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PEG > SEC Filings for PEG > Form 10-Q on 1-Aug-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 primarily 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 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

Our business plan is designed to achieve growth 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 greater diversity 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 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 and six months ended
June 30, 2014 and 2013 are presented as follows:

                                           Three Months Ended            Six Months Ended
                                                June 30,                     June 30,
  Earnings (Losses)                          2014           2013          2014          2013
  Power                               $       54           $  210    $     218         $  351
  PSE&G                                      151              121          365            300
  Other (A)                                    7                2           15              2
  PSEG Net Income                     $      212           $  333    $     598         $  653

  PSEG Net Income Per Share (Diluted) $     0.42           $ 0.66    $    1.18         $ 1.29

(A) Other includes activities at the parent company, PSEG LI, and Energy Holdings as well as intercompany eliminations.

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         Six Months Ended
                                         June 30,                  June 30,
                                     2014          2013         2014        2013
                                                Millions, after tax
  NDT Fund Income (Expense) (A)  $      14       $     8    $      23      $  17
  Non-Trading MTM Gains (Losses) $     (42 )     $    80    $    (174 )    $ (25 )

(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 $121 million decrease in Net Income for the three months ended June 30, 2014 was driven by
MTM losses in 2014 due to an increase in prices on forward positions as compared to gains in 2013,

lower volumes of generation sold in the PJM region at lower average realized prices, and

higher Operation and Maintenance (O&M) costs largely due to planned outages at our fossil plants, including maintenance and installation of upgraded technology at our Linden station, partly offset by lower pension and other postretirement benefit (OPEB) costs and cost control measures.

These decreases were partially offset by higher revenues due to increased investments in transmission projects.
Our $55 million decrease in Net Income for the six months ended June 30, 2014 was driven by
higher O&M costs due to higher planned outage and maintenance costs at our fossil plants, including maintenance and installation of upgraded technology at our Linden plant, partly offset by lower pension and other postretirement benefit (OPEB) costs and cost control measures,

higher MTM losses in 2014 resulting from an increase in prices on forward positions,

lower volumes of electricity sold under our basic generation service (BGS) contracts resulting from serving fewer tranches in 2014, and

higher generation costs due to higher fuel costs and higher gas costs related to the basic gas supply service (BGSS) contract.

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These decreases were partially offset by
higher revenues due to increased investments in transmission projects.

higher average realized prices on sales in the New England (NE) and PJM regions, as well as higher capacity revenues, primarily in PJM resulting from higher average auction prices, and

higher sales volumes under the BGSS contract due to colder average temperatures in the 2014 winter heating season.

Power's results also benefited from access to natural gas supplies through its existing firm pipeline transportation contracts 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.
Under the PJM capacity auction conducted in May 2014, Power cleared 8,693 MW of its generating capacity at an average price of $164.61 MW-day for the 2017-2018 delivery period, a price consistent with what has been realized in the past three auctions. For a more detailed discussion on the Reliability Pricing Model (RPM) capacity auction, refer to Part II. Item 5. Other Information-Federal Regulation-Capacity Market Issues.
Power's 2014 results were unfavorably impacted by an extended refueling outage at Salem Unit 2. A planned refueling outage began on April 12, 2014 but was extended due to repairs to the Reactor Coolant Pump Turning Vanes. Salem Unit 2 returned to service on July 14, 2014.
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 half of 2014 reflect the favorable impacts from these investments as well as a slowly improving economy. Effective January 1, 2014, PSE&G's annual formula rate increased our annual transmission revenues by approximately $171 million. 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 closely 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.
We also advocate for the development and implementation of fair and reasonable rules by the U.S. Environmental Protection Agency (EPA) and state environmental regulators. On May 19, 2014, the EPA released the final Clean Water Act Section 316(b) rule on cooling water intake that establishes new requirements for the regulation of cooling water intakes at existing power plants and industrial facilities with a design flow of more than two million gallons of water per day. Eight of Power's generating facilities and three of its jointly-owned generating facilities are subject to the rule. As adopted by the EPA, the rule requires that cooling water intake structures reflect the best technology available (BTA) for minimizing adverse environmental impacts, primarily by reducing the amount of fish and shellfish that are impinged or entrained at a cooling water intake structure. Under this standard, power facilities have the flexibility to select one of several options as their method of compliance. However, the EPA has structured the rule so that each state will continue to consider renewal permits for existing power facilities on a case by case basis, and will require facilities to conduct a wide range of studies related to impingement mortality and entrainment and submit the results with their permit applications. We are unable to predict the outcome that these permitting decisions may take and the effect, if any, that they may have on us although such impacts could be material. See Item 1. Financial Statements-Note 8. Commitments and Contingent Liabilities and Item 5. Other Information-Environmental Matters-Water Pollution Control for additional information.
On June 18, 2014, the EPA issued a proposed greenhouse gas emissions regulation for existing power plants. The regulation establishes state-specific emission rate targets based on implementation of the best system of emission reduction. States may choose these or other methodologies to achieve the necessary reductions of CO2 emissions. The EPA is requesting comment on many aspects of the proposal and therefore, the final rule may look considerably different than the proposal. We continue to work with state and federal regulators, as well as industry partners, to determine the potential impact of the regulation. For a more detailed discussion of this proposed regulation, see Item 5. Other Information-Environmental Matters-Climate Change.
In addition, Clean Air Act (CAA) regulations governing hazardous air pollutants under the EPA's Maximum Achievable Control Technology 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.

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The FERC's rule 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. However, the FERC's action presents opportunities for us to construct transmission outside of our service territory. In April 2013, PJM initiated a solicitation process pursuant to Order 1000 to review technical solutions to improve the operational performance in the Artificial Island area, consisting of our Salem Units 1 and 2 and Hope Creek nuclear generation facilities. In June 2014, PJM's management recommended approval by its Board of a 500 kV project to be constructed by PSE&G to address performance issues at Artificial Island. On July 23, 2014, the PJM Board announced that it was deferring the selection of a project to enable four developers, including PSE&G, to supplement their project proposals by, among other things, re-evaluating the costs of their respective proposals. PJM currently expects to select a project by the end of 2014.
In May 2014, a federal court issued a rule that vacated a FERC Order in which the FERC determined that demand response providers should receive full market compensation for power and held that the FERC has no jurisdiction over demand response. The implications of these decisions could be significant for the capacity market. See Item 5. Other Information-Federal Regulation-Capacity Market Issues-for additional information.
In recent years we have been impacted by severe weather conditions, including Hurricane Irene in 2011 and Superstorm Sandy in 2012, the latter storm resulting 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. As a result, we filed a petition in early 2013 with the New Jersey Board of Public Utilities (BPU) in which we recommended making investments in our gas and electric distribution systems to improve resiliency. In May 2014, the BPU approved the settlement of our Energy Strong Proposal in a total amount of $1.22 billion. 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, which is to be filed no later than November 1, 2017. Work on the program, including some infrastructure replacement work and detailed engineering, has begun. We believe that the rate impacts of the Energy Strong program will be muted significantly as a result of scheduled reductions to customer bills that will be taking place over the next few years and the expectation that gas prices will remain low. 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 January 2015, Power will provide fuel procurement and power management services to LIPA under separate agreements.
In the first quarter of 2014, Power discovered that it incorrectly calculated certain components of its cost-based bids for its New Jersey fossil generating units in the PJM energy market. We notified the FERC, PJM and the PJM Independent Market Monitor (IMM) of this issue. Upon discovery of the errors, we retained outside counsel to assist in the conduct of an investigation into the matter. As the investigation proceeded, additional pricing errors in the bids were identified and it was further determined that the quantity of energy that Power offered into the energy market for its fossil peaking units differed from the amount for which Power was compensated in the capacity market for those units. We informed the FERC, PJM and the IMM of these additional issues, and have corrected these errors. Power is also in the process of implementing procedures to help mitigate the risk of similar issues occurring in the future. It is not possible at this time to reasonably estimate the ultimate impact or predict any resulting penalties, other costs associated with these matters, or the applicability of mitigating factors. For more detailed information regarding this matter, refer to Item 1. Financial Statements-Note 8. Commitments and Contingent Liabilities-FERC Compliance.
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 six months of 2014, our
total nuclear fleet achieved an average capacity factor of 90%, despite the extended outage at Salem Unit 2,

diverse fuel mix and dispatch flexibility allowed us to generate approximately 26,600 GWh, while addressing unit outages and 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 six months of 2014 as we
had cash on hand of $570 million as of June 30, 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, including positive outlooks at S&P, 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 six months of 2014 we
placed into service our 230 kV Burlington-Camden and 230 kV North Central Reliability transmission projects,

made additional investments in transmission infrastructure projects,

continued to execute our existing BPU-approved utility programs, and

completed installation of equipment to increase output and improve efficiency at our Linden combined cycle gas generating plant and continue to plan for the installation of such equipment at our other combined cycle gas units.

In July 2014, we acquired rights to a 13 MW solar energy facility located near El Paso, Texas, which is expected to be operational in the fourth quarter of 2014 and a 3.6 MW solar energy facility located near Burlington, Vermont, which is expected to be operational late in the third quarter of 2014. 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 promote competition,

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, both with regard to future energy policy, design of energy and capacity markets, transmission policy and environmental regulation, as well as with respect to the outcome of any legal, regulatory or other proceeding, settlement, investigation or claim, applicable to us and/or the energy industry,

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,

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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/             Six Months Ended            Increase/
                                 June 30,                  (Decrease)                June 30,                (Decrease)
                             2014           2013         2014 vs. 2013           2014         2013         2014 vs. 2013
                                 Millions              Millions       %              Millions            Millions       %
  Operating Revenues   $    2,249         $ 2,310     $     (61 )     (3 )   $    5,472     $ 5,096     $     376        7
  Energy Costs                789             755            34        5          2,145       1,910           235       12
  Operation and
  Maintenance                 800             646           154       24          1,656       1,356           300       22
  Depreciation and
  Amortization                295             283            12        4            601         573            28        5
  Taxes Other than
  Income Taxes                  -              14           (14 )   (100 )            -          35           (35 )   (100 )
  Income from Equity
  Method Investments            3               3             -        -              7           5             2       40
  Other Income and
  (Deductions)                 52              39            13       33             88          71            17       24
  Impairments                   2               2             -        -              4           4             -        -
  Interest Expense             94             101            (7 )     (7 )          191         203           (12 )     (6 )
  Income Tax Expense          112             218          (106 )    (49 )          372         438           (66 )    (15 )

The 2014 amounts in the preceding table for Operating Revenues and O&M Costs each include $111 million and $200 million for the three months and six months ended June 30, 2014, respectively, 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. Power

                         Three Months Ended          Increase/             Six Months Ended             Increase/
                              June 30,               (Decrease)                June 30,                 (Decrease)
                          2014         2013        2014 vs. 2013           2014         2013          2014 vs. 2013
                              Millions           Millions       %              Millions             Millions        %
  Operating Revenues   $    986     $ 1,193     $    (207 )    (17 )   $    2,686     $ 2,644     $       42         2
  Energy Costs              520         495            25        5          1,564       1,355            209        15
  Operation and
  Maintenance               327         280            47       17            629         563             66        12
  Depreciation and
  Amortization               72          67             5        7            144         133             11         8
  Income from Equity
  Method Investments          3           5            (2 )    (40 )            7           8             (1 )     (13 )
  Other Income
  (Deductions)               37          25            12       48             60          44             16        36
  Impairments                 2           2             -        -              4           4              -         -
  Interest Expense           29          29             -        -             61          59              2         3
  Income Tax Expense         22         140          (118 )    (84 )          133         231            (98 )     (42 )

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