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PEG > SEC Filings for PEG > Form 10-Q on 30-Jul-2013All Recent SEC Filings

Show all filings for PUBLIC SERVICE ENTERPRISE GROUP INC

Form 10-Q for PUBLIC SERVICE ENTERPRISE GROUP INC


30-Jul-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (MD&A)

This combined MD&A is separately filed by PSEG, Power and PSE&G. Information contained herein relating to any individual company is filed by such company on its own behalf. Power and PSE&G each make representations only as to itself and make no representations whatsoever as to any other company. PSEG's business consists of three reportable segments, which are:
Power, our wholesale energy supply company that integrates its generating asset operations with its wholesale energy, fuel supply, energy trading and marketing and risk management activities primarily in the Northeast and Mid-Atlantic United States,

PSE&G, our public utility company which provides electric transmission services and distribution of electric energy and natural gas in New Jersey; implements demand response and energy efficiency programs and invests in solar generation, and

Energy Holdings, which principally owns energy-related leveraged leases and solar generation projects.

Our business discussion in Part I, Item 1. Business of our 2012 Annual Report on 10-K (Form 10-K) provides a review of the regions and markets where we operate and compete, as well as our strategy for conducting our businesses within these markets, focusing on operational excellence, financial strength and making disciplined investments. Our risk factor discussion in Part I Item 1A of Form 10-K provides information about factors that could have a material adverse impact on our businesses. The following supplements that discussion and the discussion included in the Overview of 2012 and Future Outlook provided in Item 7 in our Form 10-K by describing significant events and business developments that have occurred during 2013 and changes to the key factors that we expect may drive our future performance. The following discussion refers to the Condensed Consolidated Financial Statements (Statements) and the Related Notes to Condensed Consolidated Financial Statements (Notes). This discussion should be read in conjunction with such Statements, Notes, the 2012 Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.

OVERVIEW OF 2013 AND FUTURE OUTLOOK
Our business plan is designed to maintain earnings stability while achieving growth in recognition of market, regulatory and economic trends. We continue to focus on operational excellence to provide the foundation for our financial strength, which enables us to invest in a disciplined way.
Our financial results for the first six months of 2013 were lower when compared to the first half of 2012. In the power markets in which our generation fleet operates, natural gas prices have a major impact on the price that generators receive for their output. While wholesale natural gas prices during the period remained low relative to historic prices following multiple years of steep declines, financial results for our generation operations were favorably impacted by increased output and higher market prices driven by colder winter weather in the period as compared to the first six months in 2012, as well as cost controls, partially offset by mark-to market losses in 2013 due to the impact of rising prices on our forward sale positions.
Under the PJM capacity auction conducted in May 2013, Power cleared 8,637 MW of its generating capacity at an average price of $166 per MW-day for the 2016-2017 delivery period. While this year's auction resulted in lower clearing prices for the PJM Regional Transmission Organization (RTO), Power benefited from higher prices than the rest of the RTO, as the majority of its generation fleet is situated in the relatively constrained Eastern part of PJM. For a more detailed discussed on the RPM capacity auction, refer to Part II. Item 5. Other Information-Federal Regulation-Capacity Market Issues.
Our utility business benefited from increased transmission investment during the first half of the year, but financial results were impacted by the absence of last year's tax settlement. In the first six months of 2013, we continued to invest capital in transmission and distribution infrastructure projects, aimed at maintaining the reliability of our service to our customers. Over the past few years, these types of investments have altered the business mix of our results of operations to reflect a higher percentage contribution by our regulated utility.
In developing and implementing our strategy of operational excellence, financial strength and disciplined investment, we monitor significant regulatory and legislative developments. Competitive wholesale power market design is of particular importance to our results and we continue to advocate for policies and rules that promote competitive electricity markets. This includes opposing efforts to subsidize generation and procurement activities in New Jersey in connection with the Long-Term Capacity Agreement Pilot Program (LCAPP) and in Maryland through the Maryland Public Service Commission Request for Proposal and supporting rule changes which we believe are necessary to avoid artificial price suppression and other distortions in the energy and capacity markets.


We continued to monitor and advocate for the development and implementation of fair and reasonable rules by the U.S. Environmental Protection Agency (EPA). In particular, the EPA's 316(b) rule on cooling water intake could adversely impact future nuclear and fossil operations and costs. Clean Air Act regulations governing hazardous air pollutants under the EPA's Maximum Achievable Control Technology (MACT) rules are also of significance; however, we believe our generation business remains well-positioned for such regulations if and when they are implemented.
As discussed in further detail under Part II. Item 5. Other Information-Federal Regulation-Transmission Regulation- Transmission Policy Developments, the FERC's rules under Order 1000 altered the right of first refusal previously held by incumbent utilities to build all transmission within their respective service territories. We are challenging the FERC's determination in court as we do not believe that the FERC sufficiently justified its decision to alter this right embedded in the FERC-approved contracts and tariffs. At the same time, the FERC's action presents opportunities for us to construct transmission outside of our service territory.
At year-end 2012, we were severely impacted by Superstorm Sandy, which resulted in the highest level of customer outages in our history. We sustained significant damage to some of our generation, transmission and distribution facilities. The New Jersey Board of Public Utilities (BPU) issued an order allowing us to defer actually incurred prudent otherwise unreimbursed, incremental, storm restoration costs not otherwise recoverable through base rates or insurance. In February 2013, the BPU announced that it would initiate a generic proceeding to evaluate the prudency of extraordinary, storm-related costs incurred by all of the regulated utilities as a result of the natural disasters experienced in New Jersey in 2011 and 2012. In June 2013, we made a compliance filing with the BPU providing the details of our storm restoration costs for Superstorm Sandy as well as other major storms and seeking to demonstrate that we responded to these extreme weather events in a timely, diligent and thorough manner and that the costs incurred were prudent. We requested that the BPU issue an Order approving the compliance filing and specifically finding that the storm costs incurred were reasonable and prudent, and should be recovered from ratepayers.
As discussed further in Note 9. Commitments and Contingent Liabilities, in the first six months of 2013, Power incurred significant storm-related expenses, primarily for repair at certain of its coal and gas-fired generating stations. We are seeking recovery from our insurers for the property damage, above our self-insured retentions; however, no assurances can be given relative to the timing or amount of such recovery. In June 2013, we filed suit against the insurance carriers seeking legal interpretation of certain terms in the insurance policies regarding losses resulting from damage caused by Superstorm Sandy's storm surge. For a more detailed discussion concerning this proceeding, refer to Part II Item 1. Legal Proceedings-Superstorm Sandy.
On February 20, 2013, we filed a petition with the BPU describing our Energy Strong program, consisting of $3.9 billion of proposed improvements we recommend making to our gas and electric distribution systems over a ten year period to harden and improve resiliency. In the petition, we sought approval for $2.6 billion of the $3.9 billion of investments over an initial five year period, plus associated expenses, and to receive contemporaneous recovery of and on such investments. We cannot predict the outcome of this pending proceeding, including whether the program will be approved or the terms under which it would be approved. We anticipate seeking BPU approval to complete our investment under the program at a later date. In addition, we anticipate investing an additional $1.5 billion in our transmission system for the same reason. As proposed, we believe that the rate impacts of the Energy Strong program will be significantly muted as a result of scheduled reductions to customer bills that will be taking place over the next few years and assuming continued low gas prices. See Part II Item 5. Other Information-State Regulation-Energy Strong Program for additional details.
We continue to take all necessary steps in connection with the expected January 1, 2014 commencement of our management of the Long Island Power Authority (LIPA) transmission and distribution (T&D) system. Legislation enacted in New York in July 2013 would enable us to have an expanded role in management of LIPA's T&D system. A proposed revised contract with LIPA is currently under negotiation. See Part II Item 5. Other Information-Business Operations and Strategy-Energy Holdings-Products and Services for additional details.


Operational Excellence
We emphasize operational performance while developing opportunities in both our competitive and regulated businesses. Flexibility in our generating fleet has allowed us to take advantage of market opportunities presented in the first half of the year as we remain diligent in managing costs. In the first six months of 2013, our
outstanding performance allowed us to increase generation to meet loads, and

construction of transmission and solar projects proceeded on schedule and within budget.

Financial Strength
Our financial position remained strong during the first six months of 2013 as we:
had cash on hand of $164 million as of June 30, 2013,

extended the expiration date of approximately half of our credit facilities, and maintained substantial liquidity and solid investment grade credit ratings, as evidenced by the recent credit rating upgrades by Standard & Poor's (S&P) of PSEG, Power and PSE&G as disclosed below in Liquidity and Capital Resources-Credit Ratings,

completed pension and other postretirement benefit funding for 2013,

refinanced PSE&G maturing debt at historically low rates and repaid Power's maturing debt with cash on hand, and

increased our indicated annual dividend to $1.44.

We expect to be able to fund our proposed Energy Strong program with internally generated cash and external debt financing. Disciplined Investment
We seek to invest in areas that complement our existing business and provide reasonable risk-adjusted returns. These areas include upgrading our energy infrastructure, responding to trends in environmental protection and providing new energy supplies in domestic markets with growing demand. In addition to the proposed Energy Strong program discussed above, in the first six months of 2013 we
made additional investments in transmission infrastructure projects,

continued to execute our existing BPU-approved utility programs,

obtained approval from the BPU to increase our spending up to $247 million and $199 million under our Solar 4 All Extension and Solar Loan III investment programs, respectively (see Part II. Item 5. Other Information-State Regulation for further detail), and

continued construction of a 19 MW solar project in Arizona.

Delays in the construction schedules of our projects could impact their costs as well as the timing of expected revenues. Future Outlook
Our future success will depend on our ability to continue to maintain strong operational and financial performance in a difficult economy and cost-constrained environment, to capitalize on or otherwise address appropriately regulatory and legislative developments and to respond to the issues and challenges described below. In order to do this, we must continue to:
focus on controlling costs while maintaining safety and reliability and complying with applicable standards and requirements,

successfully re-contract our open supply positions,

execute our capital investment program, including investments for growth that yield contemporaneous and reasonable risk-adjusted returns, while enhancing the resiliency of our infrastructure and maintaining the reliability of the service we provide to our customers,

advocate for measures to ensure the implementation by PJM and FERC of market design rules that continue to protect competition and achieve appropriate Reliability Pricing Model (RPM) and BGS pricing, and

engage multiple stakeholders, including regulators, government officials, customers and investors.

For the remainder of 2013 and beyond, the key issues and challenges we expect our business to confront include


regulatory and political uncertainty, particularly with regard to future energy policy, design of energy and capacity markets, transmission policy and environmental regulation,

uncertainty in the national and regional economic recovery and continuing customer conservation efforts, which impact customer demand,

the continuing potential for sustained lower natural gas and electricity prices, both at market hubs and at locations where we operate,

the aftermath of Hurricane Irene and Superstorm Sandy, including addressing the BPU's review of performance and communications, as well as cost recovery and opportunities for investment in system strengthening, including our proposed Energy Strong program,

financially-stressed power plant leveraged lease investments,

delays and other obstacles that might arise in connection with the construction of our transmission and distribution projects, including in connection with permitting and regulatory approvals, and

the successful transition to our management of the LIPA transmission and distribution system. See Part II Item 5. Other Information-Business Operations and Strategy-Products and Services for additional details.


RESULTS OF OPERATIONS
The results for PSEG, PSE&G, Power and Energy Holdings for the three months and
six months ended June 30, 2013 and 2012 are presented below:

                         Three Months Ended             Six Months Ended
                              June 30,                      June 30,
  Earnings (Losses)        2013            2012          2013           2012
                                            Millions
  Power             $     204             $ 104    $     341           $ 357
  PSE&G                   121               101          300             298
  Energy Holdings           4                 2            4              42
  Other (A)                 4                 4            8               7
  PSEG Net Income   $     333             $ 211    $     653           $ 704




                                    Three Months Ended            Six Months Ended
                                         June 30,                     June 30,
  Earnings Per Share (Diluted)        2013           2012          2013          2012
  PSEG Net Income              $     0.66           $ 0.42    $    1.29         $ 1.39

(A) Other primarily includes parent company interest and financing activity and certain administrative and general expenses.

Our results include the realized gains, losses and earnings on Power's Nuclear Decommissioning Trust (NDT) Fund and other related NDT activity. This includes the net realized gains, interest and dividend income and other costs related to the NDT Fund which are recorded in Other Income and Deductions. This also includes impairments on certain NDT securities which are included in Other-Than-Temporary Impairments and the interest accretion expense on Power's nuclear Asset Retirement Obligation (ARO), which is recorded in Operation and Maintenance Expense and the depreciation related to the ARO asset. Our results also include the after-tax impacts of non-trading mark-to-market (MTM) activity, which consist of the financial impact from positions with forward delivery dates.
The variances in our Net Income include the changes related to NDT and MTM shown in the chart below:

                                     Three Months Ended           Six Months Ended
                                          June 30,                    June 30,
                                       2013           2012         2013         2012
                                                 Millions, after tax
  NDT Fund Income (Expense)      $     8             $   4     $      17       $   9
  Non-Trading MTM Gains (Losses) $    80             $ (10 )   $     (25 )     $  42

Our $122 million increase in Net Income for the three months ended June 30, 2013 was driven primarily by
an increase in net MTM gains in 2013 resulting from a decrease in prices on forward positions, and

higher revenues due to increased investments in transmission projects.

Our $51 million decrease in Net Income for the six months ended June 30, 2013 was driven primarily by
lower average pricing and lower volumes of electricity sold under the BGS contracts and wholesale load contracts at Power,

higher gas costs related to our BGSS contractual obligations and higher generation fuel costs,

higher MTM losses due to an increase in prices on forward prices in PJM,


higher Operation and Maintenance Costs, including repairs related to damage caused by Superstorm Sandy, and

higher Income Tax Expense due to the absence of tax benefits related to the settlement of the 1997-2006 Internal Revenue Service (IRS) audits in 2012.

The decreases were partially offset by
higher capacity revenues and operating reserve revenues in PJM, and

higher revenues due to increased investments in transmission projects.

PSEG
Our results of operations are primarily comprised of the results of operations
of our operating subsidiaries, Power, PSE&G and Energy Holdings, excluding
charges related to intercompany transactions, which are eliminated in
consolidation. We also include certain financing costs, charitable contributions
and general and administrative costs at the parent company. For additional
information on intercompany transactions, see Note 18. Related-Party
Transactions. For an explanation of the variances, see the discussions for
Power, PSE&G and Energy Holdings that follow the table below:

                               Three Months Ended             Increase/             Six Months Ended            Increase/
                                    June 30,                  (Decrease)                June 30,                (Decrease)
                                2013           2012         2013 vs. 2012           2013         2012         2013 vs. 2012
                                    Millions              Millions       %              Millions            Millions       %
  Operating Revenues      $    2,310         $ 2,098     $    212        10     $    5,096     $ 4,973     $    123         2
  Energy Costs                   755             761           (6 )      (1 )        1,910       1,940          (30 )      (2 )
  Operation and
  Maintenance                    646             629           17         3          1,356       1,257           99         8
  Depreciation and
  Amortization                   283             255           28        11            573         511           62        12
  Taxes Other than Income
  Taxes                           14              20           (6 )     (30 )           35          49          (14 )     (29 )
  Income from Equity
  Method Investments               3               2            1        50              5           2            3       N/A
  Other Income and
  (Deductions)                    39              32            7        22             71          60           11        18
  Other-Than-Temporary
  Impairments                      2               7           (5 )     (71 )            4          12           (8 )     (67 )
  Interest Expense               101             103           (2 )      (2 )          203         204           (1 )       -
  Income Tax Expense             218             146           72        49            438         358           80        22

Power

                              Three Months Ended              Increase/            Six Months Ended        Increase/
                                   June 30,                  (Decrease)              June 30,              (Decrease)
                              2013              2012        2013 vs. 2012        2013         2012       2013 vs. 2012
                                                                   Millions

Net Income $ 204 $ 104 $ 100 $ 341 $ 357 $ (16 )

For the three months ended June 30, 2013, the primary reason for the $100 million increase in Net Income was net MTM gains in 2013 resulting from a decrease in prices on forward positions as well as higher capacity payments, partially offset by lower generation prices and volumes.


For the six months ended June 30, 2013, the primary reasons for the $16 million decrease in Net Income were:
lower average pricing and lower volumes of electricity sold under our BGS contracts,

lower volumes on wholesale load contracts in the PJM and New England regions,

lower net revenues due to MTM losses in 2013 due to an increase in prices on forward positions in the PJM region,

higher gas costs related to obligations under the BGSS contract and higher generation costs due to higher fuel costs, and

higher Operation and Maintenance Costs in 2013, including costs related to damage caused by Superstorm Sandy at our fossil plants,

These decreases were partially offset by
higher capacity revenues resulting from higher auction prices and an increase in operating reserve revenue in PJM, and

higher sales volumes and gas prices under the BGSS contract due to colder average temperatures in 2013.

The quarter and year-to date details for these variances are discussed below:

                           Three Months Ended             Increase/             Six Months Ended             Increase/
                                June 30,                  (Decrease)                June 30,                 (Decrease)
                            2013            2012        2013 vs. 2012           2013         2012          2013 vs. 2012
                                Millions              Millions       %              Millions             Millions        %
  Operating Revenues   $      1,190        $ 985     $    205        21     $    2,637     $ 2,546     $       91         4
  Energy Costs                  496          447           49        11          1,356       1,269             87         7
  Operation and
  Maintenance                   280          284           (4 )      (1 )          562         525             37         7
  Depreciation and
  Amortization                   65           58            7        12            129         115             14        12
  Other Income
  (Deductions)                   25           20            5        25             44          35              9        26
  Other-Than-Temporary
  Impairments                     2            7           (5 )     (71 )            4          12             (8 )     (67 )
  Interest Expense               29           32           (3 )      (9 )           59          62             (3 )      (5 )
  Income Tax Expense            139           73           66        90            230         241            (11 )      (5 )

Three Months Ended June 30, 2013 As Compared to 2012 Operating Revenues increased $205 million due to changes in generation and gas supply revenues.
Generation Revenues increased $182 million due primarily to
a net increase of $181 million due primarily to MTM gains in 2013 in the PJM and New York regions resulting from a change in prices on forward positions, and

a net increase of $63 million due to higher capacity and other revenues, of which $54 million resulted from higher auction prices and $9 million from an increase in operating reserves in the PJM region,

partially offset by a decrease of $37 million due to lower average pricing and lower volumes of electricity sold under our BGS contracts, and

a decrease of $25 million due primarily to lower volumes on wholesale load contracts in the PJM and New England regions.


Gas Supply Revenues increased $23 million due primarily to
a net increase of $15 million in sales under the BGSS contract, substantially comprised of higher sales volumes due to colder average temperatures during 2013 at higher average gas prices, and

an increase of $8 million due to higher average prices from sales to third party customers, partially offset by lower volumes.

Operating Expenses
Energy Costs represent the cost of generation, which includes fuel costs for generation as well as purchased energy in the market, and gas purchases to meet Power's obligation under its BGSS contract with PSE&G. Energy Costs increased $49 million due to
Generation costs increased $32 million due primarily to $64 million of higher fuel costs reflecting higher average realized natural gas prices and higher nuclear fuel prices and MTM losses resulting from lower prices on forward positions in 2013. This increase was partially offset by $16 million of lower load contract volumes in 2013 and $16 million related to lower congestion costs in the PJM region.

Gas costs increased $17 million, principally related to obligations under the BGSS contract, reflecting higher sales volumes in 2013 due primarily to colder average temperatures in 2013 and higher average prices on third-party sales, partially offset by lower volumes.

Operation and Maintenance decreased $4 million due primarily to the recognition of a $25 million insurance recovery related to Superstorm Sandy, partially offset by $22 million in incremental costs associated with Superstorm Sandy. Depreciation and Amortization increased $7 million due primarily to a higher . . .

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