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PEG > SEC Filings for PEG > Form 10-Q on 2-May-2014All Recent SEC Filings




Quarterly 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, our 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 (LIPA) transmission and distribution (T&D) 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 of our 2013 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. Risk Factors 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 2013 and Future Outlook provided in Item 7 in our Form 10-K by describing significant events and business developments that have occurred during 2014 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 and the 2013 Form 10-K.

Our business plan is designed to achieve growth in response to market, regulatory and economic trends while managing the risks associated with fluctuating commodity prices and changes in customer demand. We continue 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 T&D infrastructure projects with a consequential 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 respond to market volatility and capitalize on market opportunities as they arise in the locations in which we operate.

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Financial Results
The results for PSEG, PSE&G and Power for the three months ended March 31, 2014
and 2013 are presented as follows:

                                           Three Months Ended
                                               March 31,
  Earnings (Losses)                          2014           2013
  Power (A)                           $      164           $  141
  PSE&G                                      214              179
  Other (B)                                    8                -
  PSEG Net Income                     $      386           $  320

  PSEG Net Income Per Share (Diluted) $     0.76           $ 0.63

(A) Power's results in 2014 and 2013 include after-tax expenses of $9 million and $28 million, respectively, for Operations and Maintenance (O&M) costs due to severe damage caused by Superstorm Sandy. See Note 8. Commitments and Contingent Liabilities.

(B) 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 following table:

                                    Three Months Ended
                                         March 31,
                                     2014           2013
                                    Millions, after tax
  NDT Fund Income (Expense) (A)  $        9       $    9
  Non-Trading MTM Gains (Losses) $     (132 )     $ (105 )

(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, and impairments on certain NDT securities recorded as Other-Than-Temporary Impairments. Interest accretion expense on Power's nuclear Asset Retirement Obligation (ARO) is recorded in O&M Expense, as well as the depreciation related to the ARO asset.

Our $66 million increase in Net Income for the three months ended March 31, 2014 includes the MTM and NDT activity presented in the preceding table and was also impacted by:
higher energy volumes sold primarily in the PJM and New England (NE) regions at higher average realized prices as well as higher capacity revenues primarily in PJM resulting from higher average prices,

higher sales volumes under the basic gas supply service (BGSS) contract due to colder average temperatures, and

higher revenues due to increased investments in transmission projects.

These increases were partially offset by
higher generation costs due to higher fuel costs and higher gas costs related to the BGSS contract, and

higher O&M costs due to a planned outage at our Linden fossil station partly offset by lower pension and other postretirement benefit (OPEB) costs and cost control measures.

Power's results also benefited from access to reasonably-priced natural gas supplies through its existing firm pipeline transportation during the cold weather experienced in the first quarter of 2014. Power manages these contracts for the benefit of PSE&G's customers through the BGSS arrangement. The contracts are sized to ensure delivery of a reliable gas supply to PSE&G customers on peak winter days. When pipeline capacity beyond the customers' needs is available, Power can use it to supply gas to its generating units in New Jersey and to make third party sales.

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At PSE&G, our regulated utility, we continued to invest capital in T&D infrastructure projects aimed at maintaining the reliability of our service to our customers. PSE&G's results for the first quarter of 2014 reflect the favorable impacts from these investments. In December 2013, we filed a Modified 2014 Annual Formula Rate Update with the Federal Energy Regulatory Commission (FERC) 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 while supporting rule changes which we believe are necessary to avoid artificial price suppression and other distortions in the energy and capacity markets.
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.
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. For more detailed information, refer to Item 1-Note 8. Commitments and Contingent Liabilities-Superstorm Sandy. In February 2013, we filed a petition with the New Jersey Board of Public Utilities (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. On May 1, 2014, we reached a $1.22 billion settlement on our Energy Strong proposal. The settlement provides for cost recovery at a 9.75% rate of return on equity on the first $1.0 billion of the investment, plus associated allowance for funds used during construction (AFUDC), through an accelerated recovery mechanism. We will seek recovery of the remaining $220 million of investment in PSE&G's next base rate case, to be filed no later than November 1, 2017. The stipulation, signed by the staff of the BPU, the New Jersey Division of Rate Counsel and AARP, is now being reviewed by the other parties and participants in the case and will be submitted to the BPU for review and approval. 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. For more detailed information, refer to Item 5. Other Information-Energy Strong Program. On January 1, 2014, we commenced operation of the LIPA 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. 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 the first three months of 2014, our
total nuclear fleet achieved an average capacity factor of 100%,

solid performance, a diverse fuel mix and dispatch flexibility allowed us to increase generation as compared to the comparable 2013 period by 3% to meet demand, while balancing fuel availability and price volatility, and

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

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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 the first three months 2014 as we:
had cash on hand of $655 million as of March 31, 2014,

extended the expiration dates of PSEG's $500 million and Power's $1.6 billion five-year credit facilities from 2017 to 2019, and maintained substantial liquidity and solid investment grade credit ratings, and

increased our indicated annual dividend for 2014 to $1.48 per share.

We expect to be able to fund our transmission projects required under PJM's reliability program, our Energy Strong program and other projects with internally generated cash and external debt financing. 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 the first quarter of 2014 we:
made additional investments in transmission infrastructure projects,

continued to execute our existing BPU-approved utility programs,

initiated installation of equipment to increase output and improve efficiency at our existing combined cycle gas turbine generation facilities, and

commenced operation of a newly constructed 4 MW solar project in California.

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 our Energy Strong program and other 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 the remainder of 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 slowly improving 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, and

delays and other obstacles that might arise in connection with the construction of our T&D projects, including in connection with permitting and regulatory approvals.

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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 Note 17. Related-Party

                                            Three Months Ended             Increase/
                                                 March 31,                (Decrease)
                                              2014           2013        2014 vs. 2013
                                                 Millions              Millions      %
  Operating Revenues                    $    3,223         $ 2,786    $    437       16
  Energy Costs                               1,356           1,155         201       17
  Operation and Maintenance                    856             710         146       21
  Depreciation and Amortization                306             290          16        6
  Taxes Other than Income Taxes                  -              21         (21 )   (100 )
  Income from Equity Method Investments          4               2           2      100
  Other Income and (Deductions)                 36              32           4       13
  Other-Than-Temporary Impairments               2               2           -        -
  Interest Expense                              97             102          (5 )     (5 )
  Income Tax Expense                           260             220          40       18

The 2014 amounts in the preceding table for Operating Revenues and Operation and Maintenance (O&M) Costs each include $89 million for Long Island Electric Utility Servco, LLC, a wholly owned subsidiary of PSEG LI. These amounts represent the O&M pass-through costs for the Long Island operations, the full reimbursement of which is reflected in Operating Revenues. See Note 3. Variable Interest Entities for further explanation. The following discussions for Power and PSE&G provide a detailed explanation of their respective variances.


                                            Three Months Ended            Increase/
                                                 March 31,               (Decrease)
                                              2014           2013       2014 vs. 2013
                                                 Millions               Millions     %
  Operating Revenues                    $    1,700         $ 1,451    $       249    17
  Energy Costs                               1,044             860            184    21
  Operation and Maintenance                    302             283             19     7
  Depreciation and Amortization                 72              66              6     9
  Income from Equity Method Investments          4               3              1    33
  Other Income (Deductions)                     23              19              4    21
  Other-Than-Temporary Impairments               2               2              -     -
  Interest Expense                              32              30              2     7
  Income Tax Expense                           111              91             20    22

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Three Months Ended March 31, 2014 as Compared to 2013 Operating Revenues increased $249 million due to changes in generation, gas supply and other operating revenues.
Generation Revenues increased $151 million due primarily to
higher net revenues of $111 million due primarily to higher energy volumes sold in the PJM and NE regions at higher average realized prices, partially offset by lower generation sold in the New York region and higher MTM losses in 2014 resulting from an increase in prices on forward positions, and

a net increase of $65 million due primarily to higher capacity revenues resulting from higher average auction prices partially offset by a decrease in operating reserve revenues in PJM,

partially offset by a decrease of $15 million due primarily to lower volumes of electricity sold under our BGS contracts as a result of serving fewer tranches than in 2013 and lower average pricing, and

a net decrease of $11 million due to lower volumes on wholesale load contracts in the PJM and NE regions.

Gas Supply Revenues increased $94 million due primarily to
a net increase of $79 million in sales under the BGSS contract, substantially comprised of higher sales volumes due to colder average temperatures during the 2014 winter heating season, and

an increase of $15 million due to higher sales volumes to third party customers with higher average sales prices.

Other Operating Revenues increased $4 million due to transition fees related to fuel management and power supply management contracts with LIPA. 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 $184 million due to
Generation costs increased $141 million due primarily to $247 million of higher fuel costs, reflecting higher average realized natural gas prices, high nuclear fuel costs, the utilization of higher volumes of natural gas, coal and oil and the unfavorable MTM impact from lower average unrealized natural gas prices on forward positions and $14 million in higher energy purchases, primarily in the PJM and NE regions as result of higher prices. These higher fuel costs and energy purchases were largely offset by $120 million of lower congestion costs in the PJM region.

Gas costs increased $43 million, principally related to obligations under the BGSS contract, reflecting higher sales volumes in 2014 due to colder average temperatures during the 2014 winter heating season, partially offset by lower average gas inventory costs.

Operation and Maintenance increased $19 million due primarily to
higher planned outage fossil costs of $54 million, primarily at our Linden plant in New Jersey, and

higher outside service costs of $5 million,

partially offset by lower storm costs of $19 million,

a decrease in pension and OPEB costs of $14 million, and

lower nuclear outage costs of $10 million largely due to the timing of planned outage costs at our Salem facility.

Depreciation and Amortization increased $6 million due primarily to a higher depreciable fossil and nuclear asset base.
Income from Equity Method Investments experienced no material change. Other Income and (Deductions) experienced no material change.
Interest Expense increased $2 million due primarily to the issuance of $500 million of Senior Notes in November 2013, partially offset by the maturity of $300 million of Senior Notes in April 2013.
Income Tax Expense increased $20 million in 2014 due primarily to higher pre-tax income.

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                                    Three Months Ended             Increase/
                                         March 31,                (Decrease)
                                      2014           2013        2014 vs. 2013
                                         Millions              Millions      %
  Operating Revenues            $    2,145         $ 1,995    $    150        8
  Energy Costs                       1,045             967          78        8
  Operation and Maintenance            462             427          35        8
  Depreciation and Amortization        227             215          12        6
  Taxes Other Than Income Taxes          -              21         (21 )   (100 )
  Other Income (Deductions)             14              12           2       17
  Interest Expense                      68              73          (5 )     (7 )
  Income Tax Expense                   143             125          18       14

Three Months Ended March 31, 2014 as Compared to 2013 Operating Revenues increased $150 million due to changes in delivery, clause, commodity and other operating revenues.
Delivery Revenues increased $54 million due primarily to an increase in transmission revenues.
Transmission revenues were $39 million higher due to net rate increases resulting primarily from increased capital investments.

Electric distribution revenues increased $9 million due primarily to higher revenue from Green Program Recovery Charges (GPRC) of $16 million and higher sales volumes of $4 million, partially offset by lower Transitional Energy Facilities Assessment (TEFA) revenue of $11 million due to elimination of the TEFA rate effective January 1, 2014.

Gas distribution revenues increased $6 million due primarily to $51 million from higher sales volumes, partially offset by lower Weather Normalization Clause (WNC) revenue of $36 million due to colder than normal weather and lower TEFA revenue of $10 million due to elimination of TEFA rate effective January 1, 2014.

Commodity Revenue increased $78 million due to higher Electric and Gas revenues. This is entirely offset with increased Energy Costs. PSE&G earns no margin on the provision of BGS and BGSS to retail customers.
Electric revenues increased $49 million due primarily to $52 million in higher BGS revenues, partially offset by $3 million in lower revenues from collection of Non-Utility Generation Charges (NGC) and sales of Non-Utility generation (NUG) energy due to lower volume, partially offset by higher prices. BGS sales increased 10% due primarily to weather, partially offset by customer migration to third party suppliers (TPS).

Gas revenues increased $29 million due primarily to higher BGSS volumes of $90 million, partially offset by lower BGSS prices of $61 million The average price of natural gas was 12% lower in 2014.

Clause Revenues increased $16 million due primarily to higher Societal Benefit Charges (SBC). The change in the SBC amount was entirely offset by the amortization of Regulatory Assets and related costs in O&M, Depreciation and Amortization and Interest Expense. PSE&G does not earn margin on SBC collections.
Other Operating Revenues increased $2 million due to higher miscellaneous electric operating revenues.
Operating Expenses
Energy Costs increased $78 million. This is entirely offset by Commodity Revenue.
Electric costs increased $49 million or 11% due to $52 million of increased deferred cost recovery and $8 million of higher BGS and NUG prices, partially offset by $11 million in lower BGS and NUG volumes. BGS and NUG volumes decreased 2% due primarily to customer migration to TPS.

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