium hexafluoride, a enrichment of uranium hexafluoride ,and a fabrication of nuclear fuel assemblies..
| |
| The nuclear fuel markets are competitive, and although prices for uranium, conversion and enrichment are increasing, Power does not anticipate any significant problems in meeting its future requirements.
| |
| Uranium concentrates and hexafluoride Power has commitments and inventory to supply sufficient quantities of uranium (concentrates and uranium hexafluoride) to meet 100% of its total requirements through 2011. Additionally, Power has commitments covering approximately 55% of its requirements for 2012 and 15% from 2013 through 2016.
| |
| These commitments total approximately $464 million through the period of which Power's share is approximately $332 million. Powver has decided to maintain strategic levels of concentrates and uranium hexafluoride.in ihventory and may mnake periodic purchases to support such levels.
| |
| Power also has commitments that provide 100% of its uranium enrichment requirements through 2010.
| |
| These commitments total approximately $198 million through the period of which Power's share is $146 million'. " '
| |
| Power has commitments for the fabrication of fuel assemblies for reloads required through 2011 for Salem and through.2Q12 for Hope Creek. These commitments total approximately $122 million through the period, of which Powver's share is, $93 million. ,
| |
| Power has been advised by Exelon Generation that it has similar purchase- contracts to satisfy the fuel requirements for Peach Bottom Atomic Power Station.
| |
| 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 December 31, 2005,. the total minimum requirements under these contracts were approximately. $1.2 billion through 2016.
| |
| These purchase obligations are. in keeping, with Power's strategy to 'enter into contracts for- its fuel supply in comparable volumes to its sales contracts.
| |
| Energy Holdings..
| |
| * 'The Guadalupe and Odessa plants of Texas Independent Energy, L.P. (TIE),, an indirect,- wholly owned subsidiary 'of Energy Holdings, have' entered into 'gas supply agreements for their anticipated fuel requirements to. satisfy obligations under their forward energy sales contracts. As of December 31, 2006', the Guadalupe and Odessa plants, which total approximately 2,000. MW of capacity, had forward energy. sales, contracts in place for approximately, 30% of their expected output for 2007' and the sale of approximately 158
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20% of their aggregate capacity for 2008 through 2010. The plants had fuel purchase. commitments totaling
| |
| $64 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 relating to the operation of the Hope Creek and Salem nuclear generating stations. The OSC requires Exelon Generation 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 Generation is entitled to receive reimbursement of. its costs in discharging its obligations, an annual operating services fee of $3 million and incentive fees up to $12 million annually, based on attainment of goals relating to safety, capacity factor and operation and maintenance expenses. On October 27, 2006, Nuclear informed Exelon Generation that it was electing to continue to 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 .Generation, became employees .of Power, Other PSEG and PSE&G BPU Deferral Audit The BPU Energy and Audit.Division conducts audits of deferred balances. A draft Deferral Audit-Phase IIreport relating to the 12-month period ended July 31, 2003 was released by the consultanit to the BPU in April 2005. The draft report addresses the SBC, Market Transition Charge (MTC) and 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 majerial 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 1I four-year transition period. The amount in dispute is approximately $130 million. PSE&G and the BPU Staff are continuing discussions to resolve these questions and, if a resolution cannot be achieved, a BPU proceeding may be instituted to consider the issues raised.
| |
| 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 iequest 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. any such proceeding.
| |
| New Jersey Clean Energy Program The BPU has approved a funding requirement for each New Jersey utility applicable to its Renewable Energy and Energy Efficiency programs for the years 2005 to 2008. The sum of PSE&G's electric and gas funding requirement was $82 million and $96 million for the years 2005 and 2006 respectively. The remaining liability, $119 million for 2007 and $137 million for 2008, has been recorded at a discounted present value with an offsetting regulatory asset. The costs associated with this program will be recovered from PSE&G ratepayers through the SBC over a period of four years and, therefore,. a Regulatory Asset was also recorded.
| |
| . 159
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The liability for the funding requirement as of December 31, 2006 and December 31; 2005 was $253 million and $329 million, respectively. .
| |
| iPSEG and Energy Holdings Leveraged Lease Investments On November 16, 2006, the IRS issued its Revenue Agents report for tax years 1997 through 2000, which disallowed all deduction's associated with certain of lease transactions that. are similar to a type that the IRS publicly announced its intention to challenge. Ifi 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 each of ..December 31, 2006 and .December 31, 2005, Resources' total gross investment in such transactions was approximately $1.5 billion and $1.4 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 were sustained, approximately $773 million of.PSEG's deferred tax liabilities that h'ave been recorded under leveraged lease accounting through December 31, 2006 would become currently payable. In addition,. interest of approximately $124'million, after-tax would be charged, and 1enalties of $155 million may become ,payable.
| |
| Management assessed.the probability of various outcomes to this matter and recorded appropriate reserves in accordance. with SAS No. .5. "Accounting for Contingencies.," Management has also prepared. various sensitivity analyses regarding 'potential payment obligations,. including scenarios .that consider the current position of the IRS regarding these types of listed transactions, and believes that Energy Holdings has the financial capacity to meet such potential 'obligations, if required: .
| |
| The FASB recently issued additional guidance -for leveraged leases.,.See Note 2. Recent Accounting Standards for additional information.'
| |
| Power '. ' '
| |
| Restructuring Charge In June 2005; Power implemented a plan, approved by management, to reduce its Nuclear workforce by approximately 200 positions. The plan includes voluntary and involuntary separations offered to both represented and non-represented employees. The major cost associated with the restru6turing 'relates' to payments to the employees who are terminated. Power's $14 million share of the estimated total cost was recorded in 2005, substantially all of which had been paid as of December 31, 2006..
| |
| Minimum Lease Payments PSEG, PSE&G, Power and Energy Holdings PSE&G and Energy Holdings lease administrative office space under various operating leases. Total future minimum lease payments as of December 31, 2006 are:
| |
| After 2007 2008 2009 2010 2011 2012 Total (Millions)
| |
| PSE&G ............................... .... $3 $1 $1 $1 $ 2 $1 $ 9 Energy Holdings ...................................... 3 1 1 1 -. - 6 Total PSEG ........................................... $6 $2 $2 $2 $ 2 $1 $15 160
| |
| | |
| NOTES TO. CONSOLIDATED FINANCIAL STATEMENTS Power, Energy Holdings and Services have entered into capital leases :for administrative office space.
| |
| The total future minimum payments and present value of these capital leases as of December 31, 2006 are:
| |
| E e..
| |
| rgy Services Power Holdings (Millions) 2007 ........................................................ 8 $ 2 $12 2008 ..................................................................... . 7 . 2 12 2009 ....................... . ..................................... ........ 7 1, 12 -.
| |
| 2 0 10 . . . .. ... . . . . . .. . .. I I . . . . . . . . .. . . . ... 7 1 9 2 0 11.............. *...... '.... . . ...... . ...... "........ ...
| |
| 201...........................7........3 ................ . . ..... . '. 7 1-" . 31 ° Thereafter ...... . ....................... ......................... 37 8 9 Total Minimum Lease Payments ......................... ....... 73 15 57-Less: imputed Interest ........... ....... ..... ..... .(33) (5) '(9)
| |
| Present Value of Net Minimum Lease Payments......... .$' 40 $10 $481 Note 13. Nuclear Decommissioning .
| |
| Power ' . fac litie in accordance' with NRC regulations, entities, owning an interest in nuclear generating facilities are
| |
| :required to determine the costs and funding methods necessary to decommission such facilities upon termination of' operation.. As a general practice, .each: nuclear owner places funds in independent external trust accounts it maintains to provide for decommissioning.
| |
| Power maintains the external master nucl.ear decommissioning trust previously estalilished by PSE&G.
| |
| This trust contains two separate funds: a qualified fund and'a non-qualified fund.: Section 468A of the Internal Reve'nue "Code limits the amiufit ofimoney that can be ýontribUtld into a "qualifi~d" fund. in the most recent study of the total"fosi'. df decommissioning; Power's:sliar related to' its five nuclear, units'was inclding contingencies. ...
| |
| estimated at approximately $2.1. billion, iliclui'gciineie. ,. . .
| |
| Power's policy is that, except for investmehts tied to market indekXs or other non-nuclear sector common trust funds or mutual funds (e.g., an S&P 500 imutual fund), Assets* of the trust shall not be invested in the securities or other obligations of PSEG or its affiliates, or. its successors. or assigns;'and assets shall not be invested in securities' of any entity owning one or more nuclear power plants.: .... , ..
| |
| Power classifies investments in the NDT Funds as available-for-sale under SFAS 115. The following tables show the fair values and gross unrealized gains and losses for the securities held in the NDT Funds.
| |
| As of December 31, 2006 Gross . Gross ' Estimated Unrealized Unrealized. Fair Cost,. " Gains Losses
| |
| * Value (Millions)
| |
| Equity Securities .......... ....... $ 571 $217 . $(3.) $ 785..
| |
| Debt Securities Government Obligations .............. 215,. 2 217 O ther D ebt Securities .......................................... 211 4 215 Total D ebt Securities .......... .................................. 426 6 .432 O ther Securities ..................................................
| |
| Total Available-for-Sale Securities .... $1,935 38
| |
| $224 ,$1,256 39 I
| |
| 161
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2006 Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value (Millions)
| |
| Equity Securities ..................................................... $534 $161 $(13) $ 682 Debt Securities Government Obligations.......... ...................... 212 '3 (3) 212 Other D ebt Securities ......................................... 206 3' (3) 206 Total Debt Securities ...................................... 418 6 (6) 418 O ther Securities ............................. ...................... 33 4 (4) 33 Total Available-for-Sale Securities ................................. $985 $171, $(23) $1,133 Years Ended December 31, 2006 2005 2004 (Millions)
| |
| Proceeds from Sales ........................................ ..................... $1,405 $3,223' $ ,637 G ross R ealized G ains ............................................................ $ 98 $ 132 ,$ 126 Gross Realized Losses ....................................... ......... $ 54 $ 36 $ 43 In 2006; other-than-temporary impairments of $8 million and $6 million were recognized on $59 million of equity and $152 million of debt securities, respectively, that were included in the Estimated Fair Vailue of NDT Funds as of December 31, 2006.
| |
| Net realized gains of $44 million were recognized in Other Income and Other Deductions on Power's Consolidated Statement of Operations for the year ended December 31, 2006. Net unrealized gains of $108 million (after-tax) were recognized in Accumulated Other Comprehensive Loss on Power's Consolidated Balance Sheet as of December 31, 2006. The $3 million of gross 2006 unrealized losses has been in an unrealized loss position for less than twelve months. The available-for-sale debt secu'rities held as of December 31, 2006, had the following maturities: $18 million less than one yeaf, $108 million one to five years, $97 million five to 10 years, $48 million 10 to 15 years, $21 million 15 to 20 years, and $140 million over 20 years. The cost of these securities was determined on the basis of specific identification.
| |
| The fair value of securities in an unrealized loss position as of December 3M,2006 was approximately
| |
| $339 million. If the fair market value of the securities falls below cost, 'the investments are considered to be other-than-temporarily impaired. The difference between the fair market value and cost is nimmediately recorded as a charge to earnings since Power does not definitely have the ability and intenit to hold the securities for a reasonable time to permit recovery. Any subsequent recoveries in the value of these securities are recognized in OCI. The assessment of fair market value compared to cost is applied on a weighted average basis taking into account various purchase dates and initial cost detail of the securities.
| |
| 162
| |
| | |
| NOTES TO CONSOLIDATED. FINANCIAL STATEMENTS Note 14. Other Income and Deductions Other Income .
| |
| Energy Consolidated PSE&G Power Holdings Other(A) Total (Millions)
| |
| -For the Year Ended December 31, 2006:'
| |
| Interest and DiVidend Income ....................... $11 $ 13 $23 $(12) $ 35 2"
| |
| Gain on Disposition of Property .................... 4 6 NDT Fund Realized Gains .................... 98 98 NDT Interest and Dividend Income .. ; .............. 40 40 Foreign Currency Gains ...... :...................... 4 -- . 4 Contributions in Aid of Construction............ 9 9
| |
| -- 4 Albany Contingency ................................. 4
| |
| ' O th e r .................................................... 1 2 10 - 1.3 Total O ther Incom e.*................ .............. $25 $157 $39 $(12) $209 For the Year Ended December 31, 2005:
| |
| Interest and Dividend Income ...................... $11 $ 11. $13 $ -' $ 35
| |
| 'Gain on Disposition of Property.................... 3' 5 2 - * '10 Gain on Investments ................................. 8 8 NDT Fund Realized Gains .......................... J132 - 132 NDT Interest and Dividend Income ........... ...... '-35, -- ' .35 Foreign Currency Gains .... .................. 6 -- ' 6.
| |
| O th er ...... ..... ................... ............... .. .4 2 -- 7 Total O ther Incom e........... : ....................... $15 '$187 $23 $, 8' $233 For the Year Ended Deember 31, 2004:
| |
| Interest and Dividend Income ................. $1s $ i1 $ 9 $ (8) $21 NPT'Fund Realized Gains .......................... 126 126 NDT Interest and Dividend Iicome............. 28, 28
| |
| ' Foreign Currency Gains.....,... ........ '4 - 4 O ther ....... .............. ......... .... .. ....... . 2 3 1 1 7 Total Other Income ................ ......... .$12 $167 $14 5$(7) $186 163
| |
| | |
| NOTES-TO CONSOLIDATED FINANCIAL STATEMENTS Other Deductions Energy . ,.Consolidated PSE&G Power Holdings , Other(A) Total (Millions)
| |
| For the Year Ended Decmrnber,31, 2006:.
| |
| Donations..... ..... ................... $2 $-- $ 2 NDT Fund Realized Losses and Expenses ........... -- 74 -- 74.
| |
| 9 - :9 Foreign Currency Losses .. ......................
| |
| Minority Interest. .............................. 2 2 Change in Derivative Fair Value .................... 3 3
| |
| _. Environmental Reserves...................... 15 - :, '-15 Loss on Early Retirement of Debt ................... 13 . 13 O ther .................................................. 1 .2 3 2 8
| |
| $4 *- $126 Total Other Deductions .............................. $ 3 $91 $28 For the Year Ended December 31, 2005:
| |
| Donation's. ......................... $ 2 $-" $13 $ 15
| |
| -- 42 NDT Fund Realized Losses and Expenses ........... -- . 42 Loss on Early Retiirement of Debt.:; ................ 10 -- '10 Foreign Currency Losses ....... ............... 15 - 15.
| |
| M inority Interest..-............................ -1'1 Change in Derivative Fair Value ........................ :4 -- 4 O ther ............. .................................... 1 1 2 2 6
| |
| 'Total Other Deductions. ...................... $ 3 $43. $31 ,..$16, $ 93 For the Year Ended December 31, 2004:
| |
| D onations ........... .................................. $ 1 $- $ 1 NDT Fund Realized Losses and Expenses ........ - 49
| |
| -- 491 1 Loss on Disposition of Property ..... : ...............
| |
| Loss on Early Retirement of Debt ........... ........ 3 Foreign Currency Losses ................... ......... 3 M inority Interest ..................................... 2. 2 Change in Derivative Fair Value .......... 9......... 2. 2 Other ..................................... .3 '$
| |
| 1 $54
| |
| $50. $11 $3* '$65 Total Other Deductions ...................... $1 (A) Other primarily consists of activity at PSEG (parent company), Services and. intercompany eliminations.
| |
| 164
| |
| | |
| NOTES TO, CONSOLIDATED FINANCIAL STATEMENTS Note 15. Income Taxes - .
| |
| A reconciliation of reported income tax expense with the amount computed by multiplying pre-tax income by the statutory Federal indome tax rate of 35% is as follows:
| |
| Energy Consolidated PSE&G " Power Holdings , Oth6r Total (Millions) Ll 2006 Net Income (Loss)/ Earnings Available to PSEG ............ $ 261 $ 276 $ 275' $ .(73) . $ 739.
| |
| Loss from Discontinued Operations, (Including Loss 2,26 -- (13) on Disposal, net of tax benefit-$24) .................
| |
| -- (239)"
| |
| - -
| |
| Minority Interest-in Earnings ,of Subsidiaries ............ -- : (2) (2 Income (Loss) from Continuing Operations, less Preferred Dividends............ ................. 261 515 51 (73) 754 Preferred Dividends.(net) ............................... (4) - (4)
| |
| Income (Loss) from Continuing Operations excluding Minority Interest and Preferred Dividends ........... $ 265. $ 515 -51 $ (7.3) $ 758 Income Taxes:
| |
| * Federal.--C urrent ........................................ $ 246 $ 263 $(207) $ .(24) $ 278 D eferred ..................................... (108) 20 187 *(13) , .86
| |
| )
| |
| ITC ........................................... (3) __)
| |
| 135 283 (21) (37) 360 Total Federal ......... ............
| |
| State-Current ............................... 49 78 (30) (16) " 81 Deferred .............................. __!) 2. 9:. ,- 10 T otal State ............................... 48 '80 (*21) (16) 9,1-Total Foreign ... . ...... ............. 3 - .3 183 Total .................................... 363 (39) "(53) 454 Pre-tax Income .................................. $ 448 $ 878 $ 12 $(126). $1,212 Tax Computed at the.Statutory Rate ........................ $ 157 $ 307 $ ..
| |
| 4 $.$'(44) $ 424 Increase (Decrease) Attributable to Flow-Through of Certain Tax Adjustments:
| |
| Plant-Related Items.......... (5) (5)
| |
| Amortization of Investment Tax Credits ............... (3) (1) (4)
| |
| .7 1 16 Reserve for Tax Contingencies ............... (3) 11 7
| |
| APB 23 ............ ........................ 7 Nuclear Decommissioning....... ............. 7. 7.
| |
| Other ............................... ....... (4) 8 4 Tax Effects Attributable to Foreign Operations ........ (50) (50)
| |
| State Income Tax (net of Federal Income Tax) ............ 31 52 (18) (10) 55 Subtotal ................................. 26 56 (43) (9) 30 Total Income Tax Provisions ...................... $ 183 $ 363 $_(39) $ (53) $ 454 Effective Income Tax Rate ......................... 40.8% 41.3% N/A 42.1% 37.5%
| |
| I 165
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Energy Consolidated PSE&G Power Holdings Other Total (Millions) 2005 Net Income (Loss)/Earnings Available to PSEG........ .$344 $192 $ 214. $ (89.) $ 661 (Loss)/Gain from Discontinued Operations, (Including (Loss)9Gain on Disposal, net of tax benefit--$154).. (226) 18 (208)
| |
| .Cumuiiatyve Sffect Of 'a Change in Accounting Principle, net 6f tax benefit-$1 ..... ........... (16) (1) (17)
| |
| Minority hiter6st in E arnings, of Subsidiaries .......... 1_() -- (1)
| |
| Income (Ldss) Fromn ddntinuing Operations, less Preferred Dividends .... ................. . ......... 344 434 197 (88) 887 r&.Di;id.. ....... -I)
| |
| (3)
| |
| Income (Lossj froni Continuing Operations Excluding' Minority Interest and Preferred Dividends........... $ 348 $ 434 $ 200 $(9') -$ 891 Income axes:-. ';
| |
| Federal- Current ........................... $ 239 $ 105 $ (64) $ (49) $ 231 D eferred ......................... ........... * (58) 147 149 (8) 230 ITC .................................. '(3)
| |
| Total Federal ..................... 178 252 ,84 i(5'7) 457 State-Current .............................. ......
| |
| * 49* 44 14 (1) 106 Deferred .... .......................... :;8 22 (15)
| |
| (41)
| |
| _(5)
| |
| Total State . ..... ........... 57 66 (27) .91 Total Foreign ... ...... .... ...... ... 12 12 Total . .................................. 235 318 69 __62) 560 Pre-tax Indonie........... ....................... $ 583 $j752 $ 269 $(153), $1,451 Tax Computed at the Statutory Rate ...................... $ 204 $ 263 $ 94 $ (54) $" 507 Increase. (Decrease) Attributable to Flow-Through of Certairv Tax Adjustments":
| |
| Repatriation ..-............... ; ............ 11 11 te s : . : . : . ...... .:. .. :... . :.... ... .. ...
| |
| p'eilantte:d iItems.
| |
| Pla tni-kehtked .3 S3 Amortization of Investment Tax Credits........... (3)
| |
| (1) (4)
| |
| Taax ReserFves ... ..... ....... .............. " ,6. 6 N uclearle ommissionjng Trust .................. 15 15 Lease, Rate- Diff~rgntial ....... ................. 2 2 Taxi Effects Attrib'utable to Foreign Operations. (33) (33)
| |
| :.. . . (3)
| |
| *OtAe'r Ot ... 4.. : : .: .. ,....... ...... t...........
| |
| , er!: . (6) '2, (4) (11).
| |
| Stat& Income Tax (net of Federal Income Tax) ........... 37 43 (12) (4) 64
| |
| ',Subtotal.................. s................. 31 55 (25) (8) 53 Total Income 'Tax Provisions ....................... $235 $ 318 $ 69, $0(62) $ 560 Effective Inromp Tax Rate., ...... 2............. ;40.3% 42.3% 25.1% .40.5% 38.6%
| |
| 166
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PEnergy Consolidated PSE&G Power Holdings Other Total (Millions) 2004 Net Income (Loss)/Earnings Available to PSEG ........ $ 342 . $'308 $125 $.(40)- $.726 Loss from Discontinued Operations, (Including Loss' (4
| |
| on Disposal, net of tax benefit-$44) ................
| |
| Minority Interest in Earnings of Subsidiaries .........
| |
| -: (2) ,
| |
| _ 7(69) 2_
| |
| (.)
| |
| Income (Loss), from Continuing Operations, less Preferred Dividends ....... .............................. 342' 367' '13) ý(49) " ý97 Preferred Dividends (net) ........................... (16) :16 L4)
| |
| Income (Loss) from Continuing Operations excluding Minority Interest arid Preferred Dividends... ......... $346 $ 367:. $153 $'(6_5) $ 801
| |
| * (35)
| |
| Income Taxes:
| |
| Federal- Current ... ............................ ......... $ 255 $ 43 $ (91) $ (35). $ 172 D eferred . ................. ................... (67) 134 163 3 233 ITC ............................. ....... (1)
| |
| Total Federal ....................... 185 177 71 (32) 401 State-Current . ........... ............ 72 24' S4 100 (11) 26 * (40) (f2)
| |
| " Deferred.. . ..............................
| |
| Total State............. ......... : .........
| |
| * 61 50 (36) (2) 73
| |
| . Total Foreign -..................... ... 10 10 246 Total .............. .......... 227 45 (34) 484 Pre-tax Income. ................................... $592 $ 594 '$ 198 $ (99) $1,285 Tax, Computed at the Statutory Rate.. $207 $ 208 $ 69 $ (34) $' 450 Increase (Decrease) Attributable to Flow-Through of Certain Tax Adjustments: 0:
| |
| Plant-Related Items .............................. 5 .5 Amortization of Investment Tax Credits ............... (3) (1) (4)
| |
| :Tax Reserves ................................. (18) 1,7 (1)
| |
| O ther ....................................................
| |
| * (3).. *.5 (8) S1.* , (5)
| |
| Lease Rate Differential ............................ (8) (8)
| |
| State Income Tax (net of Federal Income Tax)......... 40 32 (24) A)
| |
| Subtotal ...... ........... .... .............. ...... 39 19" -(24). 34
| |
| , Total Income Tax Provisions ................... S$ 246 $ 227 - 45, $(34). " $ 484 Effective Income Tax Rate ..... .................... 41.6% 38.2% 2217% 34.3% ý37.7%
| |
| 167
| |
| | |
| NOTES TO*,CONSOLIDATED FINANCiAL' STATEMENTS PSEG, PSE&G, Power and Energy Holdings Each of PSEG, PSE&G, Power and Energy Holdings provide deferred taxes at the enacted statutory tax rate for all temporay differences between the 'financial statenient carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment' for rate-making purposes. Management believes that it is probable that the accumulated tax benefits that previously have been treated as a flow-through i.tem to PSE&G customers will be recovered from PSE&G's customers in the future. Accordingly, an offsetting regulatory asset was established. As of December 31, 2006, PSE&G had a regulatory asset of, $412 million representing the' tax costs expected to be recovered through fates based upon established regulatory practices, which permit recovery of current taxes payable. This amount was determined using' the enacted Federal income-tax rate of 35% and State incometax rate of 9%.
| |
| Energy Holdings' effective tax rate differs from the statutory Federal income tax rate of 35% primarily due to the imposition of state taxes and the fact that Global accounts for many 'of its investments using the equity method of accountirg: In addition, as allowed under APB Opinion No. 23, "Accounting for'Income Taxes--Special Areas" and SFAS 109, Manageiment generally'has maintained a permanent 'einvestment strategy as it relates to Global's international investments. If Management were to change thai strategy, a deferred tax expense and deferred tax liability would need to be recorded to reflect the expected taxes that would need to be paid on Global's offshore earnings.. As of December 31,. 2006 and 2005, undistributed foreign earnings were approximately $80 million and $220 million, respectively. During. 2006, the reinvestment strategy for three of Global's investments was modified, resulting in a deferred tax expense of $7 million. The determination of the amount of unrecognized.U.S. Federal deferred income tax liability for undistributed earnings is not practicable ...
| |
| The `2005 Jobs Act provided a -one-year. window to" repatriate earnings from foreign investments and
| |
| 'claim a special 85% dividends received tax deduction on such distributions. PSEG approved a total of 'three Domestic Reinvestment Plans, which provided for the repatriation of approximately $242 million through December 2005, of which approximately $177 million was eligible for the reduced tax rate pursuant to. the Jobs Act.: The tax expense associated with such' repatriation totaled approximately $11 million, and was recorded in 2005. Other than amounts discussed above, Global has made no change in its current intention to indefinitely reinvest accumulated earnings of its foreign subsidiari~s. ' ..
| |
| "
| |
| 168
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is an analysis of deferred income taxes:
| |
| Energy PSE&G Power Holdings Other Consolidated 2066. 2005' 2006 2005 .2006 2005 " 2006 2005 2006 2005 (Millions) 4.
| |
| Deferred Income Taxes Assets:
| |
| Current (net)....................... $ 36 " $ 31 $_- $ $ . $ . '$ 36 , 31 Noncurrknt:
| |
| Unrecovered Investment Tax Credits.' 15 - .5 - 5 16 O C I ."*..': .......................... .. "- - 193:. 383 16 17 22 5 231' ' '408 Cumulative Effect of a Change in
| |
| .,Cumulative Accounting Principle 11 11- -- " *71 7- :.. 1 i New, Jersey Corp6rate Business Tax 145 158 77 67 (21) (12) 201 213 OPEB....... .................. .... . 160 145 .1 - 161. 145 Cost of Removal ..................... 51 51 15 '52 .51 Investment Related Adjustment.. ... , - -22 15 22
| |
| 'Devel6pfnent Fees ................. 10 18 10 18 Foreign Currency Translation ........ - - 4 30 4 '30 Contractual Liabilities and Environmenial' Costs.... ........ - 35. 35 -, - 35 35
| |
| ,11 ..- r- - -, ..- -.-- 11i. . 1)1 MTC ................ 11 Other' ................... 5 - - -- . 17 8 22 .. 8 Total Noncurrent. .......... ..... 336 333 3677 547 24 7.5, 40 13 767 - 968 Total Assefs ..................... $ 3721 ,$ 364 $367 $547. $ , 24., $ ,75: $ 40 $13 $ 803,. $ 999 Liabilities: ' '"
| |
| Noncurrent' .
| |
| Pla'nf-Related Items ........ ........ $1,398 $1,371- $(35) $ 46: $' - $ - $ (2) $ $1,361 $1,417 Nuclear Decommissioning ............. 131 79 - - 31 '. 79
| |
| '.1,218 Securitization..................... '1,110 -- " 1,110 1,218 Leasing Activities ................. 1,842 1,678 - 1,842 1;678 Partnership Activities ............ 51 .35 S - 51 35 R bpair Allowance Deferred Carrying cfalge. .. .. .................... 22 24 - - - - 22 '24 Conservation Costs ................... 12 8- - -- 12 .8 Energyý Clause Recoveries ............ 27 24 - '- - - 27 24 Pension Costs.................... 73 86 14 27 13 18 100 131 SFAS 143 ......................... - 325 325. - - 325 325 APB 23 ....................... 7 Taxes Recoverable Through Future R ates (net)... : ...... ......... ...... 167 163 -- - - - 167 163 Income from Foreign Operations.. 51 49 - - 49 Other ......... ': ..... ............. - (26) (6) (7) 12 1 (-32) "6 Total Noncurrent Liabilities ..... $2,809 $2,894 $409 $471 $1,944 $1,774 $12 $18 $5,174 $5,157 Summary-Accumulated Deferred Income Taxes: ;
| |
| Net CurrentAssets ....................... $. 36 $ 31 $ -1 $ 36 $ 31 42 (76) "4,407 Net Noncurrefit Liability (Asset) ....... . 2,473 2,561 1,920 1,699 (28) 5 4,189 42 (76) 2,530 1,920 1,699 (28) 5 4,371 4,158 Total ......... ................... 2,437.
| |
| IT C ........... .............. ......... . .... 44 .47 6. 6 5 6 55 Current Portion of SFAS 109 Transferred 36 31 36 31 Total Deferred Income Taxes and ITC ........ $2,517 $2,608 $ 48 $(70) $1,925 $1,705 $(28) $5 $4,462 $4,248 169
| |
| | |
| NOTES3TO CONSOLIDATED FINANCIAL STATEMENTS Note 16.- Pension; OPEB and Savings Plans . - .
| |
| PSEG .
| |
| PSEG sponsors several qualified and nonqualified, pension plans and.other postretirement benefit plans covering PSEG's, and its participating -affiliates, current .and former employees- who meet certain eligibility criteria. Eligible employees of.PSE&G, Power, Energy Holdings and Services participate.in~non-contributory pension and OPEB plans sponsored by PSEG and administered by.-Services'.In:addition,'represented and nqnrepres~nted employees are eligible for participation in PSEG's two defined contribution plans described below.
| |
| * In September 2006, the FASB issued SFAS 158 (see Note 2. Recent Accounting Standards), which became effective piospectively for periods ending after December 15, 2006. In accordance with SFAS 158, PSEG, Power, PSE&G and Energy Holdings were required to record the under or over funded positions of their' defined benefit pensiofi' and OPEB -plans on their' respective balance sheets. Such funding -positions were measured as of December 31, 2006 in compliance with SFAS 158 and in accordance with* customary practice of each PSEG company prior to the issuance of SFAS 158. -For under funded plans, the liability is equal to the difference between' the plan's benefit obligation and the fair value of plan assets. For defined benefit pension plans, the benefit obligation is the projected benefit obligation (PBO). For OPEB plansý, the benefit obligation is the accumulated. postretirement benefit obligation. In addition, the statement requires thAt the t'otal unrecognized costs for defined benefit pension and OPEB plans. be recorded as an'aftef-tax charge to. Accumulated Other .Comprehensive Income, a separate component of Stockholder's Equity.
| |
| However, for PSE&G, because the amortization of the unrecognized costs is being collected from customers, the accumulated unrecognized costs were recorded as a Regulatory Asset. The unrecognized costs, represent actuarial gains or losses, prior service costs and transition obligations arising, from the-adoption of. .the preceding pension and OPEB accounting, standards, which have not been expensed. ,
| |
| Prior accounting guidance required that' unrecognized costs' be presented. in a footniot. td the financial statements as part of a reconciliation of a plan's funded, status-to amounts recorded'in the financial statements. The. unrecognized costs are amortized as a component of net.periodicpension or OPEB expense.
| |
| Under'the new standard, for Power andEnergy Holdings, the charge to Other Comprehensive Income Will be amortized and recorded. as.net-periodic pension cost in the Statement of. Operations.. For PSE&G, the Regulatory Asset will'be amortized and. recorded as' net periodic" pension cost, in. the Statement of Operations. ' ' .. '
| |
| The following presents the impact of applying the provisions .of SFAS 158 on the Balance Sheet of PSEG as of December 31, 2006:
| |
| Before . 'SFAS 158; ' After SFAS 158 Adjustments SFAS 158 (Millions)
| |
| PSEG Assets:
| |
| Regulatory Assets ... .......................... ...................... . $5,023' $ 671 ' - $5,694 Other Special ;Funds,....; ...... ......... ............... ........ $. 556 $(409) .., $ '147 Goodwill and Intangibles..;: ................. . $ 595 -$ (10) '' $, 585 Other Noncurrent Assets ........................... ..... $. 221 , $ .80' ' '. $ 301 Liabilities and Equity: ..
| |
| Other Current Liabilities.. .......................... ......... $ 474 $ 7 $ 481 Deferred Income Taxes and ITC.............. .$4,604 $(142) .'$4,462 OPEB Costs ........................... :' ' ' $ 648 .$441 . . $1,089 Accrued Pension. Costs ............... : ................................ $ 95 ,$ 232 $: 327 Accumulated, Other Comprehensive Loss (net of tax) ............... $ 97 '$(205) $ (1.08) 170
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides a roll-forward of the changes in the benefitobligation and the fair value of plan assets during each of the two years in the periods ended December 31, 2006 and 2005. It also provides the funded status of the plans and the amounts recognized and amounts not recognized in the Statement of Financial Position at the end of both years.. Because December 31, 2006 balances reflect the recognition and disclosure. requirements of. SFAS 158, and December 31, 2005 balances reflect the requirements of prior accounting standards, the Reconciliation of; Funded Status found below applies, only: to. 2005 and. the Additional Amounts Recognized in. Accumulated. Other Comprehensive Income'. Regulaited Assets, and Deferred Assets applies only to 2006. " .
| |
| Pension Benefits Other Benefits S2006 2005 -. 2006., 2005
| |
| " (Millions).
| |
| Change in Benefit Obligation:.
| |
| Benefit Obligation-at Beginning of Year ...... ... ...... $3,759 $3,5 .53 $, 1,219 $ 987 Service Cost.......... . ...................................... 86.., 90 18 18 Interest Cost ....................... ...................... 211 2206 68 . 62 Actuarial (Gain) Loss....................... ................ (127) 100. .(1) 67 G ross B enefits Paid ................. . ......... ........................ (206). (1.96) .(67) (60)
| |
| Medicare Subsidy Receipts ............. " ................... -- 5 -
| |
| Plan Amendments ....................... .......... ....... 6 - 145 Benefit Obligation at End of Year .................... ............. $3,723 $3,7759 $ 1,242 $ 1,219 Change' in Plan Assets: .' '.
| |
| $2,9 Fair'Value of Assets at Beginning of Year ......... ..... $3,105 920 $123 $ 101 Actual Reiurn on' Plani 'Assets.. ........ '. .... ........... 437' 222 ' - 19 8 Employer Contributions. ........ :.............. 54 159 "-74 74 G ross Benefits' Paid ................... . ............. .............. . (206) ($1.96) ..(67) (60)
| |
| Medicare Subsidy Receipts .... ....... .......................
| |
| Fair Value of, Assets -at, End -of Year......... ........ .$3,390 $3;1 05 $ 154. $ 123 Funded' Status:'
| |
| Funded Status (Plan' Assets less B'enefit Obligation) ........ .......7 '$ (333) $ (654) $(1,088) $(1,096)
| |
| Reconciliatioh of Funded Status AmoUnts Not Recognized in the Statement of Financial Position:.
| |
| Unrecognized Transition' Obligation .... .......... ..... N/A N/A $ 167 Unrecognized Prior Service Cost ................................... N/A 61 N/A 135 Unrecognized Actuarial 'Loss ...................................... N/A 975 N/A 197 Net Amount Recognized ...................................... N/A $ 382 N/A $ (597)
| |
| Amounts Recognized in the Statement of Financial Position:
| |
| Prepaid B enefit ................................................... $ -- $ 447 $ -- $ : -
| |
| '-CurrentAccrued Benefit"Cost .... ; ................... I........... (7)
| |
| Noncurrent Accrued Benefit Cost.. ........................ (326) ,'(90) (1,088) (597)
| |
| Intangible Asset ............... ..... I ................... N/A. 7 N/A N/A Minimum Pension Liability in Accumulated Other Comprehensive Income (pretax)......... ............... N/A 18.. N/A N/A Amounts Recognized.......................... $ (333) $ 382 $(1,088) $ (597)
| |
| Additional Amounts Recognized in Accumulated Other.'
| |
| Comprehensive Income, Regulated Assets and Deferred Assets: N/A Net Transition Obligation' ............. " ................................. $ - N/A $ 139 N/A Prior Service Cost....... ................................. .......... 51 N/A 122 Net A ctuarial L oss .................................................... 622 N/A 180 N/A Total ........................................... $ 673 N/A $ 441 N/A 171
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL :STATEMENTS The pension benefits table above provides information relating to the funded status.of, all qualified and nonqualified pension plans and other postretirement benefit plans on an aggregate basis. The nonqualified pension plans are partially funded with Rabbi Trusts. In accordance with SFAS 87, the plan assets in the table above do not include the assets held in the Rabbi Trusts. The fair values of these assets are included on the Consolidated Balance Sheets. For additional information see Rabbi Trusts' below.
| |
| Accumulated Benefit Obligation The accumulated benefit obligation (ABO) for all PSEG's defined bene fit pension plan's was $3.2 billion for both December 31, 2006 and 2005.
| |
| The following table provides the, PBO, ABO, and fair value of plan assets for pension plans with an ABO in excess of plan assets. , . , ,.
| |
| December 31, 2006 2005
| |
| .(Millions)
| |
| * Pension.Plans With an Accumulated Benefit Obligation in Excess of Plan Assets:*,
| |
| Projected Benefit Obligation. .............................................. $15.1 $127 Accumulated Benefit Obligation ........................................... $141 $ 98 Fair Value of Assets. .............................................. ..... . $ 36 $ 13 The following table provides the components of net periodic benefit cost' 'fot the years ended December 31, 2006, 2005 and 2004.
| |
| Pension Benefits Other Benefits 2006 2005 2004 2006* 2005 2004 (Millions)
| |
| Components of Net Periodic Benefit Cost:
| |
| Service C ost ........................................ ......... $ 86 $" 90 $ 82 $ 18 $ 18 $_22 211' ;206.'. 197 .68 62 "55 Interest Cost ..................... ...........................
| |
| Expected Return on Plan Assets ..... ................. (265)' (249) (231) (11) '(9)., (7)
| |
| .Amortization of Net Transition 'Obligation ....... ..................... 28 21- 27 Prior Service Cost ...................... . . . . ....... 11 16 16 13 9 -
| |
| Actuarial L oss ..................................... ...... 54 46 38 8 .2 ,
| |
| .Net Periodic Benefit Cost .............................. $ 97 .$ 109 $ 102 $124 $109,,$ 97 Components of Total Benefit, Expense: '.
| |
| Net Periodic Benefit Cost .................................... $ 97 $109 $ 102 $124 $109 $ 97 Effect of Regulatory Asset ................................... 19 19, 19 Total Benefit Expense Including Effect of Regulatory Asset ...... .......................... . $ 97 $ 109 $ 102 " $143 $i28 * $116 Amounts'that are expected to be amortized from Accumulated Other Comprehensive Income 'into Net Periodic Benefit Cost in 2007 are as follows:
| |
| Pension Benefits Other Benefits
| |
| .. 2007 ' ' 2007
| |
| '- ' ' . .", ' "" (M illionis) _" .....
| |
| Estimated Amounis'th'at will be Amortized from Accuihulated 'Other Comprehensive Income/Loss into Net Periodic Benefit Cost in
| |
| .2007:.
| |
| A ctuarial Loss ......... ........ .......... ........... ......... $-5 Prior Service. Cost ..... :............................... ............... .$10. $13.
| |
| Transition O bligation ................................................ $27 172
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following assumptions were used to determine the benefit obligations and net periodic benefit costs.
| |
| Pension Benefits Other Benefits 2006 2005 2004 2006 2005 2004 Weighted-Average Assumptions Used to Determine Benefit Obligations as of December 31:
| |
| Discount Rate ....................................... 6.00% 5.75% 6.00% 6.00% 5.75% 6.00%
| |
| Rate of Compensation Increase ........................... 4.69% 4.69% 4.69% 4.69% 4.69% 4.69%
| |
| Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost for Years Ended December 31:
| |
| Discount Rate ................................. 5.75% 6.00% 6.25% 5.75% 6.00% 6.25%
| |
| Expected Return .on Plan Assets ......................... 8.75% 8.75% 8.75% 8.75% 8.75% 8.75%
| |
| Rate of Compensation Increase..... .............. I 4.69% 4.69% 4.69% 4.69% 4.69% 4.69%
| |
| Assumed Health Care Cost Trend Rates as of December 31:
| |
| Administrative Expense ...................... 5.00% 5.00% 5'00%
| |
| D ental C osts ........................................ 6.00.% 6.00% 6.00%
| |
| Pre-65 Medical Costs Immediate Rate ...................... .. 9.50%' 9.50% 10.00%
| |
| Ultimate Rate '.' 5.00% 5.00% 5.00%
| |
| Year Ultimate Rate Reached........ ......... 2012 2011 2010 Post-65 Medical Costs Im m ediate Rate ............................... 10.50% 10.50% 11.00%
| |
| Ultimate Rate ........... ............... 5.00%. 5.00% 5.00%
| |
| Year Ultimate Rate Reached ................... 2013 2012 2011 Effect. of a 1,% Increase in the Assumed Rate of.Increase in Health Care Benefit Costs.
| |
| (Millions)
| |
| Total of Service Cost and Interest Cost .......... $ 11 $ 11 $ 4
| |
| .Postretirement Benefit Obligation .................... $ i34 $ 132 $ 57 Effect of a 1% Decrease in the Assumed Rate of Increase in Health Care Benefit Costs.-
| |
| Total of Service Cost and Interest Cost ........... $ (9) $ (9) $ (3)
| |
| Postretirement Benefit Obligation ............... ;...
| |
| $ (111) $ (109) $ (50)
| |
| Plan Assets The following table.provides the percentage of fair value of total plan assets for each major category of plan assets held for the qualified. pension and OPEB plans as of the measurement, date, December 31.
| |
| As of December 31, Investments -. 2006 2005 Equity Securities ........................ ....................... 63% 61%
| |
| Fixed Income Securities ................. . I......................... 29% 31%
| |
| R eal E state A ssets . .......................................................... 6% 6%
| |
| Other Investments ................... ........................... 2% .2%
| |
| Total Percentage ............................................... ......... 100%, 100%,
| |
| PS EG utilizes an independent pension consultant to forecast returns, risk, and correlation of all asset classes in order to develop an optimal portfolio, which is 'designed to produce the maximum return opportunity per unit of risk. In 2002, PSEG completed its latest asset/liability study. The restilts from the study indicated that, in order to achieve the optimal,-risk/return portfolio, target allocations of 62% equity securities, 30% fixed.income securities, 5% real estate investments, and 3% for other investments should be maintained. Derivative financial instruments are used by the plans' investment managers primarily to rebalance the fixed income/equity allocation of the portfolio and hedge the currency risk component of.the foreign investments.
| |
| 173
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The expected~long-term rate of.return on plan assets was 8.75% as of December 31, 2006. For 2007, the expected long-term rate of return on plan assets will remain at 8.75%. This expected return was determined based on the study discussed above and considered the plans' historical annualized rate of return since inception of the plans, which was an annualized return of 10.3%.
| |
| Plan Contributions PSEG may contribute up to $70 million into its qualified pension plans and postretirement healthcare plan for calendar year 2007.'
| |
| Cash Flows Estimated Future Benefit Payments The following pension benefit and postretirement benefit payments are expected to be paid to plan participants. Postretirement benefit payments are shown both gross and net of the federal subsidy expected for prescriptidn drugs under the Medicare Prescription Drug Improvement and Modernization Act of 2003.
| |
| The.Act proyides a nontaxable. federal subsidy to employers that provide retiree prescription drug benefits that are equivalent to the benefits of Medicare Part D.
| |
| Other Benefits Pension Gross "Medicare Net Year Benefits OPEB Subsidy OPEB (Millions) 2007. . . . .......... $ 207 $76 $"(4) $ 72 2008'..................................... ........ 211 79 (5)' 74 2009. . 1 . *
| |
| ................................... 214 82 (5) 77' 2010 .......... . ..... '.......... '. ... ....... .............. 219 84 (6) .78 20 1 1 ..................... .... ..... ...... I.................. . .,225 86 .0(6), 80 2012-2016.. ........................................ 1,252 445 (36) .409
| |
| 'T otal ........................................................ $2,328 $852 $(62) $790 Rabbi Trusts .
| |
| PSEG maintains certain unfunded, nonqualified benefit plans for which certain assets have, been set aside in grantor trusts commonly known as "Rabbi Trusts" to provide supplemental retirement and deferred compensation benefits to certain of its and its subsidiaries' key employees and directors.
| |
| Effective January 1, 2003, PSEG began accounting for the assets in the Rabbi Trusts under SFAS 115.
| |
| PSEG classifies investments in the Rabbi Trusts as available-for-sale under SFAS 115. The following'tables show -the fair values,.gross unrealized gains and 1osses.,and amortized cost bases for the. securitiesheld in the Rabbi Trusts. -,. ., . . -
| |
| As of Derember 31, 2006 Gross I Gross , ,Estiniated Unrealized Unrealized Fair Cost Gains Losses Value (Millions)
| |
| E quity Securities. ............... .......... '........ ..... -.....
| |
| *.... $ 12 $3 $-- $i5 Debt Securities Governm ent Obligations ....................................... 85 - 85 O ther D ebt Securities ......................................... 28 1 - 29 Total D ebt Securities .............................................. 113 1 - 114 Other Securities.. ......................................... 15 - 15 Total Available-for-Sale Securities ........................ $140 $4 - $144 174
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, .2005 Gross Gross* Estimated Unrealized Unrealized Fair Cost Gains Losses Value (Millions)
| |
| Equity Securities ......................................... 11 $ 1 $- $ 12 Debt Securities Government Obligations ........................................ 68 -- 1 67 Other 'Debt Securities' ................................. I ....... 29 - 1 28 Total D ebt Securities .............................................. 97 - 2 95 Other Securities ......... .......................... ........ 12 - - 12 Total Available-for-Sale Securities ........................ $120 $ 1 $ 2 $119 In 2006,. other-than-temporary impairments of $4 million were recognized on $73, million of debt securities, which was included in the Estimated Fair Value of Investments in. Rabbi Trusts as of December 31, 2006.
| |
| Years Ended December 31, 2006 2005 2004 (Millions)
| |
| Proceeds from Sales " ... '... $30 $100 $95 Gross Realized Gains $- $ - $ 3 Gross Realized Losses ................. .' .................. $(1) $ (1) $ 1 Net 'realized' losses of $1 million were recognized in Other Deductions on PSEG's Consolidated Statement of Operations for the year ended December 31, 2006. The available-for-sale debt securities held as of December 31, 2006, had the following maturities: $2 million less than one year, $33 million'. one to five years, $23 million five to 10 years, $9 million 10 to 15 years, $4 million 15 to 20 years, and $44 million over 20 years. The cost of these. securities was determined on the basis of specific identification.
| |
| The estimated fair value of the Rabbi Trusts related to PSEG, PSE&G, Power and Energy Holdings are detailed .as follows:
| |
| As of December 31, 2006 2005 (Millions)
| |
| PSE&G ............................ .................................. $54 $ 50 Power'. ............................................................... .43 26 Energy 'Holdings ...................... .:.................................. 12 10 Services ...... ............
| |
| ... : '....................... .... .. 35 33 Total ...... .... .... .................. .... .............. ............... $144 $119 401(k) Plans PSEG sponsors two' 401(k) plans,' which are Employee Retiirement Income Security Act (ERISA) defined.contribution plans. Eligible represented employees of PSE&G, Power and Services, participate in the PSEG Employee Savings Plan (Savings Plan), while eligible non-represented employees of PSE&G, Power, Energy Holdings and Services participate in the PSEG Thrift and Tax-Deferred Savings Plan (Thrift Plan).
| |
| Eligible employees may contribute up to 50% of their compensation to these plans. Employee contributions up to 7% for Savings Plan participants and up to 8% for Thrift Plan participants are matched with Employer contributions of cash equal to 50% of such employee contributions. The amount paid for Employer matching contributions to the plans for PSEG, PSE&G, Power and Energy Holdings are detailed as follows:
| |
| 175
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Thrift Plan and Savings Plan Years Ended December 31, 2006 2005 2004 (Millions)
| |
| PSE&G .......................... $15 $15 $15 P ower ............... ................................ : .................. ....... 8 9 8 Energy Holdings ............................. .I... -- -4 1 Services..........." .......... ... ....... ............. ........ ....
| |
| 4$ 4$ $3
| |
| $27 $28 $27 Total Employer Matching Contributions. ...........................
| |
| PSEG, PSE&G, Power and Energy Holdings The following represents the impact of applying the provisions of SFAS 158 on the respective Balance Sheets of Power, PSE&G and Energy Holdings as of December 31, 2006 Before SFAS 158 After SFAS 158 Adjustments SFAS 158 (Millions)
| |
| PSE&G Assets: .
| |
| Regulatory Assets. . ". . . . $5,023 $ 671 $5,694 O ther Special Funds ............. ............ ........................... $, 299 $(246) $ 53 O ther N oncurrent Assets .............................................. $ .116 $ (1) ,. .$ 115 Liabilities and Equity:
| |
| O ther 'Current Liabiliti s ........... .................................. $ 318 .$ 4 $ 322 Deferred Income Taxes and ITC ......................... :........... $2,516 $ 1' $2,517 OPEB Costs ...................................... ...... $ '599 $ 299 '$ 898 Accrued Pension Costs .............. ...................... $ 14 $ 119 $ 133 Accumulated Other Comprehensive Income (net of tax) .............
| |
| $ -- 1 $ 1 Power Assets:
| |
| Goodwill and Intangibles........ .......................... $ 55 $ (4) $ 51 Other Special Funds ...... ...... " .... .. $ '150o $(108) $ 42 Liabilities and Equity:
| |
| Other Current Liabilities .......................... ........ $ .93, $ 2 ' $. 95 Deferred Income Taxes and ITC ........................... ....... $ 167 $(119) $ 48 OPEB Costs ............................. ... $' 35 $ 103 $ 138 Accrued Pension Costs. ...... ......... ...... . ...... $ 31 $. 75 $ 106 Accumulated Other Comprehensive Loss (net of-tax) ............ $ -(4) $(173) $ (177)
| |
| Energy Holdings .
| |
| Assets:
| |
| - Goodwill and Intangibles .............. . :..................... $ 535 $ $$(1)534 Other Noncurrent Assets .... ................................... $ 146 ..$ (7) $ 139 Liabilities and Equity:
| |
| Deferred Income Taxes and ITC ..................................... $1,928 $ (3) $1;925 Other Noncurrent Liabilities ...... ......................... $ 103 $ (1) $ 102 Accumulated Other Comprehensive Income (net of tax)......... $ 107 "$ (4) $ 103 176
| |
| | |
| NOTES TO*CONSOLIDATED, FINANCIAL STATEMENTS Pension costs and OPEB costs for PSEG, PSE&G, Power and Energy Holdings are detailed as follows:
| |
| Pension Benefits Other Benefits Years Ended Years Ended December 31, December 31, 2006 2005 2004 2006 2005 2004.
| |
| (Millions)
| |
| PSE&G......... ............................... $49 $ 55 $ 52 $121 $112 $104 Power ................... 30 33 31 16; 12 9 Energy Holdings ............................. ...... 2 2 2 - - -
| |
| Services .................................................. 16 19 17 6 4 3 Total Benefit Expense ......................... $97 $109 $102 $143 $128 $116 Note 17. Stock Based Compensation PSEG.
| |
| As approved at the Annual Meeting of Stockholders in 2004, PSEG's 2004 Long-Term Incentive Plan (2004 LTIP)-replaced prior Long-Term Incentive Plans (the 1989 LTIP and 2001 LTIP). The 2004 LTIP is a broad-based equity compensation program that provides for grants of various long-term incentive compensation awards, such as stock options, stock appreciation rights, performance shares, restricted stock, cash awards or any combination thereof. The types of long-term incentive awards that have been granted and remain outstanding under the LT1Ps are non-qualified options to purchase shares of PSEG s common stock, restricted stock awards anid performance unit awards. However, since-2004 through December 31, 2006, only restricted stock has been granted. " . ....
| |
| The 2004 LTIP currently provides for the issuance of equity awards withrespect to approximately 13 million shares of common -stock. As of December 31, 2006, there were approximately 11.9 million shares available for future awards under the 2004 LTIP.
| |
| 'Stock Options Under the 2004 LTIP, non-qualified options to acquire shares of PSEG common stock may be granted to officers and other key employees of PSEG and its subsidiaries selected- by the Organization and Compensation Committee of PSEG's Board of Directors, .the plan's administrative committee (Committee).
| |
| Option awards are granted with an exercise price equal to the market price of PSEG's common stock.at the grant date. The options generally vest based on three to five years of continuous service. Vesting schedules may be accelerated upon the occurrence of certain events, such as a change- in-control, retirement,,..death or disability. Options are exercisable over a period of time designated by the Committee (but-not prior to one year or longer.than 10 years from the date of grant) and are subject to such other terms and conditions as the Committee determines. Payment by option holders .upon exercise of.an. option may be made in cash or, with the consent of the Committee; by delivering previously.. acquired shares, of.PSEG common stock.
| |
| On September 1, 2006, PSEG began using treasury stock to settle the exercise of stock *options. Piior to September 1, 2006, PSEG had purchased shares on the open market to meet the exercise of stock options.
| |
| For the years ended December 31, 2006, 2005 and 2004, PSEG paid out approximately $46 millibn, $72 million and $13 million, rispectively, to settle the exercise of stock options. " "
| |
| 'Restricted Stock Under the 2004 LTIP,,PSEG has granted restricted stock iwards to officers, and Other-key emloyees.
| |
| These shares are'subject to risk of forfeiture until vested by contimied 'employmeni.'Restricted stock generally vests annually over three years, but is considered outstanding at the time of grant, as the recipients are, entitled to dividends and voting rights. Vesting may be-accelerated upon certain events, such as change in control (unless substituted with an equity award of equal value), retirement, death or disability.
| |
| In addition, from 1998 to 2001, PSEG granted 210,000 shares of restricted stock to a key executive, which are subject to risk of forfeiture until vested by-continued employment. The shares vest, on a staggered schedule through March 2007.
| |
| PSEG issues restricted stock from treasury stock.
| |
| 177
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL -STATEMENTS -
| |
| Performance Units Under the 2004 LTIP, performance units were granted to certain key executives, which provide for payffient in shares of PSEG common stock based on achievement of certain financial goals over the three-year period from 2004 through 2006. The payout varies from 0% to 200% of the number of performance units granited depending on PSEG's performance compared to the performance' of other companies in the Dow Jones Utilities Index. The performance units are credited with dividend equivalents in an amount-equal to dividends paid on PSEG common stock up until January 1, 2007. Vesting may be accelerated upon certain events such as change in control, retirement, death or disability.
| |
| Stock-Based Compensation Effective January 1, 2006, PSEG adopted SFAS 123R. See Note 2. Recent Accounting Standards for a description of the adoption of SFAS 123R. As a result, all outstanding unvested stock options as of January 1, 2006 are being expensed based on their grant date fair values, which were determined using the Black-Scholes option-pricing model. Stock option awards are expensed on a tranche-specific basis over the requisite service period of the award. Ultimately, compensation expense for stock options-is recognized for awards that vest.
| |
| Prior to the adoption of SFAS-123R, PSEG recognized compensation expense for. restricted stock over the vesting period based-on the grant date fair-market value of the shares. PSEG will continue -to recognize compensation expenseover the vesting term.
| |
| Also prior to the adoption' of SFAS 123R, PSEG recognized c0mpensation expense for performance units. The fair value of each. performance unit was based on the giant'date fair value of PSEG common stock.' The accrual of compensation cost was based dn the' probabll achievement of the performance conditions, which result in a payout from.0% to 200% of the initial grant. The current accrual is estimated at 100% of the original grant. The accrual is adjusted for subsequent changes in the estimated or actual outcome.
| |
| Compensation cost-from options, restricted stock and performance units is included in Operation and Maintenance Expense on PSEG's Consolidated Statements of Operations and amounted to approximately
| |
| $17 million, $6 million and $3 million for the years ended December 31, 2006, 2005 and 2004, respectively.
| |
| The total income tax *benefit recognized on PSEG's Consolidated Statements of Operations was approximately $7 million, $3 and $1 million for the years ended December 31, 2006, 2005 and 2004, respectively' Compensation. cost capitalized as part of Property, Plant and Equipment was less than $1 million for each of the years ended-December 31, 2006, 2005 and 2004. Of the total compensation cost for thelyears ended December,31, 2006, approximately $1 million, after-tax, related to the adoption of SFAS 123R, which was prima'rily due to expensing stock options for'the first time. There was no impact on basic and diluted earnings per share from the implementation of SFAS 123R. because there were a relatively small number of outstanding unvested stock options as of the implementation date. .
| |
| "Prior to the adoption of SFAS 123R, PSEG presented all tax benefits for deductions resulting from the exercise of share-based compensation as operating cash flows on the Consolidated Statement of Cash Flows.
| |
| SFAS 123R requires the benefits of tax deductions in excess of the taxes expensed on recognized compensation cost to be reported as financing cash flows. There was approximately $15 million, $30 million and $5 million of excess tax benefits, included as .a financing'ca'sh"infloxý on the Consolidated Statement of Cash Flow for the years ended December 31, 2006, 2005 and 2004, respectively. Total cash flow will remain unchanged from what would have been reported under prior accounting rules. .
| |
| 178
| |
| | |
| - NOTES. TO CONSOLIDATED FINANCIAL STATEMENTS The following table illustrates the effect on Net Income and earnings per share if PSEG had applied the fair value recognition provisions, of SFAS 123R for the years ended December 31,. 2005 and 2004.,
| |
| S..For the Years Ended 2005 2004 (Millions, except per Share Data)
| |
| Net Incom e, as Reported . ....... ...... .......... ....................... ..... . $ 661 $ 726:
| |
| Add: Toil Stock-Based Compefisation Expensed During ihe Period, net bf tax ..................... ......... ................................ 4 2 Deduct: Total Stock-Based Employee Compensation Expense Determined Under FairValue-Based Method for All Awards, net of related tax effects.. (6) .. (6)
| |
| Pro Forma Net Income ..................................................... $ 659 $ 722 Earnings Per Share: - .
| |
| * Basic-as Reported ............. ...................... .......... $2.75, $3.06 Basic- Pro Forma ..... . .. . ............................... I.............. :, $2.74 . $3.05!
| |
| Diluted-as :Reported ...................... . : ..................... $2.71 $3.05 Diluted-Pro Forma ........................................... $2.70 $3.03.
| |
| Prior'to the adoption .of SFAS 123R, PSEG recognized the coimpensation cost of stock based awards issued to retirement eligible employees that fully or partially yest upon an employee's retirement over the nominal vesting period of performance, and recognized any remaining compensation cost at the 'date of retirement. In accordance. with SFAS. 123.R, PSEG. recognizes compensation cost of awards issued after
| |
| -January 1, 2006 over the shorter of the original vesting period or the period beginning on, the date of grant and ending on the date an individual is eligible for retirement and the award vests.
| |
| Thereý were no options granted. during 2005 or 2006. Changes in stock options for the years ended December 31, 2006 are summarized as follows:
| |
| 2006 2005 2004 Weighted Weighted .Weighted Average Average Average Exercise Exercise Exercise Options .. Price Options . Price Options Price Beginning of year ....... ......... 3,981,555- $41.07 7,690,902 $39.97 8,734,931 $39.37 Granted.... .......... (3,707,347) 38.78 863,700 43.87 E xercised ........................ ..... (2,151,287) 39.74 (1;539,966) 38.49 (2,000) 46.06 C anceled................................. (14,266) 42.75 .(367,763) 41.26 End of year. .. ..... ... 1,816,002 $42.63 3,981,555- $41.07 7,690,902 $39.97 Exercisable at end of year, ....... 1,448,621 $42.52 3,171,589 $40.82. 5,612,528 $40.05 Weighted average fair value of options granted during the year..........
| |
| $- $ 6.58
| |
| 'Options Outstanding Options Exercisable Outstanding Exercisable Range of .as of Weighted Average Weighted as of Weighted December 31, 'Remaining Average December 31, Average Exercise Prices 2006 Contractual Life Exercise Price' 2006 Exercise Price
| |
| $30.03-$35.03 ........ ............ 161,042 5.6 . 32.61 161,042 32.61
| |
| $35.04-$40.03 ............ 3,000 2.0 39.31 3,000 39.31
| |
| $40.04-$45.04 .......................... 887,383 6.3 41.50 609,347 41.27
| |
| $45.05-$50.05 .......................... 764,577 4.7 46.06 675,232 46.03
| |
| $30.03-$50.05 .......................... 1,816,002 5.6 42.63 1,448,621 42.52 179
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Weighted, Average Remaining Aggregate Contractual Intrinsic Options *Term, Value Outstanding at December 31, 2006 .....................................- 5.5 $43,131,961 Exercisable at December 31, 2006 ........................................ 5.2 .. $34,560,733 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were no options granted during 2006. The following weighted average assumptions were used for grants in.2004: expected volatility of 26.74%, risk-free interest rate of.3.09%, expected life of 4.0 years. There was a weighted, average dividend yield of 5.00% in 2004.
| |
| The intrinsic value of options is the difference between the current market price and the exercise price.
| |
| The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004 was approximately $56 million, $72 million and $13 million, respectively. Diuring the years ended December 31*,
| |
| 2006, 2005 and 2004, cash received from stock options exercised was approximately $86 million, $141 million.
| |
| and $59 million, respectivelý: The tax benefit realized from stock options exercised during the years ended.
| |
| and $5 million, respectively December 31, 2006, 2005 and 2004 was approximately $13'million, $29 million Approximately 1 million options vested during each of the years ended December 31, 2006, 2005 and 2004, respectively. The weighted average fair value per share for options vested during the .years ended December 31, 2006, 2005 and 2004 was $41.15, $38.26 and $36.54 respectively.
| |
| As of December 31, 2006, there was less than $1 million .of u~nrecognized compensati6n cost related to stock options, which" is expected to be recognized over a Weighted averagd period of eight moth&s.
| |
| Restricted Stock Information .
| |
| Changes in. restricted stock for the years ended December 31, 2006 are siummarized as follows:
| |
| Weighted Weighted Average Average Remaining Aggregate Grant Date .Contractual Intrinsic Shares Fair Value Term Value Outstanding at January 1, 2006 ............................ 466,744 $56.69 G ranted ................................................... 49,325 65.88 Vested .... ....................................... (188,299) 56.07 Canceled .......... .............. ....... ................. . (10,03,7) 59.30 ..
| |
| Outstanding at December 31, 2006 ..... ................ 317,733 -$58.40,.. 1.5 '$21,091,117 The weighted average grant date fair value per share was $65.88, $57.46 and $42.75 for~restriýcted stock awards granted during the years ended December 31, 2006, 2005 and 2004, respectively.
| |
| The total intrinsic value of restricted stock vested during the years ended December 31, 2006 and 2005 was approximately. $2 million and $1 million, respectively.
| |
| As of December .31, 2006, there was approximaiely $14 million of unrIecog'nized c 6 mpensation cost related to restricted stock, which is expected to be recognized over a weighted average. period of 1.7 years.
| |
| Performance Units Information..
| |
| In May 2004, 94,400 performance units were granted to certain key executives, which provide for payment in shares of PSEG Common Stock based on achievement of certain financial goals over the 2004 through 2006 three-year period. The number of units outstanding and unvested as of January 1; 2006 and December 31, 2006 was 83,600 and 82,700, respectively. 11,700 units were forfeited in 2005 and 900 in..2006..
| |
| Approximately 9,500 dividend equivalents had accrued on these performance units. The grant date fair value of the performance units is $42.75 per unit..
| |
| Assuming performance. units are paid- out at the 100% performance -level,, the total intrinsic value-of performance units outstanding as of December 31, 2006 was approximately $6 million.. .
| |
| 180
| |
| | |
| NOTES TO. CONSOLIDATED FINANCIAL STATEMENTS Outside Directors During .2006, each director who was 'not an officer of PSEG or its subsidiaries and affiliates was paid an annual retainer of $50,000. Pursuant -to the Compensation Plan for Outside Directors, 50% of the 'Annual retainer was paid in PSEG common stock. .
| |
| PSEG also maintains a Stock Plan for Outside Directors (Stock Plan) pursuant- to which directors of PSEG. who are not employees of PSEG or its subsidiaries receive a restricted stock award, currently .1,000 shares per: year, for each year of servic& as a director. The restrictions on the'stock' granted Under the Stock Plan provide 'that the shares are subject to forfeiture if the' director leaves service at-any time prior to the
| |
| 'Annual"Meeting of Stockholders .following his or her 72nd birthday. This restriýtion would be deemed to have been satisfied if the director's service was terminated after a "change in on0trol'2 as defined in t he Stock Plan orJf the director was to die in office. PSEG also has the ability to waive this restriction for good ,cause shown. Restricted stock may rnot be sold or otherwise' transferred prior to the lapse of the restrictions.
| |
| Dividends on,shares held subject to restrictions are paid directly to the director who has the right to vote-the shares. The fair value of these shares, is recorded as compensation expense on the Consolidated Statements of*
| |
| Operations. Compensation expbnse for the Stock Plan for each of the years ended December 31, 2006 and 2005 was approximately.$1 million and less than' $1 million for the year -ended. December 31, 2004.
| |
| Employee Stock Purchase Plan PSEG maintains an employee stock purchase plan for all eligible employees of PSEG and its subsidiaries. Under lthe plan, shares of. PSEG common sto8ck may be purchased at 95% of the fair market value through payroll deductions. In Any year, employees may turchase shares having a value not exceeding 10% of their base pay. During the years ended December 31,. 2006, 2005 and 2004, employees purchased 60,351, 76,729,'and 99,712 shares at an average price of $61.63, $54.00 and $40.59 per share, respectively. As of December 31, 2006, 1.8 million shares were.available for future issuance under this plan.
| |
| Note 18. Financial Information by Business Segment Basis of Organization' PSEG, PSE,&G, Power and Energy'.Holdings The reportable segments were determined by management in accordance with-.SFAS No. 131, "Disclosures About Segments of~an Enterprise 'and Related Information", (SFAS 131)-.These segments-were determined based on how management measures performance based on segment Net Income, as illustrated in. the following table,'and: how' it 'allocates, resources lto, each business .. :
| |
| PSE&G .. .. . ....
| |
| ,
| |
| PSE&G earns revenue from its tariffs, Under which it'provides electric transmission and electric and gas distribution services' to residential, commercial and'industrial customers in 'New Jersey.-The rates charged for electric, transmission are regulated by FERC while the rates charged for electric and gas distribution are regulated by the BPU. Revenues are :also earned from several other activities such as sundry sales, the appliance service business, wholesale transmission services and other miscellaneous services.
| |
| Power : .
| |
| Power 'earns revenues by selling energy, 'apfacity arnd ancillary 'services 6n a wholesale basis under contract to'power 'marketers and to load 'se-rving entities- and by biddiiigh energy, capacity and aincillary services into. the. markets .for these products. Power also enters into trading' contracts for energy, capacity, firm transmission rights, gas,' emission allowances and other energy-related contracts.to optimize the value of its portfolio of generating assets and its electric and gas supply obligations. ..
| |
| '181
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Energy Holdings Global;,. .. ,
| |
| Global earns revenues from its investment in and operation of projects in the generation and distribution of energy, both domestically, and internationally. Global has ownership interests in three distribution companies and in electric generation facilities w*hich sell energy, capacity and ancillary services to numerous
| |
| -customers. The generation plants'sell power under long-term agreements as well~as on a merchant basis while the%' distribution companies are rate-regiulated enterprises. Revenues include revenues of consolidated
| |
| * investments. Gains and losses on sales of investments are typically recognized in revenues.
| |
| Resources Resources earns revenues from its passive investments in leveraged leases, limited partnerships, leveraged buyout funds arid'marketable securities. Approximately 95% of Resources' investments are in leveraged leases. DSM investments earn revenues primarily from monthly .payments from utilities; representing shared electricity savings. from the installation of energy efficient equipment. Resources operates both domestically and internationally; however, revenues from all' international investments are denominated in U.S. dollars. Gains 'and losses on sales of investments are typically recognized in' revenues.
| |
| Other
| |
| * Energy Hdldings' othef activities include amounts applicable to Energy Holdings (parent'cornpiny). The net.losses primarily relate to financing and certain administrative and general costs at the EnergyHoldings parent corporation.:
| |
| Other '
| |
| PSEG's other activities include amounts applicable to PSEG (parent corporation), and intercompany elifriinations, 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 21. Related-Parity Transactions. The net losses primarily relate to financing and certain administrative and general costs at. the PSEG parent corporation.
| |
| 182
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information related to the segments of PSEG and its subsidiaries is detailed below:-
| |
| Energy Holdings Consolidated PSE&G Power Resources Global Other Other Total I, 1. , (Millions) 1, For the Year Ended December 31, 2006:
| |
| Total Operating Revenues ... ............ .......... $ 7,569 * $6,057 $ 174, $1,174 $ 9 $(2,819)' $12,164 140 41 -' '20 '832 Depreciation and Amortization ..................... 620 11' Inconme from Equity' Method. Investments ..........-. ., : oý 120 Operating Income (Loss) ......... L................. :...... ,772
| |
| * 960 142 .68,,. (6) (1). 1,935
| |
| -- 3 .18 (10)" 35 Interest Income ................................. *11. 13 ..
| |
| 111 808 Net Interest Charges ............................. 346 148 51 133 19 Income (Loss) Before Income Taxes ....................... 448 878 85 (67) (6) (132) *1,206 Incom e T axes ................................................. 183 363 23 (58) (4) (53)
| |
| * 454 Income (Loss) From Continuing Operations ............... 265 515 6.3. (11) (3) (77) .752 Loss from Discontinued Operati6ns, net of Tax-(includin'g'
| |
| * Gain (Loss) on Disposal)............................ S265- (239) 226 : (13)
| |
| N et 'Income (Loss) .. ...... :................... :............. 265 .276 63 .: 215 (3) (7.7) '739 Segment Earnings (Loss).. ................... 261 .,276. .63 215 . (3) (73). 739
| |
| $ 528 .$ 418 $ 62,, $ 2 $ '5 $ 1,0115 Gross Additions to Long:Lived Assets................ -
| |
| As of December 31, 2006:
| |
| Total Assets .................................... $14,553 $8,146 $2,969 $3,118 $ 77 $ (293) $28,570 Investments in Equity Method Subsidiaries ................ $ - $ 16 $ 5 $ 818 $- $ -- $ 839 For the Year Ended December 31, 2005:
| |
| Total Operating Revenues........ ........... ........... $ 7,5 14 $6,027 $ 247 $1,045 $ 10 $(2,679) 5$12,164 114 39 18 Depreciation 'and Amortization ..................... 5553 :731 Income (Loss) from Equity' Method Investmients ........... * (1)" 125
| |
| * 124 Operating Income (Loss) .................................. 9913 708 208 293 (11) '(17) 2,094 Interest Incom e ............................................. 11 11 8 5 35 Net Interest Charges ....................................... 342 100 73 138 2 129 784 Income (Loss) Before Income Taxes ....................... 583 752 130 147 (8) (158) - 1,446
| |
| ý2235- 318 (.3) * (62,).. 560 .38.
| |
| Income Taxes .................... 34 Income (Loss), From Continuing Operations ............. 348 434
| |
| * 92 (95),. 886
| |
| .11.2 (5)
| |
| (Loss)/[ncome from Discontinued Operations, net of tax (including Loss on Disposal)................-....... - (226) "18ý 14 (208)
| |
| Cumulative Effect of.a Change .in Accounting Principle, . (I) net of tax ........ ..... ........ -....... . ............ (16). (17)
| |
| Net Income (Loss) .......... 4.............. 3348 192. 130 (96), 661 92 (5) 3344 192 92 127 (89) 661 Seg'mheit Earnings (Loss) ................ ....... ....... (5)
| |
| Gross Additions to Long-Lived Assets ..................... $ 4498 $ 476 $ .3 $ 64 $ $ 12 $ 1,o53 As of December 31, 2005:
| |
| Total A ssets ............................................... $14,297 $8,945 $2,871 $3,799 $385 $ (476) $29,821
| |
| $ - $ -- $ -15 $1,128 $- $ - $ 1,143 Investments in Equity Method Subsidiaries ................
| |
| For the Year Ended December 31, 2004:
| |
| Total Operating Revenues ................................ $ 6,810 $5,166 $ 187 $ 639 $ 10 $(2,202) $10,610 Depreciation and Amortization ............................ 523 98 5 39 18 683 Income from Equity Method Investments .................. 1 118 119 Operating Income (Loss) ................................. *943 567 154 277 (13) 8 1,936 Interest Income. ....................... 10 10 7 ,2 (8)
| |
| Net Interest Charges. ............................. 362 90 81 138 4 99. 774 Income (Loss) Before Income 'Taxes ..... ............ 592 594 71 141 (14) (105) 1,279 Incom e Taxes .............................................. 246 227 4 47 (6) (34) 484 Income (Loss) From Continuing Operations ............... 346 367 68 93 (10) (69) 795 Loss from Discontinued Operations, net of tax ............ (59) (10) (69)
| |
| N et Incom e (Loss) ......................................... 346 308 68 83 (10) (69) 726 Segment Earnings (Loss).. ..................... 342 308 65 69 (9) (49) 726 Gross Additions to Long-Lived Assets ..................... $ 420 $ 725 $ 4 $ 82 $ 16 $ 1,247 183
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL. STATEMENTS Geographic information for PSEG is disclosed below.-The foreign assets and operations noted below relate solely to Energy Holdings.
| |
| Revenues Assets(A)
| |
| December 31, December 31, 2006 2005 2004 2006 2005 (Millions)
| |
| United States ....... ...................................... $11,578 $11,652 $1.0,148 $24,862 $25,516 Foreign Countries .................
| |
| . 586 512 462 3,708 4,305 Total ................................................. $12,164 $12,164 $10,610 $28,570 $29,821 Identifiable assets in foreign countries include:
| |
| Chile .................................................................... $1;441 $1,463 Netherlands .................... ............................................ .1,231 1,174 Poland ....... *................. ........ ................. ................................ * - - 500 Peru....... : ..................................................... ....... 462 440 A ustria...................................................................... .. . . 191 -178 Italy. .................................................................... . 149 73 B razil .................................. ..................................................- : 223 O th er ....................................................................................... 234 , r254 T otal ............................... ................................................ .$3,708 , $4,305 (A)- Total assets are net of foreign currency translation adjustment of $111 million (after-tax) as of December 31, 2006 and $(44) million (after-tax) as of December 31i 2005.
| |
| As of December 31, 2006,"Global and Resources had approximately $2.1 billion and $1.6 billion, respectively, of international assets. As of December 31, 2006, foreign assets represented 13% and 60% 6f PSEG's and Energy Holdings' consolidated assets, respectively, and the revenues related to those foreign assets contributed 5% and 40% to PSEG's and Energy Holdings' consolidated revenues,- respectively, for the yeatrended December 31, 2006.
| |
| 184
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19. Property, Plant and Equipment and Jointly-Owned Facilities Information related to Property, Plant and Equipment as of December 31, 2006 and 2005 is detailed below:
| |
| Energy PSEG PSE&G Power Holdings
| |
| * Other Consolidated (Millions) 2006 Generation:
| |
| Fossil Production ......................................... . $ $4,342 $ 858 $ 5,200 Nuclear Production .............................. 625 -- 625
| |
| - 479 Nuclear Fuel in Service......................... 479 Construction W ork in Progress ........................... 361 3 -364 Total G eneration ..................................... 5,807 861 6,668, Transmission and Distribution:
| |
| Electric Transmission ............................. 1,402 - -- 1,402 Electric D istribution ........................ .. ........... 5,058 -- 553 5,61:1:
| |
| Gas Transmission ............................... 88 88 Gas Distribution................................ 3,872' 3,872 Construction Work in Progress ......................... 58 50 108 Plant Held for Future Use ........................ 24 -24 Other .................................... .455 455 Total Transmission and Distribution ... .......... I 0,957. 603'- - .-- 11,560 O th er ...................................................... 104 61 242 216 623 T otal ... .... ......... ........................... $1: [,061 $5,868, * $1,706 $216 $18,851 2005 Generation:
| |
| Fossil Production ....... .... .............. .. $ $3,274.. $ 750. - $ 4,024 N uclear Production .......................................... -- 606 606 N uclear Fuel in Service : .................................. -- 490 490 Construction Work in Progress ........... .......... -- 1,340 1,341 Total Generation ............................ * - 5,710 751 6,461 Transmission and Distribution:
| |
| Electric Transm ission ...................................... .1,333 - 1,333 E lectric D istribution ......................................... 4,841 - 561 5,402 G as Transm ission ............................ ............. 75 - 75 Gas Distribution ................................ 3,687 - 3,687 Construction Work in Progress ..................... 58 26 84 Plant Held for Future Use .......................... 24 - 24 Other .................................... ..... 487 _ 487 Total Transmission and Distribution ............. 10,505 - 587 11,092 O th e r ...................................................... 131 61 222 242 656 Total.. .................................... $10,636 $5,771 $1,560 $242 $18,209 PSE&G and Power PSE&G and Power have ownership interests in and are responsible for providing their share of the necessary financing for the following jointly-owned facilities. All amounts reflect the share of PSE&G's and Power's jointly-owned projects and the corresponding direct expenses are included in the Consolidated Statements of Operations as operating expenses.
| |
| 185
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ownership Accumunlated Interest Plant. Depreciation (Millions)
| |
| December 31, 2006 Power:
| |
| Coal. Generating Conemaugh ............................................. . 22.50% $21i3 $105 K eysto ne ............................................................... 22.84% $18' 9 $ 84 Nuclear Generating Peach Bottom ........................................... 50.00% $2253 $121
| |
| $54.
| |
| S a lem .................................. .......... .....................
| |
| Nuclear Support. Facilities ..................................
| |
| :57.41%
| |
| Various
| |
| .$i11C19 $172.
| |
| $ 15 Prumped Sfo0age Ffcilities "" .
| |
| Y a -ds C reek .........
| |
| ........ ............... ................ 50.00% $ 2'9 ' $22 M errill Creek Reservoir: ............. . ....................... . 13.91% $ 1 $
| |
| PSE&G:
| |
| Transm ission Facilities........... .............................. .......... Various $11' 6... $ 54.
| |
| L inden SN G Plant ......................................................... 90.00% $ 5 $ 6 December 31, 2005 Power:
| |
| Coal' Generating Conemaugh ............................................. 22.50% $212 $ -97
| |
| 'Keystone .... .............. .............................
| |
| I 22.84% $173 .76'
| |
| $16 Nuclear Generating Peach Bottom ........................................... 50.00% $268 $121 Salem .... :.................................................. . 57.41% $507 ,$174
| |
| *N uclear Support Facilities ............................................. Various $120 $ 24 Pumped Storage Facilities Yards Creek . "....................................................... 50.00% $ 28 $ 20
| |
| * Merrill Creek Reservoir. .................................... 13.91% $ 1 PSE&G:"
| |
| T ransm ission Facilities :: .......... ......................................... Various $115 $ 52 Linden Synthetic Natural Gas (SNG) Plant ........................ 90.00% $ 5 $ 6 Power Power holds undivided ownership interests in the jointly-owned facilities above, excldding related nuclear fuel and inventories. Power is entitled to- shares of. the generating capability and-output of each unit equal to its respective ownership interests. Power also pays. its ownership share of additional construction costs, fuel inventory purchases and. operating expenses. Power's share of expenses for the jointly-owned facilities.is-.included in the appropriat expen-se category.
| |
| Power's subsidiary, Nuclear, co-owns Salem and Peach Bottom with Exel6n Generation. Nuclear is the owner-operator of Salem and Exelon Generation is the operator of Peach Bottom. A committee appointed by the co-owners 'reviews/approves major planning, financing and budgetary (capital and operating) decisions'.
| |
| Operating decisions within the above guidelines are made by the 6wner-operator.
| |
| .- R6liant Energy, Inc. is a co-owner and the operator for Keystone Generating Station and Conemaugh Generating Station. A committee appointed .by all co-owners makes all planniag,..financing and budgetary (Capital and operating) decisions. Operating decisions within the above guidelines are made by -Reliant Energy, Inc.
| |
| Power is a co-owner in the Yards Creek Pumped Storage Generation Facility. First Energy Corporation is also a co-owner and the operator of this facility. First Energy submits separate capital and Operations and Maintenance budgets, subject to the approval of Power. I 186
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Power is a minority owner in the Merrill Creek Reservoir and Environmental Preserve in Warren County,*New Jersey; Merrill Creek Reservoir is the owner-operator of this facility. The operator submits separate capital and Operations and Maintenance budgets, subject to the approval of the non-operating owners.
| |
| All owners receive revenues, Operations and Maintenance and capital allocations based on their ownership percentages. Each owner is responsible for any financing with respect to its pro rata share of capital expenditures.:
| |
| Note, 20. Selected Quarterly Data (Unaudited)
| |
| PSEG,. PSE&G, Power and Energy Holdings The information shown below, in the opinion of PSEG, PSE&G, Power and Energy Holdings, includes all adjustments, consisting only of normal recurring accruals, necessary to fairly present such amounts.
| |
| Calendar Quarter Ended March 31, June 30, September 30, December 31, 2006 2005 2006 2005 2006 2005 2006 2005 (Millions, where applicable) .
| |
| PSEG Consolidated:
| |
| Operating R evenues ...................................... $3,461 $3,199 $2,556 $2,327 $3,212 $3,164 $2,935 $3,474 Operating Incom e ......................................... 528 630 176 340 799 598 432 .527 Income from Continuing Operations................ 208 288 (5) 99 376 272 173, 227 Income/(Loss) from Discontinued Operations, including Loss on D isposal, net of tax ............................ (5) (3) 214 (181) (2) (19)' (220) (5)
| |
| Cumulative Effect' of a Change in Accounting Principle -- -- , - (17)
| |
| Net Income (Loss) ........ ............. 203 285 209 (82) 374 253 . (47). 205 Earnings Per Share:
| |
| Basic:
| |
| Income from Continuing Operations ..... .......... 0.83 1.21 (0.02) 0.42 1.49 1.13 0.69 0.92 NetIncome. ................................ .0.81 1.20. 0.83 (0.34) 1.48 1.06 (0.18) 0.84 Diluted:
| |
| Income from Continuing Operations ................. 0.82 1.19 (0.01)., 0.41 1.49 1.11 0.69 0.92 N et Incom e ............................................ 0.81 1.18 0.83 (0.34) 1.48 1.03 . (0.18) 0.83 Weighted Average Common Shares Outstanding:
| |
| 'B asic ................................................. 251 238 251 239 252 239 .252 245 Diluted .................................... 252 242 252 243 252 244 253 248 Calendar Quarter Ended March 31, . June.30, September 30, December 31, 2006 2005 2006 2005 2006 2005 2006 2005 (Millions)
| |
| PSE&G:
| |
| O perating R evenues ...................................... $2,293 $2,144 $1,490 $1,397 $1,870 $1,800 $1,916 $2,173 Operating Income ...... : ................ ........... 225 287 136 164 237 273 174 189 Income from Continuing Operations ...................... 78 118. 34 49 88 115 65 66 N et-Incom e ....... .................. ....... ...... 78 -118 34 .49 88 115 65 66 Earnings Available to PSEG ...................... 77 117 33 48 87 114 64 65 Calendar Quarter Ended March 31, June 30, September 30, December 31, 2006 2005 2006 2005 2006 2005 2006 2005.
| |
| (Millions)
| |
| Power:
| |
| Operating Revenues............................. $1,967. $1,730 $1,129 $1,054 $1,455 $1,419 $1,506 $1,824 O perating Incom e ......................................... 217 210 162 109 391 201 190 188 Income from Continuing Operations ................ 121 123 86 64 206 135 102 112 Loss from Discontinued Operations, including Loss on.
| |
| D isposal, net of tax....': .............. (9) '(15) (9), (19i) (1) (10) (220) (10)
| |
| Cumulative Effect ofa Change in Accounting Prinrciple (16)
| |
| Net Income, (Loss) ........... ................... 112 108 77 (127). 205 .125 . (118) 86 187
| |
| | |
| NOTES' TO CONSOLIDATED FINANCIAL STATEMENTS Calendar Quarter Ended March 31, June 30, September 30, December 31, 2006 2005 . 2006 2005 2006 2005 2006, 2005
| |
| :(Millions)
| |
| Energy Holdings:.
| |
| Operating Revenues ..................................................... $312 $313 $ 367 $270 $401 $334 $277. $385 Operating Income .... ......................................... 90 134 (124) 75 173 129 65 152 Income Before Discontinued Operations and Cumulative Effect of a" - "
| |
| Change in Accounting Principle... .............................. 28 67 (105), 12 101;,: 48 .25 *72, Income/(Loss) on Disposal of Discontinued Operations, including Loss from Discontinued Operations, net of tax benefit .............. 4 12 223 10 - (9) (1) 5 Net Income ......................... ......................... 32 79 118 22 101 39 24 77 Earnings Available to PSEG .... ............ 32 77 118 21 101 39 24 77 PSE&G As disclosed in Note 1. Organization 'and Summary of Significant Accounting Policies, certain amounts have been reclassified to conform to the current presentation. Such reclassifications primarily relate, to recording revenues and expenses related to a certain contract at PSE&G on amnet basis versus gross. The amounts.in the. tables above for PSEG and PSE&G reflect the reduction of $46 million, $44 million and $57 million in both Operating Revenues and Energy Costs for.the quarters ended September, 30, 2006, June 30, 2006 and March 31, 2006, respectively; and $80 million, $50- million, $44 million and $40 million for ,the quarters ended December 31, 2005, September 30, 2005, June 30, 2005 and March 31, 2005, respectively, with no impact on Operating Income.
| |
| Note 21. Related-Party Transactions -
| |
| The majority of the following discussion relates to intercompany transactions, which are eliminated during the PSEG consolidation process in accordance with GAAP.
| |
| BGSS and BGS 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 31, 2012 and
| |
| .year-to-yearr thereafter.
| |
| Power has also entered into contracts to supply energy, capacity and ancillary services to PSE&G through the BGSauction process.
| |
| The amounts which Power charged to PSE&G for BGS and BGSS are presented below:
| |
| Billings for the Years Ended December 31, 2006 2005 2004 (Millions)
| |
| BGS...................................................... $ 793 $ 497: $ 359 BGSS ........................................ $1,995 $2,127 $1,784 As of December 31, 2006 and 2005, Power had receivables from PSE&G of app'roximately $370 imillion and $454 million, respectively, primarily related to the BGS and BGSS contracts. These transactions were properly recognized on each company's stand-alone financial statements and were eliminafed when pi'ephring PSEG's Consolidated Financial Statements.. .
| |
| In addition, as of December 31, 2006 PSE&G had a"payable to Power of approximately $1.74 million as of December 31, 2005. PSE&G had a receivable 'from Power of approximately $152 million related to gas supply hedges Power entered into for BGSS. For additional information, see Note 12. Commitments and Contingent Liabilities. "
| |
| 188
| |
| | |
| NOTESTO CONSOLIDATED FINANCIAL STATEMENTS Services PSE&G, Power and Energy Holdings Services provides and bills administrative services to PSE&G, Power andEnergy 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 Payable to for the Years Services as of Ended December 31, December 31, 2006 2005 2004 2006 2005 (Millions)
| |
| PSE&G ......................................... $215 $209 $208 $41 $34' Power ....................... ......... $137 $1-54 $150 $21 $21 Energy Holdings ... ............................... $ 17 $,J9 $ 18 $,2, ;,$ 2 These transactions were properly' recognized on each, company's stand-alone financial statements' and were eliminated when preparing PSEG's Consolidated Financial Statements. PSEG, PSE&G, Power and Energy Holdings believe that the-costs of services provided by Services approximate market value for s'uch services.
| |
| Tax Sharing Agreement PSEG, PSE&G, Power and Energy Holdings PSEG files a consolidated Federal income tax return with its affiliated companies.. A'.tax allocation agreement exists between PSEG and each of its affiliated companies. The general operation of these agreements is that the subsidiary company will compute its taxable income on a stand-alone basis. If the result is a net tax liability, such amount shall be paid to PSEG. If there are net operating losses and/or- tax' credits, the subsidiary shall receive payment for the tax savings from PSEG to the extent that PSEG is able to utilize those benefits.
| |
| PSE&G, ,Power and Energy Holdings had (payables to) receivables from,. PSEG related to taxes as follows:
| |
| (Payable to).
| |
| Receivable from PSEG as of December 31,
| |
| _i2006 ' 2005 (Millions)
| |
| PSE&G ................. ................... $(63) $(59)
| |
| Power ...... ' ................................................ $(28) $ 4 Energy Holdings .............................................. $(10) $(12)
| |
| Affiliate Loans 'and Advances PSEG and Power As of December 31, 2006 and December 31, 2005, Power'had-a demand''note payable to PSEG of approximately $54 million and $202 million, respectively, for short-term funding. needs. Interest Income and Interest Expense relating to these short. term funding activities was immaterial ...
| |
| PSEG and Energy Holdings As of December-31, 2006 and 2005, Energy Holdings had a demand note receivable due from PSEG of
| |
| $28 million and $409 million, respectively. These notes reflect the investment of Energy Holdings' excess cash with PSEG. Interest Income related to these borrowings for the years ended December 31, 2006 and 2005 was $18 million and $4 million, respectively..
| |
| 189
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PSE&G and Services As of each.of' December 31, ,2_006 and 2005, PSE&G "had advanced working capital to Services of approximately $33 million. The amount, is, included in Other Noncurrent Assets on pSE&G's Consolidated Balance Sheets..- '.
| |
| Power and Services As of each of December731,'2006 and 2005, Power had advanced working capital to Services of approximately $17 million. The amount is included in Other Noncurrent Assets on Power's Consolidated Balance Sheets.
| |
| Changes in Capitalization PSE&G PSE&G paid common stock dividends of approximately $200 million and. $100 million to PSEG in 2006
| |
| ýand 2004, respectively. .
| |
| Power PSEG contributed capital of approximitely $300 million to Power during 20041 Energy Holdings During-2006, 2005, and 2004 Energy Holdings made cash -distributions to PSEG totaling $520 million,
| |
| $412 million and $491 million, respectively, in the form of returns of capital preference unit redemptions, preference utnit distributions and ordinary uinit distributions.
| |
| Credit Agreements with The Bank of New York (BONY).
| |
| Thomas A. Renyi, a director of PSEG, is Chairman of the Board and' Chief Executive Officer pfBONY, a participant in threecredit facilities of PSEG and its subsidiaries. Each of these facilities, and BONY's participation, was made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons -not related to BONY,'
| |
| arnd did not involve more than the normal risk of collectibility 6r 'presentother unfavorable features.
| |
| Other PSEGI'and PSE&G .
| |
| As of December 31, 2006 and 2005, PSE&G had net receivables from PSEG of approximately $3 million anid $6 million, respectively, related to amounts that PSEG had collected on PSE&G's behalf.
| |
| PSEG and Power As of December 31, 2006 and 2005, Power had net receivables from PSEG of less than $1 million and
| |
| .iapproximately $2 million, respectiveiy, related to amounts that PSEG had collected on Power's, behalf..''
| |
| Energy Holdings .and PSE&G As of December 31, 2006 and *December 31, 2005, Energy Holdings had a receivable of approximately $1 million and $3 million, respectively, related to efficiency incentive initiatives performed. for PSE&G's customers. Energy Holdings recorded revenues for such services of approximately $10 million, $22 million
| |
| 'And $26 million for the years ended December 31, 2006j 2005 and 2004, respectively..
| |
| 190
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 22. Guarantees of Debt Each series of Power's Senior Notest 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 as of December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005 .and 2004:
| |
| Guaranto }r Other Consolidating Power . Subsidiari es Subsidiaries Adjustments Total (Millions)
| |
| For the Year Ended December 31, 2006:
| |
| Revenues ......................... ........................ $ 7,030 $ 139 $(1,112) $6,057 Operating Expenses ............................ ............. 1 6,102 107 (1,113) 5,097 Operating Income .......................................... (1) 928 32 .1 960 Equity Earnings (Losses) of Subsidiaries ......................... 284 (252 (32)
| |
| Other Income .............................................. 171 199 6 (219) 157 Other Deductions......... (2) (88: (1) (91)
| |
| Interest Expense .......... ................. ..... ............ .. . ....... (188) (133 (44) 217 (148)
| |
| Incom e T axes .................................. ............. ; ............ 12 (377: 1 1. (363)
| |
| Income (Loss) on Discontinued Operations, Including Loss on Disposal, net of tax benefit ... ...................................... -- 7 (247) 1 (239)
| |
| N et Incom e (Loss) ....................................................... $ 276 $ 284 $ (253) $ (31) $ 276 As of December 31, 2006:
| |
| Current Assets .... ; ......... ....................... $1,982 $ 3,416 $ 531 $(3,441) $2,488 Property, Plant and Equipment, net..: ................................... 150 3,226 854 4,230 Investm ent in Subsidiaries ................................................... 4,287 201 (4,488)
| |
| Noncurrent Assets .......................................... 173 ,1,398 79 (222), 1,428 Total Assets ............................................................... $6,592 $ 8,241, $1,464 $(8,151) $8,146 Current Liabilities ..... .............................. ....... $ 97 $ 3,179 .$1,251 $(3,443) $1,084 N oncurrent Liabilities .................... .......................... ....... 253 776 12 (220) 821 L
| |
| Mong-,T ermEquity ember's Debt ................................
| |
| .... ý.'
| |
| :' .. .....I . : .........................
| |
| , t ' '. ' 2,818 2,818 Member'.Equit............. '.............
| |
| ... ...... 3,424 4,286 201 (4,488) 3,423
| |
| $(8,15'1)
| |
| Total Liabilities and Member's Equity .......................... $6,592 $ 8,241 $1,464 $8,146
| |
| ,For the Year Ended December 31, 2006:
| |
| Net Cash Provided By. (Used, In) Operating Activities ..... ......... $1,105 $ 1,076 $ 14 $(1,152) $1,043 Net Cash (Used In) Provided By Investing Activities .... ;................. $ (605) $(1,016 $ 25 $1,206 $ (390)
| |
| Net Cash Used In Financing Activities ................................... $ (500) $ (55) $ (39) $ (54) $ (648)
| |
| For the Year Ended December 31, 2005:
| |
| Revenues ............. .................................... $ 6,955 $ 137 $(1,065) $6,027 Operating Expenses.. ....................................... 6,288 95 .(1,064) ..5,319 O perating Incom e ...... ................................................. 667 42 (1) 708 Equity Earnings (Losses) of Subsidiaries ...... ................... 218 (213) (5)
| |
| ....... ...... .. .. . ... .................... (138)
| |
| Other Income .... 138 185 2 187 O ther D eductions ......................................................... (42) (1) (43)
| |
| Interest Expense ................................................. ....... (142) (84 (14) 140 (100)
| |
| Incom e Taxes ............................................................ (22) (288) (8) (318)
| |
| Loss on Discontinued Operations, 'Including Loss on Disposal, net of tax benefit .............................................. 7 (233) - .(226)
| |
| Cumulative Effect of a 'Change in Accounting Principle, net of-tax ...... (15) (1) -- .(16)
| |
| Net Income (Loss).. ........................................ $ 192 $ 217 $ (213) $ (4) $ 192 As of December 31, 2005:
| |
| Current Assets " ................. $2,584 $ 2,623 $ 911 $.(2,876) $3,242 Property, Plant riid Equipment, net. ............................. 143 3,271 807 4,221 Investment in Subsidiaries ... .................... 3,507 453 (3,960),
| |
| Noncurrent Assets ............................. 179 1,600 16 (313) 1,482 Total Assets .... ........................................... $6,413 $ 7,947 $1,734 $(7,149) $8,945 Current Liabilities ........................................................ $ 695 $ 3,212 $1,146 $(2,876) $2,177 Noncurrent Liabilities ....................................... 63 1,267 96 (312) 1,114 Long-Term D ebt ....... .......... ................................... 2,817 2,817 Member's Equity ........................................... 2,838 3,468 492 (3,961) 2,837-Total Liabilities and Member's Equity................................... $6,413 $ 7,947 $1,734 $(7,149) $8,945 191
| |
| | |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Guarantor Other Consolidating Power Subsidiaries Subsidiaries Adjustments Total (Millions)
| |
| For the Year Ended December 31, 2005:
| |
| Net Cash (Used In) Provided By Operating Activities ................... $ (943) $ (371) $ 1,050 $ 400 $ 136 Net Cash (Used In) Provided By Investing Activities .................... $ (157) $ 133 $ 37 $ (255) $ (242)
| |
| Net Cash Provided By (Used In) Financing Activities .............. $1,100. $ 235 $(1,087,) .- $ (144) $ 104 For the Year Ended December 31, 2004:
| |
| Revenues ................................................................ $ - $6,137 $ 122 $(1,093) $5,166 O perating Expenses ....................................................... " 5,603 88 (1,092) 4,599 Operating Income .................................................... 534 34 (1) 567 Equity Earnings in Subsidiaries .......................................... . 295 -,(54). - (241) -
| |
| Other Income ................. .................................. 101 161 1 (96) 167 Other Deductions ................................................... - ' (49) -- (1) (50)
| |
| Interest Expense ........... ................................... ' (118) (57) (11), 96 (90)
| |
| Income Taxes ............................................... .30 (238) (.19) - (227)
| |
| Loss on Discontinued Operations ......................................... - -. (58) (1) (59)
| |
| Net Incom e (Loss) .................... .................................. $ 308 $ 297 $ (53) $ (244) $ 308 For the Year Ended December 31, 2004: .. . -
| |
| Net Cash Provided By (Used In) Operating Activities ................. $ 121 . * $ (34) $ 78 $ 342 $ 507 Net Cash (Used In) Provided By Investing Activities ..................... $ (121) $ (83) $ (158) $ (248) $ (610)
| |
| Net Cash (Used In) Provided By Financing Activities ....... .......... $ - $ (199) $ 80 $ 205 " $ '86 Note 23. Subsequent Events Energy Holdings:
| |
| Global From about 1995 through 2001, Global and its partners expended approximnately-$12 million towards the construction of a power plant in the Konya-Ilgin region of Turkey. In- 2001, Turkey *passed legislation and otherwise- deprived' Global of rights and fair .and equitable treatment and exoropriated Global's Coricessioh contract for the power plant project without.compensation, despite'the Turkish Government's obligation to compensate' Global for. its.costs under the existing 'contractr.and Turkish law. In 2002,, Global initiated arbitration before the International Centre for Settlement of International Disputes seeking return of sunk costs, lost profits, interest and attorney fees and costs.. A decision in this matter was made in January 2007 under which the Turkish Government will be required to pay approximately $20 million for sunk costs, interest and arbitration fees. After legal contingency. fees, Global expects to receive approximately $7 million, after tax, 'for its share of the project. Global expects to receive payment in the second quarter of 2007.d..
| |
| Resources ,'. ' .
| |
| In 2001, Resources made an investment of $14 million in a collateralized: bond obligation fund (CBO fund) which was managed by Credit Suisse First BostonLLC and Credit Suisse First Boston (Europe)
| |
| Limited (collectively, CSFB). Resources was an equal 33% partner in.the CBO. fund with the CIT Group, and Dana. In 2002, the CBO fund was liquidated and Resources recovered' a portioIn of its. original investmnenf.
| |
| Resources and its partners filed claims against CSFB for lost interest and principal of its investment: The case was settled in January 2007 and Resources received $11 million, recording an after-tax gain of approximately
| |
| $4 million.
| |
| 192
| |
| | |
| ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PSEG, PSE&G, Power and Energy Holdings None.
| |
| ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures PSEG, PSE&G, Power and.Energy Holdings PSEG, PSE&G, Power and Energy Holdings have established and maintain disclosure, controls and procedures which are designed to provide reasonable assurance that material information relating to each company, including their respective consolidated subsidiaries, is made known to the Chief Executive Officei and Chief Financial Officer of each company by others within those entities. PSEG, PSE&G,' Power and Energy Holdings have- established a disclosure committee which is made up of seveial key management employees and which reports directly to the Chief Financial Officer and Chief Executive Officer of each respective company. The committee monitors -and evaluates -the effectiveness of these disclosure controls and procedures. The Chief Financial Officer and Chief Executive Officer of each company have, evaluated the effectiveness of the disclosure controls and procedures as of December 31, 2006 and, based on this evaluation, have concluded that the disclosure controls and procedures were effective in providing reasonable assurance during the period covered in these annual reports.
| |
| Internal Controls PSEG, PSE&G, Power and Energy Holdings, PSEG has conducted an, assessment of its internal control over financial reporting as of December.,31, 2006 as required by Section 404-of the Sarbanes-Oxley Act. Management's report on PSEG's internal control over financial reporting, is,- included on page .194. The Independent Registered Public Accounting Firm's report with respect to management's. assessment of the effectiveness of internal control over financial reporting and the effectiveness of. PSEG's internal control. over financial reporting is included on-page. 195.
| |
| Management has concluded that internal control over financial reporting is effective as of, December'31, 2006..
| |
| PSEG, PSE&G* Power and Energy Holdings continually ieview their respective disclosure cdntrols and procedures and make changes; ag- necessaly, to 'ensure the quality of their financial reporting. However, there have been no changes in. internal control over financial reporting that occurred during the fourth quarter of 2006 that have materially affected, or are reasonably likely to materially affect, each registrant's internal control over financial reporting; ITEM 9B. OTHER INFORMATION '
| |
| PSEG, PSE&G, Power and Energy Holdings None.
| |
| 193
| |
| | |
| MANAGEMENT REPORT ON INTERNAL CONTROL-OVER FINANCIAL REPORTING Management of Public Service Enterprise Group (PSEG) is responsible for establishing and maintaining effective internal control over financial reporting and for the assessment of ýthe effectiveness of internal control over financial reporting. As defined by the SEC in Rules 1,3a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision. of, the company's principal executive. arid principal financial officers, or persons performing similar functions, and implemented by the company's management and-other personnel', with oversight by the Audit Committee of the Board of Directors to provide reasonable assurance regarding the reliability of financial reporting and the .preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles).
| |
| PSEG's internal control over financial reporting includes those policies arid procedures that (1)'pertain to the maintenance of records that, in reasonable detail, accurately and.fairly reflect the transactions and dispositions of PSEG's assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of PSEG are being made only in accordance with authorizations of PSEG's management and directors; and (3) provide reasonable assurance regarding preventioni or timely detection of unauthorized. acquisition, use or disposition of PSEG's assets' that .could have a material effect on the financial statements.
| |
| in connection with the preparation of PSEG's annual financial statements, management of PSEG has undertaken an as'sessm~ent, which includes the design and operational effectiveness of PSEG's internal control over financial reporting using the framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as "COSO". The COSO framework is based upon five integrated components of control: control environment" risk assessment, control activities, information and communications: and ongoing .monitoring. ...
| |
| ..Because.of its inherent limitations, internal, control over financial reporting may not -prevent or.detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk 'that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate..
| |
| Based on the assessment performed, management has concluded that PSEG's internal c6ntrol- over financial reporting is effective and provides reasonable assurance regarding the reliability of PSEG's financial reporting -and the preparation of its financial statements as of December 31, 2006 in accordance with generally accepted accounting principles. Further, managefrient has not identified any material weaknesses in internal control over financial reporting -as of December 31, 2006.'
| |
| PSEG's external auditors, Deloitte & Touche. LLP, have audited PSEG's financial statements for.the year ended December 31, 2006 included in this annual report on Form 10-K and, as part of that audit, have issued areport on management's assessment of internal control over financial reporting, a copy of which is included in this annual report on Form 10-K. .
| |
| /s/ E. JAMES.FERLAND Chief Executive Officer .
| |
| /s! THOMAS M. O'FLYNN Chief Financial Officer February 27,-2007 .. .
| |
| 194
| |
| | |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Tothe Stockholders and Board of Directors, Of PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED: ".
| |
| We. have audited' management's assessment, included in the accompanying Management Report on Internal. ControlI Over Financial Reporting, that Public Service Enterprise Group Incorporated and subsidiaries (the "Comrpany") maintained effective internal control ov6r financial reporting as of December 31, 2006, based on the criteria established in "'Internal Control-Integrate'd Framework" issued bythe Committee of ,Sponbiring Organizations of the Treadway Commission. The Company's inanagement is responsible for maintaining effective internal control over financial reporting and for its assessment'of'the effectiveness of internal control over. financial reporting. Our iesponsibility is to" express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit ....
| |
| We conducted our audit in accordance with the standards of the Public Company -Accounting 'Oversight Board (United States). .Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective.internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of -internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and. performing such.,other procedures as we considered necessary in the circumstances.. We believe that our audit provides a reasonable basis for our opinions.
| |
| A company's internal control over financial reporting is a process designed by, or under the supervision df, the company's principal executive,a~nd principal financial officers, or persons performing similar functions, and effected by the company's board of .directors, management, and other persbonel to provide reasonable assurance regarding the reliability of financial reporting arid the preparation of financial 'statemefits for external purposesin accordf'ice with 'generally adcepted accounting principles. A 6ompan'y's internal 'control ove'r financial reporting includes those policies and procedures that '(1) pertain to the mitintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) .provide reasonable -assurance. that transactionsIare redorded as necessary'to permit preparation of financial statements in accordance with .generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance-with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial state'ments.
| |
| Because of the inherent limitations of internal control over financial reporting, including thie possibility of'collusion'or impropermanagement ,override.of controls, material misstatements due to error or fraud may not be prevented .or detected on a timely' ba'is. Also, projections of any',evaluation of the'effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may b-ecome inadequate. because'of changes in conditions, or that the degree of compliance with the policies'or procedures may deteriorate. , ' '
| |
| In our opinion, management's' is'essirient that the Company maintained effective internal coritrol' over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion,, the 'Company maintained, in all material.
| |
| respects, effective internal control over financial reporting as of December 31, 2006, based on,'the criteria established in "Internal Control-Integrated Framework" issued by the Cdmmittee of Sponsoring Organizations of the Treadway Commission.
| |
| We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule 'as of and'for the year ended December 31, 2006 of the Company, and our report dated February 27, 2007 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule, and included explanatory paragraphs regarding the adoption of Statement of Financial' Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" and Financial Accounting Standards Board Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations."
| |
| DELOITTE & TOUCHE LLP Parsippany,' New Jersey February 27, 2007 1-95
| |
| | |
| PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.*
| |
| Executive Officers ), .
| |
| PSEG, PSE&G, Power and Energy Holdings The Executive Officers of each of PSEG,,PSE&G, Power'and Energy Holdings, respectively, are set forth below, as indicated for each individuial.
| |
| Age as of Effective Date December 31, First Elected to Name 2006 Office Present Position E. James Ferland(1)(2)(3)(4) 64 Chairman of the Bbard and Chief October 2006 to present
| |
| -Executive Officer -(PSEG)
| |
| Chairman of the Board, President and July 1986 to October 2006 Chief Executive Officer (PSEG)
| |
| Chairman of the Board and Chief July 1986 to present
| |
| * Executive Officer (PSE&G)
| |
| -Chairman of the Board and Chief June 1989 to present Executive Officer (Energy ,Holdings)
| |
| Chairman of the Board and Chief June 1999 to present Executive Officer (Power)
| |
| Chairman of the Board and, Chief November 1999 to present Executive Officer (Services)
| |
| Thomas M. O'Flynn(1)(2)(3)(4) 46 Executive Vice President and July 2001 to present Chief Financial Officer,(PSEG)
| |
| Executive Vice Piesident-Finance July 2001 to present (Services)
| |
| Executive Vice President and Chief August 2002 to present Financial Officer (Energy Holdings)
| |
| Executive Vice President and Chief February 2002 to plresent
| |
| -Financial Officer (Power)
| |
| Executive Vice President and Chief January 2007 to present
| |
| *Financial Officer (PSE&G)
| |
| President and Chief Operating Officer February 2007 to present (Energy Holdings)
| |
| * Ralph Izzo(1) 49 President and Chief Operating Officer October 2006 to present (PSEG)
| |
| President and Chief Operating Officer October 2003 to October 2006 (PSE&G)
| |
| Vice President-Utility' Operations June 2002 to October 2003 (PSE&G)
| |
| Vice Piesident-Special Projects September 2001 to June 2002 (Services)
| |
| Ralph LaRossa(2), 43 President and Chief Operating Officer October,2006 to. pre'ent (PSE&G)
| |
| Vice President. Electric Delivery August 2003 to October 2006 (PS.E&G) .
| |
| Vice President Delivery January 2003 to August 2003 Operations Support,(PSE&G)
| |
| Director Distribution Operations June 2001 to January 2003 (PSE&G)
| |
| Frank Cassidy(1)(3) 60 President and Chief Operating Officer June 1999 to present (Power)
| |
| Robert J. Dougherty, Jr.(1)(4)(5) 55 President and Chief Operating Officer January 1997 to February 2007 (Energy Holdings)
| |
| Vice President ,(PSEG) March 1995 to February 2007 President (Global) August 2003 fo February 2007 196
| |
| | |
| A1 Effective Date Dec( First Elected to Name 2006 Office Present Position R. Edwin Selover(1)(2)(3) 61 Executive' Vice Prfesident and'Gen~ral December 2006 to present Counsel (PSEG)
| |
| Senior Vice President and General April 2002 to December 2006 Counsel (PSEG)
| |
| Vice President and General Counsel April 1988 to April 2002
| |
| . (PSEG),, .. -
| |
| 'Executive Vi&e President and Geferal December 2006 to" preseni Counsel (PSE&G) ' '
| |
| Senior Vice President and General January 1988 to December 2006 Counsel (PSE&G) '
| |
| ExecutiVe Vice President and General December 2006 to present Counsel. (Power)
| |
| SeniorVice President and General November 1999 to December 2006 Counsel,'(Services)
| |
| Derek M. DiRisio(1)(2)(3)(4) 42 VicePresident and Controller (PSEG) January 2007 to present "Vice President and Controller (PSE&G) January 2007 to present Vice President.andController (Power) January 2007 to present
| |
| 'Vice President and; Controller (Energy January 2007.to present t: Holdings) .
| |
| Vice President and Controller (Services) January 2007 to present Assistant Contfoller Enterprise July 2004 to January 2007 (Services). ..
| |
| VP.Planning and Analysis (Energy March 2004 to July 2004 Holdings) . ,
| |
| Vice President and Controller (Energy June 1998 to March 2004 Holdings) A'.
| |
| Patricia A. Rado(1)(2)(3)(4)(6) 64 Vice President and Controller (PSEG) April 1993 to January 2007 Vice President and.Controller (PSE&G) April 1993 to January 2007 Vice President and 'Controller (Power) June 1999 to January 2007
| |
| 'Controller (Energy Holdings) April 2004 to January 2007 Vice President and Controller (Services) November 1999 to January 2007 Elbert C. Simpson 58., President.and Chief Operating Officer January 2007 to present (Services) ' . ' '
| |
| Senior Vice'President Information May 2002 to January 2007 Technology (Services)
| |
| ..Senior Vice President Chief July 1999 to May 2002, Administrative Officer (Nuclear)
| |
| Robert E. Busch(1)(2)(6) 60 " President'and Chief Operating Officer. April 2001 to January 2007 (Services) *:
| |
| Senior' Vice President and Chief June 1998 to January 2007 Financial Officer (PSE&G)
| |
| Harold W. Borden Jr.(3)(6) 62' Vice President and General Counsel June 1999 to January 2007 (Power)
| |
| Morton A. Plawner(1)(2)(3) 59-"' .Treasurer (PSEG) . April 1998 to present Vice President and Treasurer (PSE&G) April 1998 to present
| |
| ..:Vice President and .Treasurer (Power) June 1999 to present Kevin J. Quinn (3) 50 President (ER&T) " January 2007 to present Vice President Corporate Planning April 2000 to January 2007 (Services)
| |
| .Steven R. Teitelman(3)(6) 60" President (ER&T) June 1999 to January 2007 Vice President-Energy Resources and August 1997 to August 2002 Trading (PSE&G)
| |
| Michael J. Thomson(3) 48 President (Fossil) August 2003 to present
| |
| ,, President (Global) January 1997 to July 2003 Matthew McGrath (4) 43 President (Global)- . December 2006 to present Vice President, Chief. Operating Officer September 2005 to December 2006 and General Counsel .(Global)
| |
| Vice President General Counsel February 2002 to September 2005 (Global)
| |
| Eileen A. Moran(4) 52 President (Resources) May 1990 to present, President (EGDC) January 1997 to present Miriam E. Gilligan(4) 55 Vice President-Finance and December 2001 to present Treasurer (Energy Holdings)
| |
| Vice President (Services) December 2001 to present 197
| |
| | |
| (Q) bxgcutive Officer bf PSEG (2) Executivet Officer of PSE&G (3) ExecutiVe 'Officer of Power (4) xkecutive Officer of Energy Holdin's '.
| |
| 5)' Retired in Febiruary-2007 (6) Retired .in January 2007 * .
| |
| On February. 22, 20'07', PSEG announced. the election ofRalph Izzo as Chairman of the Board and Chief Executive Officer of PSEG. Mi.' Izzo has also beenelected as Chairman of the Board and Chief Executive Ofice.r ofPSEG s subsidiaries, PSE&G Power and Energy Holdings. These actions are effective as of April 1,,2007. See Executive Officers table, above, for additional information regarding Mr. Izzo's background with PSEGand its subsidiaries and Item 11. Executive Compensation for a discussion of the material t~rms of his e*poynefit a reement.
| |
| SItwas aisQ"4nnounced that E. James Ferland,. the current Chairman of the Board aid Chief Executive Officer of'.PSEG, PSE&G, Power and Energy Holdings is scheduled to retire effective IMlarch 31, 2007 and that he subfriitted his resignation as'a director of PSEG, PSE&G, Power and Energy Holdings, also effective March 31, 2007.'
| |
| Directors .
| |
| *PSEG '.
| |
| ' .'The information reqdired by 'Item 10 of Form" 10-K witth respect to (i) presernt -directors .of PSEG who are nominees foT,oelction as directors at PSEG's. 2007 Annual Meeting of Stockholders, ahd directors whose terms' willicohtinue be5ond the jmeeting, ahd (ii) compliance with Section 16(a),of.tlhe Securities Exchange Act of1934, as amended,' is et forth under the headings 'gElectionof Directors' and Section 16(a) "Beneficial 1
| |
| cwnershit eportsngd Compliance" in' PS'd Gs defininive Proxy Statement for "suclh Meeting of 6nnual)
| |
| Stockholders,4,whith defihitive".Proxy, Statement is'expected to be filed with the U.S. Securities 'and Exchange Commission' (SECI dn 'or about March 5, 2007 and which' information set forth under said heading is inciorporated herein by this reference the-eto.'
| |
| C¢AROLINE D4ORSA hAs been a director of PSE&G since February- 2003. Age 47. Director of PSEG.
| |
| Has *been Senior Vice President and Treasurer of Avaya, Inc.' of Basking Ri'dge, New. Jersey (global. prvider of business'communicatioris.applications, systems and sef'ices)'since February 2007. Was Vice' President and Treasurer df Merck.& Co.; Inc., WHitehohse Station', Ne&w Jersey:-from Decenmber 1996 to. January, 2007. Was
| |
| 'Treas'rer .frm :Jariuary. 1994 to November' 1996, and Executi&e Director of the U.S. Human Health Mairketihg -spbsidiary of Merck & Co., Inc. from June 1992 to January 199.4.
| |
| E. JAMES&IFE RLAND. has been a director of PSE&G since July 1986. Foi' additional information, see Executive 'Officers table, abovet ' ' '
| |
| .ALBERT R. GAMPER, JR. has been a director of PSE&GG since December 2000. Age '64. Director of PSEr. Until retirement-, was Chairman of the Board of The' cFGroup; Inc. of Livingston; New Jersey (a commercial finance company) from July 2004 until Dece mber 2004. Was Chairman of the Board and Chief Executive 'officer 'of The CIT Group, Inc. 'from September 2003 to July 2004. Was Chairinan of the Board, s ad~ C f E e O r o 'fm Je 22 o e e W Pires-dent- and President a'nd Chief Executive Officer
| |
| ,Chief -Executive Officer' of of The CIT Group, the CIT Group, Inc.
| |
| Inc. from from June 2002 to February io. June' 2003.
| |
| 2002September 2002. Was Was Pr~sidefit and Chif'fExecutive Officer of Tyco Capital Corporation from June' 2001. t6 lebruary 2002. Was Chiairrhan ofthe, Board, President -and Chief Executive Officer of The CIT Group, Inc. frqm January 2000 to June.2001, and President and Chief Executive Officer of The CIT Group, Inc. from.December 1989 to December 1999. ,
| |
| `CONRAD K. HARPER has been a director of PSE&G since May 1997. Age 66:'Director of PSEG. Of Counsel to the law firm of Simpson Thacher & Bartlett LLP, New York, New' York since January 2003. Was a partner from October 1996 to December'2002 and from October 1974 to May 1993. Was Legal Adviser, United States Department' of State froin May 1993 to June 1996.. Director of New York Life Insurance Company.
| |
| 198.
| |
| | |
| RALPH IZZO has been a director of PSE&G since October 2006. For additional information, see Executive Officers table above.
| |
| Power FRANK CASSIDY has been a director of Power since June 1999. For additional information, see Executive Officers table above.
| |
| E. JAMES FERLAND has been a director of Power since June 1999. For additional information, see Executive Officers table above.
| |
| RALPH IZZO has been a director of. Power since 'October 2006. For additional information, see Executive Officers table above.
| |
| THOMAS M. O'FLYNN has been a director of Power since July 2001. For additional information;' see Executive Officers table above.
| |
| R. EDWIN SELOVER has been a director of Power since July 1999. For additional information, see Executive Officers table above.
| |
| Energy Holdings . ..
| |
| FRANK CASSIDY has been a director of Energy Holdings since January 2000. For additional information, see Executive Officers table above.
| |
| E. JAMES FERLAND has been a director of Energy Holdings since June 1989. For additional information, see Executive Officers table above.
| |
| RALPH IZZO has been a director of Energy Holdings since October 2006. For additional information, see*Executive Officers table above. . , -,
| |
| THOMAS M..O'FLYNN has been -a Director of Energy Holdings since July 2001: For. additional information,. see Executive Officers table above. -
| |
| R. EDWIN SELOVER ha's been a Director of Energy Holdings since January 2000. For addition"al information, see Executive Officers table above.
| |
| .... . 'C, " ' ." , 1 199
| |
| | |
| PSEG, PSE&G, Power and Energy Holdings-.
| |
| Code of Ethics PSEG has its Standards of. Integrity (Standards) as a code of ethics applicable to it and its subsidiaries, including, PSE&G, Power, Energy Holdings and Services. The Standards are an. integral part of PSEG's business conduct compliance program, and embody the commitment of PSEG.and its subsidiary companies to conduct operations in accordance with, the highest legal and ethical standards. -The Standards apply, to all of PSEG's directors, ,employees (including .PSEG's,. PSE&G's, Power's,, Energy -Holdings' and 'Services' respective principal executive officer,' principal 'financial officer, principal accounting officer or Controller and persons performing similar functions), contractors and consultants, worldwide. Each such person is responsible for understanding and complying. with the Standards. The Standards are posted on, PSEG's website, www.pseg.com/investor/governance. We will also send you a copy on request.
| |
| The Standards establish a Set of common expectations for behavior to which each employee must adhere in dealings with investors, customers, fellow employees, competitors, vendors, government officials, the media and all others who may associate their words and actions with PSEG. The Standards have been developed to provide reasonable assurance that, in conducting PSEG'.s business, employees behave ethica.lly and in a*oordance with the law and do not tatkei adatage of investors, regulators' or customers through manipulation, abuse oi cdnfidentiar information or misrepresentation of miaterial facts.
| |
| Any -amendment- (other than technical; administrative,"or non-substantive) to or'"awaiver from the Standards that applies to any director or PSEG's, PSE&G's, Power's, Energy Holdings' or Services' principal executive officer, principal financial officer, principal, accounting officer or Controller,, or persons performing similar functions and that 'relates to 'any element enumerated by the SEC will be posted on PSEG's website www.pseg.com/investor!governance. P wesie ITEM 11. EXECUTIVE COMPENSATION PSEG The information required by Item. 11 of Form 10-K is set forth .under the heading "Executive Compensation"' in PSEG's definitive Proxy Statement for the 2007. Annual Meeting. of Stockholders which definitive Proxy Statement is expected to be filed with the U.S. Securities and Exchange .Cmmission (SEC) on or about March 5, 200.7 and such information set forth under such heading is incorporated herein by this reference thereto.
| |
| PSE&G COMPENSATION COMMITTEE REPORT The Organization and Compensation Committee of the Board of Directors of PSEG has reviewed and discussed the Compensation Discussion and Analysis included in this Annual Report on Form 10-K with management and with Frederic W. Cook, Co., Inc., the Committee's independent compensation"'consutltant.
| |
| Based on such review and -discussions the Organization and Compensation Committee. has recommended to the Board of Directors of PSE&G that the Compensation Discussion and Analysis be ýincluded in.PSE&G's Annual Report on, FormO.10-K...
| |
| Shirley AinnJackson,'Chair .
| |
| Ernest H. Drew Conrad K. Harper William V. Hickey .
| |
| Thomas A. Renyi .
| |
| February 22, 2007 '
| |
| COMPENSATION DISCUSSION AND ANALYSIS The Company 'is a' wholly-owned subsidiary of PSEG and as such has no standing committees of its Board of Directors. Executive compensation is administered under the direction of the Organization and Compensation C6mmittee (Committee) of PSEG, which oversees compensation programs and policies for PSEG and its subsidiaries. In light of responsibilities of the Committee, the ,Board of Directors of PSE&G does not believe it is necessary for it to have a separate committee of its own with, respect to compensation 200
| |
| | |
| matters. The Committee is made up of directors who are independent, under NYSE rules and the Company's requirements for independent directors.
| |
| The executive officers named in the Summary Compensation Table (NEOs) for PSE&G are as follows:
| |
| Mr. Ferland, the'"Chairman and Chief Executive Officer (CEO), who' is also the Chairman and CEO of PSEG; Mr. Izzo, who was President and Chief Operating Officer (COO) until September 30, 2006, after which he became President and COO of PSEG;'Mr. LaRossa, the President and COO since October 1, 2006; Mr. Selover, the Executive Vice' President and General' Counsel,' who -is also the Executive Vice President and' General Counsel of PSEG; Mr. Busch, 'the Senior Vice President and Chief Financial Officer, who retired effective January 18, 2007; and.Ms. Rado, the Vice President-and Controller, who retired effective January 2, 2007., Under the compensation program, administered by' the Committee, each NEO is comp~nsated on the basis of all positions he or she holds' with .PSEG and its subsidiaries, including PSE&G.
| |
| Mr. Ferland will retire from all positions within the PSEG family of companies effective March 31, 2007. At that :time, Mr. Izzo will become the Chairman and CEO of PSEG and PSE&G.
| |
| Compensation 'Philosophy and Program' Our' Ex ecutive Compensation Program' (Program) .is designed to attract, motivate and retain high performing executives who are critical to our long-term success. The Program is structured to link executive compensation to how successfully we exetiute our business plans and meet a number of corporate, financial and operational goals. This design is intended to provide' executives increased, compensation when we do well
| |
| .and to provide less compensation when we do. not.
| |
| As' discussed below under'Committee Activity, th6 Committee has been 'engaged since the fourth quarter of 2006 in a comprehensive review' of' executive compensation, including an analysis of its compensation philosophy and its use of consultants.
| |
| The Committee's general philosophy is to set compensation of executive officers at the median of compensation of a'peer group of companies. The Committee's specific policies and benchmarking are discussed below.
| |
| The Committee reviews the philosophy, ,goals and objective's of the Program at least annually. In assessing their- continued appropriateness, the C6mmittee examines our success and the contributions of the individual executives in achieving our' business'plans. The Committee 'cohsiders the motivational impact of the Program 'as an incentive in attaining desired business results and in the continued ability to attract and retain high-quality executives. Key factors in judging whether the Program has met' its goals are the Program's relationship to our financial results, our future outlook and our ability to attract and retain key executive talent.
| |
| The Committee has the .responsibility to review, approve and modify, as' necessary, our Program and each of its constituent elements.
| |
| Compensation Consultant In O'ctober 2006,' the Committee engaged Frederic W. Cook & Co., Inc.' (Cook) as its executive compensation consultant- to perform a 'iomprehensive review of PSEG's approach to and delivery of executive compensation. The scope of the assignment also included review of the CEO's and other executive officers' specific compensation levels, including analysis of competitive market data and the mix of base salary, equity, incentive and other payments. The results of the review were used in setting executive officer compensation for 2007.
| |
| Cook does not and will not perform any other services for PSEG. Its only roles will be advising the Committee on executive compensation, and also the PSEG Corporate Governance Committee on matters pertaining, to compensation of directors who are not executive officers. Responsibility for assignment to and evaluation of work by Cook is solely that of the Committee and, beginning in April 2007 with respect to non-officer diretors, the Corporate 'Governance Committee. In furtherance 'of Cook's independence, manage-ment receives copies, of certain materials provided by Cook to the Committee only after the materials have been provided.to the Committee.
| |
| In setting, executive base pay levels for 2006 and awards made in January 2006 for 2005 .performance under the annual management incentive' compensation program (MICP), the Committee utilized Hewitt Associates, Inc. (Hewitt) as its executive compensation consultant. Hewitt provided data as to executive 201
| |
| | |
| compensation trends and .to assist in. establishing the CEO's compensation and in reviewing the CEO's recommendations for the compensation of other executive officers. - -
| |
| PSEG pays the fees of the compensation consultants retained by the Committee. In addition, it has agreed to indemnify Cook for certain matters related to Cook's engagement, by the Committee, other than matters involving negligence or intentional misconduct by Cook.
| |
| Committee Activity In setting 2006 and 2007 compensation;, the Committee examined the following elements of compensation: base salary, award targets and performance criteria under. the annual management incentive compiensation plan" (MICP) and equit3 and any other long-term. inceentive, compensation awards under the long-term incentive c'mPens'atibn ,plan (LTIP). . .
| |
| Following Cook's review of executive compensation, .the Committee, in January 2007, considered the recommendations of Cook.with regard~to compensation design and effectiveness, compensation for the CEO and the NEOs, certain other officers .and directors. As a result, the Committee determined to:
| |
| * Change the peer: group of companies (the peer groups appear belOw under Benchmarking) with respect t6 which executive comp'ensation comparisons would be made, to more closely align PSEG with its market contemporaries; Change the form of long-term equity awards from one-third each for options, restricted 4tock- and performance units (restricted stock only. during the pendency of the proposed Exelon merger), to
| |
| . one-half each options and performance units for executive officers and one-half each performance
| |
| :units and restricted stock for other key employees; ' :
| |
| 4 Change' the procedure for conveyance of the consultant's compensation information so that'the Committee would receive the data prior to 'management receiving it; and' Replace -the, PSEG Directors' Stock Plan with a new. equity compensation plan for outside directors. .
| |
| The Committee&also considered compensation.recommendations for the NEOs made by the consiiltant and the .CEO; Based on this review and the recommendations, the Committee, in conjunction with all the independent directors,. established 2007 base compensation levels for the CEO. and' the COO of PSEG. The Committee also established the 2007 base compensation levels'-for the other NEOs and certain other officers based on ,recommendations by the CEO.-'Also in Janiuary.2007, the Committee certified the. achievement of performance goals and determined the amounts earned and payable under the MICP with respect .to 2006 performance.
| |
| In reviewing and establishing compensation levels for 2007, the Committee used the revised comparison peer group. The Committee's decisions in determining compensation for., 2096. and 26,07, were made independent of prior equity awards, outstanding performance units, pensions or future compensation opportunities.
| |
| Compensation, Policies* .
| |
| PSEG and the Committee have established compensation policies to implement the compensation philosophy stated above. To meet our compensation objectives and to focus executive efforts on improving corporate performance, the Committee has' developed and currently administers pay delivery systems that fall into three broad categories: . .,
| |
| " Base salary; ' -
| |
| " Annual cash incentive compensation, including annual performnance-based incentives; and
| |
| " Long-term incentive compensation, including equity and performance awards, such as restricted stock, stock options -and performance units.
| |
| Each, of these elemerits of compensation,, including our related policies regarding determination and evaluation, is discussed further beioxý. Our policy is to provide a mix of these elements in the proportion best designed, as determined by the Committee, to' achieve our compensation objectives. The Comnmittee annually reviews the relationships among these elements, including cash, equity, performance-based pay, incentives, amount at risk and vesting schedules. The Committee does not have specific proportional factors it takes into account when establishing these elements.
| |
| 202
| |
| | |
| * -In addition to- the above elements of compensation, our practice has been to provide the following benefits (described more fully below) to non-represented employees generally, including the NEOs:.,
| |
| * Post-employment., and post-termination benefits, including defined benefit (pension) plans and severance and, change-in-control benefits;.
| |
| " Health care programs; *
| |
| " Employee Stock Purchase Plan (for the purchase. of PSEG Common Stock (Common Stock) at a 5% discount); and A defined contribution,(401(k.)) plan'(the Thrift'Plan).
| |
| Executive and other key '6hrployees are provided with certain additional benefits, such as deferred compensation opportunities, 'enhanced post-employmeiit"beffefits and a limited number' of perquisites, in amounts deemed appropriate by the Committee and management based on the individual's position' and ability to contribute to achievement of our business goals.
| |
| Except for certain employment agreements with senior managers, described below; or with respect to certain benefits: resulting fr6m':'a' termination of employment following a change 'in 'control for certain executive, officers covered under PSEG's Key Executive Severance Plan, also described below,' we generally do not provide a tax, gross-up of benefit amounts deemed to be taxable income under federal or state income tax laws and regulations.
| |
| Role of Executive Officers
| |
| .The CEO. attends Committee meetings,' other than executive' sessions, 'generally acting as Secretary for the -Committee. Other executive, officers and' internal compensation professionals 'may attend portions of Committee meetings. The CEO recommends'the compensation .of his direct'reports within an overall base salary budget and. the Committee considers these recommendations in the context:of the peer group. This includes base salary, incentive compensation. targets for the MICP and the LTIP, goals and objectives and performance evaluation. Management's data provided to the Committee generally includes a recommenda-tion with respect to CEO 'compensation which, historically; 'has reflected' the average base compensation adjustment and average MICP multiplier of other officers.
| |
| The design and effectiveness of compensation policies and programs, are reviewed by the 'CEO periodically in light of general industry and peer. trends, and recommendations for changes are made to the Committee as deemed advisable by.the CEO. The CEO reviews such compensation' matters with our interhal compensation professionals and other consultants. The Committee believes! that the-role played by the; CEO in this process.is. reasonable and. appropriate because the' CEO is best suited to evaluate the performance of his direct' reports. , . '
| |
| Benchmarking As'an important element, the-Committee sets executive cash compensation so' as to be competitive with other large eniergy services :corporations.
| |
| The Committee looks at each element',of'cash compensation within the peer group as well' as' total compensation within the peer group. General industry data is also taken into consideration for certain positions where the talent pool falls outside of the energy sector. Such positions may include the finance, human resources, accounting and information technology fields. For 2006, the following peer group was used:
| |
| AES'Corporation ' , ' JEA Ameren Corporation . ONEOK, Inc.'
| |
| American Electric Power Company, Inc. ' PG&E Corporation CenterPoint Energy, Inc. Pepco Holdings, Inc.
| |
| CMS Energy Corporation PPL Corporation Consolidated Edison, Inc. Progress Energy,' Inc.
| |
| Constellation Energy Group, Inc. '.Reliant Resources, Inc.
| |
| Dominion. Resources, Inc.. '... Semp'ra Energy DTE Energy Company Tennessee Valley Authority Duke Energy Corporation The Southern Company Edison International, , The Williams Companies, Inc.,,
| |
| Entergy, Corporation TXU Corp.
| |
| Exelon Corporation ' WPS Resources Corporation FirstEnergy Corp. , . Xcel Energy Inc.
| |
| FPL Group, Inc.
| |
| 203
| |
| | |
| In determining executive compensation for 2007, the following group of energy 'erfvices firms with reported net income averaging about $1 billion/year and market capitalization averaging. about $16 billion was used. PSEG's net income and market capitalization are approximately at the median of this group and we believe that this group is more closely, aligned with PSEG.
| |
| AES Corporation FPL Group, Inc.
| |
| American, Electric Power Company, Inc. PG&E Corporation Consolidated'Edison, Inc. Progress Energy, Inc.
| |
| Dominion Resources, Inc. Sempra Energy '
| |
| Duke Energy Corporation. The Southern Company, Edison International The Williams Companies, Inc.
| |
| Entergy Corporation . . . TXU Corp.
| |
| Exelon Corporation " " Xcel Energy Inc' FirstEnergy Corp.
| |
| As an initial positioning, the Coinmittee targets the 50th percentile of relative positions within- tfiis gioup for totil cash compensatibn, which is. considered the total of salary and annual cash incentive compensation.
| |
| Thfe "nit" of total cash compensation for each of the executive positions is surveyed from this peer group.
| |
| The reported pay structure from the competitive analysis is used as a general guideline in determining the appropriate mix' of compensation among base salary,. annual incentive *opportunity and long-term compensatiohn. opportunity: There:-is no predetermined formula regarding the allocation of salary and incentives.-The mix of incentives is' selected so as 'to be reflective ,of the competitive practice found in this group for each of the pay components listed above.
| |
| Compensation Components" Base Salary The NEOs' base salary levels are reviewed annually by the Committee using a budget it establishes for
| |
| .merit increases 'and salary survey data' provided.by external compensation ch'nsultants. Market competitive base salary levels 'are determined'and established for all covered executive positions as well as for other 6fficers. Annually, the individual 'performance, of the executives with respect 'to corporate performance criteria is determined and taken into, account when setting salaries against the competitive market data. Such corporate performance criteria include attainment of business unit plans, and financial targets, as well as individual measures for each NEd related'td such 'person's area of responsibility: In addition, factors such as leadership ability, managerial skills anid other personal aptitudes and attributes are considered. Base salaries for satisfactory performance are targete'd at the median (50th percentile) of the competitive market.
| |
| Generally, for 2006; base salaries as a group were increased 3.6% from 2005 levels to reflect general market adjustments f6i' comparable positions. ''......
| |
| The Committee attempts to assure that annual salary determinations, on average, fall within the' range of median base* salaries. provided to executives.in the peer panel that have duties and, responsibilities similar to those of our executive officers. Differences are primarily driven by the executive's individual performance and experience.
| |
| Basessalaries and base salary adjustments for individual NEOs other than the CEO are determined relative to, the. recommendations -of-the CEO, considering the individual's level of responsibilities, sustained performance over time and results during the immediately preceding year and the -executive's pay in relation to the market median. Performance metrics 'included achievement of business plans, safety ,and operational results,' customer satisfaction, regulatory outcomes' and other factors. -
| |
| For fiscal year 2006, the base salary of E. James Ferland, Chairman of the Board and CEO, based on overall performance and consideration of market data, was set at a rate of $1,120,000 or a'3.7% increase over the rate for 2005, which was approximately the median of base salary provided to CEO's of other large energy services organizations.. In 'determining base. salary for the CEO, individual performance in relation to corporate performance factors 'such as achievement of business plans, financial results, safeiy, human resources management, nuclear operations and civic6 leadership was considered. For 2007, until Mr. Ferland's retirement on March 31st, he will' be paid a salary at the annual rate of $1,160,000. 'On his election as President and COO of PSEG in October 2006, Ralph Izzo's annual base salary rate was set at $700,000. For 2007, Mr. Izzo's annual rate of base salary as COO of PSEG was increased to $725,000. The annual rate of 204
| |
| | |
| base salary for 2007 for Mr. Selover is $505,000 and for 'Mr.- LaRossa is $380,000. Mr. Busch and Ms. Rado both. retired in January 2007. "
| |
| Annual Cash Incentive Compensation The MICP, which was approved by stockholders in 2004, is an annual cash incentive compensation program for executive and other officers. To support 'the performance based objectives of our compensation program, corporate and business unit goals and measures are established each year based on factors deemed necessary to achieve strategic financial and non-financial business objectives. The goals and measures are established by the CEO-for the NEO's reporting to him, and for all other officers by the individual to whom he or she reports. The goals' and measures applicable to each NEO for 2006 are further discussed below.
| |
| The MICP was designed to comply with Section 162(m) of the. Internal Revenue Code, which, as explained below, limits the Federal income tax deduction for compensation in excess of certain limits. The MICP sets a maximum award fund in any year of 2.5% of PSEG's net income. The CEO's maximum .award cannot exceed 10% of the award fund and the maximum award for each other participant cannot exceed 90%
| |
| of the award fund divided by the number, of participants, other than the CEO, for that year. FQr. 2006 performance under the MICP,, these limits were $.18,475,000 for the total award pool (of which $7,919,300.was awarded), $1,847,500 for the CEO's maximum award and $437,600 for each other participant's maximum award..: , ,. . ..
| |
| * Subject. to the overall maximums stated above, NEOs are eligible for annual incentive compensation based on a combination of the achievement of individual performance goals by each officer which determines his/her Individual Performance Factor, as adjusted by overall corporate, performance, as measured by the Corporate Factor. The Corporate Factor is a financial measure, PSEG's Return on Equity (ROE), which is a relative performance assessment comparing PSEG's ROE against the median ROE performance of energy companies that comprise the Dow Jones ,Utility Index (DJUI). This Corporate Factor is the, significant determinant of MICP awards. A maximum award is based on a comparative performance factor of 1.5 and is achieved if PSEG's annual ROE, as measured on September 30, exceeds the median ROE performance of the group, of energy companies that make up.the DJUI by five hundred basis points. The minimum award threshhold,'based on a cbmparative performance factor of 0.5, is reached if PSEG's ROE is not more than five hundred basis points below" the DJUI median. Actual incefitive 'awards for 'participants in the MICP are' computed as follows: (A) the participant's Target Award Amount (% of basesalary) is multiplied by (B) the participant's Individual Performance 'Factor (0.0 to 1.5), which, in turn, is multiplied by (C) the Corporate Factor to arrive at the Final Award. In no case, however, may' a Final'Award exceed the lesser 'of (i) 1.5 times the participant's Target Award Amount or (ii) the maximum amount allowed for that partitipant under the'total award pool for that'year.. ".
| |
| -Individual Performance Goals for NEOs include the following. measures: OSHA safety. performance, operational performance, customer satisfaction, operations and environmental performance and compliance.
| |
| Each NEO position has a targeted incentive award established by the Committee at the beginning of each year ranging from 35% (increased to 40% for 2007) to 100% of base salary. Annual incentive awards are.
| |
| intended to' provide a competitive level of compensation. if the 'corporation meets its'financial goals and the NEO achieves his or her business unit specific and individual goals. Since' MICP targets are set as' a percentage of base salary, increases in salary affect target bonIuses. Thie goals and measures applicable to each NEO for 2006 are further discussed on page 213..
| |
| For the 2006 performance' year,:based on PSEG's ROE of 15.3%, as compared with the median ROE of the companies comprising the DJUI of 13.4%, the Corporate' Factor applied to MICP participants was 1.19.
| |
| Also for 2006, Mr. Ferland's final award was limited to an overall performance factor of 1.5, the maximum allowed, which was also the average overall performance factor of his direct reports.
| |
| The MICP awards of the NEOs for 2006 are shown below in the Summary, Compensation, Table. The Committee made -its determinations regarding MICP awards for the 2006 performance ,year in ,January of- 2007. Payment was made as soon as practicable thereafter.,
| |
| Long-Term Incentive Compensation .
| |
| The LTIP was approved by PSEG's stockholders at the 2004 Annual Meeting'. To 'permit flexibility, the LTIP provides for different forms of equity awards including:-
| |
| * s.tock options (the right.to, purchase shares of Common Stock at a stated price);
| |
| * restricted stock (shares of Common Stock subject to forfeiture if certain service requirements or other restrictions are not.met); during the restriction period;, recipients of shares of restricted 205
| |
| * stock may exercise full voting rights with respect to those shares and are entitled to receive all dividends on the shares; and- - -- . . .
| |
| performance. units (the right to receive a stated number of shares of Common Stock or cash based upon the value of such stated number of share's upon the attainment...f.certain performance goals).
| |
| NEOs, other officers and other key employees, as selected by the Committee, are eligible to participate in the LTIP.
| |
| This plan is d~signed to attract and retain qualified personnel for positions of substantial responsibility, to motivate participants toward-goal achievement by means of appropriate incentives, to achieve long-range corporate goals, to provide incentive compensation opportunities that are competitive with those of other similar companies and to align participants' interests with those of our stockholders.
| |
| The exercise price of any stock option granted under the LTIP may not be below the. closing price of Common Stock on the date of grant,' no repricing may be done without stockholder approval and no discounted options may be granted. Performance goals are used for any performance based. awards.
| |
| ,Neither options nor performance units were granted to NEOs in 2005 and 2006. All grants made were restricted stock- awards because- the Committee determined that this type of award. was most compatible with the proposed merger, with Exelon. 'In January -2005, LTIP awards were made *with respect, to 2005 compensation and in. December 2005, LTIP awards were made- with respect to 2006 compensation.
| |
| For 2007 grants, the'Committee determined that senior officers, including the NEOs, would be granted' a long-te'im award consisting of 50% performance shares and 50% non-qualified stock options. For other participants;ý 2007 awards would' consist of 50% performance shakes andc 50% restricted stock. The Committee structured the grants in this manner to increase the performance related nature of the grants to senior officers.
| |
| Grant.levels are determined by the Committee based upon, several factors including the value of long-term incentive awa.rds.made by firms in the peer group to executives in similar positions and whose .cash compensation is. similar to each NEO as well- as. the individual's ability to contribute.to PSEG's overall--
| |
| success. The ,level of grants is reviewed annrually by the Committee. In general, when making LTIP grants, the Committee's determinations are made independently from any consideration of the. individual's prior LTIP awards.
| |
| The CEO determines his recommendations for the size of LTIP grants for -NEOs and each other participant by averaging the median of long-term incentive grants for a- comparable position in the peer group and the median of long-term incentive grants for comparable levels of base salary for positions -within the peer group. In making his recommendation for the size of a particular LTIP grant for each NEO, the CEO adjusts this average to reflect the individual's performance and ability to contribute to PSEG's long-
| |
| - term value. '
| |
| * PSEG has not granted stock options to NEOs since early 2004, shortly after PSEG's stockholders approved the LTIP at the 2004 Annual Meeting. Generally, the Committee considers -changes regarding executive officer salary adjustments, short-term cash incentive goals and. equity compensation grants at its December meeting each year. However, because of the ongoing review of executive compensation -by Cook at year-end 2006, LTIP awards for 2007 were'not made until January 2007. For future years, the Committee intends to resume its practice of making compensation decisions, and LTIP. grants within the same period, generally around December of each year. The Committee expects, this 'practice to be followed without consideration of the timing of release of earnings or other non-public information.
| |
| The following table discloses LTIP awards made by the Committee to the NEOs in February'2007:
| |
| Name Stock Options (#) Performance Units (#)
| |
| Ferland . ý........................................... 44,000 7,800 Izzo ............................................ ..... 70,000 .12,300 Busch: ............................................. 0 . -0 Selover ........................................ 26,000 4,600 R ado ................................................ 0 0 LaRossa ....................................... 26,000 '4,600 The Stock Options granted have a term of ten years and an exercise price of $65.85 (the closing price on, the date of grant). The right to exercise one-quarter of the stock options vests on each of December 31, 2007, 2008, 2009 and 2010.
| |
| 206
| |
| | |
| The performance units are subject to the achievement of certain performance goals related to PSEG's performance with respect to Total Shareholder Return and ROE relative- to the companies in"the DJUI over a performance period ending on December 31, 2009.. .
| |
| Other Executive Compensation Programs Retirement:-. .. .
| |
| We provide certain retirement benefits to maintain practices that are competitive with companies with which we compete for executive talent, In addition to the.qualified pension plan, we maintain.supplemental plans to provide, competitive retirement benefits. These benefits are described below under Pension Benefits.
| |
| Severance and Change in Control Benefits '*'
| |
| We provide for severance benefits in the event of certain employment terminations. These benefits are available to officers,' including the NEOs, in order to be competitive With the companies with which we compete for executive talent. We also provide severance benefits upon a change -in control to' officers, including the NEOs, and to certain key executive level' employees. A change in control is by its nature disruptive to an organization and to many executives. Such executives are frequently key players in the success of, organizational change. To assure the continuing performance of such executives in the face of a possible termination of employment in the event- of a change -in control, PSE&G deems it prudent to provide a competitive severance package. In addition, some executives, not'a key party.to such transaction, may have their employment .terminated -following its completion. A severance plan with. benefits, applicable upon a change in control,.is an important. element, for attracting and retaining key executives. These benefits are described below ,under Potential Payments upon Termination of Employment or Change in Control.,
| |
| Perquisites We also provide certain perquisites that PSEG believes are reasonable to maintain' compensatibn practices -that are competitive with companies with which' we 'compete for-executive talent.TThese include automobile use, financial planning services, annual7 physical examinations, -spousal travel to accompany executive officers' on business trips, PSEG-purchased' tickets' to entertainment and 'sporting events, home security, ho*ine computer services and chartered air travel'. These perquisites are described- in the Sumfiiary Compensation Table.
| |
| Stock Ownership Guidelines.,
| |
| To encourage equity ownership of Common Stock by our officers, PSEG has estAblished guidelines for stock ownership over.a reasonable period of time as follows: ,. '
| |
| 'CEO: 5x, salary; '
| |
| * President/Chief Operating Officer and Executive Vice President: 3x salary;
| |
| * Senior Vice President: 2x salary; and.
| |
| . Vice President: lx salary.,. " ,' ' ' .
| |
| In fulfilling the stock ownership guidelines, the executive may count all stock owned directly and beneficially. All restricted stock whether or not vested may be included. Also included.are shares, held -in the Thrift Plan. Stock options and performance units are not counted. .
| |
| !PSEG's Insider Trading Policy prohibits the pledgingor hedging bf such shares.
| |
| The Stiock Ownership Guidelines will be reviewed annually by the Committee.
| |
| In making 2007 grants'under the LTIP, the stock. ownership policy was not a, factor considered by the Committee ' ''
| |
| 207
| |
| | |
| The following table shows, for each NEO, the dollar amount of stock ownership required by the Stock Ownership Guidelines and the dollar amount of these actual stock holdings as of February 16, 2007 (see Security Ownership of Directors, Management and Certain Beneficial Owners):
| |
| Dollar Value 1of Name Ownership Guideline Shares Held Ferland . $5,600,000 $28,488,187 Izzo' $2,175,000 $ 5,217,687 Selover $1,515,000 $ 1,754,625 Busch $1,2i5,000 $ 1,241,740 Rado $ 285,000 $ - 563,323.
| |
| LaRossa $1,140,000 $ 392,490; Value shown based upon the closing price of $73.69 on February 16, 2007.
| |
| Accounting and Tax Implications The Committee has. considered the effect of the adoption of FAS 123R. (see Notes 2 and 17 of the Notes' to Consolidated Financial Statements included in this Form 10-K) regarding the expensing of. stock. options in determining the nature of -the grants under the LTIP.
| |
| The Committee considers the tax-deductibility of our..compensation payments: Section 162(m) of the Internal Revenue Code (IRC) generally denies a deduction for United States federal income tax purposes, for compensation in excess of $1 million for persons named in .the proxy statement, except for compensation pursuant to shareholder-approved performance-based plans. Stockholder approval of the LTIP and MICP.
| |
| was received at PSEG's 2004 Annual Meeting of Stockholders. As a result, performance-based compensation under these plans is not now subject to-the limitation on deductions contained in Section 162(m) of the IRC.'
| |
| In 2006, Messrs. Ferland and Izzo had compensation (consisting of base salary and the taxable'value of
| |
| .restricted stock that vested during the year) in excess .of the amount deductible under Section 162(m) of the!:,
| |
| IRC. The Committee will continue to evaluate executive compensation in light of Section 162(m) of the IRC.
| |
| For 2007, the Committee has determined to make all awards to NEO's under the LTIP performance-based.*
| |
| In light of Section 162(m), as well as certain New York Stock Exchange rules, the Committee's general.
| |
| policy is to present all incentive compensation plans in which executive *officers participate to stockholders for approval prior-to implementation.
| |
| I,
| |
| .1,t 208
| |
| | |
| ==SUMMARY==
| |
| COMPENSATION TABLE Change in Pension Value and Non-Equity Non-Qualified Incentive Deferred Stock Option' Plan Compensation All Other' Name and Salary Bonus ,, Awards Awards Compensation Earnings Compensation Total Principal Position Year ($) ' ($) ' ($)p ($)2 ($)3 ($)4 ($)5,6
| |
| ($)
| |
| E. James Ferland 2006 l,115,8167- 0 5,166,867 1,680,0008 821,233 279,035 9,1*72,301 10,8356 Chairman of the Board and Chief Executive Officer 9 Ralph Izzo 2006 559,920 0 .778,585 272,836 437,6008 620,394 49,038 '2,718,373 President and Chief Operating Officer of PSEG10 R: Edwin Selover 2006 473,2251 0 425,019 17,819 356,30Q 494,725 *46,989 1,814,077 Executive Vice President and General Counsel .,
| |
| Robert E. Busch 20066. -403,487 0 703,800- 161200 303,800 '324,000 "' 61,770 1,813,057 Senior Vice President and Chief Financial Officer12 Patricia A. Rado 2006 283,934 0 302,073 6,155 149,600 173,129 46,595 961,486 Vice President and Controler 1I3 Ralph A. LaRossa 2006 238,720 0 155,230 4,536 176,400 , 135,000 .38,826 '748,712 President and Chief Operating 14 Officer .*
| |
| The amount shown 'reflects the expense included on PSE&G Financial. Statements for, 2006 related to restricted stock awards and performance units granted in current or prior years under the LTIP and still outstanding as determined under Financial Accounting Standard (FAS)123R. The fair value at the grant date of the number of shares of equity awards granted in 2006 is shown below in the Grants of Plan-Based Awards Table. Generally, restricted stock awards vest one-third annually and, during the restricted period, earn dividends as declared on the Common Stock.
| |
| Under their terms, all shares of restricted stock Vest upon. retirement. For Mr. Busch and Ms. Rado, in accordance with FAS 123R, a portion of the market value of unvested shares of restricted stock was recognized in 2006 and reflected in the amount shown. The amount expensed by PSE&G was accelerated to reflect earlier vesting following their announcements of anticipated retirement dates.
| |
| Performance units are denominated in shares of Common Stock and are subject to achievement of certain performance goals over a three-year period and are payable as determined by PSEG in shares of stock or cash. For a discussion of the assumptions made invaluation see Note 17 of the Notes to the Consolidated Financial Statements included in PSEG's 2006 Annual Report on Form 10-K.
| |
| The respective amounts attributable to restricted stock and performance units are as follows:
| |
| Ferland Izzo Selover Busch Rado LaRossa Restricted Stock $4,813,839 $691,123 $372,541 $656,093 $282,195 $140,918 Performance Units $ 353,028 $ 87,462 . $ 52,477 $ 47,707 $ 19,878 $ 14,312 2 Expense of options granted in current or prior years under the LTIP 'and still outstanding as determined under FAS 123R. The fair value at the grant date of the number of shares of equity awards granted in 2006 is shown below in the Grants of Plan-Based Awards Table.
| |
| 3 Amounts awarded were earned under the MICP and determined and paid in the.following year.
| |
| 4 Includes change in actuarial present value of accumulated benefit under defined benefit pension plans between 12/31/05 and 12/31/06 determined by calculating the benefit under the applicable plan benefit 209
| |
| | |
| formula: for each of the plans, -based on credited service and earnings in effect at the respective measurement dates. These changes are:
| |
| Ferland Izzo Selover Busch Rado LaRossa
| |
| $708,000 $601,000. $469,000 $324,000 $160,000 $135,000 Includes interest earned under the Deferred Compensation Plan at Prime plus 1/2/%, to the extent that it exceeds 120% of the applicable long-term rate. These amounts are:,
| |
| Ferland Izzo Selover Busch Rado LaRossa
| |
| $113,233 $19,394 $25,725 $0 $13,129 $0 5 Includes perquisites and personal benefits which include (a) automobile; gas, parking and maintenance, (b) financial planning services, (c) physical examinations and related transportation, (d) home computer and related services, (e) home security systems, (f). airline clubs, (g) travel on chartered aircraft, (h) spousal-travel and (i) personal/family entertainment. We compute the aggregate incremental cost to.PSEG by estimating the amount by which the value of the benefit provided exceeds whatever reimbursement for such expenses the NEO would ordinarily been entitled to claim under established business expense policies.
| |
| For automobiles; the lease value of the vehicle was used; for parking, the amount charged back to the NEO's business unit for the space was used; for'the driver, actual compensation and benefit expense was used; for gasoline and maintenance, estimates were used based on the vehicle's annual mileage. For each NEO, the amount that exceeded the greater of $25,000 or 10% of his total perquisite and personalbenefit amount is shown in the following chart:
| |
| Ferland Izzo Selover Busch Rado LaRossa Automobile,' Gas & Parkinga $159,671 $27,858 $26,414 $24,481 $24,185 _$28,140 a Mr. Ferland receives the services of a driver for business, commuting and occasional personal use.
| |
| In addition, the Company chartered aircraft to transport Mr. Ferland on some occasions when business needs precluded Mr. Ferland from taking commercial flights, which Mr. Ferland had scheduled for personal reasons. The cost to PSEG of such charters was $87,797. Mr. Selover traveled with Mr. Ferland on two such trips.
| |
| 6 Includes the following employer contributions to Thrift and Tax-Deferred Savings Plan:
| |
| Ferland Izzo. Selover Busch Rado LaRossa
| |
| .$6,600 $8,803 $8,806 $8,804 $7,969 $8,804
| |
| ' Includes $780,000 deferred. under the Deferred Compensation Plan.
| |
| 8 Entire amount. was deferred under the Deferred Compensation Plan.
| |
| 9 Will retire effective March 31, 2007.
| |
| 10 Was President and COO of PSE&G through September 30, 2006. Was elected President and COO of PSEG effective October 1, 2006. Was elected Chairman 'of the Board and CEO of PSEG and PSE&G, effective April 1, 2007.
| |
| 11 Includes $39,000 deferred under the Deferred. Compensation Plan.
| |
| 12 Retired effective January 18, 2007.
| |
| 13 Retired effective January 2, 2007.
| |
| 14 Elected President and COO of PSE&G effective October 1, 2007.
| |
| 210
| |
| | |
| GRANTS OF PLAN-BASED AWARDS TABLE All Other All Other Grant Stock Option' Date Awards: Awards: Exercise Fair Estimated Possible Payouts Estimated Future Payouts Number Number'of 'or -Base Value Under Non-Equity Incentive Under Equity Incentive of Shares Securities Price of Of Stock 2
| |
| Plan Awards . Plan Awards of Stock Underlying Option and Grant Threshold Target Maximum Threshold Target Maximum orUnits Options Awards Option Name DateI ($) ($) ($) (#) (#)' ' (#) (#) 0
| |
| (#) ($/Sh)' Awards($)
| |
| E. James Ferland '- N/A 560,000 1,120,000 '1,68.0,000 ' 0 0 0 - 0 . 0 0 Ralph Izzo 10/2/06:177'500 455,000 632,500
| |
| : 1. 0 3,125' 0 0 0 0 189,656 R. Edwin Selover N/A 118,750 .237,500 356,250 . 0 . 0 0 0 0 0Q 0 Robert E. Busch- N/A 101,250 202,500 303,750 0 0 - 0 0 0 - 0 0 Patrici 4 A. Rado N/A 49,875 99,750 149,625 0 0 - 0 0 - 0 -0 0 Ralph" A. LaRossa 10/2/06 72,187 144,375 216,562' 0 2,4004 0 0 0 0-
| |
| . 145,656
| |
| ',Relates to.equity awards...
| |
| 2 Represents possible -payouts under MICP for 2006 performance. The actual awards were made in January
| |
| * 2007 and reported in the Summary Compensation Table. ' ,
| |
| 3 Shares of restricted stock awarded'under the.LTIP. Granted to reflect election as Chief Operating Officer of PSEG based on benchmark peer group and pro-rated for October election. One-third of the restricted stock award vests on the each of December 20, 2006, 2007 and 2008: .
| |
| Shares of restricted stock awarded under the LTIP.
| |
| Material Factors Concerning Awards Shown in Summary Compensation Table, Grants of Plan-Based Awards Table and'Employment Agreements MICP.. ... .
| |
| The Plan-based awards for annual. incentive compensation included in the, Summary Compensation Table were paid in 2007 with respect to 2006 performance under the terms of the MICP. The range of possible awards for.each NEO in relation to his Target Award is set forth in the Grants Based Awards Table above. The results of individual performance goals are multiplied by the overall corporate performance factor and applied against the individual's performance target (see Compensation Discussion and Analysis for an explanation of how the MICP works).
| |
| Mr. Ferland's 2006 MICP award was $1,680,000. The Organization ind Compensation Committee evaluates Mr. Ferland's performance based on overall corporate performance plus the relative performance of his direct reports taken as a group.
| |
| Mr. Izzo's 2006. MICP award was .$43.7,600, and was limited by the maximum award allowed .for participants ,in the MICP other.than the CEO *(see Compensation Discussion and Analysis 'for an explanation). Mr. Izzo had eight performance goals for 2006, with the preponderance related to business integration planning for the proposed merger with Exelon and contingency planning in the event of a merger termination. His other goals included responsibility for developing a corporate-wide financial plan for 2007-2011, providing programs to improve employee health and safety and , increasing!, diversity in employee recruitment and retention.
| |
| Mr. Selover's 2006 MICP award was $356,250. Mr. Selover had. five performance goals for 2006, with the preponderance related to legal support of the merger preparation and integration planning processes. His other goals related to support for maintaining the business of PSEG on a stand alone basis in event of a merger termination; restart of operations on merger termination and improving quality of the legal and environmental services to the operating companies.
| |
| Mr. Busch's 2006 MICP award was $303,750. Mr. Busch had two performance goals for 2006, both related to the performance of Services. The first related to maintaining the day-to-day operations, including staffing levels, of Services during the merger integration process to enable it to support the operating companies effectively. The second was to demonstrate, through client surveys, improvements in accuracy, responsiveness, innovation and value of the services provided to the operating companies.
| |
| Ms. Rado's 2006 MICP award was $149,600. Ms. Rado had two'performance goals for 2006. The first related to maintaining the design and integrity of PSEG's financial systems and processes during the merger 211
| |
| | |
| integratioff process. The second-related to alignment of .PSEG's purchase accounting An-d accounting'policy systems in anticipation of the merger close.
| |
| Mr. LaRossa's 2006- MICP award was $176,400. Mr. LaRossa had four -performanrce goals for 2006, each related to the operations of PSE&G. One related to customer satisfaction as measuredby customer survey
| |
| 'responses;' Aiother related to workforce safety as measured by OSHA incident results; .a third related to reliability of electric service measured by scores on availability' indices and the last related to managing capital and O&M expenditures with target levels of $362.7 million'for capital expenditures and $295.2 million for O&M expenditures.
| |
| LTIP ' " ....
| |
| As discussed in the Compensation Discussion and Analysis, no LTIP awards xere made to NEOs in
| |
| '2006, except for an Award of 3,1f25 shares of restricted stock to Mr. Izzo upon his election as President'and COO of PSEG in October 2006'. The award was determined based on the proportionate difference between the restricted stock award he received in December 2005 is President and COO of PSE&G and the award he would have received had he been President and COO of PSEG at that tim&
| |
| While no Performance Unit Awards were made during 2006, the performance measurement period with' respect to Performance Unit Awards granted by the Committee in 2004 was completed on December 31, 2006. Under the terms of the award grants,, award recipients were eligible to receive 100% of their grant.
| |
| amount 'if, for the three-year performance period ending on December 31, 2006, (a) PSEG's Total Shareholder Return (TSR) placed. it wit.hin ,the third quintile of the companies within the DJUI andj(b)
| |
| PSEG's ROE was within one percent (1%) of the ROE of the DJUI. For performance above or below these levels, the final award could be increased to as much as 200% of the grant amount (TSR in the first quintile
| |
| .and ROE more than 3% above the DJUI) or decreased to as little as zero.'
| |
| See the Option Exercises and Stock Vested During 2006 Table, below, for a list of the NEOs' target awards. As of the date of this Proxyý Statement, the comparative data" necessary to calculate, comparative performance and final award amounts was not yet available.
| |
| Employment Agreements PSEG entered into an employment agreement dated as of June 16, 1998 and amended as of NoVefnber 20, 2001 with Mr. Ferland (together, the Ferland Employment!Ag~eement) covetirfg liis 'employment as'Chief Executive Officer through March 31, 2007. The Ferland Employment' Agreement provides that Mr. Ferland will be renominated for election as a director during his employment' thereunder. The Ferland Employment Agreement also provides that Mr. Ferland's base salary, target annual incentive bonus and ilong-term incentive bonus will be determined based on compensation* practices for CEOs of -similar ;companies and that his annual salary will not be reduced during its.term. The Ferland Employment Agreement-also provided for an award to him of 150,000 shares of restricted Common Stock as of June 16, 1998 and 60,000 shares of restricted Common Stock as of 'November 20,'.2001, with '60,000 shares vesting in 2002; 20,000 shares.vesting in 2003;-30,000 shares vesting in 2004; 40,000 shares' vesting~in 2005; 30,000 shares vesting in 2006; and 30,000 shares vesting :in 2007. The Ferland Employment Agreement' provides for the granting of 22 years'of pension credit for Mr. Ferland's~prior experience, which was awarded at the time of his initial employment.
| |
| When Mr. Ferland retires at the end of his' term of 'employment on March 31, 2007, he will be fully vested in any outstanding shares of restricted 'stock and any other equity awards he received as ý.long-term incentive'award, and he will be paid any previously deferred compensation. He will not receive amy slpecial severance payments on retirement. ,'. - " '
| |
| PSEG entered into an employment agreement with Mr. Izzo dated Octdber 18, 2003, 6overing his employment as President and COO Of PSE&G and in other executive positions 'to which, he may be elected through October 18, 2008. The agreement provides that his base salary, target annual incentive bonus and long-term incentive bonus will be determined based on compensation' practices of similar companies and that annual salary will not be reduced during its term, and' awarted him'options With respect to 250,000 shares of Common Stock, 50,000 of which vest on each October 18 from 2004 through 2008, and expire on October 18, 2013, provided he has remained continuously employed through each such vesting date.
| |
| 212
| |
| | |
| OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (12/31/06) TABLE Option Awards Stock Awards Equity Incentive Equity Plan Incentive ' Awards:
| |
| Equity Plan Market Incentive Awards: or Payout Plan AwardIs: Market Number of Value of Number of Number of Number o f N[umber of Value of Unearned Unearned Securities Securities Securities hares or Shares or Shares, Shares, Underlying Underlying Underlying Units of Units of Units or Units or Unexercised Unexercised Unexercise d Option Stock Stock Other Rights Other Rights Options I Options Unearned Exercise Option t hat have that have that have that have Exercisable Unexercisable Options Price "Expiration Not Vested Not Vested Not Vested Not Vested Name (#) ($) Date (#)7 ($)8 ,(#) ($)
| |
| E.-James Feiland 300,9000- $46.06252 12/19/2010 76,668, 5,089,222 0* 0 231,000, :$40.78003 12/18/2011
| |
| _451,000" 11 $42.75004: 05/03/2014' Ralph Izzo 100,000 100,00010 0 $40.77006 10/18/2013 21,085. 1,399,622 .0 0 11,0009 .$42.75004 05/03/2014 R. Edwin Selover' ': 7,3339 0( * $42.7500 05/03/2014 11,201 743,522 0 0 Robert' E. Busch' 18,333 0. $46.2300 04/24/2011 9,067 601,867 0 0
| |
| '6,6679 $42.7500 05/03/2014 Patricia A. Rado 0 2,5339 0 $42.7500, 05/03/2014 3,867 ' 256,691 0 0 0
| |
| Ralph A. LaRossa 01 1,8679 0 $42.7500 05/03/2014. 4,334 287,691 0 Grants of non-qualified options to purchase Common Stock. The date of grant is ten years prior to the option expiration date shown.
| |
| Closing 3 Closing priceprice on on NYSE NYSE on om grant' grant date date of of 10/19/00.
| |
| 2 12/18/01.
| |
| 3 Closing price on NYSE 'on grant 'date of 5/3/04.
| |
| 4 Closing price on NYSE on grant date of 07/1/01.
| |
| 6 Closing price on: NYSE on grant date of 10/18/03.
| |
| 7 Shares of Restricted Stock awarded under the LTIP, which vest as shown below. Dividends accrue at the regular dividend rate and are paid on each regular dividend payment date as declared by the Board of Directors, -*
| |
| *Vesting Date Grant Date Ferland Izzo. Selover Busch Rado LaRossa 1/18/07 , '. 1/18/05, 21,667 5,333 3,033 2,500 1,033 733.
| |
| 1/18/08 1/18/05' 21,667 5,334 3,034 2j500 1,034. 734 12/20/07 12/20/05 16,667 4,167 2,567 2,033 900 633
| |
| .12/20/08 12/20/05 16,667' 4,167 -2,567 2,034 900 634 12/20/07 10/02/06 0 1,042 0 0 0 .800 12/20/08 10/02/06 , 0 1,042 0. 0 0. 800 8 Value represents number of shares multiplied by the closing price on the NYSE on. December .29, 2006 of
| |
| $66.38. For Mr. Busch and Ms. Rado, a portion of the amount shown was recognized in 20.06 in accordance with FAS 123R due to their announced anticipated retirements as discussed in footnote 1 to the Summary Compensation Table.
| |
| 9 These options vested on January 1, 2007.
| |
| 10 50,000 options vest, on.October 18, 2007 and 50,000' options Vest on October 18, 2008..
| |
| 213
| |
| | |
| OPTION EXERCISES AND. STOCK VESTED DURING 2006 TABLE Option Awards Stock Awards Number of Number of Shares Value Shares Value Acquired on Realized on Acquired on ' Realized on Exercise, Exercise Vesting Vesting Name (#) 6 . ($) ________, ($)2 E-. James Ferlan'd 70,489 4,769,0671 Ralph zJzo 1'8,507"
| |
| .33,667 $1,004,759 1,251,834 R. Edwin__Se!over .333 $ _164,322 10,379 7.01,819ý Robert E. Busch 210,000 $ 4,436,598 8,878 599,861 Patricia A. Rado _53,400' $ 1,290,010 3,744, Ralph A. LaRossa 6,866 234;429 2,670 180,365 I Represents: (i) the aggregate number of shares acquired from the vesting of restricted stock awards under the LTIP and (ii) the aggregate number of performance units granted under the LTIP which vested on 12/
| |
| 31/06 at the .completion'of the three-year performance cycle applicable to such awards as follows:
| |
| Ferland Izzo Selover. Busch, Rado LaRossa Restricted stock 45,732 12,374 6,6991 5,533 2,350 1,666 Performance unitsa 24,757 6,133 3,6,8,0 3,345 1,394 1,004 2 The value attributable to the vested restricted stock is based on the closihig price of the Common Stock on the respective date(s) that the shares vested and the value attributable to the vested performance units is based upon~the closing price of the Common Stock on December,29, 2006. These amounts are: .
| |
| Ferland Izzo Selover . Busch Rado LaRossa Restricted stock $3','125,721 $844,699. $457,5M!1'. $377,820 $160,411 $113,719 Performance ,unitsa $1,643,346 $407,135 $244,278 $222,041 $ 92,533 $ 66,646 a Amounts shown represent. the number and value of target awards, since the final comparative performance data necessary, to calculate the final award amounts is not expected to bel a'ailable until late March 2007.
| |
| 4-,
| |
| 214
| |
| | |
| PENSION BENEFITS TABLE Number of Present Value of Payments Years Credited Accumulated During Last Service Benefit Fiscal Year
| |
| 'Name ,. Plan Name (#) ($)3
| |
| ($)
| |
| E.' James Ferland Qualified Pensicn Plan1 . 20.59 1,358,000 Retirement Incomhe Reinstatement Plan 3,732,000 Mid-Career Hire Supplemental Retirement IncomePln -27.00 _ ý6,681,000' Limited 'Sup'plernental Benefits Plan3 47.59 371,000
| |
| 'Total.. 12,142,000 Ralph Izzo Qualified Pension Plan' 14.70 275;000 Retirement Income Reinstatement Plan 14.70 575,000 Mid-Career Hire 2 Supplemental Retirement , *2.88 Income Plan 3
| |
| -
| |
| 1.7.58 418,000 ,
| |
| Limited Supplemental Benefits Plan 855,000 Total 2,123,000 R. Edwin Selover'7 Qualified Plan' *- 34:33 1,334,060 Retirement Income Reinstatement Plan 34.33 2,398,000:
| |
| 'Mid-Career Hire Supplemental Retirement Income Plan2 - . : 5.00 39.33
| |
| - 546,000' Limited Supplemental Benefits Plan . 514,000
| |
| - 4,792,000 .
| |
| Robert E. Busch Qualified Pension 'Plan' " 8.75 97,000 Retirement Income Reinstatement Plan 8.73 87,000 Mid-Career Hire.2 Supplemental -Retirement Income Plan 4 20.00 57,060 Limiied Supplemental Benefit Plan 28.75 3,376,000' 3,617,000 Patricia A.*Rado . Qualified Plan'- 13.70 435,000 Retirement Income Reinstatement Plan 13.70 364,000
| |
| ' - Mid-Career Hire Supplemental Retirement Income' Plan2 *- 15.00. - 875,000 Limited Supplemental Benefits Plan 28.70 355,000 2,029,000 Ralph A. LaRossa Qualified Pension Plan' 21.51 398,000 Retirement Income Reinstatement Plan 21.51 109,000 Mid-Career Hire 2 Supplemental Retirement Income Plan 0 0 Limited Supplemental Benefits Plan 0 0 507,000
| |
| . All NEOs participate in either a traditional defined benefit pension plan (pension plan) or a cash balance pension plan (cash balance plan) (depending on date of hire), each of which is a qualified plan under the IRC. Such plans are available to all other employees under the same terms and conditions. Messrs. Ferland, Izzo, Selover and Ms. Rado participate in the pension plan. Mr. Busch participates in the cash balance plan.
| |
| 2 Certain employees receive additional years of credited service for the purpose of retirement benefit calculations in recognition of prior work experience before joining employment, including 22 years for Mr.
| |
| Ferland and 15 years for Mr. Busch.
| |
| 3 Amounts shown represent actuarial present value of accumulated benefit computed as of the same pension plan measurement date used for PSEG's financial statements for the year ended December 31, 2006, with two exceptions: (i) NEOs were assumed to retire at the earliest point at which the benefits were payable on an unreduced basis in the plan providing the largest target benefit and (ii) no pre-retirement termination, disability or death was assumed to occur. For a discussion of the valuation method and material assumptions applied in quantifying the present value, see Note 16 to Notes to Financial Statements in this Form 10-K.
| |
| 4 The actuarial present value of accumulated benefits based on actual years of service is $2,112,000 and the actuarial present value of accumulated benefits based on additional years of service is $1,264,000.
| |
| 215
| |
| | |
| Qualified Pension Plans All employees are eligible to participate in ieither a pension plan or 'a.cash balance plan. The pension plan covers employees hired prior to January, 1, 1996 and provides participants with a life annuity benefit at normal retirement (age- 65) pursuant to a'formula based upon (a) the participant's number of years of service and (b) the average X.of the participant's- five highest years of compensation after '12/31/94 up to the limit imposed by the-.IRC. -
| |
| The benefit formula is A + B + C:
| |
| A 1.3% 'of the lesser of 5-year final average earnings not in excess 6f'$24,600 times'years of credited service not exceeding 35 years, -..
| |
| B = 1.5% of the amount by which 5-year final average earnings exceeds $24,600 times years of credited service not exceeding 35 years, 0= 1.5% of .5-year final average earnings times years, of credited-service. in excess of 35 years..
| |
| An additional benefit equal to $4.00 per month for each year of credited service is' payable until the retiree reaches age 65.
| |
| Participants, become fully vested in their pension; pjan benefit upon. completion of five years of service.
| |
| Benefits are payable on an unreduced basis (i). at age 65, (ii) at age. 60, if the participant's age, plus'years of service, equals or exceeds 80 or (iii) at age.,55, if the participant has 25 or more years of service. Participants whose age, plus.years of service, equals or exceeds 80, but. who are not yet ýage- 55, may commence their pension plan benefits .on a reduced basis.. Messrs. Ferland, and Selover are currently eligible for early retirement under the pension plan. Mr.. Ferland. will retire on March 31, 2007: Mr.. Busch and Ms. Rado retired in January 2007. . '. ...
| |
| The cash balance plan covers employees hired or rehired on or after January 1, 1996 and provides, each participant with a life annuity benefit at normal retirement (age 65) equal to the actuarial equivalent of a notational amount maintained for him/her. Participants are eligible for retirement under 'the cash balance plan upon the attainment of age 55 with five or more years of service. Participants' accounts are credited each year with a percentage of compensation, which is determined based on the participant's age plus years of service measured at year-end.
| |
| Percentage of Sum of Age Compensation and Service Credited
| |
| <30 2.00%
| |
| 30-39 . 2.50%
| |
| 40-49 3.25%
| |
| 50-59 4.25%
| |
| 60-69 5.50%
| |
| 70-79 .7.00%
| |
| 80-89 9.00%
| |
| 90+ 12.00%
| |
| Each participant's notional amount grows each year with interest credits based on a 6.0% annual rate of interest. Participants become fully vested in their cash balance plan benefit upon completion of five years of service.
| |
| Reinstatement Plan All employees are eligible to participate in a non-qualified supplemental retirement plan, the Retirement Income Reinstatement Plan for Non-Represented Employees (Reinstatement Plan), designed to replace earned pension benefits as determined by the qualified pension formula, but which are not eligible for payment from the qualified pension plans as a result, of IRC mandated limits' for qualified plans. The benefits payable under this plan mirror those of the qualified plans described above except that the compensation considered in computing the benefit (i) will not be limited by qualified plan limits, (ii) will include any amounts that the participant may have deferred under deferred compensation plans, (iii) will include amounts earned under MICP (which are not considered under the qualified pension plans), (iv) will be limited to 150% of average base salary for the applicable five years and (v) will be offset by any benefits' received by the participant under the qualified plan.
| |
| 216
| |
| | |
| Mid-Career Plan Certain employees, receive additional years of service for the purpose of retirement benefit calculations in recognition of prior work experience.. Such benefits are,, paid from a non-qualified plan, the Mid-Career Hire :Supplemental Retirement Income Plan (Mid-Career Plan). Under the Mid-Career Plan, certain participants, including the NEOs, receive an additional five years of..credited service for the purpose of pension benefit calculations if they retire between ages 60 and 65. The credited years of service re~duce by one-year for each six-month period such participant works beyond age 65. This feature of the plan is designed to encourage retirement on or before age 65. Benefits payable under the Mid-Career Plan mirror those payable under the Reinstatement Plan, except that the additional years of service are considered in
| |
| .calculating the amount of benefit. Any benefit payable under this plan is offset-by benefits payable under the qualified plan and the Reinstatement Plan.
| |
| Limited Plan Certain employees,, including the NEOs, -participate. in a limited non-qualified supplemental retirement plan, the. Limited Supplemental Benefits Plan for Certain Employees (Limited Plan). This plan seeks to provide a total target replacement income percentage equal to credited service for qualified pension calculation purposes, Mid-Career Plan calculation purposes plus 30 to a maximum, of 75%. Compensation covered for the Limited Plan is the same as for the Mid-Career Plan. The target replacement amount under the Limited Plan is reduced by any pension benefits accrued and vested from a previous employer-at the time of hires by the participant's Social Security benefit at normal' retirement age and by the pension benefits provided by each other' PSEG retirement benefit plan (qualified plans and non-qualified plans). The Limited Plan also provides a 'death 'benefit'-equal to 150% of base compensation if death occurs while the-particigant is actively employed. Participants become entitled to a Limited Plan benefit only upon (a) retirement under the'terms of the qualified plan in which they participate (pension plan or cash balance plan) or (b)-death, at which point the benefit is payable -as an annuity on an unreduced .basis.
| |
| 217
| |
| | |
| NON-QUALIFIED DEFERRED COMPENSATION TABLE Aggregaie Executive Registrant , . Balance at-Contributions Contributions in Aggregate Aggregate Last Fiscal in Last ".. Lastf. Earnings in Last. Withdrawals/ Year End Fiscal Year Fiscal Year ' Fiscal Year Distributions (12131/06)
| |
| Name " (2006) ($) . (2006) ($) (2006) ($) ($) ' ($)
| |
| E. James Ferland' 780,000' 0i 384,332 .. 0 5,162,619 Ralph Izzo 2 183,150 0 65,852 . 0 826,383 R. Edwin Selover 3 39,000' 0 88,390 0 1,103,701 Robert E. Busch I 01 0 0 0 . 0 Patricia A. Rado 4 85 _00Q ., .0 44,565 0 595,872 Ralph A. LadRossa ' 0 0 0 0 ' ' 0 1 The amount shown under Executive Contributions in Last Fiscal Year (2006) is reflected in the Summary Compensation Table as Salary for 2006. $113,233 of the amount shown under Aggregate Earnings in Last Fiscal Year (2006) is reported in the Summary Compensation Table under Change in Pension Value and Non-Qualified Deferred Compensation as earnings in excess of 120% of the applicable long-term rate as discussed in Footnote 4 of that Table. $3,281,937 of the amount shown under Aggregate Balance at Last Fiscal Year End (12/31/06) was reported in the Summary Compensation Tables for the last fiscal year or previous years.
| |
| 2 The amount shown under Executive Contributions in Last Fiscal Year (2006) was previously reported in PSEG's 2005. Proxy Statement. $19,394 of the amount shown under Aggregate Earnings in Last Fiscal Year.
| |
| (2006) is reported in the Summary Compensation Table under Change in Pension Value and Non-Qualified Deferred Compensation as earnings in excess of 120% of the applicable long-term rate as discussed in Footnote 4 of that Table. $721,485 of the amount shown under Aggregate Balance at Last Fiscal Year End (12/31/06) was reported in Summary Compensation Tables for the Last Fiscal Year or previous years.
| |
| 3 The amount shown under Executive Contributions in Last Fiscal Year (2006) is reflected in the Summary Compensation Table as Non-Equity' Incentive Plan Compensation for 2006. $25,725 of the amount 'shown under Aggregate Earnings in Last Fiscal Year (2006) is reported in the Summary Compensation Table under Change in Pension Value and Non-Qualified Deferred Compensation as earnings in excess of 120%
| |
| of the applicable long-term rate as discussed in Footnote 4 of that Table.. $412,607 of the amount shown under Aggregate Balance at Last Fiscal Year End (12/31/06) was reported in Summary Compensation Tables for the last fiscal year or previous years.
| |
| 4 $13,129 of the amount shown under Aggregate Earnings in Last Fiscal Year (2006) is reported in the Summary Compensation Table under Change in Pension Value and Non-Qualified Deferred Compensation as earnings in excess of 120% of the applicable, long-term rate as discussed in Footnote 4 of that Table.
| |
| $484,021 of the amount shown under Aggregate Balance at Last Fiscal Year end (12/31/06) was reported in Summary Compensation Tables for the last fiscal year or previous years.
| |
| Deferred Compensation Plan Under PSEG's Deferred Compensation Plan for Certain Employees (Deferred Compensation Plan),
| |
| participants, including the NEOs, may elect to defer any portion of their compensation by making appropriate elections in the calendar year prior to the year'.in which the services giving rise to the compensation being deferred is rendered. For performance-based compensation, elections may be made up to the date that is six months before the end of the related performance period, as long as a) the performance period is at least 12 months in length, b) the participant performed services continuously from the date the performance criteria were established through the date the deferral election is made and c) at the time the deferral election is made, the performance-based compensation is not both i) substantially certain to be paid and ii) readily ascertainable. A participant may change an election to defer compensation not later than the date that is the last date that an election to defer may be made.
| |
| At the same, time he/she elects to defer compensation, the participant must make an election as to the timing and the form of distribution from his/her Deferred Compensation Plan account. Distributions may commence (a) on the thirtieth day after the date he/she terminates employment or, in the alternative, (b) on January 15th of any calendar year following termination of employment elected by him/her, but in any event no later than the later of (i) the January of the year following the year of his/her 70th birthday or (ii) the January following termination of employment. Notwithstanding the forgoing, however, for NEOs, distribution of his/her account may not occur earlier than six months following the date of his/her 218
| |
| | |
| termination of service. Participants may elect to receive the distribution of their Deferred Compensation account in the form of (x) one lump-sum payment, (y) annual distributions over a five-year period or (z) annual .distributions over a 10.year period.
| |
| Participants mfay make changes of distribution elections on a prospective basis. Participants may also make 'changes of distribution, elections, with resp.ect to prior deferred compensation as. long as (a) any such new distribution election is made at least *one year prior to the date that the commencement of the distribution would otherwise have occurred and (b) the revised commencement date is at least five years later than the date that the commencement of the distribution would otherwise have occurred.. ,
| |
| .Amounts deferred under the Deferred Compensation' Plan are credited with earnings based on (a) the performance of 'ne or more of the life style investment funids or the S&P 500 Fund available to employees under PSEG's 401K Plans or (b) at the rate of Prime plus 1/2,%, in such percentages as selected'by the participant' A participant who fails to provide a designation of investment funds will accrue earnings on his/hei account at the rate of Prime plus 11/2ý% '
| |
| .1*7 " ' , . , 4'.
| |
| 219
| |
| | |
| POTENTIAL PAYMENTS UPON TERMINATION OF EMPLOYMENT OR CHANGE-IN-CONTROL"*
| |
| The employment agreements of Messrs. Ferland and Izzo discussed above each provide for certain severance benefits. Each of these agreements provides that if the individual is terminated without "cause" (a willful failure to perform his duties) or resigns for "good reason" (a reduction in pay, position or authority) during the term of such agreement, the respective entire restricted stock award and/or entire option award becomes vested, the, individual will be paid a benefit of two times base salary and target bonus, and his welfare benefits will be continued for two years unless he is sooner employed. In the event. such a termination occurs after a "change in control" (as defined below), the payment to the individual becomes three times the sum of salary and target bonus, continuation of welfare benefits for three years unless sooner reermployed,- payment of the net present value of providing three years, additional service under our retirement plans and a gross-up for excise taxes due under the IRC on any termination. payments. Each of the agreements, provides that the individual is prohibited for one year (two years for Mr. Ferland) from competing with and for two years from recruiting e Iniployees-from us- or its subsidiaries'0r affiliates, 'after termination of employment. Violations of these provisi6nis require a forfeiture of the respective 'restricted stock and option grants and certain benefits . .
| |
| PSEG's Key Executive Severance Plan provides severance benefits to Messrs. Selover and'LaRossa.and, prior to -their retirements, Mr. Busch and Ms. Rado and tocertain of our. key. executive-level employees whose employment is terminated without. cause after a Change in Control.
| |
| Under the Key Executive Severance Plan, if Mr. Selover and Mr. LaRossa are terminated without cause or resign their employment for good reason within two years after. a change in control, they will receive (1) a pro rata bonus based on their respective target annual incentive compensation, (2) three times'the sum of their salaries and target incentive bonuses, (3).accelerated vesting of equity-based awards, (4) a lump sum payment.equal to the actuarial equivalent of their benefits under 'all of 'our 'retirement plans in which they participate calculated as though the participant remained employed for three ,years beyon'd the date their employment terminates less the actuarial, equivalent of. such benefits on the date their employment terminates, (5) three years continued welfare benefits (the first 18 months of which will be provided through PSEG-paid COBRA .continuation coverage), (6) one year of PSEG-paid outplacement services and (7) vesting of any compensation previously deferred. Similar provisions applied to Mr. Busch and Ms. Rado until their respective retirements.
| |
| Messrs. Selover and LaRossa also participate in PSEG's'Separation Allowance Benefit Plan for Non-Represented Employees (Separation Allowance Plan) which provides certain -severance, benefits. to non-represented employees who suffer a termination of 'employment as a result of a reduction in force or reorganization. Under the Separation Allowance Plan, 'key managers, including Messrs.'Selover and LaRossa, are entitled to two weeks, of base salary for 'each year of service, with. a minimum .of 26 weeks and a maximum of 52 weeks of base salary, as well'as, a prorated. payment of their, target incentive award 'and certain outplacement services, educational assistance, 'health care and life insurance coverage. Similar provisions applied to Mr. Busch and Ms; Rado until their respective retirements.
| |
| If a termination withoutcause, with good reason or for. a reduction in force or reorganization had occurred on December 31, 2006, each of the.NEOs would .have received. the following benefits- ' . -
| |
| Ferland: $13,800,729 Izzo: $ 7,880,567 Selover: "$ 1',949,381 Busch: $ 1,464,153 Rado: $ 700,259 La Rossa: $ 941,404 220
| |
| | |
| If a termination without 'cause or with good reason hadoccurred.on. December 31, 2006 following a change in control, each of the NEOs wo.uld have received the following benefits:
| |
| Ferland: $16,069,885 " " ' . -
| |
| Izzo: $12,872,701 Selover: $ 3,702,722 ' "
| |
| Busch: $ 3,158,885 . ".
| |
| Rado: $ .1,365,323 ,
| |
| La 'Rossa; $ 3,812,893 .
| |
| when Mr. Busch andý Ms. Rado retired in 'January 2007, neither received a severance benefit Urider these plans.
| |
| .Change in Control under the Employment Agreements, of Messrs. Ferland and Izzo and *under.the Key Executive Severance Plan generally means the occurrence o.f any of the following events:
| |
| (a) any person is or becomes the beneficial owner of our securities representing25% or more of the combined, voting power of PSEG's then outstanding securities; or (b) a majority of PSEG's Board of Directors is replaced without approval of the current Board; or (c) there is consummated 'a merger or consolidation 6f'PSEGO6other than a merger or consolidation which would result in PSEG's voting securities outstanding ilmediately prior to' such merger continuing to represent at least 75% of the combined voting 'power of the securities of PSEG 6r such surviving entity'immediately after such merger or*consolidation; or '
| |
| (d) PSEG's shareholders' 'approve a plan of complete liquidation or dissolution of us'or there is constinmated an agreement for the sale or disposition by us of all or substantially all of PSEG's assets.
| |
| DIRECTOR COMPENSATION TABLE)' .
| |
| Chafige in Pension Value '
| |
| Fees Earned
| |
| * Non-Equity and Nonqualified or Paid Stock Option Incentive Plan " Deferred' "- '- All' Other In Cash Awards Awards Compensation Compensation' Compensation 'Total 4
| |
| Name ($)2 ($)3 ($) ($) Earnings ($) ($)
| |
| Caroline Dorsa ........... 73,500 92,200 0 0 " 0 " 0 165,700 Albert R. Gamper, Jr........78,500 92,200 ' 0 0 "0 . . ' 0 170,700 Conrad K. Harper ........... 69,000 92,200 0 0 0 0 161,200 PSE&G is a wholly-owned subsidiary of PSEG. PSE&G's directors consist"of five'persons who are also directors of PSEG: Ms. Dorsa, and Messrs. Ferland, Gamper,' Ha-rper and Iiz6. 'Messrs. Ferland and Izzo are employees and are not paid any fees as directors. Ms. Dorsa and Messrs. GampIeran.d "HarpeIr 'are paid a retainer and meeting fees as PSEG directors a'nd do not receive an'additional ietainer as dir'ctors of PSE&G. The amounts shown below include the fees paid' to each as PSEG directors.
| |
| 2 Includes all meeting fees, chair/committee retainer fees and: cash portion ($25,000) of the annual retainer.
| |
| During 2006, each director who was not an officer of us or our subsidiaries and affiliates was paid an annual retainer of $50,000 and a fee of $1,500 for attendance at any Board or committee meeting, inspection trip, conference or other similar activity relating to us or PSE&G. Pursuant to the Compensation Plan for Outside Directors, a certain percentage, as determined by the Board, fifty percent 'during, 2006, of the annual retainer is paid in shares of Common Stock. Each Committee Chair received an additional annual retainer of $5,000, except for the Chair of the Audit Committee, who received $10,000. In 'addition, each member of the Audit Committee received an additional annual retainer of $5,000.
| |
| 3 Includes a payment of the number of shares of Common Stock equal to $25,000, the fair value computed in accordance with FAS 123R, the stock portion of the annual retainer. Also includes the grant date fair value computed in accordance with FAS 123R of 1,000 shares granted under the Stock Plan for Outside Directors, pursuant to which directors who are not employees of us or our subsidiaries receive shares of restricted stock for each year of service as a director. For 2006, this amount was 1,000 shares.
| |
| The restrictions on the shares of Common Stock granted under the Stock Plan for Outside Directors provide that the shares are subject to forfeiture if the director leaves service at any time prior to the Annual Meeting of Stockholders following his or her 72nd birthday. This restriction would be deemed to 221
| |
| | |
| have been. satisfied if the director's service were terminated after h change- in control as 'defined in the Plan or-if the director were to die in office. The Plan's administrative committee (comprised of the-directors who do noi participate in the plan) has the ability to waive these restrictions for good cause shown. Restricted stock may not be sold or otherwise transferred prior to the lapse of the restrictions. Dividends on shares of Common Stock held subject to restrictions are .paid directly to the director and the director-has the right to vote the shares of Common Stock.
| |
| In November 2006,, the Committee recommended changes to .the Directors Restricted Stock Plan, to
| |
| ,provide that grants would be made on May 1 of each year, rather than on the first business day following the Annual Meeting, and to reflect the change from age 70 to age 72 in the'mandatory retirement age for Directors previously made by the Board. The Board subsequently approved these changes. Subsequently, the Board, based on the recommendation of the Organization and Compensation Committee, determined to replace the Directors' Stock Plan with. a new equity compensation plan for outside directors.
| |
| 4 Includes interest earned under the Directors' Deferred Compensation Plan at Prime plus 1/2h% to the extent that it exceeds 120% of the applicable Federal long-term rate. The directors do not participate-in a PSEG-sponsored pension plan.
| |
| Directors' Deferred Compensation Plan
| |
| -Under PSEG's Deferred' Compensation Plan fbr Directors (Directors' Deferred Compensation Plan),
| |
| directors who are not employees may elect to defer any portion of their retainer and meeting attendance fees by making appropriate elections in the calendar year prior to the year in which the services giving rise to the compensation being deferred is rendered. A participant may change- an election to defer .compensation not later.than the date that is the last date that an election to defer may be made. * .
| |
| At the same time he/she elects to d6fer comipensation, the participant must make an election as to the timing and the form of distribution from his/her Directors' Deferred Compensation Plan" account.
| |
| Distributions may commence (i) on.the thirtieth day after the date he/she' terminates service as a director or, in the alternative, (ii) on January 15th of any calendar year following termination of service elected by the him/her, but in any event no later than the later of (A) the January of the year following the year- of the his/her 71st birthday or (B)-the January following termination of service. Participants .may elect to receive the distribution of their Directors' Deferred Compensation account in the form of (i) one lump-sum payment; (ii) annual distributions over a period selected by the participant, up to 10 years.
| |
| Participants may make changes of distribution elections on a prospective basis. Participants may also make changes of distribution elections with respect to prior deferred comp'ensation as long (A) any such new distribution election is made at least one year prior to the date that the commencement of the distribution would otherwise have occurred and (B) the"revised commencement date is at least five years later than the date that the'commencement of the distribution would otherwise have occurred.
| |
| Amounts deferred under the Directors' Deferred Compensation Plan are credited with earnings based on (i) the performance of one or more of the lifestyle investment funds or the S&P 500 fund, available to employees under PSEG's 401K Plans, (ii) at the rate of- Prime plus lh% or (iii) by' reference to the performance of the Common Stock, in such percentages designated, by the participant. A participant who fails to provide a designation will accrue earnings on his/her account at the rate of Prime plus 1/2,%.,
| |
| 222
| |
| | |
| COMPENSATION COMMITTEE, INTERLOCKS AND INSIDER PARTICIPATION PSE&G does not hd've a cdmpensaiion comniittee. Decisions regarding compensati6n -of PSE&G's executiVe officers are nriade by the Organization'and Compensation Committee of PSEG. During 2006, each of the'following individuals' served as a member of the Ofgfnizati6r and Compensation Committee. Shirley Ann Jackson, Chair, trnest H. Df&w, Conrad K. Harper, William V. Hickey and Thomas A. Reniyi.'During
| |
| *2006, no member of the Organization and Compensation Committee was an officer or employ&ee bra former officer or employe6 of any PSEG company. No PSEG officer served as a director of :or On the compensation committee of any of' the companies-for which any -of these individuals ser,'ed as an dfficer.
| |
| Power. . .. : . ..
| |
| Omitted pursuant to conditions set .forth in General Instruction I of Form 10-K.
| |
| Energy Holdings.. .
| |
| Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.
| |
| ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
| |
| PSEG .... ... .
| |
| The information required by Item 12 of Form .10-K withrespect to diirectors, executive officers..and certain beneficial owners is set forth under the heading "Security: Ownership of Directors, Management.and Certain Beneficial Owners" in PSEG's definitive Proxy Statement for the 2007. Annual Meeting of Stockholders which definitive Proxy Statement is expected tobe filed with the U.S. Securities~and Exchange Commission (SEC) on 6r, about ,March 5, 2007, and such information set forth under., such heading is incorporated, herein by this reference thereto.
| |
| 'For information relating to securities, authorized for issuance under 'equity compensation plans, see Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and. Issuer -Purchases of Equity -Securities.,. .
| |
| PSE&G The following table sets forth,, as of February 19, 2007, beneficial ownership of PSEG Common Stock; including options, by the directors and executive officers named in PSE&G's Summary Compensation table.
| |
| None of these amounts exceeds 1% of the. Common.Stock outstanding.
| |
| Amount and Nature of Beneficial Name Ownership Robert E. Busch ............... . ......................... ,41,851V Caroline D orsa .... .................. ....... ......... 6,732;2 E. James Ferland ............................................... 996,5951 Albert R. Gamper, Jr. ........................................... 7,5674 Conrad K. Harper 10,8535 R alp h Izzo ................ .................................................... 351,806 6 Patricia A. Rado ........................ 10,1777 R. Edwin Selover .............................................. 57,1448 R alph A . L aR ossa ............................................................ 33,1939 All directors and executive officers as a group (11 persons) .................. 1,822,13810 Includes the equivalent of 201 shares held under the PSEG Thrift and Tax-Deferred Savings Plan (Thrift Plan). Includes options to purchase 25,000 shares. Mr. Busch retired effective January 18, 2007.
| |
| 2 Includes 4,400 shares of restricted stock. Includes 500 shares jointly owned with husband.
| |
| 3 Includes the equivalent of 16,489 shares held under the Thrift' Plan. Includes 55,001 shares of restricted stock. Includes options to purchase 610,000 shares, 566,000 of which are currently exercisable. Includes 210,000 shares held in a trust.
| |
| 4 Includes 4,800 shares of restricted stock.
| |
| 223
| |
| | |
| Includes 6,600 shares of restricted stock.
| |
| 6 Includes the equivalent of 344 shares held under the Thrift Plan. Includes 15,752 shares of restricted stock.
| |
| Includes options to purchase 281,000 shares, 111,000 of which are currently exercisable. Includes 54,710 held in 'a trust.
| |
| : 7. Includes' options to purchase 2,533 shares.. Ms.. Rado retired effective January 2,.2007. .
| |
| 8 Includes the equivalent of 12 shares held under the Thrift Plan. Includes 8,168 shares of restricted stock.
| |
| InCludes' options to' puirchase i ; 33,333 slhares,
| |
| *', 7,333
| |
| * . of which. 'are currently
| |
| . exercisabfe'.
| |
| .q "j, t . fi.
| |
| 9 Includes 3,601 shares of restricted stock. Includes options to purchase 27,867 shares. 1,867 of which, are currently exercisable.
| |
| 10 Includes 'the equivalent df 18,263 shiares"held under the"Thrift Plan.`Inicludes options to purchase 1,210,833
| |
| 'shares;, 901,733, of which- are, currently' exercisable. 'Includes 97,823 shares of restricted siock. Includes
| |
| -271;710 shares held in trusts. *-
| |
| Certain Beneficial Owners The following table sets forth, as of February 19, 2007, beneficial ownership by.any pers~on, or group known to us to be the beneficial owner of more than.five percent of Common.Stock. According to the SChedules '13G filed by these owners with thel' SEC, these securities were acquired and are 'held 'in the ordihary course of businessand not foi the purpose of changing o'rinfluencing the contirl of PSEG.
| |
| . * . ' Amount and Nature of Beneficial .....
| |
| Name and Address Ownership Percent Franklin Resources, Inc. 22,638,8031 9.0%1 One Franklin Parkway San Mateo, CA 94403-19.06.
| |
| Capital Research and Management Company 20,043,3002 ' .79%2 333 South Hope Street Los Angeles, CA 90071-1447 As reported on Schedule 13G filed February 5, 2007 2 As reported on Schedule 13G filed February 12, 2007 Section 16 Beneficial Ownership Reporting Compliance .'
| |
| During 2006, none of our directors or executive officers was late in filing a.Form 3,'4 or 5- in accordance with the requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, with regard to transactions involving Preferred Stock.
| |
| Power Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.
| |
| Energy Holdings Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.
| |
| ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PSEG The information required by Item 13 of Form 10-K is set forth under the heading "Transactions with Related Persons" in PSEG's definitive Proxy Statement for the 2007 Annual Meeting of Stockholders which definitive Proxy Statement is expected to be filed with the (SEC) on or about March 5, 2007. Such information set forth under such heading is incorporated herein by this reference thereto.
| |
| 224
| |
| | |
| PSE&G Transactions with Related Persons" Except as*stated below, there were no transactions during 2006, and there are no transactions currently proposed, in which PSE&G was or is to be a participant and the amount involved exceeded $120,000 and in which any related person (director, nominee, executive officer, or their immediate family members) had or will have a direct or indirect material interest.
| |
| Thomas A. Renyi, a -director of PSEG and a member of the Organization and Compensation Committee, ,is Chairman of the Board and CEO of The Bank of New York (BONY), a participant in three credit facilities of PSEG and its subsidiaries, including* PSE&G. Each of these facilities, and BONY's participation, was'made in the ordinary course of business, on substantially the same termis, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to BONY, and.did not involve more than the. normal risk of collectibility or present other.unfavorable feature s.
| |
| PSE&G's policies and procedures with regard to transactions with related parties, including the review, approval or ratification of any such transactions, the standards applied and the responsibilities for application are set forth in the Corporate Governance Principles and the Standards of Integrity, discussed above.
| |
| Director Independence As determined by the Board, all current PSE&G directors, with the exception of E. James Ferland, Chairman of the Board and CEO, and Ralph Izzo, President and COO of PSEG, are independent under the requirements. of the SEC and the NYSE. This determination was based on a review of the questionnaires submitted by each director, PSE&G's relevant business records, publicly available information and applicable SEC and NYSE requirements.
| |
| Power Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.
| |
| Energy Holdings Omitted pursuant to conditions set forth in General Instruction I of Form 10-K.
| |
| ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 of Form 10-K is set forth under the heading "Fees Billed to PSEG by Deloitte & Touche LLP for 2006 and 2005" in PSEG's definitive Proxy Statement for the 2007 Annual Meeting of Stockholders which definitive Proxy Statement is expected to be filed with the SEC on or about March 5, 2007. Such information set forth under such heading is incorporated herein by this reference thereto.
| |
| 225
| |
| | |
| PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) The following Financial Statements are filed as a part of this report:
| |
| a: Public Service, Enterprise Group Incorporated's Consolidated Balance Sheets. as of December 31, 2006 and 2005 and, the related Consolidated Statements of -Operations,- Cash Flows and, Common Stockholders' Equity for the three years. ended December 3J1,2006 on. pages 97'and .98, 96, 99 and 100, respectiyely... .
| |
| : b. Public Service Electric and Gas Company's Consolidated Balance Sheets as. of December 31, 2006 and 2005.S and the related Consolidated, Statements of Operations, Cash Flows and Common Stockholder's Equity for the three years ended December 31,; 2006 on pages 102 and.103, 101, 104 and 105, respectively. . . .
| |
| : c. PSEG 'Power LLC Consolidated Balance Sheets as of December 31, 2006 and'2005 and the related Consolidated Statements of Operations, Cash Flows and Capitalization and Mehber's, Equity for the three years ended December 31, 2006 on pages 107, 106, 108 and 109, respectively:
| |
| : d. PSEG Energy Holdings L.L.C. Consolidated Balance Sheets as of December 31, 2006 and 2005 and the related Consolidated Statements of Operations, Cash Flows and Member's/Commnon Stock-
| |
| .holder's Equity for the three years.ended December 31, 2006 on pages .11. and 1i2, 110; 113 and 114, respectively. ,-
| |
| (B) The following documents are filed as a' part of this report: :'
| |
| : a. PSEG Fi'nanciai Statement Schedules: ' ' ' '' " '
| |
| Schedule II-Valuation and Qualifying Accounts for each of the three years in the period ended e'cember'31, 2006 (page 237).
| |
| : b. PSE&G Financial Statement Schedules: '
| |
| Schedule II-Valuation and Qualifying Accounts for each of the three years in 'the period ended December 31, 2006 (page 238).,
| |
| : c. Power's Financial Statement Schedules: .' ..
| |
| Schedule II-Valuation and Qualifying Accounts for'eachof the three years in the period ended December 31, 2006 (page 238)..
| |
| : d. Energy Holdings' Financial Statement Schedules:
| |
| Schedule II-Valuation and Qualifying Accounts for each of the three years in the. period ended December'31, 2006 (page 239).
| |
| Schedules other than those listed above are omitted for the reason that they are not required.or are not applicable, or the required information is shown in the consolidated financial staterments.or notes thereto.
| |
| (C) The following documents are filed as part of this report:
| |
| LIST OF EXHIBITS: ' ' : . -
| |
| : a. PSEG:
| |
| 3a Certificate of Incorporation Public Service Enterprise Group Incorporated t 3b By-Laws of Public Service Enterprise Group Incorporated as in effect May 16, 20052 3c Certificate of Amendment of Certificate of Incorporation of Public Service Enterprise Group Incorporated, effective April'23, 19873 -
| |
| 3d Amended and Restated Trust Agreement for Enterprise Capital Trust I.
| |
| 3e Amended and Restated Trust 'Agreement for Enterpris'e Capital Ttust"11 3f Amended and Restated Trust Agreement for Enterprise Capital Trust 1116'"
| |
| 3g Amended and Restated Trust Agreement for PSEG Funding Trust 17 " '
| |
| 3h Amendment No. 1 to Amended and Restated Trust Agreement 'for PSEG Funding TrUist 18' 226
| |
| | |
| 3i Amended. and Restated Trust Agreement for PSEG Funding Trust II9 4a(1) Indenture between Public Service Enterprise Group Incorporated and First Union National Bank (US Bank National Association, successor), as Trustee, dated January 1, 1998 providing for Deferrable Interest Subofdinated:Debentures in Series (relating to Quarterly Preferred Securities)10 4a(2) First Supplemental Indenture..to Indenture' dated as of January 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank (US Bank National Association, successor), as Trustee, 'dated -June 1, 1998 providing for the issuance of Floating Rate Deferrable Interest Subordinated Debentures, Series B (relating to Trust Preferred Securities)"
| |
| 4a(3) " Second Supplemental Indenture to Indenture dated.as of January 1, 1998 between Public Service Enterprise Group Incorporated and. First Union National Bank (US Bank National Association, successor),. 'as Trustee; dated' July '1, 1998 :providing -for. the' issuance, of Deferrable Interest Subordinated Debentures, Series C (relating to Trust Preferred Securities)12-4b Indenture dated as of November. 1, 1998 between Public .Service Enterprise Group' Incorporated
| |
| -and First -Union 'National Bank (US Bank National Association, successor) providing for the 13 .
| |
| issuance of Senior Debt Securities 4c First Supplemental 'Indenture to Indenture dated as..of November 1, 1998 between Public Service
| |
| '-Enterprise Group Incorporated and Wachovia Bank, National .Association (US Bank National Association, successor),' as Trustee, dated September 10, 2002 providing for the issuance of Senior 14 Deferrable Notes (Senior Debt Securities) 4d Second Supplemental Indenture to Indenture dated as of November 1, 1998 between Public Service Enterprise Group Incorporated and Wachovia Bank, National Association (US. Bank-National Association, successor), as Trustee, dated July 27, 200515 4e Indentuire dated"as of December 17, 2002 between Public Service Enterprise Group Incorporated and Wachovia Bank, National Association (US Bank National Association,' successor), providing for the issuance of Debentures in Series including 8.75% Deferrable Interest Junior Subordinated Debentures, Series D16 ....
| |
| 9 Inapplicable 85 10a(1) Deferred Compensation Plan for Directors 10a(2) .Deferrid Compensation Plan for Certain Employees86 10a(3) Amended and Restated Limited Supplemental Benefits Plan for Certain Employees87 88 10a(4) Mid Career Hire Supplemental Retirement Income Plan 89 10a:(5) Retirement Income Reinstatement Plan for Non-Represented Employees 10a(6) 1989 Long-Term Incentive Plan, as amended"7 10a(7) 2001 Long-Term' Incentive Plan18 10a(8) Restated and Amended Management Incentive Compensation Plan19 10a(9) Employment Agreement with E. James Ferland dated June 16, 199820 10a(10) Amendment to Employment Agreement with E. James Ferland dated November 20, 200121 10a(ll) Second Amendment to Employment Agreement with E. James Ferland dated December 20, 200422 10a(12) Employment Agreement with Thomas M. O'Flynn dated April 18, 200123 10a(13) Amendment to Employment Agreement with Thomas M. O'Flynn dated December 21, 200124 94 10a(14) Key Executive Severance Plan 10a(15) Employment Agreement with Ralph Izzo dated October 18, 200326 27 10a(16) Stock Plan for Outside Directors, as amended 10a(17) Employment Agreement with Robert E. Busch dated April 24, 200128 10a(18) Employee Stock Purchase Plan2 9 ,.
| |
| 30 10a(19) Compensation Plan for Outside Directors ,..
| |
| 3 10a(20) 2004 Long-Term Incentive Plan '
| |
| 227
| |
| | |
| 10a(21) Retention Program for Key Employees 32 33 10b(1) Agreement and Plan of Merger 34 10b(2) Operating Services Contract 11 Inapplicable 12 Computation of Ratios of Earnings to Fixed Charges 13 Inapplicable 84 14 Code of Ethics 16 Inapplicable 18 Inapplicable 21 Subsidiaries of the Registrant 22 Inapplicable 23 Consent of Independent Registered Public Accounting Firm 24 Inapplicable 31a Certification by E. James Ferland, pursuant to Rules 13a-14;,and 15d-14 of the 1934 Securities Exchange Act 31b Certification by Thomas M. O'Flynn pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act 32a Certification by E. James Ferland, pursuant to Section. 1350 of Chapter 63 of Title 18 of the United States Code 32b Certification by Thomas M. O'Flynn, pursuant to Section 1350 of Chapter 63 of'Title 18 of the United States Code
| |
| : b. PSE&G: .. . - ..
| |
| 35 3a(1) Restated Certificate of'Incorporation of PSE&G '
| |
| 3a(2). Certificate of Amendment of Certificate of Restated Certificate of Incorporation of PSE&G filed February: 18, 1987 with the 'State -of New Jersey' adopting 'limitations of 'liability prdvisions in accordance with an amendmeit'to New Jersey Business Corporation Act36 3a(3) Certificate of Amendment of Restated Certificate of Incorporation of PSE&G filed June 17, 1992 with the State of New Jersey, establishing the 7.44%' Cunffilative Preferred Stock '($100 Par) as a 37 "
| |
| series of Preferred Stock .
| |
| 3a(4) Certificate of Amendment'of'Restated Certificate Of Incorporation of PSE&G-filed.March 11, 1993 with -the State of New Jersey; establishing the 5.97% Cumulatiye.Preferred Stock ($100 Par) as a 38 series of Preferred Stock 3a(5) Certificate of Amendment of Restated Certificate of Incorporation of PSE&G filed January 27, 1995 with the State of New Jersey, establishing the 6.92% Cumukitiv'e'Preferred Stock ($100 Par) 3 and the 6.75% Cumulative Preferred Stock-$25 Par as series'.of Preferred Stock 9 3b(1) By-Laws of PSE&G40 ' . . ',.. * ,
| |
| 4a(1) Indenture between PSE&G and Fidelity Union Trust Company (now, .Wachovia Bank; National 4
| |
| Association), as Trustee, dated August 1,,1924, securing First and Refunding Mortgage Bond l Indentures between .PSE&G and First Fidelity Bank, National Association (US Bank National Association, 'succesgOr), as Trustee, supplemental to Exhibit 4a(1), dated'as' follows:
| |
| 4a(2) April 1, 192742 4a(3) June 1, 193743 . "
| |
| 4a(4) July 1, 1937A 4a(5) December 19, 193945 4a(6) March 1, 194246 - ""''" ' "
| |
| 4a(7) June 1, 1991 (No. 1)41 ' " ' ' '
| |
| 228
| |
| | |
| 4a(8) July 1, 199348.
| |
| 4a(9) September 1, 199349 4a(10) February 1, 199450 4a(11) March 1, 1994 (No. 2)51 4a(12) May 1, 199452 ,
| |
| 4a(13) October 1, 1994 (No. 2)53 4a(14) January 1, 1996 (No. 1)54 4a(15) January 1, 1996 (No. 2)55 4a(16) May 1, 199856 4a(17) September 1, 200257.
| |
| 4a(18) August 1, ,200358 4a(19) December 1, 2003 (No. 1)59 4a(20) December 1, 2003 (No. 2)60 4a(21) December 1, 2003 (No. 3)61 4a(22) December 1, 2003 (No. 4)62
| |
| ý4a(23) June 1, 200463 4a(24) August 1, 2004 (No. 1)64" 4a(25) August 1, 2004 (No. 2)65 4a(26) August 1, 2004 (No: 3)66 4a(27) August 1, 2004 (No. 4)67 4b Indenture of Trust between PSE&G and Chase Manhattan Bank (National Association) (The Bank of New York, successor), as Trustee, providing for Secured MediumrTerm Notes dated July 1, 199368 4c Indenture dated as, of. December 1,, 2000 between Public Service Electric and Gas Company and First Union National Bank (US Bank *National, Association,.successor), as Trustee,, providing for Senior Debt Securitiess 69 85 1a(1) Deferred Compensation Plan.,.for Directors ...
| |
| 86 l0a(2) Deferred Compensation Plan for Certain Employees 87 10a(3) Amended and Restated .-Limited Supplemental. Benefits Plan for Certain Employees 10a(4) Mid CareerHire Supplenmental Retirement Income Plan 88' 89 10a(5) Retirement Income Reinstatement Plan for Non-Represented Employees 10a(6).., 1989 Long-Term Incentive Plan,, as amended17 "
| |
| 18 10a(7) 2001 Long-Term Incentive-Plan 10a(8) Restated and Amended Management Incentive Compensation Plan 19 :*.
| |
| 10a(9) Employment Agreement with E. James Ferland, dated June 16, 19982.
| |
| 10a(10) "Amendment to Empploymet Agreement with E. James Ferland dated Novemiber'20, 200121 10a(11) Second Amendment to Employment Agreement with E. James Ferland dated December 20, 200422 95 10a(12) Key Executive Severance Plan 10a(13) Employment Agreement with Ralph Izzo dated October 18, 200326 10a(14) Employment Agreement with Robert E. Busch dated April 24, 200126 10a(15) Employee Stock Purchase Plan 29 27 10a(16) Stock Plan for Outside Directors, as amended 1 10a(17) Compensation Plan for Outside Directors 30 .
| |
| 229
| |
| | |
| 10a(18) 2004 Long-Term Incentive 'Plan 31.
| |
| 32 10a(19) Retention Program for Key Employees 11 Inapplicable 12a Computation of Ratios of.Earnings to Fixed Charges 12b Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements 13 Inapplicable 14 Code of Ethics84
| |
| : 16. Inapplicable 18 Inapplicable 19 Inapplicable 21a Inapplicable 23a Consent of Independent Registered Public Accounting Firm 24 Inapplicable 31c Certification by E. James Ferland, pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act 31d Certification by Thomas M. Q'Flynn pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act 32c . Certification by.E. James Ferland, pursuant to Section, 1350 of Chapter, 63 of Title 18 of the United States Code 32d Certification by Thomas, M. .,O'Flynn, pursuant to Section .1350 of Chapter 63 of Title 18 of the United States Code
| |
| : c. Power: ,.
| |
| 70 3a Certificate of Formation of PSEG Power LLC 71 3b PSEG Power LLC Limited Liability Company' Agreement 3c Trust Agreement for PSEG Power Capital. Trust 172 3d Trust Agreement for PSEG Power Capital Trust 1173 3e Trust Agreement for PSEG Power Capital. Trust II174 75 3f . Trust Agreement for PSEG .Power Capital Trust.IV 76 3g Trust Agreement for PSEG Power Capital Trust V .
| |
| 4a Indenture dated April 16, 2001 between and aindng PSEGW Power, PSEG Fossil, PSEG Nuclear, PSEG Energy Resources & Trade and The Bank of New York and form of Subsidiary Guaranty 77 included therein 4b First. Supplemental Indenture, supplemental to Exhibit. 4a, dated as. of March 13;'2002T8 10a(1) Deferred Compensation Plan for Certain Employees9" .
| |
| 10a(2) Amended and Restated Limited Supplemental Benefits. Plan for. Certain,Employees?'
| |
| 92
| |
| .10a(3) Mid Career Hire Supplemental Retirement Income Plan .
| |
| 93 10a(4) Retirement Income Reinstatement Plan for Non-Represented Employees 10a(5) 1989 Long-Term Incentive Plan, as amended 17 . . . ."
| |
| 10a(6) 2001 Long-Term Incentive Plan18 " .. . .
| |
| 10a(7)ý Restated and Amended Management'Incentive Compensation Plan'9 ....
| |
| 10a(8) Employment Agreement with-E. James Ferland, datedJune 16, 199820 .20 .
| |
| 10a(9) ;Amendment to Employment Agreement with E. James Ferland dated ,November 20, 200121 22 10a(10) Second Amendment to Employment Agreement.with E. James Ferland dated December 20, 2004 10a(11) 'Employment Agreement with Thomas M. O'Flyn.n dated April 18, 200123 . . ....-
| |
| 230
| |
| | |
| 10a(12) Amendment to Employment Agreement with Thomas M. .O'Flynn dated December 21, 200124 96 10a(13) Key Executive Severance Plan . .
| |
| 29 10a(14) Employee Stock Purchase Plan 10a(15) 2004 Long-Term Incentive Plan31 . . ,
| |
| 10a(16) Retention Program for Key Employees32.
| |
| 34 10b(1) Operating Services Contract 11 Inapplicable :
| |
| 12c Computation of Ratio of Earnings to Fixed Charges 13 Inapplicable 14 Code of Ethics 84 16 Inapplicable 18 Inapplicable .
| |
| 19 Inapplicable 23 Consent of Independent Registered Public Accounting -Firm.
| |
| 24 Inapplicable 3e Certification by 'E. James F~rland, pursuant to 'Ruie-s.13a*14 and 15d-14 of the 1934 Securities, Exchange Act 31f C'ertification by Thormas M: O'Flynn purs-dant to' Rules 13'a-14 and 15d-*4 df 'the 1934 Securities Exchange Act 32e Certification by'E 'James Ferland,*pursuaAii to"Sectiaiý 1350'of Chapter 63 of Title 18 of the United States Code 32f Certification by Thomas M. O'Flynn, pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
| |
| : d. Energy Holdings:
| |
| 79 3a Certificate of Formation of PSEG Energy, Holdings L.L.C. 1 3b Certificate of Amendment. to Certificate of'Formation of PSEG Energy Holdings.L.L.C. 80 3c Limited Liability Company Agreement of. PSEG Energy Holdings L.L.C.8 ,
| |
| 4a Indenture dated October 8, 1999 between.Energy, Holdings and:First Union National Bank (US 82 Bank National Association, successor) 4b First Supplemental Indenture to Exhibit .4a, between Energy Holdings and Wachovia Bank, National Association (US Bank.National Association, successor) dated September 30, 200283 10a(1) Deferred Compensation Plan for Certain Employees 90 . -
| |
| 9 10a(2) Amended and Regtated Limited Supplemental Benefits Plan for Certain Employees '1 92 10a(3) Mid Career Hire Supplemental Retirement. IncomePlan .
| |
| 10a(4) Retirement Income Reinstatement Plan for Non-Represented Employees9 3 .
| |
| 7 10a(5) 1989 Long-Term Incentive Plani, as amended .1 10a(6) 2001 Long-Term Incentive 'Plan'18. . . -
| |
| 9 10a(7) Restated and Amended Management Incentive Compensation -Plan' '
| |
| 10a(8) Employment Agreement with E. James Ferland, dated June.16, 199820 . .
| |
| 10a(9) Amendment to Employment Agreement with E. -James Ferland dated, November 20, 200121 10a(10) -Second Amendment to Employmfient Agreement with E. James Ferland dated December 20, 200422 10a(11) Employment Agreement with Thomas M. O.'Flynn dated-April 18, 200123. ..
| |
| 10a(12) Amendment to Employment-Agreement with-Thomas M. O'Flynn dated December 21,.200124 10a(13) Employee Stock!Purchase Plan 29 . .,"
| |
| 231
| |
| | |
| 31
| |
| .10a(14) 2004 Long-Term Incentive Plan 97 10a(15) Key Executive Severance Plan 32 10a(16) Retention Program for Key Employees 11 Inapplicable, 12d Computation of Ratios.of Earnings to -Fixed Charges 13 Inapplicable 84 14 Code of Ethics 16 Inapplicable 19 Inapplicable 24 Inapplicable :
| |
| 31g Certification by E. James Ferland, pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act 31h Certification by Thomas M. O'Flynn. pursuant to Rules 13a-14 and 15d-14 of the 1934 Securities Exchange Act 32g Certification by E. James Ferland, pursuant to Section 1350 of Chapter 63 of Title 18 of the United Siates Code 32h Certification by Thomas M. O'Flynn, pursuant to Section 1350 of Chapter 63 of Title 18 of the
| |
| '-United States Code (1) Filed as Exhibit 3(a) to Registration Statement on'Form S-4, No. 33-2935 and incorporated herein by this reference.
| |
| (2) Filed as Exhibit 3(ii) with Current Report on Form 8-K, No. 001-09120 filed on May 20, 2005 and incorporated' herein by this reference.
| |
| (3) Filed as Exhibit 3(c) with Annual Report on Form 10-K for the year ended December 31, 1987, File No.
| |
| 001-09120 'n April-'111; 1988 and incorporated herein by this reference.
| |
| (4) Filed as Exhibit 3(d) with Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-09120 on February 26, 2003 and incorporated herein by this refer-elce.
| |
| (5) Filed as Exhibit 3 with Quarterly Report on Form 10-Q for the quarter, ended June 30, 1998, File No.
| |
| 001-09120 on August 14, 1998 and incorporated herein by this reference.
| |
| (6) Filed as Exhibit 3(f). with Annual Report on Form 10-K for the year ended.December 31, 2002, File No.
| |
| 001-09120 on February 26, 2003 and incorporated herein by this reference.
| |
| (7) Filed as Exhibit 4.3 with Current Report on Form. 8-K, File No.: 001-09120 on September 9, 2002 and incorporated herein by this reference.
| |
| (8) Filed as Exhibit 4.2 with Current Report on Form 8-K, File No. 001-09120 on July 29, 2005 and incorporated herein by this reference.
| |
| (9) Filed, as Exhibit 3(h) with Annual Report on. Form 10-K for the year ended December 31, 2002, File No. 001-09120 on February 26, 2003 and incorporated herein by this reference.
| |
| (10) Filed as Exhibit 4(f) with Quarterly Report on Form 107Q for the quarter ended March 31'1998, File No. 001-09120 on May 13, 1998 and incorporated herein by this reference.
| |
| (11) Filed as Exhibit 4(a) with Current Report on Form 8-K, File No. 001-09120 on August 14, .1998 and incorporated herein by this reference..
| |
| (12) Filed as Exhibit,4(b) with Current Report on Form. 8-K, File No. 001-09120 on August 14, 1998 and incorporated herein by this reference. . .
| |
| (13) Filed as ,Exhibit.4(f) with Annual Report on Form 10-K for the year ended December 31, 1998, File .No; 001-09120 on February 22, 1999 and incorporated herein by this reference.
| |
| (14) Filed as Exhibit 4(c) with Annual Report on Form 10-K for the year ended December:31, *2002, File No.
| |
| 001-09120 on February 26, 2003 and incorporated herein by this reference. ..
| |
| 232
| |
| | |
| (15) Filed as Exhibit 4.1 with Current Report on Form 8-K, File No. 001-09120. on July 29, 2005 and incorporated herein by this reference.
| |
| (16) Filed as Exhibit 4(d) with Annual Report on Form 10-K for the year ended December 31, 2002, File No. 001-09120 on February 26, 2003 and incorporated, herein by this reference.
| |
| (17) Filed as Exhibit 10 with Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, File No. 001-09120, on November 2, 2002 and incorporated herein by-this reference.,
| |
| (18) Filed as Exhibit 16a(7) with Annual Report on Form 10-K for the year ended December 31, 2000, File No. 001-09120, on March 6, 2001 and incorporated herein by this reference.
| |
| (19) Filed as Exhibit 10a(8) with Annual Report on Form 10-K for the year ended December 31, 2000, File No. 001-09120, on March 6, 2001 and incorporated herein by this reference.
| |
| (20) Filed as Exhibit 10 with Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No.
| |
| 001-09120, on August 14, 1998 and incorporated herein by this reference.
| |
| (21) Filed as Exhibit 10a(10) with Annual Report on Form 10-K for the year ended December 31, 2001, File No. 001-09120, on March 1, 2002 and incorporated herein by this reference.
| |
| (22) Filed as Exhibit 10.1 with Current RepoIrt on Form 8-K, File No. 001-09120, on December 20, 2004 and incorporated herein by this reference.
| |
| (23) 'Filed as Exhibit 10a(24) with Quarterly Report on Form 10-0 for the quarter end'ed June 30, 2001, File No. 001-09120, on August 9, 2001 and incorporated herein by this reference.
| |
| (24) Filed as Exhibit 10a(12) with Annual Report on Form 10-K for the year ended December,31, 2001, File No. 001-09120, on March 1, 2002 and incorporated herein by this reference.
| |
| (25) Filed as Exhibit 10a(14) with Annual Report on Form 10-K for the year ended December. 31, 1993, File No. 001-09120, on February 26, 1994 and incorporated herein by this reference.
| |
| (26) Filed as Exhibit 10 with Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 001-09120, on October 30, 2003 and incorporated herein by this reference.
| |
| (27) Filed as Exhibit 10A(17) with Annual Report on Form 10-K for the year'ended December 31, 2002, File No. 001-09120, on February 26, 2003 and incorporated herein by this reference, (28) Filed as Exhibit 10a(23) with Quarterly Report on Form 10-Q for the quarter 6nded June 30, 2001, File No. 001-09120, on August 9, 2001 and incorporated herein by this reference.
| |
| (29) Filed with Registration. Statement on Form S-8, File No. 333-106330 filed on June20, 2003 and incorporated herein by this reference.
| |
| (30) Filed as Exhibit 10a(20) with'Annual Report on Form 10-K for the. year ended December 31,2002, File No. 001-09120, on February 26, 2003 and incorporated herein by this reference.
| |
| (31) Filed as Exhibit 10a(21) with Annual Report on Form 10-K for the year ended December 31, 2003, File No. 001-09120, on February 25, 2004 and incorporated herein by this reference.
| |
| (32) Piled as Exhibit 10 with'Quarterly Report on Form 10-Q, for the -quarter ended&March 31, 2006, File Nos. 001-09120, 001-00973, 001-49614 and 000-32503, and incorporated herein' by reference.
| |
| (33) Filed as Exhibit 2.1 with'Current Repo.rt on Form 8-K, File No. 001-09120, on December 20, 2004 and incorporated. herein by this reference.'
| |
| (34) Filed as Exhibit 99.2 with' Current Report on Form 8-K" File No. 001-09120, on December 20, 2004 and incorporated herein by this-reference.
| |
| (35) Filed as Exhibit 3(a) with Quarterly Report on Form 10-Q for the quarter' ended'June 30, 1986,-File No.
| |
| 001-00973, on August 28, 1986 and incorporated herein by 'this reference. '..
| |
| (36) Filed as Exhibit 3a(2) with Annual Report on Form-10-K f6r the year ended December 31, 1987, File No. 001-00973, on March 28, 1988 and incorporated herein by this reference. I :, "
| |
| (37) -Filed as 'Exhibit 3a(3) on Form 8-A, File No. 001:00973, on February 4, 1994 and incoiporated herein by this reference. .
| |
| (38) Filed as Exhibit 3a(4) on Form.8-A, File No. 001-00973, on February 4, 1994 and incorporated hereinby this reference.. -
| |
| 233
| |
| | |
| (39) Filed as Exhibit 3a(5) on Form 8-A, File No. 001-00973, on February 4, 1994 and incorporated herein by this reference.
| |
| (40) Filed as Exhibit 3b(1) with Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, No.
| |
| 001-00973 filed on August 8, 2000 and incorporated herein, by this reference., *
| |
| (41) Filed as Exhibit 4b(l), with Annual Report onForm 10-K for the year ended December 31, 1980, File No. 001-00973 on February 18, 1981 and incorporated herein by this reference..
| |
| (42) Filed, as Exhibit.4b(2) with Annual Report on Form 10-K for the year ended December 31, .1980, File No. 001-00973 on February 18, 1981, and incorporated herein by this reference. ,
| |
| (43) Filed as Exhibit 4b(3) with.Annual Report on Form 10-K for the year ended December 31, 1980, File No. 001-00973 on February 18,..1981.,and incorporated herein by this reference. ;
| |
| (44) Filed as Exhibit 4b(4) with Annual Report on Form 10-K for the year ended December 31, 1980, File No. 001-00973 on February 18, 1981 and incorporated herein by this reference.
| |
| (45). Filed as Exhibit 4b(5) with Annual Report on Form 10-K for the year ended December 31, 1980, File No. 001-00973 on February 18, 1981 and incorporated herein by this reference.
| |
| (46) Filed as Exhibit 4b(6) .with Annual Report on Form 10-K for the .year ended December 31., 1980, File No. 001-00973 on February 18, 1981 and incorporated herein by this reference..
| |
| (47) Filed as Exhibit 4(i) on Form 8-A, File No. 001-00973 on July 1, 1991 and incorporated herein by-this reference.
| |
| (48) Filed as Exhibit 4(ii) on Form 8-A, File No. 001-00973 on May.25, 1993 and incorporated herein by this reference.
| |
| (49) Filed as Exhibit 4(i) with Current Report on Form 8-K, File No. 001-00973 on December 1, 1993 and incorporated herein by this reference.
| |
| (50) Filed as Exhibit 4 with- Current Report on Form 8-K, File No. 001-00973 on. December 1, 1993 and incorporated herein by this reference.
| |
| (51) Filed as Exhibit 4 on. Form 8-A, File No.'001-00973 on February 3, 1994 and incorporated herein by this reference.
| |
| (52) Filed as Exhibit 4(i) on'Form 8-A, File No. 001-00973 on March 15, 1994 and incorporated herein by this reference.
| |
| (53) Filed as Exhibit 4a(91) with Quarterly Report on Form 10-0 for the quarter.ended September 30, 1994, File No. 001-00973, on November 8, 1994 and incorporated herein, by this reference.
| |
| (54) Filed as Exhibit 4a(2) on Form 8-A, File No. 001-00973 on January 26, 1996 and incorporated herein by this reference.
| |
| (55) Filed as Exhibit.4a(3) on Form 8-A, File No. 001-00973 on January 26, 1996 and incorporated, herein by this reference.
| |
| (56) Filed as Exhibit 4-on Form 8-A, File.No. 001-00973 on May' 15, 1998 and incorporated herein by this reference.
| |
| (57) Filed as Exhibit 4a(97) with Annual Report, on Form 10-K for the. year ended December 31, 2002, File No. 001-00973 on February 25, 2003 and incorporated herein by this reference.
| |
| (58) Filed as Exhibit 4a(98)'with Annual Report on Form 10-K 'for the year ended December 31, 2003, File No. 001-00973 on 'February 25, 2004 and incorporated herein by this reference.
| |
| (59) Filed as Exhibit 4a(99) with Annual Report on Form 10-K for' the year ended December 31, 2003, File No. 001-00973' on February 25, 2004 and incorporated herein by this reference.
| |
| (60) Filed as Exhibit 4a(25) with Annual Report on Form 10-K for the'year ended December 31, 2004, File No. 001-00973 on March. 1, 2005 and incorporated herein by this reference.
| |
| (61) Filed as Exhibit 4A(26) with Annual Report on Form 10-K for the year ended December 31, 2004, File No. 001-00973 on March 1, 2005 and incorporated herein by this reference.'.,
| |
| (62) Filed as, Exhibit 4a(27) with Annual Report on Form 10-K for the year ended December 31, 2004, File No. 001-00973 on March 1, 2005 and incorporated herein by this reference:.
| |
| 234
| |
| | |
| (63) 'Filed as Exhibit 4a(28) with Annual Report on .Form .10-K 'for the year ended December 31,'2004, File No. 001-00973 on March 1, 2005 and incorporated herein by this reference.
| |
| (64) Filed as Exhibit 4a(100)',with Aniual Report on Form.10-K for the'year ended December 31,2003, File No. 001-00973 on February 25, 2004 and incorporated herein by this reference.''
| |
| (65) Filed as Exhibit 4a(I01) with Annual Report on Fbrm 10:K for the'year ended December 31, 2003, File No. 001-00973 on February 25, 2004 and incorporated herein by this reference.
| |
| (66) Filed as Exhibit 4a(102) with Annual Report on Form 10-K for the 'year ended December 31,,2003, File No. 001-00973 on February 25;,2004" andincorporated:herein by this reference. '* ' , I :"
| |
| (67) Filed as Exhibit 4 with Quarterly Report on Form 10-Q for the quarter. ended June 30, 2004; File No.
| |
| 001-00973 on August 3, 2004 and 4incorporated herein by, this, reference. ,
| |
| (68) Filed as Exhibit 4 with CurrentReport on Form 8-K, File No. 001-00973 on December 1,. 1993 and incorporated herein by this reference. .
| |
| (69) Filed aý Exhibit 4.6 to Registration Statement on Form S-3, No. 333-76020 filed on December 27; 2001 and incorporated herein, by this reference. ,
| |
| ' , .
| |
| (70) Filed as Exhibit 3.1 to Registration' Statement- on Form S-4, No. 333-69228 filedon October 5, 2001 and incorporated herein by: this reference.
| |
| (71) Filed as Exhibit. 3..2 to Registration Statemehnt, on' Form S-4, No. 333-69228 filed on October 5, 2001 and incorporated herein by this reference.
| |
| (72) Filed' as. Exhibit':3.6 to Registration Statement on Form S-3, No. 333-105704 filed on May 30, .2003 .and incorporated herein by this reference. I "
| |
| (73) Filed as Exhibit 3.7 to Registration Statement on Form S-3, No: '333-105704 filed on'May 30,.2003 and incorporated herein by this reference.
| |
| (74) 'Filed as Exhibit 3.8 to Registration Statement on Form S-3, No. 333-105704 filed on' May 30, 2003 and incorporated herein by this reference.
| |
| (75) Filed as Exhibit 3.9 to Registration Statement on Forni.-S-3, 'N6. 333-105704 filed on"May 30, 2003 and incorporated herein by this reference.
| |
| (76) Filed as Exhibit .3.10 to Registration Statement on Form S-3, No. 333-105704 filed on May 30, 2003 'and incorporated herein by this reference.
| |
| (77), Filed as Exhibit 4.1 to Registration Statement on Form S-4, No., 333-69228 filed on October 5,'2001 and incorporated herein .by this reference. '
| |
| (78)* Filed as.Exhibit' 4.7 with'Quarterly.Report on 'Form 10-Q for the quarter ended March 31, 2002, File No. 001-49614, on May 15, 2002 and incorporated herein by this reference.
| |
| (79) Filed as Exhibit '3 with'Current .Report,.on Forn'. 8-K,; File No. 000-32503 on October 4, 2002 and incorporated herein by this reference.
| |
| (80) Filed, as. Exhibit 3.1 with Cuttent Report on Form 8-K, File. No. 000-32503 on October 4, 2002 and incorporated herein by this reference.
| |
| (81) Filed as Exhibit 3.2 With Current' Report on -Form, 8-K, File No. 000-32503 on October.4,. 2002 and incorporated herein by this: reference. ' " ' , .- ' .
| |
| (82) Filed as. Exhibit 4.1 to Registration StAtementon Form S-4, No. 333-95697 filed on January 28, 2000 and incorporated herein by this. reference. . '
| |
| (83) Filed as Exhibit 4 with Current Report ,on. Form'8-K,File No. .000-32503 on October 4, 2002 and incorporated herein by this reference. ' . .
| |
| (84) Filed as Exhibit 14 with Annual Report on Form 10-K.for,the year ended December:31, 2004, File NOs.
| |
| 001-09120, 001-00973, 001-49614 and 000-32503, and incorporated herein by reference. .
| |
| (85) Filed as Exhibit '10a(1) with Annual Report on Form 10-K for the, year ended December 31, 2005, File
| |
| ':, .
| |
| Nos. 001-09120 and 001-00973, andyincorporated herein by reference.
| |
| (86) Filed as Exhibit' 10a(2) with. Annual'Report on 'Form 10-K for the year ended 'December 31, 2005, File Nos. 001-09120 and 001-00973. and. incorporated herein' by 'reference.. '
| |
| 235
| |
| | |
| (87) Filed as Exhibit 10a(3) with Annual Report on Form 10-K for the year ended December 31, 2005, File Nos. 001-09120 and 001-00973, and incorporated herein by reference.
| |
| (88) Filed as Exhibit 10a(4) with Annual Report on Form 10-K for the year ended December 31, 2005, File Nos. 001-09120 and 001-00973, and incorporated herein by reference.
| |
| (89) Filed as Exhibit 1Oa(5) with Annual Report on Form 10-K for the year ended December 31, 2005, File Nos. 001-09120 and 001-00973, and incorporated herein by reference.
| |
| (90) Filed as Exhibit 10a(1) with Annual Report on Form 10-K for the year ended December 31, 2005, File Nos. 001-49614 and 000-32503 and incorporated herein by reference.
| |
| (91) Filed as Exhibit 10a(2) with Annual Report on Form 10-K for the year ended December 31, 2005, File Nos. 001-49614 and 000-32503, and incorporated herein by reference.
| |
| (92) Filed as Exhibit 10a(3) with Annual Report on Form 10-K for the year ended December 31, 2005, File Nos. 001-49614 and 000-32503, and incorporated herein by reference.
| |
| (93) Filed.as Exhibit 10a(4) with Annual Report on Form 10-K for the year ended December 31, 2005, File Nos. 001-49614 and 000-32503, and incorporated. herein by reference.
| |
| (94) Filed as Exhibit 10a(14) with Annual Report on Form 10-K for the year ended December 31, 2005, File No. 001-09120, and incorporated herein by reference.
| |
| (95) Filed as Exhibit 10a(12) with Annual Report on Form 10-K for the year ended December 31, 2005, File No. .001-00973, and incorporated herein by reference.
| |
| (96) Filed as Exhibit 10a(13) with Annual Report on Form 10-K for the year ended December 31, 2005, File No. 001-49614, and incorporated herein by reference.
| |
| (97) Filed as Exhibit 10a(15) with Annual Report on Form 10-K for the year ended December 31, 2005, File No. 006-32503, and incorporated herein by reference.
| |
| 236
| |
| | |
| . -
| |
| [THIS PAGE INTENTIONALLY LEFVI BLANK]
| |
| | |
| SCHEDULE II PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED Schedule Il-Valuation and Qualifying Accounts Years Ended December 31, 2006--December 31, 2004 Column A, Column B Column C Column D Column E Additions Charged to' Balance at Charged to other Balance at Beginning cost and accounts- Deductions- End: of' Description of Period expenses describe describe Period (Millions) 2006:
| |
| Allowance for. Doubtful Accounts ........... $44 $80 $- $72(A) $52 Materials and Supplies Valuation Reserve 6 7 - 5(B) 8 Other Reserves ................. .......... 3 - - 3(C)
| |
| Other Valuation Allowances ............... 8 - - - 8 2005:
| |
| Allowance for Doubtful Accounts .......... $34 $67 $- $57(A) $44 Materials and Supplies Valuation Reserve 9, - - 3(B) 6 Other Reserves ........................... 2 1(C) - - 3 Other Valuation Allowances...".........8 ,. - - 8 2004:
| |
| Allowance for Doubtful Accounts .......... $40 $47 $- $53(A)(D) $34 Materials and Supplies Valuation Reserve 15 - 6(B) 9 Other Reserves ........................ 4 - 2(B) 2
| |
| -Other Valuation Allowances ............ 18 17(E) 27(E)(F) 8 (A) Accounts Receivable/Investments written off.
| |
| (B) Reduced reserve to appropriate level and to remove obsolete inventory.
| |
| (C) Includes various liquidity, credit and bad debt reserves.
| |
| (D) Valuation allowances reversed in connection with PSEG Energy Technologies Asset. Management Company LLC (PETAMC) Accounts Receivable settlement.
| |
| (E) Recorded $10 million in connection with the sales of certain properties held by Enterprise Group Development Corporation (EGDC) in 2004. .,, -. , .. ,..
| |
| (F) Recorded in 2004 to reduce the carrying value of the Collins Lease by $17 million.,
| |
| 237
| |
| | |
| PUBLIC SERVICE ELECTRIC AND GAS COMPANY' Schedule 11-Valuation and Qualifying Accounts Years. Ended December 31, 2006-December 31, 2004 Column A. Column B Column C Column D Column E Additions Charged to Balance at Charged to other Balance at Beginning cost and accounts- Deductions- End of Description . of Period expenses describe describe Period (Millions) 2006:
| |
| Allowance for Doubtful Accounts ........... . $41 $77 $ $72(A) $46 2005:
| |
| Allowance for Doubtful Accounts ........... $34 $64 $- $57(A). $41 2004:
| |
| Allowance for Doubtful Accounts ........... $34 $47$ $47(A) $34 (A) Accounts Receivable/Investments written off.
| |
| PSEG POWER LLC Schedule II-Valuation and Qualifying Accounts Years Ended December 31, 2006-December 31, 2004 Column A Column B Column C Column D Column E Additions
| |
| "* ./" " 'Charged to Balance at Charged to other Balance at Beginning cost and accounts- Deductions- End of Descrilition 'of Period expenses describe describe Period (Millions) 2006:
| |
| Materials and Supplies Valuation Reserve...- $ 6 $ 7 $ 5(A) $ 8 Other Reserves ........... ....... 3 - -
| |
| -
| |
| 3(B) 2005:
| |
| .-Materials 'and Supplies- Valuationr Reserve .9 $ ' $ ' $3(A) $ 6,.'
| |
| Other Reserves ............................. 2 1(B) - 3 2004:
| |
| Materials and Supplies Valuation Reserve... $15 $ -' S $ 6(A) $ 9 Other Reserves ..... ........................ 4 12(A) 2..
| |
| (A) Reduced reserve to appropriate level and removed obsolete inventory.
| |
| (B) Includes various liquidity, credit and bad debt reserves.
| |
| 238
| |
| | |
| PSEG ENERGY HOLDINGS L.L.C.
| |
| Schedule II-Valuation and Qualifying Accounts Years Ended December 31, 20062-December 31, 2004.
| |
| " Column A Columw B Column C Column D . Column E
| |
| -Additions Charged to Balance at Charged to other Balance at
| |
| * Beginning cost and accounts- Deductions- End of Description of Period expenses describe describe Period (Millions) 2006:
| |
| Allowance for Doubtful Accounts..........."$ 3 $ 3 $-- $- $ 6 Other Valuation'Allowances ............... 8 - - - 8 2005: -
| |
| Allowance for Doubtful Accounts ........... $- $ 3 $3 Other Valuation Allowances ......... ....... 8 .- - - 8 i004: ** .
| |
| Allowance for Doubtful Accounts ........... $6 6-6 $ - $ 6(A) .
| |
| Other Valuation Allowances ............... 18 1'7(B) 27(B)(C)
| |
| (A) Valuation allowances reversed in connection with PETAMC Accounts Receivable settlement.
| |
| (B) Recorded in 2004 to reduce the carrying value of the Collins Lease by $17 million.
| |
| (C) Recorded $10 million in connection with the siles of certain'properties held by EGDC.
| |
| 239
| |
| | |
| SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be' signied on" its behlalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
| |
| PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED By: /s/ RALPH Izzo Ralph-Izzo President and Chief Operating Officer Date: February 27, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities-and on the dates indicated. The signatures of the undersigned shall be.deemed to relate only to matters having',rference to such company and any subsidiaries thereof.
| |
| Signature Title Date Is/ E. JAMES FERLAND Chairman of the Board, February 27, 2007 E. James Ferland Chief Executive Officer" and Director (Principal Executive Officer)
| |
| /s/ THOMAS M. O'FLYNN Executive Vice President and Chief February 27, 2007 Thomas M. O'Flynn Financial Officer (Principal Financial Officer)
| |
| /s/ DEREK M. DiRisio Vice President and Controller February 27, 2007 Derek M. DiRisio (Principal Accounting Officer)
| |
| /s/ CAROLINE DORSA Director February 27, 2007 Caroline Dorsa
| |
| /S! ERNEST H. DREW Director February 27, 2007 Ernest H. Drew
| |
| /s! ALBERT R. GAMPER, JR. Director February 27, 2007 Albert R. Gamper, Jr.
| |
| /s/ CONRAD K. HARPER Director .February 27, 2007 Conrad K. Harper
| |
| /S/ WILLIAM V. HICKEY Director February 27, 2007 William V. Hickey
| |
| /s/ RALPH Izzo Director February 27, 2007 Ralph Izzo
| |
| /S/ SHIRLEY ANN. JACKSON Director February 27, 2007 Shirley Ann Jackson
| |
| /s/ THOMAS A. RENYI Director February 27, 2007 Thomas A. Renyi
| |
| /s/ RICHARD J. SwiFr Director February 27, 2007 Richard J. Swift
| |
| * 240
| |
| | |
| SIGNATURES Pursuant to-. the requirements of Section 13 or 15(d) of .the Securities' Exchange Act of 1934, the registrant has :duly caused this. report. to be signed on its behalf ,by -the .undersigned, thereunto duly authorized::The signature of the undersigned shall be deemed to-relate only to matters having reference:to such company and any subsidiaries thereof.
| |
| PUBLIC SERVICE ELECTRIC AND GAS COMPANY By: /s/ RALPH LXRoSSA Ralph LaRossa President and Chief Operating Officer Date: February 27, 2007 Pursuant to the requirements of the Securities Exchange!Act of 1934, this report-has been signedbelow by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signatures, of the undersigned' company, shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. . .
| |
| Signature Title Date
| |
| /s/ E. JAMIS FERLAND Chairman of the Board and' Chief' February 27, 2007 E. James Ferland Executive Officer and Director (Principal Executivie Officer)
| |
| /S/sTHOMAS M. O'FLYNN Executive Vice President and Chief February 27, 2007 Thomas M. O'Flynn Financial Officer (Principal Financial Officer)
| |
| / /S!DEREK M. DiRisIo .Vice President arid Controller February 27, 2007 Derek M. DiRisio (Principal Accounting Officer).
| |
| *February27, 2007
| |
| /S/ CAROLINE DORSA Director Caroline Dorsa
| |
| 'February 27, 2007
| |
| /s/ ALBERT R. GAMPER, JR. Director Albert R. Gamper, Jr.
| |
| February 27, 2007 CONRAD. K. HARPER
| |
| -Sb Director
| |
| *Conrad K. Harper February 27, 2007
| |
| /s/ RALPH Izzo Director Ralph Izzo 241
| |
| | |
| SIGNATURES Pursuant to' the requirements of Section 13 or 15(d) of the Securities Exchange.Act of 1934, the registrant has duly. caused ,this report to be signed on its 'behalf by the undersigned, thereunto dulyy authorized. The signature of the. undersigned:,company. shall be deemed to relate, only. to matters having reference to such company and any subsidiaries thereof.
| |
| PSEG POWER LLC By:, /s/ FRANK CASSIDY Frank Cassidy President and Chief Operating Officer Date: February 27, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signatures .of.the undersigned company shall be deemed to relate-only to.matters having reference to such company and any subsidiaries thereof.,
| |
| Signature Title Date
| |
| /s/ E. JAMES FERLAND Chairman of the .Board and Chief 'February 27, 2007 E. James Ferland Executive Officer and' Director (Principal Executive -Officer),
| |
| /s/ THOMAS M. O'FLYNN Executive Vice, 'President and Chief February ,27; 2007 Thomas M. O'Flynn :Financial Officer. and Director (Principal Financial Officer),_,,ý'.
| |
| /s/ DEREK M. DiRisio Vice President ,and Controller February 27, 2007 Derek M. DiRisio (Principal Accounting Officer) -:
| |
| IS/ FRANK:CASSIDY Director February 27, 2007 Frank Cassidy.
| |
| /s/. RALPH Izzo Director February 27, 2007 Ralph Izzo
| |
| /s/ R. EDWIN SELOVER Director February 27, 2007 R. Edwin Selover 242
| |
| | |
| SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof..
| |
| PSEG ENERGY HOLDINGS L.L.C.
| |
| By: /s/S THOMAS M. O'FLYNN Thomas M. O'Flynn President and Chief OperatingtOfficer Date: February 27, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signatures of the undersigned shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
| |
| Signature Title Date*
| |
| /s/ E. JAMES FERLAND :Chairman of the Board and February 27, 2007 E. James Ferland Chief Executive Officer and Manager (Principal Executive Officer)
| |
| /s/ THOMAS M. O'FLYNN Chief Financial Officer and Manager 'FebrtiAry 27, 2007 Thomas.M. O'Flynn' (Principal Financial Officer)
| |
| /s/ DEREK M. DiRisio Vice President and Controller February. 27, 2007 Derek M. DiRisio (Principal Accounting Officer)
| |
| /s/ FRANK CASSIDY Manager February 27, 2007 Frank Cassidy
| |
| /s/ RALPH Izzo Manager. February 27,, 2007 Ralph Izzo
| |
| /s/ R. EDWIN SELOVER Manager February 27, 2007 R. Edwin Selover
| |
| . I ý , ;: . ý 243
| |
| | |
| EXHIBIT INDEX The following documents are filed as a part of this report:
| |
| a.' PSEG:.
| |
| Exhibit 12: Computation of Ratios of Earnings to Fixed Charges Exhibit 21: Subsidiaries of the Registrant Exhibit 23: Consent of Independent Registered Public Accounting Firm
| |
| -Exhibit 31a: Certification by E. James Ferland Pursuant to Rules 13a-14 and .15d-14 of the Securities Exchange Act of 1934 Exhibit 31b: Certification by Thomas M. O'Flynn Pursuant to Rules 13a-14 and .15d-14 of the Securities Exchange Act of 1934 Exhibit 32a:. Certification by E. James Ferland Pursuant to Section 1350 of Chapter 63 of Title 18.of the United States Code Exhibit 32b: Certification by Thomas M. O'Flynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
| |
| : b. PSE&G: '
| |
| Exhibit 12a: Computation of Ratios of Earnings to Fixed Charges Exhibit 12b: Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend.
| |
| Requirements Exhibit 21a: Subsidiaries of Registrant Exhibit 23a: ý.Consent of Independent Registered Public Accounting Firm Exhibit 31c: Certification by E. James Ferland Pursuant to- Rules 13a-14 and 15d-14 of tfie. Securities Exchange Act of 1934 Exhibit 31d: Certification by Thomas M. O'Flynn Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange. Act of 1934 .
| |
| Exhibit 32c: Certification by E. James Ferland Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code Exhibit 32d:' Certification by Thomas M: O'Flynn Pursuant to Section 1350 of Chapter,63 of Title. 18 of the United States Code ,
| |
| : c. Power:
| |
| SE xhibit'12c: Computation of Ratios of Earnings to Fixed Charges . -
| |
| Exhibit 23b: Consent of Independent Registered Public Accounting Firm Exhibit :31e: Certification'by E. James Ferland Pursuant to Rules.13a-14 and 15d-14. of the'Securities Exchange Act of 1934 Exhibit 31f: Certification by Thomas M. O'Flynn Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934
| |
| 'Exhibit 32e: Certification by E. James Ferland Pursuant to Section 1350 of Chapter,:63 of Title 18 of the United States Code Exhibit 32f: Certification by .Thomas M. O'Flynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
| |
| : d. Energy Holdings:
| |
| Exhibit 12d: Computation of Ratios of Earnings to Fixed Charges Exhibit 31g: Certification by E. James Ferland Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 Exhibit 31h: Certification by Thomas M. O'Flynn Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 Exhibit 32g: Certification by E, James Ferland Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code Exhibit 32h: Certification by Thomas M. O'Flynn Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code 244
| |
| | |
| [THIS PAGE INTENTIONALLY LEFT BLANK]
| |
| [THIS PAGE INTENTIONALLY LEFT. BLANK]
| |
| /
| |
| I
| |
| | |
| Forward Looking Statements: The statements contained in this communication about us and our subsidiaries' future performance, including, without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, are forward-looking statements for purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995. Although we believe that our expectations are based on information currently available and on reasonable assumptions, we can give no assurance they will be achieved. There are a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements made herein. A discussion of some of these risks and uncertainties is contained in our Annual Report on Form 10-K and subsequent reports on Form 10-Q and Form 8-K filed with the Securities and Exchange Commission (SEC), and available on our website: http://www.pseg.com. These documents address in further detail our business, industry issues and other factors that could cause actual results to differ materially from those indicated in this communication. In addition, any forward-looking statements included herein repre-sent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if our estimates change, unless otherwise required by applicable securities laws.
| |
| | |
| PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 8o PARK PLAZA NEWARK, NJ 07102 973.430.7000 WWW.PSEG.COM}}
| |
