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PEG > SEC Filings for PEG > Form 10-K on 26-Feb-2014All Recent SEC Filings




Annual Report

This combined MD&A is separately filed by Public Service Enterprise Group Incorporated (PSEG), PSEG Power LLC (Power) and Public Service Electric and Gas Company (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 two reportable segments, its principal direct wholly owned subsidiaries, which are:
Power, our wholesale energy supply company that integrates its nuclear, fossil and renewable 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, and

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

PSEG's other direct wholly owned subsidiaries are: PSEG Energy Holdings L.L.C. (Energy Holdings), which earns its revenues primarily from its portfolio of lease investments; PSEG Long Island LLC (PSEG LI), which effective January 1, 2014 operates the Long Island Power Authority's transmission and distribution system under a contractual agreement; and PSEG Services Corporation (Services), which provides us and these operating subsidiaries with certain management, administrative and general services at cost.
Our business discussion in Part I, Item 1. Business 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. Risk Factors provides information about factors that could have a material adverse impact on our businesses. The following discussion provides an overview of the significant events and business developments that have occurred during 2013 and key factors that we expect will drive our future performance. This discussion refers to the Consolidated Financial Statements (Statements) and the Related Notes to Consolidated Financial Statements (Notes). This discussion should be read in conjunction with such Statements and Notes.
2013 Overview
Our business plan is designed to manage the risks associated with fluctuating commodity prices and changes in customer demand as we invest to achieve growth in light of market, regulatory and economic trends. In 2013, we continued our focus on operational excellence, financial strength and disciplined investment. These guiding principles have provided the base from which we have been able to execute our strategic initiatives, including:
Growing our utility operations through continued investment in transmission and distribution infrastructure projects with a consequent rebalancing of our business mix and greater diversification of regulatory oversight, and

Maintaining a reliable generation fleet with the flexibility to utilize a diverse mix of fuels to allow us to capitalize on market opportunities as they arise in the locations in which we operate.

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Financial Results
The results for PSEG, Power and PSE&G for the years ended December 31, 2013 and
2012 are presented below:

                                       Years Ended December 31,
                                        2013                 2012
  Earnings (Losses)                 Millions, except per share data
  Power                          $           644         $        666
  PSE&G                                      612                  528
  Other                                      (13 )                 81
  PSEG Net Income                $         1,243         $      1,275

  Earnings Per Share (Diluted)
  PSEG Net Income                $          2.45         $       2.51

Our $32 million 2013 over 2012 decrease in Net Income was due primarily to higher Operations and Maintenance (O&M) costs in 2013 related to planned outage work and higher mark-to-market losses at Power. In addition, 2012 Net Income included recoveries from one of Energy Holdings' leverage lease investments, and a one-time benefit from the settlement of the 1997-2006 Internal Revenue Service audits in 2012. These factors were partially offset by higher market prices, fuel supply cost savings and increased capacity pricing at Power, and higher transmission revenues at PSE&G. For a more detailed discussion of our financial results, see Results of Operations.
Power's results also benefited from access to low-cost natural gas from the Marcellus region during the latter half of 2013 through its existing firm pipeline transportation and storage contracts. Power manages these contracts for the benefit of PSE&G's customers through the basic gas supply service (BGSS) arrangement. The contracts are sized to ensure delivery of a reliable gas supply to PSE&G customers on peak winter days. When the customers' demand for gas is lower, which frequently occurs outside of the winter usage period, Power can use the remaining available pipeline transportation to make third party sales and supply the Marcellus gas to its generating units in New Jersey.
At PSE&G, 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. In January 2014, we filed a Modified 2014 Annual Formula Rate Update with the Federal Energy Regulatory Commission (FERC) in December 2013 which provides for approximately $171 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. Federal court decisions in New Jersey and Maryland invalidated legislation in those states which sought to subsidize generation. For a more detailed discussion of the status of these efforts, refer to Item 1. Business-Regulatory Issues-Federal Regulation. We continue to advocate for the development and implementation of fair and reasonable rules by the U.S. Environmental Protection Agency (EPA) and state environmental regulators. 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 air pollution control regulations if and when they are implemented. These matters are discussed in Item 1. Business-Environmental Matters.
As discussed in further detail under Item 1. Business-Regulatory Issues-Federal Regulation, 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.

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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 PSE&G to defer actually incurred prudent, incremental storm restoration costs not otherwise recoverable through base rates or insurance. Proceedings at the BPU on the prudency and recovery of storm-related costs are pending. Power also incurred significant storm-related expenses, primarily for repairs at certain of its coal and gas-fired generating stations in 2013. 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 more detailed information, refer to Item 1. Business-Regulatory and Item 8. Financial Statements and Supplementary Data-Note
13. Commitments and Contingent Liabilities for additional information. In February 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 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. 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 Item 1. Business-State Regulation for additional details. During 2013, we continued to execute our five major regional transmission projects for which we were assigned construction responsibility by PJM. In December 2013, we were assigned construction by PJM of a new transmission project that will provide a double-circuit 345kV line in the Bergen-Linden Corridor to maintain reliability. See Item 1. Business-Business Operations and Strategy-PSE&G for additional information. On January 1, 2014, we commenced operation of the Long Island Power Authority (LIPA) transmission and distribution (T&D) system under a twelve-year contract with opportunity to extend for an additional eight years. Also, beginning in 2015, Power will provide fuel procurement and power management services to LIPA under separate agreements. See Item 1. Business-Business Operations and Strategy-Other 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 during the year as we remain diligent in managing costs. In 2013, our
total nuclear fleet achieved an average capacity factor in excess of 90% for the ninth consecutive year,

outstanding performance allowed us to increase generation to meet loads,

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

utility ranked nationally in the top quartile for safety and reliability.

Financial Strength
Our financial strength is predicated on a solid balance sheet, positive cash flow and reasonable risk-adjusted returns on increased investment. Our financial position remained strong during 2013 as we:
had cash on hand of $493 million as of December 31, 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 and upgrade by Moody's of PSE&G as disclosed below in Liquidity and Capital Resources-Credit Ratings,

completed pension funding for 2013, which when combined with strong market results and a higher discount rate, resulted in a year-end ratio of the value of our pension plan assets to our projected pension benefit obligation of 106 percent,

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

paid an annual dividend of $1.44 and increased our indicated annual dividend for 2014 to $1.48.

We expect to be able to fund our proposed Energy Strong program with internally generated cash and external debt financing.

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Disciplined Investment
We utilize rigorous investment criteria when deploying capital, and 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 2013 we:
made additional investments in transmission infrastructure projects of $1.7 billion,

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,

approved additional investments in our existing generation facilities to increase output and improve efficiency, and

commenced operation of a newly constructed 19 MW solar project in Arizona.

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 basic generation service (BGS) pricing,

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

successfully operate the LIPA T&D system.

For 2014 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, and

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.

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                                                            Years Ended December 31,
                                                        2013          2012           2011
  Earnings (Losses)                                                 Millions
  Power (A)                                         $      644     $     666     $    1,013
  PSE&G (A)                                                612           528            521
  Other (B)                                                (13 )          81           (127 )
  PSEG Income from Continuing Operations                 1,243         1,275          1,407
  Income (Loss) from Discontinued Operations,
  Including Gain on Disposal (C)                             -             -             96
  PSEG Net Income                                   $    1,243     $   1,275     $    1,503

                                                            Years Ended December 31,
  Earnings Per Share (Diluted)                          2013          2012           2011
  PSEG Income from Continuing Operations            $     2.45     $    2.51     $     2.77
  Income from Discontinued Operations, Including
  Gain on Disposal (C)                                       -             -           0.19
  PSEG Net Income                                   $     2.45     $    2.51     $     2.96

(A) Power's results in 2013 and 2012 include after-tax expenses, net of insurance recoveries, of $32 million and $39 million, respectively, and PSE&G's results in 2012 include after-tax expenses of $24 million for O&M costs due to severe damage caused by Superstorm Sandy. See Item 8. Financial Statements and Supplementary Data-Note 13. Commitments and Contingent Liabilities.

(B) Other includes an after-tax charge of $170 million taken in 2011 at Energy Holdings related to the reserve for assets underlying a leveraged lease receivable. See Item 8. Financial Statements and Supplementary Data-Note 8. Financing Receivables.

(C) See Item 8. Financial Statements and Supplementary Data-Note 4.

Discontinued Operations and Dispositions.

The 2013 year-over-year decrease in our Income from Continuing Operations/Net Income was driven primarily by:
lower volumes of electricity sold under Power's basic generation service (BGS) contracts at lower average prices,

lower volumes of wholesale load contracts in the PJM and New England (NE) regions,

unfavorable amounts related to the mark-to-market (MTM) activity, discussed below,

higher generation costs due to higher fuel costs,

higher planned outage and maintenance costs at certain of our fossil and nuclear plants, partially offset by cost control measures,

the absence of the gain on the Dynegy settlement in 2012 (see Item 8.
Financial Statements and Supplementary Data-Note 8. Financing Receivables), and

higher Income Tax Expense due to the absence of tax benefits related to the settlement of the 1997-2006 IRS audits in 2012 (see Item 8. Financial Statements and Supplementary Data-Note 20. Income Taxes).

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

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

higher revenues due to increased investments in transmission projects.

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The 2012 year-over-year decrease in our Income from Continuing Operations was driven by:
lower average pricing and volumes for electricity sold under our BGS contracts,

lower average prices realized on generation sold into various power pools,

unfavorable amounts related to the MTM activity, discussed below,

higher O&M costs due to severe damage caused by Superstorm Sandy to our transmission and distribution system throughout our service territory as well as to some of our generation infrastructure in the northern part of New Jersey.

The decreases were partially offset by:
the absence of the $170 million after-tax charge taken in 2011 on leveraged leases related to Dynegy and the settlement proceeds received in 2012 (see Item 8. Financial Statements and Supplementary Data-Note 8. Financing Receivables), and

higher transmission revenues at PSE&G.

Our results include the realized gains, losses and earnings on Power's Nuclear Decommissioning Trust (NDT) Fund and other related NDT activity. Net realized gains, interest and dividend income and other costs related to the NDT Fund are recorded in Other Income and Deductions, and impairments on certain NDT securities are recorded as Other-Than-Temporary Impairments. Interest accretion expense on Power's nuclear Asset Retirement Obligation (ARO) is recorded in Operation and Maintenance Expense, as well as the depreciation related to the ARO asset. In September 2012, we restructured a portion of our NDT Fund and realized gains of $59 million. The investments were transitioned to new investment managers.
Our results also include the after-tax impacts of non-trading MTM activity, which consist of the financial impact from positions with forward delivery dates.
The combined after-tax impact on Income from Continuing Operations for the years ended December 31, 2013, 2012 and 2011 include the changes related to NDT Fund and MTM activity shown in the chart below:

  Years Ended December 31,            2013       2012      2011
                                        Millions, after tax
  NDT Fund and Related Activity    $    40      $  52     $  50
  Non-Trading MTM Gains (Losses)   $   (74 )    $ (10 )   $ 107

Our results of operations are primarily comprised of the results of operations of our principal operating subsidiaries, Power and PSE&G, excluding charges related to intercompany transactions, which are eliminated in consolidation. For additional information on intercompany transactions, see Item 8. Financial Statements and Supplementary Data-Note 24. Related-Party Transactions.

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                                                                        Increase /              Increase /
                                Years Ended December 31,                (Decrease)              (Decrease)
                             2013          2012          2011         2013 vs. 2012           2012 vs. 2011
                                        Millions                    Millions         %      Millions        %
  Operating Revenues     $   9,968       $ 9,781     $ 11,079     $     187          2     $ (1,298 )     (12 )
  Energy Costs               3,536         3,719        4,747          (183 )       (5 )     (1,028 )     (22 )
  Operation and
  Maintenance                2,887         2,632        2,481           255         10          151         6
  Depreciation and
  Amortization               1,178         1,054          976           124         12           78         8
  Income from Equity
  Method Investments            11            12            4            (1 )       (8 )          8       N/A
  Other Income and
  (Deductions)                 159           162          135            (3 )       (2 )         27        20
  Impairments                   12            18           22            (6 )      (33 )         (4 )     (18 )
  Interest Expense             402           423          475           (21 )       (5 )        (52 )     (11 )
  Income Tax Expense           812           736          977            76         10         (241 )     (25 )
  Income from
  including Gain on
  Disposal, net of tax           -             -           96             -          -          (96 )    (100 )

For a detailed explanation of the variances, see the following discussions for Power and PSE&G.


                                                                         Increase /              Increase /
                                  Years Ended December 31,               (Decrease)              (Decrease)
  Power                         2013          2012        2011          2013 vs. 2012           2012 vs. 2011
                                          Millions                   Millions         %      Millions         %
  Operating Revenues       $   5,063        $ 4,873     $ 6,150     $    190          4     $ (1,277 )      (21 )
  Energy Costs                 2,496          2,381       3,044          115          5         (663 )      (22 )
  Operation and
  Maintenance                  1,224          1,127       1,105           97          9           22          2
  Depreciation and
  Amortization                   273            242         228           31         13           14          6
  Income from Equity
  Method Investments              16             15          14            1          7            1          7
  Other Income
  (Deductions)                   105            111         111           (6 )       (5 )          -          -
  Impairments                     12             18          20           (6 )      (33 )         (2 )      (10 )
  Interest Expense               116            132         175          (16 )      (12 )        (43 )      (25 )
  Income Tax Expense             419            433         690          (14 )       (3 )       (257 )      (37 )
  Income (Loss) from
  Operations, Including
  Gain on Disposal                 -              -          96            -          -          (96 )     (100 )

Year Ended December 31, 2013 as compared to 2012 Operating Revenues increased $190 million due to changes in generation and supply revenues.
Generation Revenues increased $102 million due primarily to
an increase of $341 million due to higher capacity revenues resulting from higher average auction prices and an increase in operating reserve revenues in PJM, and

higher net revenues of $36 million due primarily to higher generation sold in the PJM and NE regions partly offset by higher MTM losses in 2013 resulting from an increase in prices on forward positions in the PJM and NE regions,

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partially offset by a decrease of $155 million due primarily to lower . . .

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