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PEG > SEC Filings for PEG > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for PUBLIC SERVICE ENTERPRISE GROUP INC

Form 10-Q for PUBLIC SERVICE ENTERPRISE GROUP INC


31-Oct-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. A subsidiary of Energy Holdings has been awarded a contract to manage the transmission and distribution assets of LIPA beginning on January 1, 2014.

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 Reports on Form 10-Q for the quarters ended June 30, 2013 and 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.
Financial Results
The results for PSEG, PSE&G, Power and Energy Holdings for the three months and
nine months ended September 30, 2013 and 2012 are presented below:

                                  Three Months Ended          Nine Months Ended
                                    September 30,               September 30,
  Earnings (Losses)                2013          2012          2013           2012
                                                     Millions
  Power                        $     221       $   181    $      562        $   538
  PSE&G                              168           155           468            453
  Energy Holdings                     (3 )           7             1             49
  Other (A)                            4             4            12             11
  PSEG Net Income              $     390       $   347    $    1,043        $ 1,051

  Earnings Per Share (Diluted)
  PSEG Net Income              $    0.77       $  0.68    $     2.06        $  2.07

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


Power's results above include the realized gains, losses and earnings on the Nuclear Decommissioning Trust (NDT) Fund and other related NDT activity and the 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           Nine Months Ended
                                        September 30,               September 30,
                                       2013           2012        2013          2012
                                                  Millions, after tax
  NDT Fund Income (Expense) (A)  $    12             $  40     $     29       $   49
  Non-Trading MTM Gains (Losses) $     3             $ (76 )   $    (22 )     $  (34 )

(A) NDT Fund Income (Expense) 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 $43 million increase in Net Income for the three months ended September 30, 2013 includes the MTM and NDT activity above and was also impacted by:
higher revenues due to increased investments in transmission projects, and

higher capacity revenues, and

higher Operation and Maintenance Costs due primarily to planned maintenance costs at our gas-fired Bethlehem Energy Center (BEC) in New York and costs related to damage caused by Superstorm Sandy at our fossil plants, partly offset by cost control measures.

Our $8 million decrease in Net Income for the nine months ended September 30, 2013 was driven primarily by:
lower volumes of electricity sold under our basic generation service (BGS) contracts at lower average prices,

lower volumes of wholesale load contracts in the PJM and NE regions,

higher generation costs due to higher fuel costs,

higher Operation and Maintenance Costs in 2013, including costs related to damage caused by Superstorm Sandy, partially offset by cost control measures,

higher Income Tax Expense at PSE&G and Energy Holdings due to the absence of tax benefits related to the settlement of the 1997-2006 Internal Revenue Service (IRS) audits in 2012, and

net realized gains in September 2012 resulting from restructuring our NDT Fund.

These decreases were largely offset by
higher capacity pricing in the PJM region resulting from higher auction prices as well as higher generation sold primarily in the PJM region,

higher average gas prices on sales to third party customers, and

higher revenues due to increased investments in transmission projects,

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.
Power's results also benefited from access to low cost natural gas from the Marcellus region through its existing transportation and storage contracts. Power manages these contracts primarily for the benefit of PSE&G's customers through the basic gas supply service (BGSS) arrangement. During times of low customer demand for gas, Power can use the remaining transportation that is available to supply the Marcellus gas to its generating units in New Jersey.


At our regulated utility, we continued to invest capital in transmission and distribution infrastructure projects, aimed at maintaining the reliability of our service to our customers. PSE&G's results for 2013 reflect the favorable impacts from these investments. We filed our 2014 Annual Formula Rate Update with the FERC in October of this year, which would provide for approximately $176 million in increased annual transmission revenues effective January 1, 2014. Over the past few years, these types of investments have altered the business mix of PSEG's overall results of operations to reflect a higher percentage contribution by PSE&G.
Regulatory, Legislative and Other Developments 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 by states to subsidize generation and supporting rule changes which we believe are necessary to avoid artificial price suppression and other distortions in the energy and capacity markets. For a more detailed discussion of the status of these efforts, refer to Part II. Item 5. Other Information-Federal Regulation-Capacity Market Issues-LCAPP.
We continue to 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 (CAA) 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. These matters are discussed in Part II. Item 5. Other Information-Environmental Matters-Climate Change-CO2 Regulation under the CAA. 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.
In the fourth quarter of 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, incremental storm restoration costs not otherwise recoverable through base rates or insurance. In February 2013, the BPU initiated 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.
Power also incurred significant storm-related expenses, primarily for repairs at certain of its coal and gas-fired generating stations in the first nine months of 2013 (See Note 9. Commitments and Contingent Liabilities). 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 any 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 authorized an expanded role for us in the management of LIPA's T&D system. A revised contract with LIPA was approved by the LIPA Board in October 2013, but implementation of the new contract remains subject to a number of factors,


including LIPA's receipt of a Private Letter Ruling from the IRS on the continued tax-exempt status of certain LIPA debt securities and LIPA's approval of the proposed 2014 and 2015 operating and capital pass-through budgets. 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 nine months of the year as we remain diligent in managing costs. In the first nine 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 nine months of 2013 as we:
had cash on hand of $448 million as of September 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,

issued bonds at PSE&G to refinance its maturing debt at historically low rates and fund its capital program,

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 the first nine 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, 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 the 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, continuing customer conservation efforts, changes in energy usage patterns and evolving technologies, 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 T&D system.


RESULTS OF OPERATIONS
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/              Nine Months Ended             Increase/
                              September 30,                (Decrease)               September 30,               (Decrease)
                             2013           2012         2013 vs. 2012            2013           2012         2013 vs. 2012
                                 Millions              Millions       %               Millions              Millions       %
  Operating Revenues   $    2,554         $ 2,402     $    152         6     $    7,650        $ 7,375     $    275         4
  Energy Costs                801             879          (78 )      (9 )        2,711          2,819         (108 )      (4 )
  Operation and
  Maintenance                 713             619           94        15          2,069          1,876          193        10
  Depreciation and
  Amortization                313             286           27         9            886            797           89        11
  Taxes Other than
  Income Taxes                 15              24           (9 )     (38 )           50             73          (23 )     (32 )
  Income from Equity
  Method Investments            4               7           (3 )     (43 )            9              9            -       N/A
  Other Income and
  (Deductions)                 47              95          (48 )     (51 )          118            155          (37 )     (24 )
  Other-Than-Temporary
  Impairments                   3               2            1        50              7             14           (7 )     (50 )
  Interest Expense            100             106           (6 )      (6 )          303            310           (7 )      (2 )
  Income Tax Expense          270             241           29        12            708            599          109        18




Power

                              Three Months Ended              Increase/           Nine Months Ended         Increase/
                                September 30,                (Decrease)            September 30,           (Decrease)
                              2013              2012        2013 vs. 2012        2013         2012        2013 vs. 2012
                                                                    Millions
  Net Income           $     221             $    181     $            40     $     562     $   538     $            24

For the three months ended September 30, 2013, the primary reasons for the $40 million increase in Net Income were:
significant MTM losses in 2012 resulting from an increase in prices on forward positions, and

higher capacity revenues in 2013.

These increases were partially offset by
higher Operation and Maintenance Costs, due primarily to planned maintenance costs at our BEC plant and costs related to damage caused by Superstorm Sandy at our fossil plants, and

$59 million of net realized gains in September 2012 resulting from restructuring our NDT Fund.


For the nine months ended September 30, 2013, the primary reasons for the $24 million increase in Net Income were:
higher capacity pricing in the PJM region resulting from higher auction prices as well as higher generation sold primarily in the PJM region, and

higher average gas prices on sales to third party customers.

These increases were largely offset by
lower volumes of electricity sold under our BGS contracts at lower average prices,

lower volumes of wholesale load contracts in the PJM and NE regions,

higher generation costs due to higher fuel costs,

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

$59 million of net realized gains in September 2012 resulting from restructuring our NDT Fund.

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

                            Three Months Ended             Increase/              Nine Months Ended             Increase/
                              September 30,                (Decrease)               September 30,               (Decrease)
                             2013           2012         2013 vs. 2012            2013           2012         2013 vs. 2012
                                 Millions              Millions       %               Millions              Millions       %
  Operating Revenues   $    1,169         $ 1,038     $    131        13     $    3,806        $ 3,584     $    222         6
  Energy Costs                430             456          (26 )      (6 )        1,786          1,725           61         4
  Operation and
  Maintenance                 304             255           49        19            866            780           86        11
  Depreciation and
  Amortization                 66              60            6        10            195            175           20        11
  Other Income
  (Deductions)                 34              84          (50 )     (60 )           78            119          (41 )     (34 )
  Other-Than-Temporary
  Impairments                   3               2            1        50              7             14           (7 )     (50 )
  Interest Expense             26              35           (9 )     (26 )           85             97          (12 )     (12 )
  Income Tax Expense          153             133           20        15            383            374            9         2

Three Months Ended September 30, 2013 as Compared to 2012 Operating Revenues increased $131 million due to changes in generation and gas supply revenues.
Generation Revenues increased $133 million due primarily to
an increase of $147 million largely due to a $137 million increase primarily attributable to significant MTM losses in 2012 in the PJM region resulting from increases in prices on forward positions, and

an increase of $78 million due to higher capacity revenues resulting from higher average auction prices and an increase in operating reserve revenues in the PJM region,

partially offset by a decrease of $74 million due primarily to lower volumes of electricity sold under our BGS contracts and lower average pricing, and

a net decrease of $18 million due primarily to lower volumes in the NE region as well as lower average prices in the PJM and NE regions on wholesale load contracts.


Gas Supply Revenues decreased $2 million due primarily to
a net decrease of $5 million in sales under the BGSS contract, primarily due to lower average gas prices partly offset by higher sales volumes,

partially offset by a net increase of $3 million partially due to higher sales volumes to third party customers.

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 decreased $26 million due to
Generation costs decreased $20 million due primarily to $28 million of lower fuel costs, reflecting utilization of lower volumes of coal and natural gas at lower average prices, partially offset by higher nuclear fuel prices. This decrease was partially offset by a net increase of $8 million due to energy purchases at higher average prices partly offset by the recovery of excess solar renewable energy credit (SREC) cost in PJM. . . .

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