Financing Receivables

9 Months Ended

Sep. 30, 2012

PSE&G

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




Credit Risk Profile Based on Payment Activity
	As of		As of
Consumer Loans	September 30, 2012		December 31, 2011
	Millions
Commercial/Industrial	$	159	$	106
Residential	14		10
Total	$	173	$	116

Energy Holdings

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

The table below shows Energy Holdings’ gross and net lease investment as of September 30, 2012 and December 31, 2011, respectively.




	As of			As of
	September 30, 2012			December 31, 2011
	Millions
Lease Receivables (net of Non-Recourse Debt)	$	724		$	763
Estimated Residual Value of Leased Assets	535			553
	1,259			1,316
Unearned and Deferred Income	(423		)	(435		)
Gross Investments in Leases	836			881
Deferred Tax Liabilities	(696		)	(716		)
Net Investments in Leases	$	140		$	165

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




	Lease Receivables, Net of Non-Recourse Debt
	As of		As of
Counterparties’ Credit Rating (S&P) as of September 30, 2012	September 30, 2012		December 31, 2011
	Millions
AA	$	21	$	21
A+	73		110
BBB+ - BBB-	316		316
B-	165		299
CCC	133		—
Not Rated	16		17
Total	$	724	$	763

The “B-” and “CCC” ratings above represent lease receivables related to coal-fired assets in Illinois and Pennsylvania. As of September 30, 2012, the gross investment in the leases of such assets, net of non-recourse debt, was $555 million ($40 million, net of deferred taxes). A more detailed description of such assets under lease is presented in the table below.




Asset	Location	Gross Investment		% Owned		Total	Fuel Type	Counterparties’ S&P Credit Ratings	Counterparty
		Millions				MW
Powerton Station Units 5 and 6	IL	$	134	64	%	1,538	Coal	CCC	Edison Mission Energy
Joliet Station Units 7 and 8	IL	$	84	64	%	1,044	Coal	CCC	Edison Mission Energy
Keystone Station Units 1 and 2	PA	$	114	17	%	1,711	Coal	B-	GenOn REMA, LLC
Conemaugh Station Units 1 and 2	PA	$	114	17	%	1,711	Coal	B-	GenOn REMA, LLC
Shawville Station Units 1, 2, 3 and 4	PA	$	109	100	%	603	Coal	B-	GenOn REMA, LLC

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

Of facilities under lease by indirect subsidiary companies of Energy Holdings to GenOn REMA, LLC (GenOn REMA), a subsidiary of GenOn Energy Inc (GenOn), Energy Holdings believes Keystone has adequate environmental controls installed. Conemaugh has flue gas desulfurization control. Selective catalytic reduction (SCR) equipment for nitrogen oxide (NOx) and mercury control are scheduled to be installed and operational at Conemaugh in the first quarter of 2015. GenOn’s plan for the coal-fired units at the Shawville facility is to place them in a “long-term protective layup” by April 2015; however, GenOn has indicated that it will continue paying the required rent and maintaining the facility in accordance with the lease terms. GenOn has further stated that the lessee is evaluating its options under the lease, including termination for obsolescence or continuing to keep the facility in “long-term protective layup.” In the event that the lessee is able to terminate for obsolescence, the lessee would be required, among other things, to pay the contractual termination value structured to recover Energy Holdings' indirect subsidiaries' lease investment as specified in the lease agreement. On July 22, 2012, GenOn announced that it has signed a definitive agreement to merge with NRG Energy, Inc. Energy Holdings is carefully monitoring these developments.

With respect to Edison Mission Energy’s (EME) Midwest Generation leases on the Powerton and Joliet coal units in Illinois, the lessees completed investments in mercury removal (Activated Carbon Injection), low NOx burners and Selective Non-Catalytic Reduction systems and plan to employ a dry sorbent (Trona) system to reduce sulfur. EME and these units remain in litigation with the United States Environmental Protection Agency (EPA) and the State of Illinois regarding certain environmental matters; however, EME has announced that the above actions should enable compliance with pending environmental rules. The federal district court has dismissed new source review claims in reference to Powerton and Joliet, but certain opacity claims remain active and under appeal by the EPA and the State of Illinois. The federal district court has stayed proceedings in connection with the opacity claims until the appeal is resolved. In its most recent quarterly report filed on July 31, 2012, EME’s parent, Edison International, reported that it will no longer provide financial support to EME; that Midwest Generation is largely dependent upon EME for its funding; and that, based upon current projections, EME will not be able to meet its debt obligation in June 2013. In addition, Edison International also reported that, if EME and Midwest Generation failed to restructure their obligations, EME and Midwest Generation may need to file for protection under Chapter 11 of the Bankruptcy Code, which could have an impact on the Powerton and Joliet leases.

The credit exposure for lessors is partially mitigated through various credit enhancement mechanisms within the lease transactions. These credit enhancement features vary from lease to lease. The leasing transactions include letters of credit, affiliate guarantees, or covenants that restrict the flow of dividends from the lessee to its parent. 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 temporary market downturn or degradation in operating performance of the leased assets. Upon the occurrence of certain defaults, indirect subsidiary companies of Energy Holdings could step into the lease directly to protect its investments. In the event of a default in any of the lease transactions, Energy Holdings' indirect subsidiary companies would exercise their rights and attempt to seek recovery of their investment. The results of such efforts may not be known for a period of time. A bankruptcy of a lessee would likely delay any efforts on the part of the lessors to assert their rights upon default. Failure to recover adequate value could ultimately lead to a foreclosure on the lease by the lenders. If foreclosures were to occur, Energy Holdings could potentially record a pre-tax write-off up to its gross investment in these facilities and may also be required to pay significant cash tax liabilities.

On December 13, 2011, indirect subsidiary companies of Energy Holdings and Dynegy reached a settlement agreement resolving disputes that had arisen between them with regard to Dynegy Holding’s (DH) rejection of the Dynegy leases. The settlement agreement resolved certain disputes regarding Energy Holdings' Dynegy leases, including claims under Tax Indemnity Agreements that indirect subsidiaries of Energy Holdings have with DH. The original terms of the settlement agreement included a cash payment to Energy Holdings of $7.5 million, which was received on January 4, 2012, and an allowed claim in Bankruptcy Court of $110 million against DH. On December 30, 2011, the effective date of the court order authorizing the Dynegy lease rejections, the leases no longer qualified for leveraged lease accounting treatment under GAAP. As a result, Energy Holdings wrote off the $264 million gross lease investment against the previously recorded reserve. The Energy Holdings' indirect subsidiary companies that are owners/lessors of the two plants ceased leveraged lease accounting and recorded the generation assets and related nonrecourse project debt on their balance sheets at their respective fair values (See Note 11. Fair Value Measurements).

On June 1, 2012, an amended and restated settlement agreement entered into by DH, Dynegy and their creditors (including indirect subsidiary companies of Energy Holdings) was approved by the Bankruptcy Court and became effective on June 5, 2012. As part of that settlement, the indirect subsidiary companies of Energy Holdings, DH and the creditors of DH agreed to commence a process to sell the Roseton and Danskammer facilities; the agreement allocates proceeds from the sale of the facilities to pay DH’s creditors, including the lease bondholders, and grants the lease bondholders claims in agreed upon amounts against DH in its bankruptcy proceedings. The settlement agreement also includes an exchange of releases by various settling claimants, including parties to the leases with respect to claims arising out of the leases. Concurrently with the entry into the settlement agreement, DH filed an amended plan of reorganization, which was supported by the various settling claimants, providing that Energy Holdings and other unsecured creditors of DH would be paid claims partially in cash and partially in stock in a reorganized Dynegy that would emerge at the conclusion of the bankruptcy. On September 5, 2012, the Bankruptcy Court approved Dynegy’s plan of reorganization. On October 1, 2012, Dynegy emerged from bankruptcy and distributed cash and stock settlements to the claimants. The total recovery of Energy Holdings' indirect subsidiary companies from the Dynegy leases, including proceeds from the liquidation of Dynegy common stock, the aforementioned cash payment received in January 2012 and the recovery of professional fees of $5.2 million received in June 2012, was approximately $63 million, of which the remaining $49.9 million was recorded in Operating Revenues in the fourth quarter 2012.

PSE And G [Member]

Financing Receivables

PSE&G




Credit Risk Profile Based on Payment Activity
	As of		As of
Consumer Loans	September 30, 2012		December 31, 2011
	Millions
Commercial/Industrial	$	159	$	106
Residential	14		10
Total	$	173	$	116

Energy Holdings

The table below shows Energy Holdings’ gross and net lease investment as of September 30, 2012 and December 31, 2011, respectively.




	As of			As of
	September 30, 2012			December 31, 2011
	Millions
Lease Receivables (net of Non-Recourse Debt)	$	724		$	763
Estimated Residual Value of Leased Assets	535			553
	1,259			1,316
Unearned and Deferred Income	(423		)	(435		)
Gross Investments in Leases	836			881
Deferred Tax Liabilities	(696		)	(716		)
Net Investments in Leases	$	140		$	165




	Lease Receivables, Net of Non-Recourse Debt
	As of		As of
Counterparties’ Credit Rating (S&P) as of September 30, 2012	September 30, 2012		December 31, 2011
	Millions
AA	$	21	$	21
A+	73		110
BBB+ - BBB-	316		316
B-	165		299
CCC	133		—
Not Rated	16		17
Total	$	724	$	763




Asset	Location	Gross Investment		% Owned		Total	Fuel Type	Counterparties’ S&P Credit Ratings	Counterparty
		Millions				MW
Powerton Station Units 5 and 6	IL	$	134	64	%	1,538	Coal	CCC	Edison Mission Energy
Joliet Station Units 7 and 8	IL	$	84	64	%	1,044	Coal	CCC	Edison Mission Energy
Keystone Station Units 1 and 2	PA	$	114	17	%	1,711	Coal	B-	GenOn REMA, LLC
Conemaugh Station Units 1 and 2	PA	$	114	17	%	1,711	Coal	B-	GenOn REMA, LLC
Shawville Station Units 1, 2, 3 and 4	PA	$	109	100	%	603	Coal	B-	GenOn REMA, LLC