Document

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2016
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM          TO

Commission
File Number
 
Registrants, State of Incorporation,
Address, and Telephone Number
  
I.R.S. Employer
Identification No.
001-09120
  
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
(A New Jersey Corporation)
80 Park Plaza
Newark, New Jersey 07102
973 430-7000
http://www.pseg.com
  
22-2625848
001-00973
  
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
(A New Jersey Corporation)
80 Park Plaza
Newark, New Jersey 07102
973 430-7000
http://www.pseg.com
  
22-1212800
001-34232
  
PSEG POWER LLC
(A Delaware Limited Liability Company)
80 Park Plaza
Newark, New Jersey 07102
973 430-7000
http://www.pseg.com
  
22-3663480
 
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes ý No ¨
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Public Service Enterprise Group Incorporated
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
 
 
 
Public Service Electric and Gas Company
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
 
 
 
 
 
PSEG Power LLC
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of October 18, 2016, Public Service Enterprise Group Incorporated had outstanding 505,896,218 shares of its sole class of Common Stock, without par value.
As of October 18, 2016, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record by Public Service Enterprise Group Incorporated.
Public Service Electric and Gas Company and PSEG Power LLC are wholly owned subsidiaries of Public Service Enterprise Group Incorporated and meet the conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q. Each is filing its Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H.




Table of Contents


 
  
Page
FILING FORMAT
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
Note 3. Early Plant Retirements
 
Note 4. Variable Interest Entities (VIEs)
 
Note 5. Rate Filings
 
Note 6. Financing Receivables
 
Note 7. Available-for-Sale Securities
 
Note 8. Pension and Other Postretirement Benefits (OPEB)
 
Note 9. Commitments and Contingent Liabilities
 
Note 10. Debt and Credit Facilities
 
Note 11. Financial Risk Management Activities
 
Note 12. Fair Value Measurements
 
Note 13. Other Income and Deductions
 
Note 14. Income Taxes
 
Note 15. Accumulated Other Comprehensive Income (Loss), Net of Tax
 
Note 16. Earnings Per Share (EPS) and Dividends
 
Note 17. Financial Information by Business Segments
 
Note 18. Related-Party Transactions
 
Note 19. Guarantees of Debt
Item 2.
 
Executive Overview of 2016 and Future Outlook
 
 
 
 
Item 3.
Item 4.
 
 
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.
 


i


Table of Contents


FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this report about our and our subsidiaries’ future performance, including, without limitation, future revenues, earnings, strategies, prospects, consequences and all other statements that are not purely historical constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such statements are based on management’s beliefs as well as assumptions made by and information currently available to management. When used herein, the words “anticipate,” “intend,” “estimate,” “believe,” “expect,” “plan,” “should,” “hypothetical,” “potential,” “forecast,” “project,” variations of such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Other factors that could cause actual results to differ materially from those contemplated in any forward-looking statements made by us herein are discussed in filings we make with the United States Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K and subsequent reports on Form 10-Q and Form 8-K and available on our website: http://www.pseg.com. These factors include, but are not limited to:
adverse changes in the demand for or ongoing low pricing of the capacity and energy that we sell into wholesale electricity markets,
adverse changes in energy industry law, policies and regulations, including market structures and transmission planning,
any inability of our transmission and distribution businesses to obtain adequate and timely rate relief and regulatory approvals from federal and state regulators, including prudency reviews, disallowances and changes in authorized returns,
any deterioration in our credit quality or the credit quality of our counterparties,
changes in federal and state environmental regulations and enforcement that could increase our costs or limit our operations,
adverse outcomes of any legal, regulatory or other proceeding, settlement, investigation or claim applicable to us and/or the energy industry,
changes in nuclear regulation and/or general developments in the nuclear power industry, including various impacts from any accidents or incidents experienced at our facilities or by others in the industry, that could limit operations or increase the cost of our nuclear generating units,
actions or activities at one of our nuclear units located on a multi-unit site that might adversely affect our ability to continue to operate that unit or other units located at the same site,
any inability to manage our energy obligations, available supply and risks,
delays or unforeseen cost escalations in our construction and development activities, or the inability to recover the carrying amount of our assets,
availability of capital and credit at commercially reasonable terms and conditions and our ability to meet cash needs,
increases in competition in energy supply markets as well as for transmission projects,
changes in technology, such as distributed generation, storage and micro grids, and greater reliance on these technologies,
changes in customer behaviors, including increases in energy efficiency, net-metering and demand response,
adverse performance of our decommissioning and defined benefit plan trust fund investments and changes in funding requirements,
any equipment failures, accidents, severe weather events or other incidents that impact our ability to provide safe and reliable service to our customers, and any inability to obtain sufficient insurance coverage or recover insurance proceeds with respect to such events,
acts of terrorism, cybersecurity attacks or intrusions that could adversely impact our businesses,
delays in receipt of necessary permits and approvals for our construction and development activities,
any inability to achieve, or continue to sustain, our expected levels of operating performance,
changes in the cost of, or interruption in the supply of, fuel and other commodities necessary to the operation of our generating units,
economic recessions,
an inability to realize anticipated tax benefits or retain tax credits,
challenges associated with recruitment and/or retention of a qualified workforce, and
changes in the credit quality and the ability of lessees to meet their obligations under our domestic leveraged leases.
All of the forward-looking statements made in this report are qualified by these cautionary statements and we cannot assure you that the results or developments anticipated by management will be realized or even if realized, will have the expected

ii


Table of Contents


consequences to, or effects on, us or our business prospects, financial condition or results of operations. Readers are cautioned not to place undue reliance on these forward-looking statements in making any investment decision. Forward-looking statements made in this report apply only as of the date of this report. While we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even if internal estimates change, unless otherwise required by applicable securities laws.
The forward-looking statements contained in this report are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

FILING FORMAT
This combined Quarterly Report on Form 10-Q is separately filed by Public Service Enterprise Group Incorporated (PSEG), Public Service Electric and Gas Company (PSE&G) and PSEG Power LLC (Power). Information relating to any individual company is filed by such company on its own behalf. PSE&G and Power are each only responsible for information about itself and its subsidiaries.
Discussions throughout the document refer to PSEG and its direct operating subsidiaries, PSE&G and Power. Depending on the context of each section, references to “we,” “us,” and “our” relate to PSEG or to the specific company or companies being discussed.


iii


Table of Contents





PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Millions, except per share data
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
OPERATING REVENUES
$
2,450

 
$
2,688

 
$
6,971

 
$
8,137

 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
Energy Costs
866

 
815

 
2,326

 
2,577

 
 
Operation and Maintenance
776

 
746

 
2,215

 
2,170

 
 
Depreciation and Amortization
231

 
313

 
679

 
960

 
 
Total Operating Expenses
1,873

 
1,874

 
5,220

 
5,707

 
 
OPERATING INCOME
577

 
814

 
1,751

 
2,430

 
 
Income from Equity Method Investments
3

 
3

 
9

 
10

 
 
Other Income
47

 
47

 
139

 
171

 
 
Other Deductions
(8
)
 
(14
)
 
(39
)
 
(36
)
 
 
Other-Than-Temporary Impairments
(5
)
 
(30
)
 
(25
)
 
(45
)
 
 
Interest Expense
(99
)
 
(96
)
 
(288
)
 
(291
)
 
 
INCOME BEFORE INCOME TAXES
515

 
724

 
1,547

 
2,239

 
 
Income Tax Expense
(188
)
 
(285
)
 
(562
)
 
(869
)
 
 
NET INCOME
$
327

 
$
439

 
$
985

 
$
1,370

 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 
 
 
 
 
 
 
 
 
BASIC
505

 
505

 
505

 
505

 
 
DILUTED
508

 
508

 
508

 
508

 
 
NET INCOME PER SHARE:
 
 
 
 
 
 
 
 
 
BASIC
$
0.65

 
$
0.87

 
$
1.95

 
$
2.71

 
 
DILUTED
$
0.64

 
$
0.87

 
$
1.94

 
$
2.70

 
 
DIVIDENDS PAID PER SHARE OF COMMON STOCK
$
0.41

 
$
0.39

 
$
1.23

 
$
1.17

 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.

1


Table of Contents


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Millions
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
NET INCOME
$
327

 
$
439

 
$
985

 
$
1,370

 
 
Other Comprehensive Income (Loss), net of tax
 
 
 
 
 
 
 
 
 
Unrealized Gains (Losses) on Available-for-Sale Securities, net of tax (expense) benefit of $(24), $33, $(50) and $35 for the three and nine months ended 2016 and 2015, respectively
24

 
(31
)
 
50

 
(32
)
 
 
Unrealized Gains (Losses) on Cash Flow Hedges, net of tax (expense) benefit of $0, $(1), $(1) and $6 for the three and nine months ended 2016 and 2015, respectively
1

 

 
2

 
(9
)
 
 
Pension/Other Postretirement Benefit Costs (OPEB) adjustment, net of tax (expense) benefit of $(5), $(5), $(17) and $(17) for the three and nine months ended 2016 and 2015, respectively
9

 
9

 
25

 
25

 
 
Other Comprehensive Income (Loss), net of tax
34

 
(22
)
 
77

 
(16
)
 
 
COMPREHENSIVE INCOME
$
361

 
$
417

 
$
1,062

 
$
1,354

 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.


2


Table of Contents


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
Millions
(Unaudited)
 
 
 
 
 
 
 
 
 
September 30,
2016
 
December 31,
2015
 
 
ASSETS
 
 
CURRENT ASSETS
 
 
 
 
 
Cash and Cash Equivalents
$
450

 
$
394

 
 
Accounts Receivable, net of allowances of $67 in 2016 and 2015
1,031

 
1,068

 
 
Tax Receivable
23

 
305

 
 
Unbilled Revenues
180

 
197

 
 
Fuel
366

 
463

 
 
Materials and Supplies, net
591

 
513

 
 
Prepayments
145

 
135

 
 
Derivative Contracts
149

 
242

 
 
Regulatory Assets
253

 
164

 
 
Other
21

 
13

 
 
Total Current Assets
3,209

 
3,494

 
 
PROPERTY, PLANT AND EQUIPMENT
38,225

 
35,494

 
 
     Less: Accumulated Depreciation and Amortization
(9,421
)
 
(8,955
)
 
 
Net Property, Plant and Equipment
28,804

 
26,539

 
 
NONCURRENT ASSETS
 
 
 
 
 
Regulatory Assets
3,124

 
3,196

 
 
Long-Term Investments
1,066

 
1,233

 
 
Nuclear Decommissioning Trust (NDT) Fund
1,857

 
1,754

 
 
Long-Term Tax Receivable
177

 
171

 
 
Long-Term Receivable of Variable Interest Entity (VIE)
509

 
495

 
 
Other Special Funds
243

 
227

 
 
Goodwill
16

 
16

 
 
Other Intangibles
154

 
102

 
 
Derivative Contracts
86

 
77

 
 
Other
243

 
231

 
 
Total Noncurrent Assets
7,475

 
7,502

 
 
TOTAL ASSETS
$
39,488

 
$
37,535

 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.


3


Table of Contents


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
Millions
(Unaudited)

 
 
 
 
 
 
 
 
 
September 30,
2016
 
December 31,
2015
 
 
LIABILITIES AND CAPITALIZATION
 
 
CURRENT LIABILITIES
 
 
 
 
 
Long-Term Debt Due Within One Year
$

 
$
734

 
 
Commercial Paper and Loans
255

 
364

 
 
Accounts Payable
1,363

 
1,369

 
 
Derivative Contracts
40

 
76

 
 
Accrued Interest
127

 
96

 
 
Accrued Taxes
214

 
42

 
 
Clean Energy Program
185

 
142

 
 
Obligation to Return Cash Collateral
132

 
128

 
 
Regulatory Liabilities
96

 
123

 
 
Regulatory Liabilities of VIEs
9

 
42

 
 
Other
383

 
459

 
 
Total Current Liabilities
2,804

 
3,575

 
 
NONCURRENT LIABILITIES
 
 
 
 
 
Deferred Income Taxes and Investment Tax Credits (ITC)
8,661

 
8,166

 
 
Regulatory Liabilities
151

 
175

 
 
Asset Retirement Obligations
708

 
679

 
 
OPEB Costs
1,207

 
1,228

 
 
OPEB Costs of Servco
395

 
375

 
 
Accrued Pension Costs
400

 
487

 
 
Accrued Pension Costs of Servco
108

 
114

 
 
Environmental Costs
430

 
415

 
 
Derivative Contracts
13

 
27

 
 
Long-Term Accrued Taxes
197

 
212

 
 
Other
241

 
181

 
 
Total Noncurrent Liabilities
12,511

 
12,059

 
 
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 9)


 


 
 
CAPITALIZATION

 
 
 
 
LONG-TERM DEBT
10,697

 
8,834

 
 
STOCKHOLDERS’ EQUITY

 
 
 
 
Common Stock, no par, authorized 1,000 shares; issued, 2016 and 2015—534 shares
4,928

 
4,915

 
 
Treasury Stock, at cost, 2016—29 shares; 2015—28 shares
(714
)
 
(671
)
 
 
Retained Earnings
9,480

 
9,117

 
 
Accumulated Other Comprehensive Loss
(218
)
 
(295
)
 
 
Total Common Stockholders’ Equity
13,476

 
13,066

 
 
Noncontrolling Interest

 
1

 
 
Total Stockholders’ Equity
13,476

 
13,067

 
 
Total Capitalization
24,173

 
21,901

 
 
TOTAL LIABILITIES AND CAPITALIZATION
$
39,488

 
$
37,535

 
 
 


 
 
 
See Notes to Condensed Consolidated Financial Statements.

4


Table of Contents


PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Millions
(Unaudited)
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2016
 
2015
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
Net Income
$
985

 
$
1,370

 
 
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
 
Depreciation and Amortization
679

 
960

 
 
Amortization of Nuclear Fuel
154

 
162

 
 
 Impairment Costs
102

 

 
 
Provision for Deferred Income Taxes (Other than Leases) and ITC
445

 
230

 
 
Non-Cash Employee Benefit Plan Costs
95

 
121

 
 
Leveraged Lease (Income) Loss, Adjusted for Rents Received and Deferred Taxes
(12
)
 
6

 
 
Loss on Leases, Net of Tax
86

 

 
 
Net Unrealized (Gains) Losses on Energy Contracts and Other Derivatives
96

 
(87
)
 
 
Change in Accrued Storm Costs
(6
)
 
15

 
 
Net Change in Other Regulatory Assets and Liabilities
(66
)
 
26

 
 
Cost of Removal
(109
)
 
(82
)
 
 
Net Realized (Gains) Losses and (Income) Expense from NDT Fund
(12
)
 
(2
)
 
 
Net Change in Certain Current Assets and Liabilities:
 
 
 
 
 
          Tax Receivable
282

 
206

 
 
          Accrued Taxes
202

 
127

 
 
          Margin Deposit
(4
)
 
142

 
 
          Other Current Assets and Liabilities
(229
)
 
15

 
 
Employee Benefit Plan Funding and Related Payments
(81
)
 
(87
)
 
 
Other
154

 
106

 
 
Net Cash Provided By (Used In) Operating Activities
2,761

 
3,228

 
 
CASH FLOWS FROM INVESTING ACTIVITIES


 
 
 
 
Additions to Property, Plant and Equipment
(2,985
)
 
(2,782
)
 
 
Proceeds from Sales of Capital Leases and Investments

 
12

 
 
Proceeds from Sales of Available-for-Sale Securities
551

 
1,120

 
 
Investments in Available-for-Sale Securities
(576
)
 
(1,163
)
 
 
Other
(44
)
 
(28
)
 
 
Net Cash Provided By (Used In) Investing Activities
(3,054
)
 
(2,841
)
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
Net Change in Commercial Paper and Loans
(109
)
 
20

 
 
Issuance of Long-Term Debt
1,975

 
600

 
 
Redemption of Long-Term Debt
(824
)
 
(300
)
 
 
Redemption of Securitization Debt

 
(191
)
 
 
Cash Dividends Paid on Common Stock
(622
)
 
(592
)
 
 
Other
(71
)
 
(55
)
 
 
Net Cash Provided By (Used In) Financing Activities
349

 
(518
)
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
56

 
(131
)
 
 
Cash and Cash Equivalents at Beginning of Period
394

 
402

 
 
Cash and Cash Equivalents at End of Period
$
450

 
$
271

 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
 
Income Taxes Paid (Received)
$
(274
)
 
$
292

 
 
Interest Paid, Net of Amounts Capitalized
$
252

 
$
265

 
 
Accrued Property, Plant and Equipment Expenditures
$
579

 
$
321

 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.

5


Table of Contents



PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Millions
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
OPERATING REVENUES
$
1,684

 
$
1,766

 
$
4,746

 
$
5,234

 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
Energy Costs
721

 
740

 
1,979

 
2,176

 
 
Operation and Maintenance
376

 
391

 
1,110

 
1,171

 
 
Depreciation and Amortization
137

 
231

 
412

 
712

 
 
Total Operating Expenses
1,234

 
1,362

 
3,501

 
4,059

 
 
OPERATING INCOME
450

 
404

 
1,245

 
1,175

 
 
Other Income
22

 
22

 
61

 
59

 
 
Other Deductions
(1
)
 

 
(3
)
 
(2
)
 
 
Interest Expense
(72
)
 
(67
)
 
(214
)
 
(203
)
 
 
INCOME BEFORE INCOME TAXES
399

 
359

 
1,089

 
1,029

 
 
Income Tax Expense
(144
)
 
(137
)
 
(393
)
 
(398
)
 
 
NET INCOME
$
255

 
$
222

 
$
696

 
$
631

 
 
 
 
 
 
 
 
 
 
 
See disclosures regarding Public Service Electric and Gas Company included in the Notes to Condensed Consolidated Financial Statements.


6


Table of Contents


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Millions
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
NET INCOME
$
255

 
$
222

 
$
696

 
$
631

 
 
Unrealized Gains (Losses) on Available-for-Sale Securities, net of tax (expense) benefit of $0 and $0 for the three and nine months ended 2016 and 2015, respectively

 

 
1

 
(1
)
 
 
COMPREHENSIVE INCOME
$
255

 
$
222

 
$
697

 
$
630

 
 
 
 
 
 
 
 
 
 
 
See disclosures regarding Public Service Electric and Gas Company included in the Notes to Condensed Consolidated Financial Statements.


7


Table of Contents


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Millions
(Unaudited)

 
 
 
 
 
 
 
 
September 30,
2016
 
December 31,
2015
 
 
ASSETS
 
 
CURRENT ASSETS

 
 
 
 
Cash and Cash Equivalents
$
406

 
$
198

 
 
Accounts Receivable, net of allowances of $67 in 2016 and 2015
806

 
787

 
 
Accounts Receivable—Affiliated Companies
28

 
222

 
 
Unbilled Revenues
180

 
197

 
 
Materials and Supplies
190

 
148

 
 
Prepayments
94

 
31

 
 
Regulatory Assets
253

 
164

 
 
Derivative Contracts

 
13

 
 
Other
20

 
9

 
 
Total Current Assets
1,977

 
1,769

 
 
PROPERTY, PLANT AND EQUIPMENT
25,617

 
23,732

 
 
Less: Accumulated Depreciation and Amortization
(5,701
)
 
(5,504
)
 
 
Net Property, Plant and Equipment
19,916

 
18,228

 
 
NONCURRENT ASSETS
 
 
 
 
 
Regulatory Assets
3,124

 
3,196

 
 
Long-Term Investments
305

 
330

 
 
Other Special Funds
54

 
49

 
 
Other
110

 
105

 
 
Total Noncurrent Assets
3,593

 
3,680

 
 
TOTAL ASSETS
$
25,486

 
$
23,677

 
 
 
 
 
 
 
See disclosures regarding Public Service Electric and Gas Company included in the Notes to Condensed Consolidated Financial Statements.


8


Table of Contents


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Millions
(Unaudited)

 
 
 
 
 
 
 
 
September 30,
2016
 
December 31,
2015
 
 
LIABILITIES AND CAPITALIZATION
 
 
CURRENT LIABILITIES
 
 
 
 
 
Long-Term Debt Due Within One Year
$

 
$
171

 
 
Commercial Paper and Loans

 
153

 
 
Accounts Payable
702

 
724

 
 
Accounts Payable—Affiliated Companies
214

 
292

 
 
Accrued Interest
83

 
70

 
 
Clean Energy Program
185

 
142

 
 
Derivative Contracts
4

 

 
 
Obligation to Return Cash Collateral
132

 
128

 
 
Regulatory Liabilities
96

 
123

 
 
Regulatory Liabilities of VIEs
9

 
42

 
 
Other
276

 
297

 
 
Total Current Liabilities
1,701

 
2,142

 
 
NONCURRENT LIABILITIES
 
 
 
 
 
Deferred Income Taxes and ITC
5,703

 
5,181

 
 
OPEB Costs
908

 
937

 
 
Accrued Pension Costs
147

 
202

 
 
Regulatory Liabilities
151

 
175

 
 
Environmental Costs
364

 
365

 
 
Asset Retirement Obligations
220

 
218

 
 
Derivative Contracts

 
11

 
 
Long-Term Accrued Taxes
92

 
109

 
 
Other
114

 
114

 
 
Total Noncurrent Liabilities
7,699

 
7,312

 
 
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 9)


 


 
 
CAPITALIZATION
 
 
 
 
 
LONG-TERM DEBT
7,816

 
6,650

 
 
STOCKHOLDER’S EQUITY
 
 
 
 
 
Common Stock; 150 shares authorized; issued and outstanding, 2016 and 2015—132 shares
892

 
892

 
 
Contributed Capital
695

 
695

 
 
Basis Adjustment
986

 
986

 
 
Retained Earnings
5,695

 
4,999

 
 
Accumulated Other Comprehensive Income
2

 
1

 
 
Total Stockholder’s Equity
8,270

 
7,573

 
 
Total Capitalization
16,086

 
14,223

 
 
TOTAL LIABILITIES AND CAPITALIZATION
$
25,486

 
$
23,677

 
 
 
 
 
 
 
See disclosures regarding Public Service Electric and Gas Company included in the Notes to Condensed Consolidated Financial Statements.


9


Table of Contents


PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Millions
(Unaudited)
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2016
 
2015
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
  Net Income
$
696

 
$
631

 
 
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
 
Depreciation and Amortization
412

 
712

 
 
Provision for Deferred Income Taxes and ITC
482

 
96

 
 
Non-Cash Employee Benefit Plan Costs
55

 
71

 
 
Cost of Removal
(109
)
 
(82
)
 
 
Change in Accrued Storm Costs
(6
)
 
15

 
 
Net Change in Other Regulatory Assets and Liabilities
(66
)
 
26

 
 
Net Change in Certain Current Assets and Liabilities:

 
 
 
 
Accounts Receivable and Unbilled Revenues
2

 
30

 
 
Materials and Supplies
(42
)
 
(13
)
 
 
Prepayments
(63
)
 
(67
)
 
 
Accounts Payable
(30
)
 
34

 
 
Accounts Receivable/Payable—Affiliated Companies, net
154

 
190

 
 
Other Current Assets and Liabilities
(6
)
 
(18
)
 
 
Employee Benefit Plan Funding and Related Payments
(64
)
 
(72
)
 
 
Other
(14
)
 
(35
)
 
 
Net Cash Provided By (Used In) Operating Activities
1,401

 
1,518

 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
Additions to Property, Plant and Equipment
(2,035
)
 
(1,946
)
 
 
Proceeds from Sales of Available-for-Sale Securities
16

 
16

 
 
Investments in Available-for-Sale Securities
(17
)
 
(18
)
 
 
Other
6

 
13

 
 
Net Cash Provided By (Used In) Investing Activities
(2,030
)
 
(1,935
)
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
Net Change in Short-Term Debt
(153
)
 
20

 
 
Issuance of Long-Term Debt
1,275

 
600

 
 
Redemption of Long-Term Debt
(271
)
 
(300
)
 
 
Redemption of Securitization Debt

 
(191
)
 
 
Other
(14
)
 
(8
)
 
 
Net Cash Provided By (Used In) Financing Activities
837

 
121

 
 
Net Increase (Decrease) In Cash and Cash Equivalents
208

 
(296
)
 
 
Cash and Cash Equivalents at Beginning of Period
198

 
310

 
 
Cash and Cash Equivalents at End of Period
$
406

 
$
14

 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
 
Income Taxes Paid (Received)
$
(279
)
 
$
(29
)
 
 
Interest Paid, Net of Amounts Capitalized
$
194

 
$
186

 
 
Accrued Property, Plant and Equipment Expenditures
$
404

 
$
251

 
 
 
 
 
 
 
See disclosures regarding Public Service Electric and Gas Company included in the Notes to Condensed Consolidated Financial Statements.

10


Table of Contents



PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Millions
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 

Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
OPERATING REVENUES
$
1,075

 
$
1,096

 
$
3,102

 
$
3,846

 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
Energy Costs
462

 
367

 
1,481

 
1,669

 
 
Operation and Maintenance
289

 
263

 
807

 
748

 
 
Depreciation and Amortization
86

 
75

 
245

 
226

 
 
Total Operating Expenses
837

 
705

 
2,533

 
2,643

 
 
OPERATING INCOME
238

 
391

 
569

 
1,203

 
 
Income from Equity Method Investments
3

 
3

 
9

 
11

 
 
Other Income
23

 
25

 
74

 
109

 
 
Other Deductions
(6
)
 
(14
)
 
(33
)
 
(32
)
 
 
Other-Than-Temporary Impairments
(5
)
 
(30
)
 
(25
)
 
(45
)
 
 
Interest Expense
(24
)
 
(30
)
 
(66
)
 
(94
)
 
 
INCOME BEFORE INCOME TAXES
229

 
345

 
528

 
1,152

 
 
Income Tax Benefit (Expense)
(90
)
 
(139
)
 
(208
)
 
(445
)
 
 
NET INCOME
$
139

 
$
206

 
$
320

 
$
707

 
 
 
 
 
 
 


 
 
 
See disclosures regarding PSEG Power LLC included in the Notes to Condensed Consolidated Financial Statements.


11


Table of Contents


PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Millions
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
NET INCOME
$
139

 
$
206

 
$
320

 
$
707

 
 
Other Comprehensive Income (Loss), net of tax
 
 
 
 
 
 
 
 
 
Unrealized Gains (Losses) on Available-for-Sale Securities, net of tax (expense) benefit of $(23), $32, $(48) and $33 for the three and nine months ended 2016 and 2015, respectively
22

 
(29
)
 
47

 
(29
)
 
 
Unrealized Gains (Losses) on Cash Flow Hedges, net of tax (expense) benefit of $0, $(1), $0 and $6 for the three and nine months ended 2016 and 2015, respectively

 

 

 
(9
)
 
 
Pension/OPEB adjustment, net of tax (expense) benefit of $(5), $(5), $(15) and $(15) for the three and nine months ended 2016 and 2015, respectively
7

 
7

 
21

 
21

 
 
Other Comprehensive Income (Loss), net of tax
29

 
(22
)
 
68

 
(17
)
 
 
COMPREHENSIVE INCOME
$
168

 
$
184

 
$
388

 
$
690

 
 
 
 
 
 
 
 
 
 
 
See disclosures regarding PSEG Power LLC included in the Notes to Condensed Consolidated Financial Statements.


12


Table of Contents


PSEG POWER LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
Millions
(Unaudited)
 
 
 
 
 
 
 
 
 
September 30,
2016
 
December 31,
2015
 
 
ASSETS
 
 
CURRENT ASSETS
 
 
 
 
 
Cash and Cash Equivalents
$
12

 
$
12

 
 
Accounts Receivable
174

 
217

 
 
Accounts Receivable—Affiliated Companies
126

 
276

 
 
Short-Term Loan to Affiliate
514

 
363

 
 
Fuel
366

 
463

 
 
Materials and Supplies, net
399

 
363

 
 
Derivative Contracts
149

 
223

 
 
Prepayments
16

 
25

 
 
Other
3

 
7

 
 
Total Current Assets
1,759

 
1,949

 
 
PROPERTY, PLANT AND EQUIPMENT
12,271

 
11,354

 
 
Less: Accumulated Depreciation and Amortization
(3,564
)
 
(3,227
)
 
 
Net Property, Plant and Equipment
8,707

 
8,127

 
 
NONCURRENT ASSETS
 
 
 
 
 
NDT Fund
1,857

 
1,754

 
 
Long-Term Investments
106

 
119

 
 
Goodwill
16

 
16

 
 
Other Intangibles
154

 
102

 
 
Other Special Funds
60

 
55

 
 
Derivative Contracts
86

 
77

 
 
Other
65

 
51

 
 
Total Noncurrent Assets
2,344

 
2,174

 
 
TOTAL ASSETS
$
12,810

 
$
12,250

 
 
 
 
 
 
 
See disclosures regarding PSEG Power LLC included in the Notes to Condensed Consolidated Financial Statements.


13


Table of Contents


PSEG POWER LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
Millions
(Unaudited)

 
 
 
 
 
 
 
 
September 30,
2016
 
December 31,
2015
 
 
LIABILITIES AND MEMBER’S EQUITY
 
 
CURRENT LIABILITIES
 
 
 
 
 
Long-Term Debt Due Within One Year
$

 
$
553

 
 
Accounts Payable
477

 
432

 
 
Accounts Payable—Affiliated Companies
156

 
33

 
 
Derivative Contracts
36

 
76

 
 
Accrued Interest
43

 
25

 
 
Other
82

 
107

 
 
Total Current Liabilities
794

 
1,226

 
 
NONCURRENT LIABILITIES
 
 
 
 
 
Deferred Income Taxes and ITC
2,375

 
2,347

 
 
Asset Retirement Obligations
485

 
457

 
 
OPEB Costs
238

 
230

 
 
Derivative Contracts
13

 
16

 
 
Accrued Pension Costs
143

 
166

 
 
Long-Term Accrued Taxes
79

 
35

 
 
Other
162

 
87

 
 
Total Noncurrent Liabilities
3,495

 
3,338

 
 
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 9)


 


 
 
LONG-TERM DEBT
2,381

 
1,684

 
 
MEMBER’S EQUITY

 
 
 
 
Contributed Capital
2,214

 
2,214

 
 
Basis Adjustment
(986
)
 
(986
)
 
 
Retained Earnings
5,084

 
5,014

 
 
Accumulated Other Comprehensive Loss
(172
)
 
(240
)
 
 
Total Member’s Equity
6,140

 
6,002

 
 
TOTAL LIABILITIES AND MEMBER’S EQUITY
$
12,810

 
$
12,250

 
 
 
 
 
 
 
See disclosures regarding PSEG Power LLC included in the Notes to Condensed Consolidated Financial Statements.


14


Table of Contents


PSEG POWER LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Millions
(Unaudited)

 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
2016
 
2015
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
 
Net Income
$
320

 
$
707

 
 
Adjustments to Reconcile Net Income to Net Cash Flows from Operating Activities:
 
 
 
 
 
Depreciation and Amortization
245

 
226

 
 
Amortization of Nuclear Fuel
154

 
162

 
 
Provision for Deferred Income Taxes and ITC
(34
)
 
109

 
 
Net Unrealized (Gains) Losses on Energy Contracts and Other Derivatives
96

 
(87
)
 
 
Impairment Costs
102

 

 
 
Non-Cash Employee Benefit Plan Costs
28

 
36

 
 
Net Realized (Gains) Losses and (Income) Expense from NDT Fund
(12
)
 
(2
)
 
 
Net Change in Certain Current Assets and Liabilities:
 
 
 
 
 
Fuel, Materials and Supplies
(27
)
 
113

 
 
Margin Deposit
(4
)
 
142


 
Accounts Receivable
(11
)
 
54

 
 
Accounts Payable
(29
)
 
(99
)
 
 
Accounts Receivable/Payable—Affiliated Companies, net
235

 
115

 
 
Other Current Assets and Liabilities
20

 
(26
)
 
 
Employee Benefit Plan Funding and Related Payments
(10
)
 
(9
)
 
 
Other
187

 
117

 
 
Net Cash Provided By (Used In) Operating Activities
1,260

 
1,558

 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
Additions to Property, Plant and Equipment
(923
)
 
(797
)
 
 
Proceeds from Sales of Available-for-Sale Securities
490

 
1,057

 
 
Investments in Available-for-Sale Securities
(512
)
 
(1,083
)
 
 
Short-Term Loan—Affiliated Company, net
(151
)
 
(281
)
 
 
Other
(55
)
 
(46
)
 
 
Net Cash Provided By (Used In) Investing Activities
(1,151
)
 
(1,150
)
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
Issuance of Long-Term Debt
700

 

 
 
Cash Dividend Paid
(250
)
 
(400
)
 
 
Redemption of Long-Term Debt
(553
)
 

 
 
Other
(6
)
 
(2
)
 
 
Net Cash Provided By (Used In) Financing Activities
(109
)
 
(402
)
 
 
Net Increase (Decrease) in Cash and Cash Equivalents

 
6

 
 
Cash and Cash Equivalents at Beginning of Period
12

 
9

 
 
Cash and Cash Equivalents at End of Period
$
12

 
$
15

 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
 
Income Taxes Paid (Received)
$
(7
)
 
$
284

 
 
Interest Paid, Net of Amounts Capitalized
$
51

 
$
76

 
 
Accrued Property, Plant and Equipment Expenditures
$
175

 
$
70

 
 
 
 
 
 
 
See disclosures regarding PSEG Power LLC included in the Notes to the Condensed Consolidated Financial Statements.


15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents


Note 1. Organization and Basis of Presentation
Organization
Public Service Enterprise Group (PSEG) is a holding company with a diversified business mix within the energy industry. Its operations are primarily in the Northeastern and Mid-Atlantic United States and in other select markets. PSEG’s principal direct wholly owned subsidiaries are:
Public Service Electric and Gas Company (PSE&G)—which is a public utility engaged principally in the transmission of electricity and distribution of electricity and natural gas in certain areas of New Jersey. PSE&G is subject to regulation by the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). PSE&G also invests in solar generation projects and has implemented energy efficiency and demand response programs in New Jersey, which are regulated by the BPU.
PSEG Power LLC (Power)—which is a multi-regional, wholesale energy supply company that integrates its generating asset operations and gas supply commitments with its wholesale energy, fuel supply and energy transacting functions primarily in the Northeast and Mid-Atlantic United States through its principal direct wholly owned subsidiaries. Power’s subsidiaries are subject to regulation by FERC, the Nuclear Regulatory Commission (NRC), the Environmental Protection Agency (EPA) and the states in which they operate.
PSEG’s other direct wholly owned subsidiaries include PSEG Energy Holdings L.L.C. (Energy Holdings), which primarily has investments in leveraged leases; PSEG Long Island LLC (PSEG LI), which operates the Long Island Power Authority’s (LIPA) transmission and distribution (T&D) system under an Operations Services Agreement (OSA); and PSEG Services Corporation (Services), which provides certain management, administrative and general services to PSEG and its subsidiaries at cost.
Basis of Presentation
The financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) applicable to Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements (Notes) should be read in conjunction with, and update and supplement matters discussed in, the Annual Report on Form 10-K for the year ended December 31, 2015.
The unaudited condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. All intercompany accounts and transactions are eliminated in consolidation. The year-end Condensed Consolidated Balance Sheets were derived from the audited Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2015.

Note 2. Recent Accounting Standards
New Standards Issued But Not Yet Adopted
Revenue from Contracts with Customers
This accounting standard clarifies the principles for recognizing revenue and removes inconsistencies in revenue recognition requirements; improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and provides improved disclosures.
The guidance provides a five-step model to be used for recognizing revenue for the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.
The standard was originally to be effective for annual and interim reporting periods beginning after December 15, 2016; however, the Financial Accounting Standards Board issued new guidance deferring the effective date by one year to periods beginning after December 31, 2017. Early application will be permitted as of the original effective date. PSEG is currently analyzing the impact of this standard on its financial statements and disclosures as well as the transition method to use to adopt the guidance. PSEG is considering the impacts of outstanding industry related issues currently being addressed by the AICPA’s Revenue Recognition Working Group and the FASB’s Transition Resource Group, including its ability to recognize revenue for

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

certain contracts where there is uncertainty regarding collection, bundled price sales contracts and accounting for contributions in aid of construction.
Recognition and Measurement of Financial Assets and Financial Liabilities
This accounting standard will change how entities measure equity investments that are not consolidated or accounted for under the equity method. Under the new guidance, equity investments (other than those accounted for using the equity method) will be measured at fair value through Net Income instead of Other Comprehensive Income (Loss). Entities that have elected the fair value option for financial liabilities will present changes in fair value due to a change in their own credit risk through Other Comprehensive Income (Loss). For equity investments which do not have readily determinable fair values, the impairment assessment will be simplified by requiring a qualitative assessment to identify impairments. The new standard also changes certain disclosures.
The standard is effective for annual and interim reporting periods beginning after December 15, 2017. PSEG is currently analyzing the impact of this standard on our financial statements; however, PSEG expects increased volatility in Net Income due to changes in fair value of our equity securities within the Nuclear Decommissioning Trust (NDT) and Rabbi Trust Funds.
Leases
This accounting standard replaces existing lease accounting guidance and requires lessees to recognize all leases with a term greater than 12 months on the balance sheet using a right-of-use asset approach. At lease commencement, a lessee will recognize a lease asset and corresponding lease obligation. A lessee will classify its leases as either finance leases or operating leases based on whether control of the underlying assets has transferred to the lessee. A lessor will classify its leases as operating or direct financing leases, or as sales-type leases based on whether control of the underlying assets has transferred to the lessee. Both the lessee and lessor models require additional disclosure of key information. The standard requires lessees and lessors to apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. However, existing guidance related to leveraged leases will not change.
The standard is effective for annual and interim periods beginning after December 15, 2018 with retrospective application to previously issued financial statements for 2018 and 2017. Early application is permitted. PSEG is currently analyzing the impact of this standard on its financial statements.
Stock Compensation-Improvements to Employee Share-Based Payment Accounting
This accounting standard was issued to simplify aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
Under the new guidance, all excess tax benefits and tax deficiencies will be recognized in income tax expense rather than recognized in additional paid in capital. In the statement of cash flows, excess tax benefits and deficiencies will be classified with other income tax cash flows as an operating activity rather than a financing activity as currently classified. In addition, the minimum statutory tax withholding requirements were simplified in order to facilitate equity classification of the award.
The standard is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted for an entity in any interim or annual period. An entity that elects early adoption must adopt all of the amendments in the same period; however, the amendments within this update require different adoption methods. PSEG is evaluating early adoption of the standard in the fourth quarter of 2016; however, PSEG does not expect adoption to materially affect its financial statements.
Measurement of Credit Losses on Financial Instruments
This accounting standard provides a new model for recognizing credit losses on financial assets carried at amortized cost. The new model requires entities to use an estimate of expected credit losses that will be recognized as an impairment allowance rather than a direct write-down of the amortized cost basis. The estimate of expected credit losses is to be based on past events, current conditions and supportable forecasts over a reasonable period. For purchased financial assets with credit deterioration, a similar model is to be used; however, the initial allowance will be added to the purchase price rather than reported as an allowance. Credit losses on available-for-sale securities should be measured in a manner similar to current GAAP; however, this standard requires those credit losses to be presented as an allowance, rather than a write-down. This new standard also requires additional disclosures of credit quality indicators for each class of financial asset disaggregated by year of origination.
The standard is effective for annual and interim periods beginning after December 15, 2019; however, entities may adopt early beginning in the annual or interim periods after December 15, 2018. PSEG is currently analyzing the impact of this standard on its financial statements.

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
This accounting standard reduces the diversity in practice in how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows.
The standard is effective for annual and interim periods beginning after December 15, 2017; however, entities may adopt early including in an interim period. PSEG is currently analyzing the impact of this standard on its financial statements.

Note 3. Early Plant Retirements
On October 3, 2016, Power determined that it will cease generation operations of the existing coal/gas units at the Hudson and Mercer generating stations on June 1, 2017. Power has filed deactivation notices with PJM for these existing units at both stations and final must-offer exception requests for the 2020-2021 PJM capacity auction to the PJM Independent Market Monitor. Power expects the units to continue to be available to generate electricity and receive previously cleared capacity payments through the date the units cease operations. The exact timing of the early retirement of these units will be reviewed for reliability impacts by PJM, the regional transmission organization that controls the area where these units are located, and may be impacted by operational and other conditions that could subsequently arise. 
PSEG and Power undertake their annual five year strategic planning process primarily during the third and fourth quarters of each year. The primary factors considered during this process that contributed to the decision to retire these units early include significant declines in revenues and margin caused by a sustained period of depressed wholesale power prices and reduced capacity factors caused by lower natural gas prices making coal generation less economically competitive than natural gas-fired generation. Despite experiencing recent warmer than normal weather in PJM this summer, Power did not experience the usual increase in electricity prices in PJM as it had in past hot summers. This trend has a further adverse economic impact to these units because they generally dispatch and earn energy margin on peak hot and cold days. In addition, the upcoming PJM capacity auction in May 2017 for the capacity period from June 2020 to May 2021 will be the first to require all generating units to meet the increased operating performance standards of PJM’s new capacity performance regulations. During the current annual five-year strategic planning process, Power determined, on October 3, 2016, that the costs to upgrade the existing units at the Hudson and Mercer stations to comply with these higher reliability standards to be too significant and not economic given current market conditions, including anticipated future capacity prices, current forward energy prices and past operational performance results of the units. While these units have the capability to run on both coal and natural gas, they have higher operating costs and fuel consumption as well as longer start-up times compared to newer combined cycle gas units.
The decision to retire the Hudson and Mercer units early will have a material effect on PSEG’s and Power’s results of operations. In the third quarter of 2016, PSEG and Power recognized the following one-time pre-tax charges in Energy Costs, Operation and Maintenance and Depreciation expense:
 
 
 
 
 
 
Three Months Ended September 30,
 
 
 
2016
 
 
 
Millions
 
 
Statement of Operations Expense (pre-tax)
 
 
 
Energy Costs
 
 
 
Coal Inventory Lower of Cost or Market Adjustments and Capacity Penalties
$
62

 
 
Operation and Maintenance
 
 
 
    Materials and Supplies Obsolescence
31

 
 
    Write-down of Construction Work in Progress
14

 
 
    Other (A)
3

 
 
Depreciation and Amortization
 
 
 
Accelerated Depreciation including Asset Retirement Costs
4

 
 
Total Pre-Tax Expense
$
114

 
 
 
 
 
(A)
Includes severance and miscellaneous costs.

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

In addition to these one-time charges, Power will recognize incremental Depreciation and Amortization during the remainder of 2016 of $568 million and $946 million into 2017 due to the significant shortening of the expected economic useful lives of Hudson and Mercer. Additional employee-related salary continuance and severance costs and various miscellaneous costs may also be incurred during the period prior to retirement. Finally, Power currently anticipates using the sites for alternative industrial activity. However, if Power determines not to use the sites for alternative industrial activity, the early retirement of the units at these sites would trigger investigation and possible remediation of identified environmental contamination. The amounts for any such environmental investigation or remediation are neither currently probable nor estimable but may be material.
PSEG and Power evaluate long-lived assets for impairment whenever events or changes in circumstances, such as significant adverse changes in regulation, business climate or market conditions, including a current expectation that a long-lived asset will be sold or disposed of significantly before the end of its previously estimated useful life, could potentially indicate an asset’s or asset group’s carrying amount may not be recoverable. In such an event, an undiscounted cash flow analysis is performed to determine if an impairment exists. When a long-lived asset’s or asset group’s carrying amount exceeds the associated undiscounted estimated future cash flows, the asset/asset group is considered impaired to the extent that its fair value is less than its carrying amount. As disclosed for Power, cash flows for long-lived assets and asset groups are determined at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The cash flows from the generation units are generally evaluated at a regional portfolio level (PJM, NYISO, ISO-NE) along with cash flows generated from the customer supply and risk management activities, inclusive of cash flows from contracts, including those that are accounted for as derivatives or that meet the normal purchases and normal sales exemption. An impairment would result in a reduction of the value of the long-lived asset/asset group through a noncash charge to earnings.
Because the Hudson and Mercer generating units will cease operations significantly before the end of their previously estimated useful lives, Power performed a recoverability test for its portfolio of generating assets in the PJM region to determine if an impairment exists. As of September 30, 2016, the estimated undiscounted future cash flows of the PJM asset group exceeded the carrying amount and no impairment was identified.
In addition, PSEG and Power continue to monitor their other coal assets, including the Keystone, Conemaugh and Bridgeport Harbor generating stations, to ensure their economic viability through the end of their designated useful lives. The precise timing of a change in useful lives may be dependent upon events out of PSEG’s and Power’s control and may impact their ability to operate or maintain certain assets in the future. These generating stations may be impacted by factors such as environmental legislation, co-owner capital requirements and continued depressed wholesale power prices or capacity factors, among other things. Any early retirement of our other coal units before the end of their current estimated useful lives may have a material adverse impact on PSEG’s and Power’s future financial results.

Note 4. Variable Interest Entities (VIEs)
VIEs for which PSE&G is the Primary Beneficiary
PSE&G is the primary beneficiary and consolidates two marginally capitalized VIEs, PSE&G Transition Funding LLC (Transition Funding) and PSE&G Transition Funding II LLC (Transition Funding II), which were created for the purpose of issuing transition bonds and purchasing bond transitional property of PSE&G, which was pledged as collateral to a trustee. PSE&G acted as the servicer for these entities to collect securitization transition charges authorized by the BPU. These funds were remitted to Transition Funding and Transition Funding II and were used for interest and principal payments on the transition bonds and related costs. During 2015, Transition Funding and Transition Funding II paid their final securitization bond payments and as of December 31, 2015, no further debt or related costs remained with these VIEs. Effective January 1, 2016, PSE&G commenced refunding the overcollections from customers associated with these VIEs and expects to fully refund these liabilities in 2016.
VIE for which PSEG LI is the Primary Beneficiary
PSEG LI consolidates Long Island Electric Utility Servco, LLC (Servco), a marginally capitalized VIE, which was created for the purpose of operating LIPA’s T&D system in Long Island, New York as well as providing administrative support functions to LIPA. PSEG LI is the primary beneficiary of Servco because it directs the operations of Servco, the activity that most significantly impacts Servco’s economic performance and it has the obligation to absorb losses of Servco that could potentially be significant to Servco. Such losses would be immaterial to PSEG.
Pursuant to the OSA, Servco’s operating costs are reimbursable entirely by LIPA, and therefore, PSEG LI’s risk is limited related to the activities of Servco. PSEG LI has no current obligation to provide direct financial support to Servco. In addition to reimbursement of Servco’s operating costs as provided for in the OSA, PSEG LI receives an annual contract management

19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

fee. PSEG LI’s annual contractual management fee, in certain situations, could be partially offset by Servco’s annual storm costs not approved by the Federal Emergency Management Agency, limited contingent liabilities and penalties for failing to meet certain performance metrics.
For transactions in which Servco acts as principal, such as transactions with its employees for labor and labor-related activities, including pension and OPEB-related transactions, Servco records revenues and the related pass-through expenditures separately in Operating Revenues and Operation and Maintenance (O&M) Expense, respectively. Servco recorded $116 million and $96 million for the three months and $315 million and $262 million for the nine months ended September 30, 2016 and 2015, respectively, of O&M costs, the full reimbursement of which was reflected in Operating Revenues. For transactions in which Servco acts as an agent for LIPA, it records revenues and the related expenses on a net basis, resulting in no impact on PSEG’s Condensed Consolidated Statement of Operations.

Note 5. Rate Filings
This Note should be read in conjunction with Note 5. Regulatory Assets and Liabilities to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015.
In addition to items previously reported in the Annual Report on Form 10-K, significant regulatory orders received and currently pending rate filings with FERC and the BPU by PSE&G are as follows:
Transmission Formula Rate Filings—In June 2016, PSE&G filed its 2015 true-up adjustment pertaining to its transmission formula rates in effect for 2015. This resulted in an adjustment of $34 million less than the 2015 originally filed revenues primarily due to the impact of bonus depreciation legislation enacted after PSE&G filed its 2015 formula rate requirement in October 2014. PSE&G had recognized the majority of this adjustment in its Consolidated Statement of Operations for the year ended December 31, 2015.
In October 2016, the 2017 Annual Formula Rate Update was filed with FERC and requests approximately $121 million in increased annual transmission revenues effective January 1, 2017, subject to true-up.
Energy Strong Recovery Filing—In March and September of each year, PSE&G files with the BPU for base rate recovery of Energy Strong investments which include a return of and on its investment. In June 2016, PSE&G updated its March cost recovery petition to include Energy Strong investments in service as of May 31, 2016 which represents estimated annual increases in electric and gas revenues of $16 million and $23 million, respectively. In August 2016, the BPU approved these rate increases effective September 1, 2016.
In September 2016, PSE&G filed its Energy Strong electric cost recovery petition seeking BPU approval to recover the revenue requirements associated with Energy Strong capitalized investment costs placed in service from June 1, 2016 through November 30, 2016. The petition requests rates to be effective March 1, 2017, consistent with the BPU Order of approval of the Energy Strong Program. The annualized requested increase in electric revenue requirement is approximately $15 million. This matter is pending.
Basic Gas Supply Service (BGSS)—In June 2016, PSE&G made its annual BGSS filing with the BPU requesting a reduction of $87 million in annual BGSS revenues. In September 2016, the BPU approved a Stipulation in this matter on a provisional basis and the BGSS rate was reduced from approximately 40 cents to 34 cents per therm effective October 1, 2016. The rate is subject to final settlement.
Weather Normalization Clause—On July 1, 2016, PSE&G filed a petition requesting approval to collect $54 million in net deficiency gas revenues as a result of the warmer than normal 2015-2016 Winter Period. The deficiency gas revenues would be collected from customers over the 2016-2017 and 2017-2018 Winter Periods (October 1 through May 31). In September 2016, the BPU approved PSE&G’s filing on a provisional basis with respect to the $54 million in deficiency revenues to be collected from customers effective October 1, 2016.
Solar and Energy Efficiency - Green Program Recovery Charges (GPRC)—Each year PSE&G files with the BPU for annual recovery of its Green Program investments which include a return on its investment and recovery of expenses. On July 1, 2016, PSE&G filed its 2016 GPRC cost recovery petition requesting recovery for the nine combined components of the electric and gas GPRC. The filing proposes rates for the period October 1, 2016 through September 30, 2017 designed to recover approximately $44 million and $13 million in electric and gas revenues, respectively, on an annual basis associated with PSE&G’s implementation of these BPU approved programs. In September 2016, the BPU approved the July 2016 filing on a provisional basis, with new rates effective October 1, 2016.
Gas System Modernization Program (GSMP)—In October 2016, PSE&G updated its initial annual GSMP cost recovery petition seeking BPU approval to recover in gas base rates an estimated annual revenue increase of $10 million effective

20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

January 1, 2017. This increase represents the return of and on investment for GSMP investments in service through September 30, 2016. This matter is pending.  
Universal Service Fund (USF)/Lifeline—In September 2016, the BPU approved rates set to recover state-wide costs incurred by New Jersey electric and gas distribution companies under the State’s USF/Lifeline energy assistance programs effective October 1, 2016. PSE&G earns no margin on the collection of the USF and Lifeline programs resulting in no impact on its Consolidated Statement of Operations.
Remediation Adjustment Charge (RAC)—In April 2016, the BPU approved PSE&G’s filing with respect to its RAC 23 petition allowing recovery of $54 million effective May 7, 2016 related to net Manufactured Gas Plant expenditures from August 1, 2014 through July 31, 2015.
        
Note 6. Financing Receivables
PSE&G
PSE&G sponsors a solar loan program designed to help finance the installation of solar power systems throughout its electric service area. The loans are generally paid back with solar renewable energy certificates generated from the installed solar electric system. A substantial portion of these amounts are noncurrent and reported in Long-Term Investments on PSEG’s and PSE&G’s Condensed Consolidated Balance Sheets. The following table reflects the outstanding loans by class of customer, none of which are considered “non-performing.”
 
 
 
 
 
 
 
 
Outstanding Loans by Class of Customer
 
 
 
 
As of
 
As of
 
 
Consumer Loans
 
September 30,
2016
 
December 31,
2015
 
 
 
 
Millions
 
 
Commercial/Industrial
 
$
165

 
$
177

 
 
Residential
 
11

 
12

 
 
Total
 
$
176

 
$
189

 
 
 
 
 
 
 
 
Energy Holdings
Energy Holdings, through several of its indirect subsidiary companies, has investments in domestic energy and real estate assets subject primarily to leveraged lease accounting. A leveraged lease is typically comprised of an investment by an equity investor and debt provided by a third party debt investor. The debt is recourse only to the assets subject to lease and is not included on PSEG’s Condensed Consolidated Balance Sheets. As an equity investor, Energy Holdings’ investments in the leases are comprised of the total expected lease receivables on its investments over the lease terms plus the estimated residual values at the end of the lease terms, reduced for any income not yet earned on the leases. This amount is included in Long-Term Investments on PSEG’s Condensed Consolidated Balance Sheets. The more rapid depreciation of the leased property for tax purposes creates tax cash flow that will be repaid to the taxing authority in later periods. As such, the liability for such taxes due is recorded in Deferred Income Taxes on PSEG’s Condensed Consolidated Balance Sheets. 
During the third quarter of 2016, Energy Holdings completed its annual review of estimated residual values embedded in the NRG REMA, LLC (REMA) leveraged leases. The outcome indicated that the revised residual value estimates were lower than the recorded residual values and the decline was deemed to be other than temporary due to the adverse economic conditions experienced by coal generation in PJM, as discussed in Note 3. Early Plant Retirements, negatively impacting the economic outlook of the leased assets. As a result, a pre-tax write-down of $137 million was reflected in Operating Revenues in the quarter ended September 30, 2016, calculated by comparing the gross investment in the leases before and after the revised residual estimates.



21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

The following table shows Energy Holdings’ gross and net lease investment as of September 30, 2016 and December 31, 2015, respectively.
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
September 30,
2016
 
December 31,
2015
 
 
 
Millions
 
 
Lease Receivables (net of Non-Recourse Debt)
$
630

 
$
631

 
 
Estimated Residual Value of Leased Assets
346

 
519

 
 
Total Investment in Rental Receivables
976

 
1,150

 
 
Unearned and Deferred Income
(320
)
 
(366
)
 
 
Gross Investment in Leases
656

 
784

 
 
Deferred Tax Liabilities
(661
)
 
(724
)
 
 
Net Investment in Leases
$
(5
)
 
$
60

 
 
 
 
 
 
 
The corresponding receivables associated with the lease portfolio are reflected in the following table, net of non-recourse debt. The ratings in the table represent the ratings of the entities providing payment assurance to Energy Holdings.
 
 
 
 
 
 
 
 
Lease Receivables, Net of
Non-Recourse Debt
 
 
Counterparties’ Credit Rating Standard & Poor’s (S&P) as of September 30, 2016
 
 
 
 
 
As of September 30, 2016
 
 
 
 
Millions
 
 
AA
 
$
16

 
 
BBB+ — BBB-
 
316

 
 
BB-
 
134

 
 
CCC
 
164

 
 
Total
 
$
630

 
 
 
 
 
 
The “BB-” and the “CCC” ratings in the preceding table represent lease receivables related to coal-fired assets in Illinois and Pennsylvania, respectively. As of September 30, 2016, the gross investment in the leases of such assets, net of non-recourse debt, was $436 million ($(108) million, net of deferred taxes). A more detailed description of such assets under lease, as of September 30, 2016, is presented in the following table.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset
 
Location
 
Gross
Investment
 
%
Owned
 
Total MW
 
Fuel
Type
 
Counterparties’
S&P Credit
Ratings
 
Counterparty
 
 
 
 
 
 
Millions
 
 
 
 
 
 
 
 
 
 
 
 
Powerton Station Units 5 and 6
 
IL
 
$
134

 
64
%
 
1,538

 
Coal
 
BB-
 
NRG Energy, Inc.
 
 
Joliet Station Units 7 and 8
 
IL
 
$
83

 
64
%
 
1,044

 
Gas
 
BB-
 
NRG Energy, Inc.
 
 
Keystone Station Units 1 and 2
 
PA
 
$
55

 
17
%
 
1,711

 
Coal
 
CCC (B)
 
REMA
 
 
Conemaugh Station Units 1 and 2
 
PA
 
$
55

 
17
%
 
1,711

 
Coal
 
CCC (B)
 
REMA
 
 
Shawville Station Units 1, 2, 3 and 4
 
PA
 
$
109

 
100
%
 
603

 
Coal (A)
 
CCC (B)
 
REMA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
REMA notified PJM that it deactivated the coal-fired units at the Shawville generating facility in June 2015 and has disclosed that it expects to return the Shawville units to service in the late fall of 2016 with the ability to use natural gas.

22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

(B)
On May 24, 2016, S&P lowered its corporate credit rating on REMA’s parent company, GenOn Energy Inc. (GenOn) and affiliates (including REMA) to “CCC” from “CCC+” due to a weaker forward power curve, milder weather patterns and weakening financial measures. On October 7, 2016, Moody’s downgraded the GenOn Corporate Family Rating to Caa3 to reflect its high debt burden relative to cash flow. GenOn reported in August 2016 that it did not expect to have sufficient liquidity to repay the senior unsecured notes due in June 2017.
The credit exposure for lessors is partially mitigated through various credit enhancement mechanisms within the lease transactions. These credit enhancement features vary from lease to lease and may include letters of credit or affiliate guarantees. Upon the occurrence of certain defaults, indirect subsidiary companies of Energy Holdings would exercise their rights and attempt to seek recovery of their investment, potentially including stepping into the lease directly to protect their investments. While these actions could ultimately protect or mitigate the loss of value, they could require the use of significant capital investments and trigger certain material tax obligations which could be mitigated by tax indemnification claims with the counterparty. A bankruptcy of a lessee would likely delay and potentially limit any efforts on the part of the lessors to assert their rights upon default and could delay the monetization of claims. Failure to recover adequate value could ultimately lead to a foreclosure on the assets under lease by the lenders. Although all lease payments are current, PSEG cannot predict the outcome of GenOn’s efforts to restructure its portfolio and improve its liquidity and the possible related impact on REMA. PSEG continues to monitor any changes to REMA’s and GenOn’s status and potential impacts on Energy Holdings’ lease investments. If foreclosures were to occur, Energy Holdings could potentially record a pre-tax write-off up to its gross investment in these facilities and may also be required to pay significant cash tax liabilities to the Internal Revenue Service.
Although all lease payments are current, no assurances can be given that future payments in accordance with the lease contracts will continue. Factors which may impact future lease cash flows include, but are not limited to, new environmental legislation and regulation regarding air quality, water and other discharges in the process of generating electricity, market prices for fuel, electricity and capacity, overall financial condition of lease counterparties and their affiliates and the quality and condition of assets under lease.

Note 7. Available-for-Sale Securities
NDT Fund
Power maintains an external master NDT to fund its share of decommissioning for its five nuclear facilities upon termination of operation. The trust contains two separate funds: a qualified fund and a non-qualified fund. Section 468A of the Internal Revenue Code limits the amount of money that can be contributed into a qualified fund. The trust funds are managed by third party investment advisers who operate under investment guidelines developed by Power.
Power classifies investments in the NDT Fund as available-for-sale. The following tables show the fair values and gross unrealized gains and losses for the securities held in the NDT Fund.
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016
 
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
 
Millions
 
 
Equity Securities
$
691

 
$
238

 
$
(7
)
 
$
922

 
 
Debt Securities
 
 
 
 
 
 
 
 
 
Government Obligations
509

 
21

 

 
530

 
 
Other
349

 
13

 
(2
)
 
360

 
 
Total Debt Securities
858

 
34

 
(2
)
 
890

 
 
Other Securities
45

 

 

 
45

 
 
Total NDT Available-for-Sale Securities
$
1,594

 
$
272

 
$
(9
)
 
$
1,857

 
 
 
 
 
 
 
 
 
 
 

23

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
 
Millions
 
 
Equity Securities
$
693

 
$
185

 
$
(13
)
 
$
865

 
 
Debt Securities
 
 
 
 
 
 
 
 
 
Government Obligations
483

 
8

 
(3
)
 
488

 
 
Other
366

 
3

 
(10
)
 
359

 
 
Total Debt Securities
849

 
11

 
(13
)
 
847

 
 
Other Securities
42

 

 

 
42

 
 
Total NDT Available-for-Sale Securities
$
1,584

 
$
196

 
$
(26
)
 
$
1,754

 
 
 
 
 
 
 
 
 
 
 
The amounts in the preceding tables do not include receivables and payables for NDT Fund transactions which have not settled at the end of each period. Such amounts are included in Accounts Receivable and Accounts Payable on the Condensed Consolidated Balance Sheets as shown in the following table.
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
September 30,
2016
 
December 31,
2015
 
 
 
Millions
 
 
Accounts Receivable
$
9

 
$
17

 
 
Accounts Payable
$
7

 
$
10

 
 
 
 
 
 
 

The following table shows the value of securities in the NDT Fund that have been in an unrealized loss position for less than and greater than 12 months.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016
 
As of December 31, 2015
 
 
 
Less Than 12
Months
 
Greater Than 12
Months
 
Less Than 12
Months
 
Greater Than 12
Months
 
 
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
 
Millions
 
 
Equity Securities (A)
$
101

 
$
(6
)
 
$
4

 
$
(1
)
 
$
151

 
$
(13
)
 
$
1

 
$

 
 
Debt Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government Obligations (B)
41

 

 
4

 

 
245

 
(2
)
 
19

 
(1
)
 
 
Other (C)
34

 

 
25

 
(2
)
 
222

 
(7
)
 
36

 
(3
)
 
 
Total Debt Securities
75

 

 
29

 
(2
)
 
467

 
(9
)
 
55

 
(4
)
 
 
NDT Available-for-Sale Securities
$
176

 
$
(6
)
 
$
33

 
$
(3
)
 
$
618

 
$
(22
)
 
$
56

 
$
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Equity Securities—Investments in marketable equity securities within the NDT Fund are primarily in common stocks within a broad range of industries and sectors. The unrealized losses are distributed over a broad range of securities with limited impairment durations. Power does not consider these securities to be other-than-temporarily impaired as of September 30, 2016.
(B)
Debt Securities (Government Obligations)—Unrealized losses on Power’s NDT investments in U.S. Treasury obligations and Federal Agency mortgage-backed securities were caused by interest rate changes. Since these investments are guaranteed by the U.S. government or an agency of the U.S. government, it is not expected that these securities will settle for less than their amortized cost basis, since Power does not intend to sell nor will it be

24

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

more-likely-than-not required to sell. Power does not consider these securities to be other-than-temporarily impaired as of September 30, 2016.
(C)
Debt Securities (Other)—Power’s investments in corporate bonds are primarily in investment grade securities. It is not expected that these securities would settle for less than their amortized cost. Since Power does not intend to sell these securities nor will it be more-likely-than-not required to sell, Power does not consider these debt securities to be other-than-temporarily impaired as of September 30, 2016.
The proceeds from the sales of and the net realized gains on securities in the NDT Fund were:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
Millions
 
 
Proceeds from NDT Fund Sales (A)
$
139

 
$
215

 
$
470

 
$
1,037

 
 
Net Realized Gains (Losses) on NDT Fund:
 
 
 
 
 
 
 
 
 
Gross Realized Gains
$
11

 
$
14

 
$
36

 
$
47

 
 
Gross Realized Losses
(3
)
 
(11
)
 
(25
)
 
(24
)
 
 
Net Realized Gains (Losses) on NDT Fund
$
8

 
$
3

 
$
11

 
$
23

 
 
 
 
 
 
 
 
 
 
 
(A)
2015 proceeds include activity in accounts related to the liquidation of funds being transitioned to new managers.
Gross realized gains and gross realized losses disclosed in the preceding table were recognized in Other Income and Other Deductions, respectively, in PSEG’s and Power’s Condensed Consolidated Statements of Operations. Net unrealized gains of $131 million (after-tax) were a component of Accumulated Other Comprehensive Loss on PSEG’s and Power’s Condensed Consolidated Balance Sheets as of September 30, 2016.

The NDT available-for-sale debt securities held as of September 30, 2016 had the following maturities:
 
 
 
 
 
 
Time Frame
 
Fair Value
 
 
 
 
Millions
 
 
Less than one year
 
$
22

 
 
1 - 5 years
 
233

 
 
6 - 10 years
 
214

 
 
11 - 15 years
 
56

 
 
16 - 20 years
 
62

 
 
Over 20 years
 
303

 
 
Total NDT Available-for-Sale Debt Securities
$
890

 
 
 
 
 
 
The cost of these securities was determined on the basis of specific identification.
Power periodically assesses individual securities whose fair value is less than amortized cost to determine whether the investments are considered to be other-than-temporarily impaired. For equity securities, management considers the ability and intent to hold for a reasonable time to permit recovery in addition to the severity and duration of the loss. For fixed income securities, management considers its intent to sell or requirement to sell a security prior to expected recovery. In those cases where a sale is expected, any impairment would be recorded through earnings. For fixed income securities where there is no intent to sell or likely requirement to sell, management evaluates whether credit loss is a component of the impairment. If so, that portion is recorded through earnings while the noncredit loss component is recorded through Accumulated Other Comprehensive Income (Loss). For the nine months ended September 30, 2016, other-than-temporary impairments of $25 million were recognized on securities in the NDT Fund. Any subsequent recoveries in the value of these securities would be recognized in Accumulated Other Comprehensive Income (Loss) unless the securities are sold, in which case, any gain would be recognized in income. The assessment of fair market value compared to cost is applied on a weighted average basis taking into account various purchase dates and initial cost of the securities.

25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Rabbi Trust
PSEG maintains certain unfunded nonqualified benefit plans to provide supplemental retirement and deferred compensation benefits to certain key employees. Certain assets related to these plans have been set aside in a grantor trust commonly known as a “Rabbi Trust.”
PSEG classifies investments in the Rabbi Trust as available-for-sale. The following tables show the fair values, gross unrealized gains and losses and amortized cost basis for the securities held in the Rabbi Trust.
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016
 
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
 
Millions
 
 
Equity Securities
$
11

 
$
11

 
$

 
$
22

 
 
Debt Securities
 
 
 
 
 
 
 
 
 
Government Obligations
104

 
3

 

 
107

 
 
Other
91

 
3

 

 
94

 
 
Total Debt Securities
195

 
6

 

 
201

 
 
Other Securities
1

 

 

 
1

 
 
Total Rabbi Trust Available-for-Sale Securities
$
207

 
$
17

 
$

 
$
224

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
 
 
Millions
 
 
Equity Securities
$
12

 
$
10

 
$

 
$
22

 
 
Debt Securities
 
 
 
 
 
 
 
 
 
Government Obligations
108

 
1

 
(1
)
 
108

 
 
Other
82

 

 
(1
)
 
81

 
 
Total Debt Securities
190

 
1

 
(2
)
 
189

 
 
Other Securities
2

 

 

 
2

 
 
Total Rabbi Trust Available-for-Sale Securities
$
204

 
$
11

 
$
(2
)
 
$
213

 
 
 
 
 
 
 
 
 
 
 
The amounts in the preceding tables do not include receivables and payables for Rabbi Trust Fund transactions which have not settled at the end of each period. Such amounts are included in Accounts Receivable and Accounts Payable on the Condensed Consolidated Balance Sheets as shown in the following table.
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
September 30,
2016
 
December 31,
2015
 
 
 
Millions
 
 
Accounts Receivable
$
1

 
$
1

 
 
Accounts Payable
$

 
$

 
 
 
 
 
 
 

26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

The following table shows the value of securities in the Rabbi Trust Fund that have been in an unrealized loss position for less than and greater than 12 months.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016
 
As of December 31, 2015
 
 
 
Less Than 12
Months
 
Greater Than 12
Months
 
Less Than 12
Months
 
Greater Than 12
Months
 
 
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
 
Millions
 
 
Equity Securities (A)
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
 
Debt Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government Obligations (B)
4

 

 
1

 

 
53

 
(1
)
 
2

 

 
 
Other (C)
9

 

 
5

 

 
46

 
(1
)
 
9

 

 
 
Total Debt Securities
13

 

 
6

 

 
99

 
(2
)
 
11

 

 
 
Rabbi Trust Available-for-Sale Securities
$
13

 
$

 
$
6

 
$

 
$
99

 
$
(2
)
 
$
11

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Equity Securities—Investments in marketable equity securities within the Rabbi Trust Fund are through a mutual fund which invests primarily in common stocks within a broad range of industries and sectors.
(B)
Debt Securities (Government Obligations)—Unrealized losses on PSEG’s Rabbi Trust investments in U.S. Treasury obligations and Federal Agency mortgage-backed securities were caused by interest rate changes. Since these investments are guaranteed by the U.S. government or an agency of the U.S. government, it is not expected that these securities will settle for less than their amortized cost basis, since PSEG does not intend to sell nor will it be more-likely-than-not required to sell. PSEG does not consider these securities to be other-than-temporarily impaired as of September 30, 2016.
(C)
Debt Securities (Other)—PSEG’s investments in corporate bonds are primarily in investment grade securities. It is not expected that these securities would settle for less than their amortized cost. Since PSEG does not intend to sell these securities nor will it be more-likely-than-not required to sell, PSEG does not consider these debt securities to be other-than-temporarily impaired as of September 30, 2016.
The proceeds from the sales of and the net realized gains (losses) on securities in the Rabbi Trust Fund were:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
Millions
 
 
Proceeds from Rabbi Trust Sales
$
20

 
$
20

 
$
81

 
$
83

 
 
Net Realized Gains (Losses) on Rabbi Trust:
 
 
 
 
 
 
 
 
 
Gross Realized Gains
$
2

 
$

 
$
5

 
$
2

 
 
Gross Realized Losses
(2
)
 
(1
)
 
(4
)
 
(1
)
 
 
Net Realized Gains (Losses) on Rabbi Trust
$

 
$
(1
)
 
$
1

 
$
1

 
 
 
 
 
 
 
 
 
 
 
Gross realized gains disclosed in the preceding table were recognized in Other Income in the Condensed Consolidated Statements of Operations. Net unrealized gains of $10 million (after-tax) were a component of Accumulated Other Comprehensive Loss on the Condensed Consolidated Balance Sheets as of September 30, 2016.

27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

The Rabbi Trust available-for-sale debt securities held as of September 30, 2016 had the following maturities:
 
 
 
 
 
 
Time Frame
 
Fair Value
 
 
 
 
Millions
 
 
Less than one year
 
$
9

 
 
1 - 5 years
 
42

 
 
6 - 10 years
 
48

 
 
11 - 15 years
 
9

 
 
16 - 20 years
 
9

 
 
Over 20 years
 
84

 
 
Total Rabbi Trust Available-for-Sale Debt Securities
$
201

 
 
 
 
 
 
The cost of these securities was determined on the basis of specific identification.
PSEG periodically assesses individual securities whose fair value is less than amortized cost to determine whether the investments are considered to be other-than-temporarily impaired. For equity securities, the Rabbi Trust is invested in a commingled indexed mutual fund. Due to the commingled nature of this fund, PSEG does not have the ability to hold these securities until expected recovery. As a result, any declines in fair market value below cost are recorded as a charge to earnings. For fixed income securities, management considers its intent to sell or requirement to sell a security prior to expected recovery. In those cases where a sale is expected, any impairment would be recorded through earnings. For fixed income securities where there is no intent to sell or likely requirement to sell, management evaluates whether credit loss is a component of the impairment. If so, that portion is recorded through earnings while the noncredit loss component is recorded through Accumulated Other Comprehensive Income (Loss). For the nine months ended September 30, 2016, no other-than-temporary impairments were recognized on securities in the Rabbi Trust. The assessment of fair market value compared to cost is applied on a weighted average basis taking into account various purchase dates and initial cost of the securities.
The fair value of assets in the Rabbi Trust related to PSEG, PSE&G and Power are detailed as follows:
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
September 30,
2016
 
December 31,
2015
 
 
 
Millions
 
 
PSE&G
$
44

 
$
42

 
 
Power
55

 
52

 
 
Other
125

 
119

 
 
Total Rabbi Trust Available-for-Sale Securities
$
224

 
$
213

 
 
 
 
 
 
 

Note 8. Pension and Other Postretirement Benefits (OPEB)
PSEG sponsors several qualified and nonqualified pension plans and OPEB plans covering PSEG’s and its participating affiliates’ current and former employees who meet certain eligibility criteria.
Effective January 1, 2016, PSEG changed the approach used to measure future service and interest costs for pension benefits. For 2015 and prior, PSEG calculated service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2016 and beyond, PSEG has elected to calculate service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. PSEG believes the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of the plan obligations. As a change in accounting estimate, this change is being reflected prospectively. Pension and OPEB costs, net of amounts capitalized, were reduced by $9 million and $3 million, for the three months ended September 30, 2016, respectively, and $26 million and $9 million for the nine months ended September 30, 2016, respectively, as compared to the 2016 amounts that would have been derived from applying PSEG’s 2015 and prior years’ methodology.

28

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

The following table provides the components of net periodic benefit costs relating to all qualified and nonqualified pension and OPEB plans on an aggregate basis for PSEG, except for Servco.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
OPEB
 
Pension Benefits
 
OPEB
 
 
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
September 30,
 
September 30,
 
 
 
2016

 
2015
 
2016

 
2015
 
2016
 
2015
 
2016
 
2015
 
 
 
Millions
 
 
Components of Net Periodic Benefit Costs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service Cost
$
28

 
$
30

 
$
5

 
$
5

 
$
82

 
$
92

 
$
13

 
$
16

 
 
Interest Cost
50

 
59

 
15

 
16

 
151

 
176

 
44

 
50

 
 
Expected Return on Plan Assets
(98
)
 
(103
)
 
(8
)
 
(7
)
 
(295
)
 
(310
)
 
(23
)
 
(22
)
 
 
Amortization of Net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior Service Cost (Credit)
(5
)
 
(5
)
 
(4
)
 
(4
)
 
(14
)
 
(14
)
 
(11
)
 
(11
)
 
 
Actuarial Loss
39

 
38

 
10

 
11

 
118

 
112

 
30

 
32

 
 
Total Benefit Costs
$
14

 
$
19

 
$
18

 
$
21

 
$
42

 
$
56

 
$
53

 
$
65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and OPEB costs for PSE&G, Power and PSEG’s other subsidiaries, except for Servco, are detailed as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
OPEB
 
Pension Benefits
 
OPEB
 
 
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
 
 
Millions
 
 
PSE&G
$
8

 
$
10

 
$
11

 
$
13

 
$
22

 
$
30

 
$
33

 
$
41

 
 
Power
3

 
5

 
6

 
7

 
11

 
16

 
17

 
20

 
 
Other
3

 
4

 
1

 
1

 
9

 
10

 
3

 
4

 
 
Total Benefit Costs
$
14

 
$
19

 
$
18

 
$
21

 
$
42

 
$
56

 
$
53

 
$
65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PSEG contributed its entire planned contributions for the year 2016 of $21 million into its pension plans and $14 million into its OPEB plan during 2016.
Servco Pension and OPEB
At the direction of LIPA, Servco sponsors benefit plans that cover its current and former employees who meet certain eligibility criteria. Under the OSA, all of these and any future employee benefit costs are to be funded by LIPA. See Note 4. Variable Interest Entities. These obligations, as well as the offsetting long-term receivable, are separately presented on the Condensed Consolidated Balance Sheet of PSEG.
Servco amounts are not included in any of the preceding pension and OPEB benefit cost disclosures. Pension and OPEB costs of Servco are accounted for according to the OSA. Servco recognizes expenses for contributions to its pension plan trusts and for OPEB payments made to retirees. Operating Revenues are recognized for the reimbursement of these costs. Servco has contributed its entire planned contribution of $28 million into its pension plan trusts during 2016. Servco’s pension-related revenues and costs were $16 million and $17 million for the three months ended September 30, 2016 and 2015, respectively, and $28 million and $30 million for the nine months ended September 30, 2016 and 2015, respectively. The OPEB-related revenues earned and costs incurred for each of the three months and nine months ended September 30, 2016 and 2015 were immaterial.


29

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Note 9. Commitments and Contingent Liabilities
Guaranteed Obligations
Power’s activities primarily involve the purchase and sale of energy and related products under transportation, physical, financial and forward contracts at fixed and variable prices. These transactions are with numerous counterparties and brokers that may require cash, cash-related instruments or guarantees.
Power has unconditionally guaranteed payments to counterparties by its subsidiaries in commodity-related transactions in order to
support current exposure, interest and other costs on sums due and payable in the ordinary course of business, and
obtain credit.
Under these agreements, guarantees cover lines of credit between entities and are often reciprocal in nature. The exposure between counterparties can move in either direction.
In order for Power to incur a liability for the face value of the outstanding guarantees, its subsidiaries would have to
fully utilize the credit granted to them by every counterparty to whom Power has provided a guarantee, and
all of the related contracts would have to be “out-of-the-money” (if the contracts are terminated, Power would owe money to the counterparties).
Power believes the probability of this result is unlikely. For this reason, Power believes that the current exposure at any point in time is a more meaningful representation of the potential liability under these guarantees. Current exposure consists of the net of accounts receivable and accounts payable and the forward value on open positions, less any collateral posted.
Power is subject to
counterparty collateral calls related to commodity contracts, and
certain creditworthiness standards as guarantor under performance guarantees of its subsidiaries.
Changes in commodity prices can have a material impact on collateral requirements under such contracts, which are posted and received primarily in the form of cash and letters of credit. Power also routinely enters into futures and options transactions for electricity and natural gas as part of its operations. These futures contracts usually require a cash margin deposit with brokers, which can change based on market movement and in accordance with exchange rules.
In addition to the guarantees discussed above, Power has also provided payment guarantees to third parties on behalf of its affiliated companies. These guarantees support various other non-commodity related contractual obligations.

30

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

The following table shows the face value of Power’s outstanding guarantees, current exposure and margin positions as of September 30, 2016 and December 31, 2015.
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
September 30,
2016
 
December 31,
2015
 
 
 
Millions
 
 
Face Value of Outstanding Guarantees
$
1,797

 
$
1,734

 
 
Exposure under Current Guarantees
$
143

 
$
172

 
 
 
 
 
 
 
 
Letters of Credit Margin Posted
$
164

 
$
122

 
 
Letters of Credit Margin Received
$
136

 
$
192

 
 
 
 
 
 
 
 
Cash Deposited and Received:
 
 
 
 
 
Counterparty Cash Margin Deposited
$

 
$

 
 
Counterparty Cash Margin Received
$
(4
)
 
$
(15
)
 
 
   Net Broker Balance Deposited (Received)
$
(12
)
 
$
(5
)
 
 
 
 
 
 
 
 
Additional Amounts Posted:
 
 
 
 
 
Other Letters of Credit
$
51

 
$
51

 
 
 
 
 
 
 
As part of determining credit exposure, Power nets receivables and payables with the corresponding net energy contract balances. See Note 11. Financial Risk Management Activities for further discussion. In accordance with PSEG’s accounting policy, where it is applicable, cash (received)/deposited is allocated against derivative asset and liability positions with the same counterparty on the face of the Balance Sheet. The remaining balances of net cash (received)/deposited after allocation are generally included in Accounts Payable and Receivable, respectively.
In addition to amounts for outstanding guarantees, current exposure and margin positions, PSEG and Power had posted letters of credit to support Power’s various other non-energy contractual and environmental obligations. See preceding table. PSEG also issued a $106 million guarantee to support Power’s payment obligations related to its equity interest in the PennEast natural gas pipeline and a $21 million guarantee to support Power’s payment obligations related to construction of a 755 MW gas-fired combined cycle generating station in Maryland. In the event that PSEG were to be downgraded to below investment grade and failed to meet minimum net worth requirements, these guarantees would each have to be replaced by a letter of credit.

Environmental Matters
Passaic River
Historic operations of PSEG companies and the operations of hundreds of other companies along the Passaic and Hackensack Rivers are alleged by Federal and State agencies to have discharged substantial contamination into the Passaic River/Newark Bay Complex in violation of various statutes as discussed as follows.
Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA)
In 2002, the U.S. Environmental Protection Agency (EPA) determined that a 17-mile stretch of the lower Passaic River from Newark to Clifton, New Jersey is a “Superfund” site under CERCLA. This designation allows the EPA to clean up such sites and to compel responsible parties to perform cleanups or reimburse the government for cleanups led by the EPA.
The EPA determined that there was a need to perform a comprehensive study of the entire 17 miles of the lower Passaic River. PSE&G and certain of its predecessors conducted operations at properties in this area of the Passaic River. The properties included one operating electric generating station (Essex Site), which was transferred to Power, one former generating station and four former manufactured gas plant (MGP) sites.
In early 2007, 73 Potentially Responsible Parties (PRPs), including PSE&G and Power, formed a Cooperating Parties Group (CPG) and agreed to assume responsibility for conducting a Remedial Investigation and Feasibility Study (RI/FS) of the 17

31

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

miles of the lower Passaic River. At such time, the CPG also agreed to allocate, on an interim basis, the associated costs of the RI/FS among its members on the basis of a mutually agreed upon formula. For the purpose of this interim allocation, which has been revised as parties have exited the CPG, approximately seven percent of the RI/FS costs are currently deemed attributable to PSE&G’s former MGP sites and approximately one percent is attributable to Power’s generating stations. These interim allocations are not binding on PSE&G or Power in terms of their respective shares of the costs that will be ultimately required to remediate the 17 miles of the lower Passaic River. PSEG has provided notice to insurers concerning this potential claim.
In June 2008, the EPA and Tierra Solutions, Inc. (Tierra) and Maxus Energy Corporation (Maxus) entered into an early action agreement whereby Tierra/Maxus agreed to remove a portion of the heavily dioxin-contaminated sediment located in the lower Passaic River. The portion of the Passaic River identified in this agreement was located immediately adjacent to Tierra/Maxus’ predecessor company’s (Diamond Shamrock) facility. Pursuant to the agreement between the EPA and Tierra/Maxus, the estimated cost for the work to remove the sediment in this location was $80 million. Phase I of the removal work has been completed. Pursuant to this agreement, Tierra/Maxus have reserved their rights to seek contribution for these removal costs from the other PRPs, including Power and PSE&G.
In 2012, Tierra/Maxus withdrew from the CPG and refused to participate as members going forward, other than with respect to their obligation to fund the EPA’s portion of its RI/FS oversight costs. At such time, the remaining members of the CPG, in agreement with the EPA, commenced the removal of certain contaminated sediments at Passaic River Mile 10.9 at an estimated cost of $25 million to $30 million. Construction is complete. The CPG is awaiting EPA approval of the construction report, long-term monitoring plan and confirmatory sampling plan. PSE&G’s and Power’s combined share of the cost of that effort is approximately three percent. The remaining CPG members have reserved their rights to seek reimbursement from Tierra/Maxus for the costs of the River Mile 10.9 removal.
On April 11, 2014, the EPA released its revised draft “Focused Feasibility Study” (FFS) which contemplated the removal of 4.3 million cubic yards of sediment from the bottom of the lower eight miles of the 17-mile stretch of the Passaic River. The revised draft FFS set forth various alternatives for remediating this portion of the Passaic River.
The CPG, which consisted of 52 members as of September 30, 2016, provided a draft RI and draft FS, both relating to the entire 17 miles of the lower Passaic River, to the EPA on February 18, 2015 and April 30, 2015, respectively. The estimated total cost for the preparation of the RI/FS is approximately $167 million, which the CPG continues to incur. Of the estimated $167 million, as of September 30, 2016, the CPG had spent approximately $156 million, of which PSE&G’s and Power’s combined share was approximately $10 million.
The CPG’s draft FS set forth various alternatives for remediating the lower Passaic River. It set forth the CPG’s estimated costs to remediate the lower 17 miles of the Passaic River which range from approximately $518 million to $3.2 billion on an undiscounted basis. The CPG identified a targeted remedy in the draft FS which would involve removal, treatment and disposal of contaminated sediments taken from targeted locations within the entire 17 miles of the lower Passaic River. The estimated cost in the draft FS for the targeted remedy ranged from approximately $518 million to $772 million. Based on (i) the low end of the range of the current estimates of costs to remediate, (ii) PSE&G’s and Power’s estimated share of those costs, and (iii) the continued ability of PSE&G to recover such costs in its rates, PSE&G accrued a $10 million Environmental Costs Liability and a corresponding Regulatory Asset and Power accrued a $3 million Other Noncurrent Liability and a corresponding O&M Expense in the first quarter of 2015.
In March 2016, the EPA released its Record of Decision (ROD) for the FFS which requires the removal of 3.5 million cubic yards of sediment from the Passaic River’s lower 8.3 miles at an estimated cost of $2.3 billion on an undiscounted basis (ROD Remedy). The ROD Remedy requires a bank-to-bank dredge ranging from approximately 5 to 30 feet deep in the federal navigation channel from River Mile 0 to River Mile 1.7 and an approximately 2.5 foot deep dredge everywhere else in the lower 8.3 miles of the river. An engineered cap approximately two feet thick will be placed over the dredged areas. Dredged sediments will be transported to facilities and landfills out-of-state. The EPA estimates the total project length to be about 11 years, including a one year period of negotiation with the PRPs, three to four years to design the project and six years for implementation.
Based upon the estimated cost of the ROD Remedy, PSEG’s estimate of PSE&G’s and Power’s shares of that cost, and the continued ability of PSE&G to recover such costs in its rates, PSE&G accrued an additional $36 million Environmental Costs Liability and a corresponding Regulatory Asset and Power accrued an additional $8 million Other Noncurrent Liability and a corresponding O&M Expense in the first quarter of 2016. As of September 30, 2016, these accruals bring the total liability to approximately $57 million, $46 million applicable to PSE&G and $11 million applicable to Power.
Also in March 2016, the EPA sent a notice letter to 105 PRPs, including PSE&G, all other past and present members of the CPG, including Occidental Chemical Corporation (OCC), and the towns of Newark, Kearny and Harrison and the Passaic Valley Sewerage Commission stating that the EPA wants to determine whether OCC, a successor company to Diamond

32

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Shamrock, would voluntarily perform the remedial design for the ROD Remedy. On September 30, 2016, OCC and the EPA executed an Administrative Settlement Agreement and Order on Consent for Remedial Design under which OCC agreed to conduct the remedial design for the ROD. With OCC’s commitment to perform the remedial design, it is anticipated that the EPA will begin negotiation of a remedial action consent decree, under which OCC and the other “major PRPs” will implement and/or pay for the EPA’s ROD Remedy for the lower 8.3 miles. The EPA has not defined “major PRP.”
On June 16, 2016, Tierra and Maxus, successors to Diamond Shamrock, filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Although PSEG does not currently anticipate that the filing for bankruptcy by Tierra and Maxus will affect its allocable share or total liability for the Passaic River matter, PSEG, through the CPG and independently, will monitor the bankruptcy proceedings to identify any potential impact on PSEG’s share of the costs.
The EPA has broad authority to implement its selected remedy through the ROD and PSEG cannot at this time predict how the implementation of the ROD might impact PSE&G’s and Power’s ultimate liability. Until (i) the RI/FS, which covers the entire 17 miles of the lower Passaic River, is finalized either in whole or in part, (ii) an agreement by the PRPs to perform either the ROD Remedy as issued, or an amended ROD Remedy determined through negotiation or litigation, and an agreed upon remedy for the remaining 8.7 miles of the river, are reached, (iii) PSE&G’s and Power’s respective shares of the costs, both in the aggregate as well as individually, are determined, and (iv) PSE&G’s continued ability to recover the costs in its rates is determined, it is not possible to predict this matter’s ultimate impact on PSEG’s financial statements. It is possible that PSE&G and Power will record additional costs beyond what they have accrued, and that such costs could be material, but PSEG cannot at the current time estimate the amount or range of any additional costs. 
Natural Resource Damage Claims
In 2003, the New Jersey Department of Environmental Protection (NJDEP) directed PSEG, PSE&G and 56 other PRPs to arrange for a natural resource damage assessment and interim compensatory restoration of natural resource injuries along the lower Passaic River and its tributaries pursuant to the New Jersey Spill Compensation and Control Act. The NJDEP alleged that hazardous substances had been discharged from the Essex Site and the Harrison Site. The NJDEP estimated the cost of interim natural resource injury restoration activities along the lower Passaic River at approximately $950 million. In 2007, agencies of the U.S. Department of Commerce and the U.S. Department of the Interior (the Passaic River federal trustees) sent letters to PSE&G and other PRPs inviting participation in an assessment of injuries to natural resources that the agencies intended to perform. In 2008, PSEG and a number of other PRPs agreed to share certain immaterial costs the trustees have incurred and will incur going forward, and to work with the trustees to explore whether some or all of the trustees’ claims can be resolved in a cooperative fashion. That effort is continuing. PSE&G and Power are unable to estimate their respective portions of the possible loss or range of loss related to this matter.                        
Newark Bay Study Area
The EPA has established the Newark Bay Study Area, which it defines as Newark Bay and portions of the Hackensack River, the Arthur Kill and the Kill Van Kull. In August 2006, the EPA sent PSEG and 11 other entities notices that it considered each of the entities to be a PRP with respect to contamination in the Study Area. The notice letter requested that the PRPs fund an EPA-approved study in the Newark Bay Study Area. The notice stated the EPA’s belief that hazardous substances were released from sites owned by PSEG companies and located on the Hackensack River, including two operating electric generating stations (Hudson and Kearny sites) and one former MGP site. PSEG has participated in and partially funded the second phase of this study. Notices to fund the next phase of the study have been received but PSEG has not consented to fund the third phase. PSE&G and Power are unable to estimate their respective portions of the possible loss or range of loss related to this matter.
MGP Remediation Program
PSE&G is working with the NJDEP to assess, investigate and remediate environmental conditions at its former MGP sites. To date, 38 sites requiring some level of remedial action have been identified. Based on its current studies, PSE&G has determined that the estimated cost to remediate all MGP sites to completion could range between $424 million and $481 million through 2021, including its $46 million share for the Passaic River accrued as of September 30, 2016, as discussed above. Since no amount within the range is considered to be most likely, PSE&G has recorded a liability of $424 million as of September 30, 2016. Of this amount, $70 million was recorded in Other Current Liabilities and $354 million was reflected as Environmental Costs in Noncurrent Liabilities. PSE&G has recorded a $424 million Regulatory Asset with respect to these costs. PSE&G periodically updates its studies taking into account any new regulations or new information which could impact future remediation costs and adjusts its recorded liability accordingly. NJDEP, PSEG and EPA representatives have had discussions regarding whether sampling in the Passaic River is required to delineate coal tar from MGP sites that abut the Passaic River Superfund site. PSEG cannot determine at this time whether this will have an impact on the Passaic River Superfund remedy. 

33

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Prevention of Significant Deterioration (PSD)/New Source Review (NSR)
The PSD/NSR regulations, promulgated under the Clean Air Act (CAA), require major sources of certain air pollutants to obtain permits, install pollution control technology and obtain offsets, in some circumstances, when those sources undergo a “major modification,” as defined in the regulations. The federal government may order companies that are not in compliance with the PSD/NSR regulations to install the best available control technology at the affected plants and to pay monetary penalties ranging from $25,000 to $37,500 per day for each violation, depending upon when the alleged violation occurred.
In 2009, the EPA issued a notice of violation to Power and the other owners of the Keystone coal-fired plant in Pennsylvania, alleging, among other things, that various capital improvement projects were completed at the plant which are considered modifications (or major modifications) causing significant net emission increases of PSD/NSR air pollutants, beginning in 1985 for Keystone Unit 1 and in 1984 for Keystone Unit 2. The notice of violation states that none of these modifications underwent the PSD/NSR permitting process prior to being put into service, which the EPA alleges was required under the CAA. The notice of violation states that the EPA may issue an order requiring compliance with the relevant CAA provisions and may seek injunctive relief and/or civil penalties. Power owns approximately 23% of the plant. Power cannot predict the outcome of this matter.
Clean Water Act Permit Renewals
Pursuant to the Federal Water Pollution Control Act (FWPCA), National Pollutant Discharge Elimination System permits expire within five years of their effective date. In order to renew these permits, but allow a plant to continue to operate, an owner or operator must file a permit application no later than six months prior to expiration of the permit. States with delegated federal authority for this program manage these permits. The NJDEP manages the permits under the New Jersey Pollutant Discharge Elimination System (NJPDES) program. Connecticut and New York also have permits to manage their respective pollutant discharge elimination system programs.
On May 19, 2014, the EPA issued a final rule that establishes new requirements for the regulation of cooling water intake structures at existing power plants and industrial facilities with a design flow of more than two million gallons of water per day. On August 15, 2014, the EPA established October 14, 2014 as the effective date for each state to implement the provisions of the rule going forward when considering the renewal of permits for existing facilities on a case by case basis. On September 5, 2014, several environmental non-governmental groups and certain energy industry groups filed motions to litigate the provisions of the rule. This case is pending at the U.S. Second Circuit Court of Appeals. In two related actions on October 17, 2014 and November 20, 2014, several environmental non-governmental groups initiated challenges to the endangered species act provisions of the 316 (b) rule. Power is unable to determine the ultimate impact of these actions on the implementation of the rule.
On June 10, 2016, the NJDEP issued a final NJPDES permit for Salem with an effective date of August 1, 2016. The final permit does not require installation of cooling towers and allows Salem to continue to operate utilizing the existing once-through cooling water system. The final permit does not mandate specific service water system modifications, but consistent with Section 316 (b) of the Clean Water Act, it requires additional studies and the selection of technology to address impingement for the service water system. On July 8, 2016, the Delaware Riverkeeper Network (Riverkeeper) filed a request challenging the NJDEP’s issuance of the final permit for Salem. The Riverkeeper’s filing does not change the effective date of the permit. If the Riverkeeper’s challenge were successful, Power may be required to incur additional costs to comply with the Clean Water Act. Such service water system modification costs could be material and could adversely impact the economic competitiveness of this facility.
State permitting decisions at Bridgeport and possibly New Haven could also have a material impact on Power’s ability to renew permits at its existing larger once-through cooled plants without making significant upgrades to existing intake structures and cooling systems.
Power is unable to predict the outcome of these permitting decisions and the effect, if any, that they may have on Power’s future capital requirements, financial condition or results of operations.
Power is actively engaged with the Connecticut Department of Energy and Environmental Protection (CTDEEP) regarding renewal of the current permit for the cooling water intake structure at Bridgeport Harbor Station Unit 3 (BH3). To address compliance with the EPA’s Clean Water Act Section 316(b) final rule, the current proposal under consideration is that, if a final permit is issued, Power would continue to operate BH3 without making the capital expenditures for modification to the existing intake structure and retire BH3 in 2021, which is four years earlier than the current estimated useful life ending in 2025. Based on current discussions with the CTDEEP, if the proposal is accepted, a final permit could be issued in late 2016.
Separately, Power has also negotiated a Community Environmental Benefit Agreement (CEBA) with the City of Bridgeport, Connecticut. That CEBA provides that Power would retire BH3 early if all its precedent conditions occur, which include receipt

34

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

of all final permits to build and operate a proposed new combined cycle generating facility on the same site that BH3 currently operates. The receipt of permits to allow construction and operation of the new facility could occur in 2017. Absent those conditions being met, and the permit for the cooling water intake structure referred to above not being issued, Power will seek to operate BH3 through the current estimated useful life.
In February 2016, the proposed new generating facility at Bridgeport Harbor was awarded a capacity obligation. Operations are expected to begin in mid-2019.
Bridgeport Harbor National Pollutant Discharge Elimination System (NPDES) Permit Compliance
In April 2015, Power determined that monitoring and reporting practices related to certain permitted wastewater discharges at its Bridgeport Harbor station may have violated conditions of the station’s NPDES permit and applicable regulations and could subject it to fines and penalties. Power has notified the CTDEEP of the issues and has taken actions to investigate and resolve the potential non-compliance. Power cannot predict the impact of this matter.
Jersey City, New Jersey Subsurface Feeder Cable Matter
In early October 2016, a discharge of mineral oil dielectric fluid from subsurface feeder cables located in the Hudson River near Jersey City, New Jersey, was identified and reported to the New Jersey Department of Environmental Protection (NJDEP). The feeder cables are located within a subsurface easement granted to PSE&G by the property owners, Newport Associates Development Company (NADC) and Newport Associates Phase I Developer Limited Partnership. The feeder cables are subject to agreements between PSE&G and Consolidated Edison Company of New York, Inc. (Con Edison) and are jointly owned by PSE&G and Con Edison, with PSE&G owning the portion of the cables located in New Jersey and Con Edison owning the portion of the cables located in New York. The NJDEP has declared an emergency and an emergency response action has been undertaken to investigate, contain, remediate and stop the fluid discharge; to assess, repair and restore the cables to good working order; and to restore the property. The U.S. Coast Guard has issued Notices of Federal Interest for an Oil Pollution Incident, to the property owners, PSE&G and Con Edison, and the NJDEP has issued a Field Directive to both PSE&G and Con Edison. The investigation and response actions related to the fluid discharge are ongoing. The investigation of the discharge and its potential cause is in the preliminary stages, making it difficult to determine the timing and potential costs to resolve this matter, as well as responsibility for such costs between PSE&G, Con Edison and NADC; however, based on currently available information and the potential scope of the necessary repair and remediation work, the costs could be material.   
Steam Electric Effluent Guidelines
On September 30, 2015, the EPA issued a new Effluent Guidelines Limitation Rule for steam electric generating units. The rule establishes new best available technology economically achievable (BAT) standards for fly ash transport water, bottom ash transport water, flue gas desulfurization and flue gas mercury control wastewater. The EPA provides an implementation period for currently existing discharges of three years or up to eight years if a facility needs more time to implement equipment upgrades and provide supporting information to its permitting authority. In the intervening time period, existing discharge standards continue to apply. Power’s Bridgeport Harbor station and the jointly-owned Keystone and Conemaugh stations, have bottom ash transport water discharges that are regulated under this rule. Power is unable to predict if this rule will have a material impact on its future capital requirements, financial condition and results of operations.
Coal Combustion Residuals (CCRs)
On December 19, 2014, the EPA issued a final rule which regulates CCRs as non-hazardous and requires that facility owners implement a series of actions to close or upgrade existing CCR surface impoundments and/or landfills. It also establishes new provisions for the construction of new surface impoundments and landfills. Power’s Hudson and Mercer generating stations, along with its co-owned Keystone and Conemaugh stations, are subject to the provisions of this rule. On April 17, 2015, the final rule was published with an effective date of October 19, 2015. Accordingly in June 2015, Power recorded an additional asset retirement obligation to comply with the final CCR rule which was not material to Power’s results of operations, financial condition or cash flows.
Basic Generation Service (BGS) and Basic Gas Supply Service (BGSS)
PSE&G obtains its electric supply requirements through the annual New Jersey BGS auctions for two categories of customers who choose not to purchase electric supply from third party suppliers. The first category, which represents about 80% of PSE&G’s load requirement, is residential and smaller commercial and industrial customers (BGS-Residential Small Commercial Pricing (RSCP)). The second category is larger customers that exceed a BPU-established load (kW) threshold (BGS-Commercial and Industrial Energy Pricing (CIEP)). Pursuant to applicable BPU rules, PSE&G enters into the Supplier Master Agreement with the winners of these BGS auctions following the BPU’s approval of the auction results. PSE&G has entered into contracts with winning BGS suppliers, including Power, to purchase BGS for PSE&G’s load requirements. The winners of the auction (including Power) are responsible for fulfilling all the requirements of a PJM Load Serving Entity

35

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

including the provision of capacity, energy, ancillary services, transmission and any other services required by PJM. BGS suppliers assume all volume risk and customer migration risk and must satisfy New Jersey’s renewable portfolio standards.
The BGS-CIEP auction is for a one-year supply period from June 1 to May 31 with the BGS-CIEP auction price measured in dollars per MW-day for capacity. The final price for the BGS-CIEP auction year commencing June 1, 2016 is $335.33 per MW-day, replacing the BGS-CIEP auction year price ending May 31, 2016 of $272.78 per MW-day. Energy for BGS-CIEP is priced at hourly PJM locational marginal prices for the contract period.
PSE&G contracts for its anticipated BGS-RSCP load on a three-year rolling basis, whereby each year one-third of the load is procured for a three-year period. The contract prices in dollars per MWh for the BGS-RSCP supply, as well as the approximate load, are as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction Year
 
 
 
 
2013
 
2014
 
2015
 
2016
 
 
 
36-Month Terms Ending
May 2016

 
May 2017

 
May 2018

 
May 2019

(A) 
 
 
Load (MW)
2,800

 
2,800

 
2,900

 
2,800

  
 
 
$ per MWh
$92.18
 
$97.39
 
$99.54
 
$96.38
  
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Prices set in the 2016 BGS auction year became effective on June 1, 2016 when the 2013 BGS auction agreements expired.
Power seeks to mitigate volatility in its results by contracting in advance for the sale of most of its anticipated electric output as well as its anticipated fuel needs. As part of its objective, Power has entered into contracts to directly supply PSE&G and other New Jersey electric distribution companies (EDCs) with a portion of their respective BGS requirements through the New Jersey BGS auction process, described above.
PSE&G has a full-requirements contract with Power to meet the gas supply requirements of PSE&G’s gas customers. Power has entered into hedges for a portion of these anticipated BGSS obligations, as permitted by the BPU. The BPU permits PSE&G to recover the cost of gas hedging up to 115 billion cubic feet or 80% of its residential gas supply annual requirements through the BGSS tariff. Current plans call for Power to hedge on behalf of PSE&G approximately 70 billion cubic feet or 50% of its residential gas supply annual requirements. For additional information, see Note 18. Related-Party Transactions.
Minimum Fuel Purchase Requirements
Power’s nuclear fuel strategy is to maintain certain levels of uranium and to make periodic purchases to support such levels. As such, the commitments referred to in the following table may include estimated quantities to be purchased that deviate from contractual nominal quantities. Power’s nuclear fuel commitments cover approximately 100% of its estimated uranium, enrichment and fabrication requirements through 2017 and a significant portion through 2020 at Salem, Hope Creek and Peach Bottom.
Power has various multi-year contracts for natural gas and firm transportation and storage capacity for natural gas that are primarily used to meet its obligations to PSE&G. When there is excess delivery capacity available beyond the needs of PSE&G’s customers, Power can use the gas to supply its fossil generating stations.
Power also has various long-term fuel purchase commitments for coal through 2018 to support its fossil generation stations.
As of September 30, 2016, the total minimum purchase requirements included in these commitments were as follows:
 
 
 
 
 
 
Fuel Type
 
Power's Share of Commitments through 2020
 
 
 
 
Millions
 
 
Nuclear Fuel
 
 
 
 
Uranium
 
$
338

 
 
Enrichment
 
$
307

 
 
Fabrication
 
$
179

 
 
Natural Gas
 
$
904

 
 
Coal
 
$
235

 
 
 
 
 
 

36

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Regulatory Proceedings
FERC Compliance
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. Upon discovery of the errors, PSEG retained outside counsel to assist in the conduct of an investigation into the matter and self-reported the errors. As the internal investigation proceeded, additional pricing errors in the bids were identified. 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. PSEG informed FERC, PJM and the PJM Independent Market Monitor (IMM) of these additional issues, corrected the identified errors, and modified the bid quantities for Power’s peaking units. Power continues to implement procedures to help mitigate the risk of similar issues occurring in the future.
During the three month period ended March 31, 2014, based upon its best estimate available at the time, Power recorded a charge to income in the amount of $25 million related to this matter. No additional charges to income have been recorded for this matter since that time.
Since September 2014, FERC Staff has been conducting a preliminary, non-public staff investigation into the matter and issued data requests covering a period from 2002 through the date of the self-report. This investigation is ongoing. Since that time, Power has responded to data requests from FERC Staff, including recent data requests in which Power has recalculated certain of its energy bids in PJM for a five year period, and may receive additional data requests or other fact finding. The FERC Staff investigation is still in the fact finding stage and there is considerable uncertainty around FERC’s response to PSEG’s legal arguments and the amount of disgorgement or other remedies FERC may ultimately seek.
PSEG is unable to reasonably estimate the range of possible loss for this matter; however, the amounts of potential disgorgement and other potential penalties that Power may incur span a wide range depending on the success of PSEG’s legal arguments. These arguments include that Power’s energy market bids in a substantial majority of the hours were below the allowed rate under the Tariff and therefore any errors in those hours were immaterial and that it is unclear whether the quantity of the bids violated any legal requirement. If PSEG’s legal arguments do not prevail in whole or in part with FERC or in a judicial challenge that PSEG may choose to pursue, it is likely that Power would record additional losses and that such additional losses would be material to PSEG’s and Power’s Consolidated Statements of Operations in the quarterly and annual periods in which they are recorded.
Nuclear Insurance Coverages
The following should be read in conjunction with Note 12. Commitments and Contingent Liabilities to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2015.
Based upon a review of its nuclear insurance, Power made changes to its Nuclear Electric Insurance Limited (NEIL) insurance coverage of the excess layer for property damage which became effective on April 1, 2016. The excess layer provides coverage above the primary layer of NEIL insurance coverage for property damage of $1.5 billion. For the excess layer at the Salem/Hope Creek site, Power purchased coverage for property damage of $300 million due to a nuclear event and $300 million due to a non-nuclear event. For the excess layer at the Peach Bottom site, Power purchased coverage for its ownership interest for property damage of $300 million due to a nuclear event. For the excess layer at the Peach Bottom site, Exelon purchased coverage for property damage of $600 million due to a non-nuclear event which covers the ownership interest of Power. 

Note 10. Debt and Credit Facilities
Long-Term Debt Financing Transactions
The following long-term debt transactions occurred in the nine months ended September 30, 2016:
PSE&G
issued $300 million of 1.90% Secured Medium-Term Notes, Series K due March 2021,
issued $550 million of 3.80% Secured Medium-Term Notes, Series K due March 2046,
issued $425 million of 2.25% Secured Medium-Term Notes, Series L due September 2026,
retired $171 million of 6.75% Secured First and Refunding Mortgage Bonds, Series VV at maturity, and

37

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

repurchased at par $100 million of Pollution Control Financing Authority of Salem County Bonds (Salem Bonds) and retired a like aggregate principal amount of its First and Refunding Mortgage Bonds which serviced and secured the Salem Bonds.
Power
issued $700 million of 3.00% Senior Notes due June 2021,
retired $303 million of 5.32% Senior Notes due September 2016 and
retired $250 million of 2.75% Senior Notes due September 2016.

Short-Term Liquidity
PSEG meets its short-term liquidity requirements, as well as those of Power, primarily with cash and through the issuance of commercial paper. PSE&G maintains its own separate commercial paper program to meet its short-term liquidity requirements. Each commercial paper program is fully back-stopped by its own separate credit facilities.
The commitments under PSEG’s $4.2 billion credit facilities are provided by a diverse bank group with no single institution representing more than 7% of the total commitments in PSEG’s credit facilities. As of September 30, 2016, PSEG’s total available credit capacity of $3.7 billion was in excess of its anticipated maximum liquidity requirements.
Each of PSEG’s credit facilities is restricted as to availability and use to the specific companies as listed in the following table; however, if necessary, the PSEG facilities can also be used to support its subsidiaries’ liquidity needs. PSEG’s total credit facilities and available liquidity as of September 30, 2016 were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016
 
 
 
 
 
 
Company/Facility
 
Total
Facility
 
Usage (D)
 
Available
Liquidity
 
Expiration
Date
 
Primary Purpose
 
 
 
 
Millions
 
 
 
 
 
 
PSEG
 
 
 
 
 
 
 
 
 
 
 
 
  5-year Credit Facility
 
$
500

 
$
10

 
$
490

 
Apr 2019
 
Commercial Paper (CP) Support/Funding/Letters of Credit
 
 
  5-year Credit Facility (A)
 
500

 
255

 
245

 
Apr 2020
 
CP Support/Funding/Letters of Credit
 
 
Total PSEG
 
$
1,000

 
$
265

 
$
735

 
 
 
 
 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 5-year Credit Facility (B)
 
$
600

 
$
14

 
$
586

 
Apr 2020
 
CP Support/Funding/Letters of Credit
 
 
Total PSE&G
 
$
600

 
$
14

 
$
586

 
 
 
 
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
  5-year Credit Facility
 
$
1,600

 
$
194

 
$
1,406

 
Apr 2019
 
Funding/Letters of Credit
 
 
  5-year Credit Facility (C)
 
953

 
11

 
942

 
Apr 2020
 
Funding/Letters of Credit
 
 
Total Power
 
$
2,553

 
$
205

 
$
2,348

 
 
 
 
 
 
Total
 
$
4,153

 
$
484

 
$
3,669

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
PSEG facility will be reduced by $12 million in March 2018.
(B)
PSE&G facility will be reduced by $14 million in March 2018.
(C)
Power facility will be reduced by $24 million in March 2018.
(D)
The primary use of PSEG’s and PSE&G’s credit facilities is to support their respective CP Programs. As of September 30, 2016, PSEG had $255 million outstanding under its CP Program at a weighted average interest rate of 0.79%. As of September 30, 2016, PSE&G had no amounts outstanding under its CP Program.


38

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Note 11. Financial Risk Management Activities
The operations of PSEG, Power and PSE&G are exposed to market risks from changes in commodity prices, interest rates and equity prices that could affect their results of operations and financial condition. Exposure to these risks is managed through normal operating and financing activities and, when appropriate, through hedging transactions. Hedging transactions use derivative instruments to create a relationship in which changes to the value of the assets, liabilities or anticipated transactions exposed to market risks are expected to be offset by changes in the value of these derivative instruments.
Derivative accounting guidance requires that a derivative instrument be recognized as either an asset or a liability at fair value, with changes in fair value of the derivative recognized in earnings each period. Other accounting treatments are available through special election and designation provided that the derivative instrument meets specific, restrictive criteria, both at the time of designation and on an ongoing basis. These alternative permissible treatments include normal purchase normal sale (NPNS), cash flow hedge and fair value hedge accounting. PSEG, Power and PSE&G have applied the NPNS scope exception to certain derivative contracts for the forward sale of generation, power procurement agreements and fuel agreements. Transactions receiving NPNS treatment are accounted for upon settlement. For a derivative instrument that qualifies and is designated as a cash flow hedge, the changes in the fair value of such a derivative that are highly effective are recorded in Accumulated Other Comprehensive Income (Loss) until earnings are affected by the variability of cash flows of the hedged transaction. For a derivative instrument that qualifies and is designated as a fair value hedge, the gains or losses on the derivative as well as the offsetting losses or gains on the hedged item attributable to the hedged risk are recognized in earnings each period. Power and PSE&G enter into additional contracts that are derivatives, but are not designated as either cash flow hedges or fair value hedges. These transactions are economic hedges and are recorded at fair market value.
Commodity Prices
Within PSEG and its affiliate companies, Power has the most exposure to commodity price risk. Power is exposed to price risk primarily relating to changes in the market price of electricity, fossil fuels and other commodities. Fluctuations in market prices result from changes in supply and demand, fuel costs, market conditions, weather, state and federal regulatory policies, environmental policies, transmission availability and other factors. Power uses a variety of derivative and non-derivative instruments to manage the commodity price risk of its electric generation facilities, including physical and financial transactions in the wholesale energy markets to mitigate the effects of adverse movements in fuel and electricity prices. The fair value for the majority of these contracts is obtained from quoted market sources. Modeling techniques using assumptions reflective of current market rates, yield curves and forward prices are used to interpolate certain prices when no quoted market exists. PSEG had no commodity derivative transactions designated as cash flow or fair value hedges as of September 30, 2016 and December 31, 2015.
Economic Hedges
Power enters into derivative contracts that are not designated as either cash flow or fair value hedges. Power enters into financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. These transactions are economic hedges, intended to mitigate exposure to fluctuations in commodity prices and optimize the value of Power’s expected generation. Changes in the fair market value of these contracts are recorded in earnings. PSE&G is a party to a long-term natural gas sales derivative contract to optimize its pipeline capacity utilization. Changes in the fair market value of the contract are recorded in Regulatory Assets and Regulatory Liabilities.
Interest Rates
PSEG, Power and PSE&G are subject to the risk of fluctuating interest rates in the normal course of business. Exposure to this risk is managed by targeting a balanced debt maturity profile which limits refinancing in any given period or interest rate environment. In addition, they have used a mix of fixed and floating rate debt and interest rate swaps.
Fair Value Hedges
PSEG enters into fair value hedges to convert fixed-rate debt into variable-rate debt. The changes in fair value of the interest rate swaps are fully offset by the changes in the fair value of the underlying forecasted interest payments of the debt. Interest rate swaps totaling $550 million that converted the retired Power’s Senior Notes due September 2016 into variable-rate debt matured in the third quarter. There were no outstanding interest rate swaps as of September 30, 2016. As of December 31, 2015, the fair value of all the underlying hedges was $6 million. The effect of these hedges reduced interest expense by $2 million and $5 million for the three months ended September 30, 2016 and 2015, respectively, and $6 million and $15 million for the nine months ended September 30, 2016 and 2015, respectively.

39

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Cash Flow Hedges
PSEG uses interest rate swaps and other derivatives, which are designated and effective as cash flow hedges, to manage its exposure to the variability of cash flows, primarily related to variable-rate debt instruments. As of September 30, 2016, PSEG had interest rate hedges outstanding totaling $500 million. These hedges convert PSEG’s $500 million variable rate term loan due November 2017 into a fixed rate loan. The fair value of these hedges and the related ineffectiveness were immaterial as of September 30, 2016. PSEG interest rate hedges totaling $400 million were terminated during the second quarter and a gain of $2 million was recorded in Accumulated Other Comprehensive Income (Loss) (after tax) and will amortize to interest expense over the remaining life of Power’s $700 million of 3% Senior Notes due June 2021. For additional information see Note 10. Debt and Credit Facilities. There were no outstanding interest rate cash flow hedges as of December 31, 2015. The Accumulated Other Comprehensive Income (Loss) (after tax) related to existing and terminated interest rate derivatives designated as cash flow hedges was $2 million as of September 30, 2016 and was immaterial as of December 31, 2015. The after-tax unrealized gains on these hedges expected to be reclassified to earnings during the next 12 months are immaterial. The expiration date of the longest-dated interest rate hedge is in May 2021.
Fair Values of Derivative Instruments
The following are the fair values of derivative instruments on the Condensed Consolidated Balance Sheets. The following tables also include disclosures for offsetting derivative assets and liabilities which are subject to a master netting or similar agreement. In general, the terms of the agreements provide that in the event of an early termination the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. Accordingly, and in accordance with PSEG’s accounting policy, these positions have been offset on the Condensed Consolidated Balance Sheets of Power, PSE&G and PSEG. The following tabular disclosure does not include the offsetting of trade receivables and payables.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016 (A)
 
 
 
 
Power
 
PSE&G
 
PSEG
 
Consolidated
 
 
 
 
Not Designated
 
 
 
 
 
Not Designated
 
Designated as Hedges
 
 
 
 
Balance Sheet Location
 
Energy-
Related
Contracts
 
Netting
(B)
 
Total
Power
 
Energy-
Related
Contracts
 
Interest
Rate
Swaps
 
Total
Derivatives
 
 
 
 
Millions
 
 
Derivative Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets
 
$
432

 
$
(283
)
 
$
149

 
$

 
$

 
$
149

 
 
Noncurrent Assets
 
305

 
(219
)
 
86

 

 

 
86

 
 
Total Mark-to-Market Derivative Assets
 
$
737

 
$
(502
)
 
$
235

 
$

 
$

 
$
235

 
 
Derivative Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
$
(314
)
 
$
278

 
$
(36
)
 
$
(4
)
 
$

 
$
(40
)
 
 
Noncurrent Liabilities
 
(219
)
 
206

 
(13
)
 

 

 
(13
)
 
 
Total Mark-to-Market Derivative (Liabilities)
 
$
(533
)
 
$
484

 
$
(49
)
 
$
(4
)
 
$

 
$
(53
)
 
 
Total Net Mark-to-Market Derivative Assets (Liabilities)
 
$
204

 
$
(18
)
 
$
186

 
$
(4
)
 
$

 
$
182

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

40

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015 (A)
 
 
 
 
Power
 
PSE&G
 
PSEG
 
Consolidated
 
 
 
 
Not Designated
 
 
 
 
 
Not Designated
 
Designated as Hedges
 
 
 
 
Balance Sheet Location
 
Energy-
Related
Contracts
 
Netting
(B)
 
Total
Power
 
Energy-
Related
Contracts
 
Interest
Rate
Swaps
 
Total
Derivatives
 
 
 
 
Millions
 
 
Derivative Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets
 
$
700

 
$
(477
)
 
$
223

 
$
13

 
$
6

 
$
242

 
 
Noncurrent Assets
 
208

 
(131
)
 
77

 

 

 
77

 
 
Total Mark-to-Market Derivative Assets
 
$
908

 
$
(608
)
 
$
300

 
$
13

 
$
6

 
$
319

 
 
Derivative Contracts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
$
(513
)
 
$
437

 
$
(76
)
 
$

 
$

 
$
(76
)
 
 
Noncurrent Liabilities
 
(132
)
 
116

 
(16
)
 
(11
)
 

 
(27
)
 
 
Total Mark-to-Market Derivative (Liabilities)
 
$
(645
)
 
$
553

 
$
(92
)
 
$
(11
)
 
$

 
$
(103
)
 
 
Total Net Mark-to-Market Derivative Assets (Liabilities)
 
$
263

 
$
(55
)
 
$
208

 
$
2

 
$
6

 
$
216

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Substantially all of Power’s and PSEG’s derivative instruments are contracts subject to master netting agreements. Contracts not subject to master netting or similar agreements are immaterial and did not have any collateral posted or received as of September 30, 2016 and December 31, 2015. PSE&G does not have any derivative contracts subject to master netting or similar agreements.
(B)
Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. All cash collateral received or posted that has been allocated to derivative positions, where the right of offset exists, has been offset on the Condensed Consolidated Balance Sheets. As of September 30, 2016 and December 31, 2015, net cash collateral (received) paid of $(18) million and $(55) million, respectively, were netted against the corresponding net derivative contract positions. Of the $(18) million as of September 30, 2016, $(13) million and $(14) million of cash collateral were netted against current assets and noncurrent assets, respectively, and $9 million was netted against current liabilities. Of the $(55) million as of December 31, 2015, $(53) million and $(16) million were netted against current assets and noncurrent assets, respectively, and $12 million and $2 million were netted against current liabilities and noncurrent liabilities, respectively.
Certain of Power’s derivative instruments contain provisions that require Power to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon Power’s credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. These credit risk-related contingent features stipulate that if Power were to be downgraded to a below investment grade rating, it would be required to provide additional collateral. A below investment grade credit rating for Power would represent a three level downgrade from its current S&P and Moody’s ratings. This incremental collateral requirement can offset collateral requirements related to other derivative instruments that are assets with the same counterparty, where the contractual right of offset exists under applicable master agreements. Power also enters into commodity transactions on the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE). The NYMEX and ICE clearing houses act as counterparties to each trade. Transactions on the NYMEX and ICE must adhere to comprehensive collateral and margin requirements.
The aggregate fair value of all derivative instruments with credit risk-related contingent features in a liability position that are not fully collateralized (excluding transactions on the NYMEX and ICE that are fully collateralized, and contracts designated as NPNS) was $42 million and $78 million as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016 and December 31, 2015, Power had the contractual right of offset of $11 million and $12 million, respectively, related to derivative instruments that are assets with the same counterparty under agreements and net of margin posted. If Power had been downgraded to a below investment grade rating, it would have had additional collateral obligations of $31 million and $66 million as of September 30, 2016 and December 31, 2015, respectively, related to its derivatives, net of the contractual right of offset under master agreements and the application of collateral.

41

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended September 30, 2016 and 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives in
Cash Flow Hedging
Relationships
 
Amount of
Pre-Tax
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective
Portion)
 
Location
of Pre-Tax Gain
(Loss) Reclassified
from AOCI into
Income
 
Amount of
Pre-Tax
Gain (Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
 
Location of
Pre-Tax Gain
(Loss) Recognized in
Income on
Derivatives
(Ineffective Portion)
 
Amount of
Pre-Tax
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion)
 
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2016
 
2015
 
 
 
2016
 
2015
 
 
 
2016
 
2015
 
 
 
 
Millions
 
 
PSEG
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts
 
$

 
$
1

 
Operating Revenues
 
$

 
$

 
Operating Revenues
 
$

 
$

 
 
Interest Rate Swaps
 
1

 

 
Interest Expense
 

 

 
Interest Expense
 

 

 
 
Total PSEG
 
$
1

 
$
1

 
 
 
$

 
$

 
 
 
$

 
$

 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts
 
$

 
$
1

 
Operating Revenues
 
$

 
$

 
Operating Revenues
 
$

 
$

 
 
Total Power
 
$

 
$
1

 
 
 
$

 
$

 
 
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the nine months ended September 30, 2016 and 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives in
Cash Flow Hedging
Relationships
 
Amount of
Pre-Tax
Gain (Loss)
Recognized in
AOCI on
Derivatives
(Effective
Portion)
 
Location
of Pre-Tax Gain
(Loss) Reclassified
from AOCI into
Income
 
Amount of
Pre-Tax
Gain (Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
 
Location of
Pre-Tax Gain
(Loss) Recognized in
Income on
Derivatives
(Ineffective Portion)
 
Amount of
Pre-Tax
Gain (Loss)
Recognized in
Income on
Derivatives
(Ineffective
Portion)
 
 
 
Nine Months Ended
 
 
 
Nine Months Ended
 
 
 
Nine Months Ended
 
 
 
September 30,
 
 
 
September 30,
 
 
 
September 30,
 
 
 
2016
 
2015
 
                              
 
2016
 
2015
 
 
 
2016
 
2015
 
 
 
 
Millions
 
 
PSEG
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts
 
$

 
$
2

 
Operating Revenues
 
$

 
$
17

 
Operating Revenues
 
$

 
$

 
 
Interest Rate Swaps
 
3

 

 
Interest Expense
 

 

 
Interest Expense
 

 

 
 
Total PSEG
 
$
3

 
$
2

 
 
 
$

 
$
17

 
 
 
$

 
$

 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts
 
$

 
$
2

 
Operating Revenues
 
$

 
$
17

 
Operating Revenues
 
$

 
$

 
 
Total Power
 
$

 
$
2

 
 
 
$

 
$
17

 
 
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    

42

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

The following reconciles the Accumulated Other Comprehensive Income for derivative activity included in the Accumulated Other Comprehensive Loss of PSEG on a pre-tax and after-tax basis.
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income
 
Pre-Tax
 
After-Tax
 
 
 
 
Millions
 
 
Balance as of December 31, 2015
 
$

 
$

 
 
Gain Recognized in AOCI
 
2


1

 
 
Less: Gain Reclassified into Income
 

 

 
 
Balance as of June 30, 2016
 
$
2

 
$
1

 
 
Gain Recognized in AOCI
 
1

 
1

 
 
Less: Gain Reclassified into Income
 

 

 
 
Balance as of September 30, 2016
 
$
3

 
$
2

 
 
 
 
 
 
 
 
The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as NPNS, such as its BGS contracts and certain other energy supply contracts, for the three months and nine months ended September 30, 2016 and 2015. Power’s derivative contracts reflected in these tables include contracts to hedge the purchase and sale of electricity and natural gas, and the purchase of fuel.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedges
 
Location of Pre-Tax
Gain (Loss)
Recognized in Income
on Derivatives
 
Pre-Tax Gain (Loss) Recognized in Income on Derivatives
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
Millions
 
 
PSEG and Power
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts
 
Operating Revenues
 
$
125

 
$
154

 
$
255

 
$
202

 
 
Energy-Related Contracts
 
Energy Costs
 
(11
)
 
(4
)
 
(3
)
 
(4
)
 
 
Total PSEG and Power
 
 
 
$
114

 
$
150

 
$
252

 
$
198

 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following reflects the gross volume, on an absolute value basis, of derivatives as of September 30, 2016 and December 31, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Type
 
Notional
 
Total
 
PSEG
 
Power
 
PSE&G
 
 
 
 
 
 
Millions
 
 
As of September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Natural Gas
 
Dekatherm (Dth)
 
315

 

 
300

 
15

 
 
Electricity
 
MWh
 
349

 

 
349

 

 
 
Financial Transmission Rights (FTRs)
 
MWh
 
14

 

 
14

 

 
 
Interest Rate Swaps
 
U.S. Dollars
 
500

 
500

 

 

 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Natural Gas
 
Dth
 
201

 

 
168

 
33

 
 
Electricity
 
MWh
 
299

 

 
299

 

 
 
FTRs
 
MWh
 
23

 

 
23

 

 
 
Interest Rate Swaps
 
U.S. Dollars
 
550

 
550

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 


43

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Credit Risk
Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. We have established credit policies that we believe significantly minimize credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power’s and PSEG’s financial condition, results of operations or net cash flows.
As of September 30, 2016, 92% of the net credit exposure for Power’s operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives and non-derivatives and normal purchases/normal sales).
The following table provides information on Power’s credit risk from others, net of collateral, as of September 30, 2016. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of Power’s credit risk by credit rating of the counterparties.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rating
 
Current
Exposure
 
Securities
Held as
Collateral
 
Net
Exposure
 
Number of
Counterparties
>10%
 
Net Exposure of
Counterparties
>10%
 
 
 
 
 
Millions
 
 
 
Millions
 
 
 
Investment Grade—External Rating
 
$
384

 
$
135

 
$
249

 
2

 
$
147

(A) 
 
 
Non-Investment Grade—External Rating
 
24

 

 
24

 

 

  
 
 
Investment Grade—No External Rating
 
9

 

 
9

 

 

  
 
 
Non-Investment Grade—No External Rating
 
1

 
1

 

 

 

  
 
 
Total
 
$
418

 
$
136

 
$
282

 
2

 
$
147

  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Represents net exposure of $114 million with PSE&G. The remaining net exposure of $33 million is with a non-affiliated power purchaser which is an investment grade counterparty.
As of September 30, 2016, collateral held from counterparties where Power had credit exposure included $3 million in cash collateral and $133 million in letters of credit.
As of September 30, 2016, Power had 135 active counterparties.
PSE&G’s supplier master agreements are approved by the BPU and govern the terms of its electric supply procurement contracts. These agreements define a supplier’s performance assurance requirements and allow a supplier to meet its credit requirements with a certain amount of unsecured credit. The amount of unsecured credit is determined based on the supplier’s credit ratings from the major credit rating agencies and the supplier’s tangible net worth. The credit position is based on the initial market price, which is the forward price of energy on the day the procurement transaction is executed, compared to the forward price curve for energy on the valuation day. To the extent that the forward price curve for energy exceeds the initial market price, the supplier is required to post a parental guaranty or other security instrument such as a letter of credit or cash, as collateral to the extent the credit exposure is greater than the supplier’s unsecured credit limit. As of September 30, 2016, primarily all of the posted collateral was in the form of parental guarantees. The unsecured credit used by the suppliers represents PSE&G’s net credit exposure. PSE&G’s suppliers’ credit exposure is calculated each business day. As of September 30, 2016, PSE&G had no net credit exposure with suppliers, including Power.
PSE&G is permitted to recover its costs of procuring energy through the BPU-approved BGS tariffs. PSE&G’s counterparty credit risk is mitigated by its ability to recover realized energy costs through customer rates.


44

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Note 12. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance for fair value measurement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources and those based on an entity’s own assumptions. The hierarchy prioritizes the inputs to fair value measurement into three levels:
Level 1—measurements utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that PSEG, PSE&G and Power have the ability to access. These consist primarily of listed equity securities and money market mutual funds.
Level 2—measurements include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable inputs such as interest rates and yield curves that are observable at commonly quoted intervals. These consist primarily of non-exchange traded derivatives such as forward contracts or options and most fixed income securities.
Level 3—measurements use unobservable inputs for assets or liabilities, based on the best information available and might include an entity’s own data and assumptions. In some valuations, the inputs used may fall into different levels of the hierarchy. In these cases, the financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. As of September 30, 2016, these consisted primarily of long-term gas supply contracts and certain electric load contracts.
The following tables present information about PSEG’s, PSE&G’s and Power’s respective assets and (liabilities) measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, including the fair value measurements and the levels of inputs used in determining those fair values. Amounts shown for PSEG include the amounts shown for PSE&G and Power.

45

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recurring Fair Value Measurements as of September 30, 2016
 
 
Description
 
Total
 

Netting  (E)
 
Quoted Market Prices for Identical Assets
(Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
 
 
 
Millions
 
 
PSEG
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash Equivalents (A)
 
$
357

 
$

 
$
357

 
$

 
$

 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$
235

 
$
(502
)
 
$

 
$
722

 
$
15

 
 
Interest Rate Swaps (C)
 
$

 
$

 
$

 
$

 
$

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
922

 
$

 
$
922

 
$

 
$

 
 
Debt Securities—Govt Obligations
 
$
530

 
$

 
$

 
$
530

 
$

 
 
Debt Securities—Other
 
$
360

 
$

 
$

 
$
360

 
$

 
 
Other Securities
 
$
45

 
$

 
$
45

 
$

 
$

 
 
Rabbi Trust (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities—Mutual Funds
 
$
22

 
$

 
$
22

 
$

 
$

 
 
Debt Securities—Govt Obligations
 
$
107

 
$

 
$

 
$
107

 
$

 
 
Debt Securities—Other
 
$
94

 
$

 
$

 
$
94

 
$

 
 
Other Securities
 
$
1

 
$

 
$
1

 
$

 
$

 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$
(53
)
 
$
484

 
$

 
$
(533
)
 
$
(4
)
 
 
Interest Rate Swaps (C)
 
$

 
$

 
$

 
$

 
$

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash Equivalents (A)
 
$
357

 
$

 
$
357

 
$

 
$

 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$

 
$

 
$

 
$

 
$

 
 
Rabbi Trust (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities—Mutual Funds
 
$
4

 
$

 
$
4

 
$

 
$

 
 
Debt Securities—Govt Obligations
 
$
22

 
$

 
$

 
$
22

 
$

 
 
Debt Securities—Other
 
$
18

 
$

 
$

 
$
18

 
$

 
 
Other Securities
 
$

 
$

 
$

 
$

 
$

 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$
(4
)
 
$

 
$

 
$

 
$
(4
)
 
 
Power
 

 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$
235

 
$
(502
)
 
$

 
$
722

 
$
15

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
922

 
$

 
$
922

 
$

 
$

 
 
Debt Securities—Govt Obligations
 
$
530

 
$

 
$

 
$
530

 
$

 
 
Debt Securities—Other
 
$
360

 
$

 
$

 
$
360

 
$

 
 
Other Securities
 
$
45

 
$

 
$
45

 
$

 
$

 
 
Rabbi Trust (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities—Mutual Funds
 
$
6

 
$

 
$
6

 
$

 
$

 
 
Debt Securities—Govt Obligations
 
$
26

 
$

 
$

 
$
26

 
$

 
 
Debt Securities—Other
 
$
23

 
$

 
$

 
$
23

 
$

 
 
Other Securities
 
$

 
$

 
$

 
$

 
$

 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$
(49
)
 
$
484

 
$

 
$
(533
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 

46

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recurring Fair Value Measurements as of December 31, 2015
 
 
Description
 
Total
 
Netting  (E)
 
Quoted Market Prices for Identical Assets
(Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
 
 
 
Millions
 
 
PSEG
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash Equivalents (A)
 
$
326

 
$

 
$
326

 
$

 
$

 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$
313

 
$
(608
)
 
$

 
$
896

 
$
25

 
 
Interest Rate Swaps (C)
 
$
6

 
$

 
$

 
$
6

 
$

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
865

 
$

 
$
865

 
$

 
$

 
 
Debt Securities—Govt Obligations
 
$
488

 
$

 
$

 
$
488

 
$

 
 
Debt Securities—Other
 
$
359

 
$

 
$

 
$
359

 
$

 
 
Other Securities
 
$
42

 
$

 
$
42

 
$

 
$

 
 
Rabbi Trust (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities—Mutual Funds
 
$
22

 
$

 
$
22

 
$

 
$

 
 
Debt Securities—Govt Obligations
 
$
108

 
$

 
$

 
$
108

 
$

 
 
Debt Securities—Other
 
$
81

 
$

 
$

 
$
81

 
$

 
 
Other Securities
 
$
2

 
$

 
$
2

 
$

 
$

 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$
(103
)
 
$
553

 
$

 
$
(644
)
 
$
(12
)
 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash Equivalents (A)
 
$
160

 
$

 
$
160

 
$

 
$

 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy Related Contracts (B)
 
$
13

 
$

 
$

 
$

 
$
13

 
 
Rabbi Trust (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities—Mutual Funds
 
$
5

 
$

 
$
5

 
$

 
$

 
 
Debt Securities—Govt Obligations
 
$
21

 
$

 
$

 
$
21

 
$

 
 
Debt Securities—Other
 
$
16

 
$

 
$

 
$
16

 
$

 
 
Other Securities
 
$

 
$

 
$

 
$

 
$

 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$
(11
)
 
$

 
$

 
$

 
$
(11
)
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$
300

 
$
(608
)
 
$

 
$
896

 
$
12

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
865

 
$

 
$
865

 
$

 
$

 
 
Debt Securities—Govt Obligations
 
$
488

 
$

 
$

 
$
488

 
$

 
 
Debt Securities—Other
 
$
359

 
$

 
$

 
$
359

 
$

 
 
Other Securities
 
$
42

 
$

 
$
42

 
$

 
$

 
 
Rabbi Trust (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities—Mutual Funds
 
$
5

 
$

 
$
5

 
$

 
$

 
 
Debt Securities—Govt Obligations
 
$
26

 
$

 
$

 
$
26

 
$

 
 
Debt Securities—Other
 
$
20

 
$

 
$

 
$
20

 
$

 
 
Other Securities
 
$
1

 
$

 
$
1

 
$

 
$

 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts (B)
 
$
(92
)
 
$
553

 
$

 
$
(644
)
 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Represents money market mutual funds.
(B)
Level 2—Fair values for energy-related contracts are obtained primarily using a market-based approach. Most derivative contracts (forward purchase or sale contracts and swaps) are valued using the average of the bid/ask

47

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

midpoints from multiple broker or dealer quotes or auction prices. Prices used in the valuation process are also corroborated independently by management to determine that values are based on actual transaction data or, in the absence of transactions, bid and offers for the day. Examples may include certain exchange and non-exchange traded capacity and electricity contracts and natural gas physical or swap contracts based on market prices, basis adjustments and other premiums where adjustments and premiums are not considered significant to the overall inputs.
Level 3—For energy-related contracts, which include more complex agreements where limited observable inputs or pricing information are available, modeling techniques are employed using assumptions reflective of contractual terms, current market rates, forward price curves, discount rates and risk factors, as applicable. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data.
(C)
Interest rate swaps are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.
(D)
The NDT Fund maintains investments in various equity and fixed income securities classified as “available for sale.” The Rabbi Trust maintains investments in an S&P 500 index fund and various fixed income securities classified as “available for sale.” These securities are generally valued with prices that are either exchange provided (equity securities) or market transactions for comparable securities and/or broker quotes (fixed income securities).
Level 1—Investments in marketable equity securities within the NDT Fund are primarily investments in common stocks across a broad range of industries and sectors. Most equity securities are priced utilizing the principal market close price or, in some cases, midpoint, bid or ask price. Certain open-ended mutual funds with mainly short-term investments are valued based on unadjusted quoted prices in active markets. The Rabbi Trust equity index fund is valued based on quoted prices in an active market.
Level 2—NDT and Rabbi Trust fixed income securities are limited to investment grade corporate bonds, collateralized mortgage obligations, asset backed securities and government obligations or Federal Agency asset-backed securities with a wide range of maturities. Since many fixed income securities do not trade on a daily basis, they are priced using an evaluated pricing methodology that varies by asset class and reflects observable market information such as the most recent exchange price or quoted bid for similar securities. Market-based standard inputs typically include benchmark yields, reported trades, broker/dealer quotes and issuer spreads. Certain short-term investments are valued using observable market prices or market parameters such as time-to-maturity, coupon rate, quality rating and current yield.
(E)
Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. All cash collateral received or posted that has been allocated to derivative positions, where the right of offset exists, has been offset in the Condensed Consolidated Balance Sheets. As of September 30, 2016, net cash collateral (received) paid of $(18) million was netted against the corresponding net derivative contract positions. Of the $(18) million as of September 30, 2016, $(27) million of cash collateral was netted against assets, and $9 million was netted against liabilities. As of December 31, 2015, net cash collateral (received) paid of $(55) million was netted against the corresponding net derivative contract positions. Of the $(55) million of cash collateral as of December 31, 2015, $(69) million was netted against assets, and $14 million was netted against liabilities.
Additional Information Regarding Level 3 Measurements
For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in Level 3. This includes derivatives valued using indicative price quotations for contracts with tenors that extend into periods with no observable pricing. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 because the model inputs generally are not observable. PSEG’s Risk Management Committee approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval and the monitoring and reporting of risk exposures. The Risk Management Committee reports to the Audit Committee of the PSEG Board of Directors on the scope of the risk management activities and is responsible for approving all valuation procedures at PSEG. Forward price curves for the power market utilized by Power to manage the portfolio are maintained and reviewed by PSEG’s Enterprise Risk Management market pricing group and used for financial reporting purposes. PSEG considers credit and nonperformance risk in the valuation of derivative contracts categorized in Levels 2 and 3, including both historical and current market data, in its assessment of credit and nonperformance risk by counterparty. The impacts of credit and nonperformance risk were not material to the financial statements.

48

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

For PSE&G, natural gas supply contracts are measured at fair value using modeling techniques taking into account the current price of natural gas adjusted for appropriate risk factors, as applicable, and internal assumptions about transportation costs, and accordingly, the fair value measurements are classified in Level 3. The fair value of Power’s electric load contracts in which load consumption may change hourly based on demand are measured using certain unobservable inputs, such as historic load variability and, accordingly, are categorized as Level 3. The following tables provide details surrounding significant Level 3 valuations as of September 30, 2016 and December 31, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quantitative Information About Level 3 Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Significant
 
 
 
 
 
 
 
 
Fair Value as of
 
Valuation
 
Unobservable
 
 
 
 
Commodity
 
Level 3 Position
 
September 30, 2016
 
Technique(s)
 
 Input
 
Range
 
 
 
 
 
 
Assets
 
(Liabilities)
 
 
 
 
 
 
 
 
 
 
 
 
Millions
 
 
 
 
 
 
 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gas
 
Natural Gas Supply Contracts 
 
$

 
$
(4
)
 
Discounted Cash Flow
 
Transportation Costs
 
$0.60 to $0.80/Dth
 
 
Total PSE&G
 
 
 
$

 
$
(4
)
 
 
 
 
 
 
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
 
Electric Load Contracts
 
$
12

 
$

 
Discounted Cash flow
 
Historic Load Variability
 
0% to +10%
 
 
Gas (A)
 
Other
 
3

 

 
 
 
 
 
 
 
 
Total Power
 
 
 
$
15

 
$

 
 
 
 
 
 
 
 
Total PSEG
 
 
 
$
15

 
$
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quantitative Information About Level 3 Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Significant
 
 
 
 
 
 
 
 
Fair Value as of
 
Valuation
 
Unobservable
 
 
 
 
Commodity
 
Level 3 Position
 
December 31, 2015
 
Technique(s)
 
 Input
 
Range
 
 
 
 
 
 
Assets
 
(Liabilities)
 
 
 
 
 
 
 
 
 
 
 
 
Millions
 
 
 
 
 
 
 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gas
 
Natural Gas Supply Contracts 
 
$
13

 
$
(11
)
 
Discounted Cash Flow
 
Transportation Costs
 
$0.60 to $0.80/Dth
 
 
Total PSE&G
 
 
 
$
13

 
$
(11
)
 
 
 
 
 
 
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
 
Electric Load Contracts
 
$
11

 
$
(1
)
 
Discounted Cash Flow
 
Historic Load Variability
 
0% to +10%
 
 
Electricity
 
Other
 
1

 

 
 
 
 
 
 
 
 
Total Power
 
 
 
$
12

 
$
(1
)
 
 
 
 
 
 
 
 
Total PSEG
 
 
 
$
25

 
$
(12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A) Includes gas supply positions that are immaterial.
Significant unobservable inputs listed above would have a direct impact on the fair values of the above Level 3 instruments if they were adjusted. For gas supply contracts where PSE&G is a seller, an increase in gas transportation cost would increase the fair value. For energy-related contracts in cases where Power is a seller, an increase in the load variability would decrease the fair value.


49

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities for the three months and nine months ended September 30, 2016 and September 30, 2015, respectively, follows:
Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis
for the Three Months and Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
Total Gains or (Losses)
Realized/Unrealized
 
 
 
 
 
 
 
 
 
 
Description
 
Balance as of July 1, 2016
 
Included in
Income (A)
 
Included in
Regulatory Assets/
Liabilities (B)
 
Purchases
(Sales)
 
Issuances/
Settlements
(C)
 
Transfers
In/Out (D)
 
Balance as of September 30, 2016
 
 
 
 
Millions
 
 
 
 
PSEG
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
5

 
$
8

 
$
(2
)
 
$
4

 
$
(4
)
 
$

 
$
11

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
(2
)
 
$

 
$
(2
)
 
$

 
$

 
$

 
$
(4
)
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
7

 
$
8

 
$

 
$
4

 
$
(4
)
 
$

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
Total Gains or (Losses)
Realized/Unrealized
 
 
 
 
 
 
 
 
 
 
Description
 
Balance as of January 1, 2016
 
Included in
Income (A)
 
Included in
Regulatory Assets/
Liabilities (B)
 
Purchases
(Sales)
 
Issuances/
Settlements
(C)
 
Transfers
In/Out (D)
 
Balance as of September 30, 2016
 
 
 
 
Millions
 
 
 
 
PSEG
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
13

 
$
24

 
$
(6
)
 
$
4

 
$
(24
)
 
$

 
$
11

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
2

 
$

 
$
(6
)
 
$

 
$

 
$

 
$
(4
)
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
11

 
$
24

 
$

 
$
4

 
$
(24
)
 
$

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 








50

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis
for the Three Months and Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
Total Gains or (Losses)
Realized/Unrealized
 
 
 
 
 
 
 
 
 
 
Description
 
Balance as of July 1, 2015
 
Included in
Income (E)
 
Included in
Regulatory Assets/
Liabilities (B)
 
Purchases
(Sales)
 
Issuances/
Settlements
(C)
 
Transfers
In/Out
(D)
 
Balance as of September 30, 2015
 
 
 
 
Millions
 
 
 
 
PSEG
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
8

 
$
4

 
$
(8
)
 
$

 
$
(2
)
 
$

 
$
2

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
5

 
$

 
$
(8
)
 
$

 
$

 
$

 
$
(3
)
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
3

 
$
4

 
$

 
$

 
$
(2
)
 
$

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
Total Gains or (Losses)
Realized/Unrealized
 
 
 
 
 
 
 
 
 
 
Description
 
Balance as of January 1, 2015
 
Included in
Income (E)
 
Included in
Regulatory Assets/
Liabilities (B)
 
Purchases
(Sales)
 
Issuances/
Settlements
(C)
 
Transfers
In/Out (D)
 
Balance as of September 30, 2015
 
 
 
 
Millions
 
 
 
 
PSEG
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
37

 
$
12

 
$
(29
)
 
$

 
$
(18
)
 
$

 
$
2

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
26

 
$

 
$
(29
)
 
$

 
$

 
$

 
$
(3
)
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
11

 
$
12

 
$

 
$

 
$
(18
)
 
$

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
PSEG’s and Power’s gains and losses attributable to changes in net derivative assets and liabilities include $8 million and $24 million in Operating Income for the three months and nine months ended September 30, 2016, respectively. Of the $8 million in Operating Income, $4 million is unrealized. The $24 million in Operating Income is realized.
(B)
Mainly includes gains/losses on PSE&G’s derivative contracts that are not included in either earnings or Accumulated Other Comprehensive Income, as they are deferred as a Regulatory Asset/Liability and are expected to be recovered from/returned to PSE&G’s customers.
(C)
Represents $(4) million and $(24) million in settlements for the three months and nine months ended September 30, 2016, respectively. Represents $(2) million and $(18) million in settlements for the three months and nine months ended September 30, 2015, respectively.

51

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

(D)
There were no transfers among levels during the three months and nine months ended September 30, 2016 and 2015.
(E)
PSEG’s and Power’s gains and losses attributable to changes in net derivative assets and liabilities include $4 million and $12 million in Operating Income for the three months and nine months ended September 30, 2015, respectively. Of the $4 million in Operating Income, $3 million is unrealized. Of the $12 million in Operating Income, $(6) million is unrealized.
As of September 30, 2016, PSEG carried $2.6 billion of net assets that are measured at fair value on a recurring basis, of which $11 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
As of September 30, 2015, PSEG carried $2.3 billion of net assets that are measured at fair value on a recurring basis, of which $2 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
Fair Value of Debt
The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions as of September 30, 2016 and December 31, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
September 30, 2016
 
December 31, 2015
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
Millions
 
 
Long-Term Debt:
 
 
 
 
 
 
 
 
 
PSEG (Parent) (A)
$
500

 
$
500

 
$
503

 
$
506

 
 
PSE&G (B)
7,816

 
8,996

 
6,821

 
7,235

 
 
Power - Recourse Debt (B)
2,381

 
2,788

 
2,237

 
2,508

 
 
Energy Holdings:
 
 
 
 
 
 
 
 
 
  Project Level, Non-Recourse Debt (C)

 

 
7

 
7

 
 
Total Long-Term Debt
$
10,697

 
$
12,284

 
$
9,568

 
$
10,256

 
 
 
 
 
 
 
 
 
 
 
(A)
Fair value includes a $500 million floating rate term loan and net offsets to debt resulting from adjustments from interest rate swaps entered into to hedge certain debt at Power. The fair value of the term loan debt (Level 2 measurement) was considered to be equal to the carrying value because the interest payments are based on LIBOR rates that are reset monthly. Carrying amount includes such fair value reduced by the unamortized premium resulting from a debt exchange entered into between Power and Energy Holdings.
(B)
Given that most bonds do not trade, the fair value amounts of taxable debt securities (primarily Level 2 measurements) are generally determined by a valuation model that is based on a conventional discounted cash flow methodology and utilizes assumptions of current market pricing curves. In order to incorporate the credit risk into the discount rates, pricing is obtained (i.e. U.S. Treasury rate plus credit spread) based on expected new issue pricing across each of the companies’ respective debt maturity spectrum. The credit spreads of various tenors obtained from this information are added to the appropriate benchmark U.S. Treasury rates in order to determine the current market yields for the various tenors. The yields are then converted into discount rates of various tenors that are used for discounting the respective cash flows of the same tenor for each bond or note.
(C)
Non-recourse project debt is valued as equivalent to the amortized cost and is classified as a Level 3 measurement.


52

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Note 13. Other Income and Deductions
 
 
 
 
 
 
 
 
 
 
 
Other Income
PSE&G
 
Power
 
Other (A)
 
Consolidated
 
 
 
Millions
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
NDT Fund Gains, Interest, Dividend and Other Income
$

 
$
21

 
$

 
$
21

 
 
Allowance for Funds Used During Construction
14

 

 

 
14

 
 
Solar Loan Interest
6

 

 

 
6

 
 
Other
2

 
2

 
2

 
6

 
 
Total Other Income
$
22

 
$
23

 
$
2

 
$
47

 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
NDT Fund Gains, Interest, Dividend and Other Income
$

 
$
69

 
$

 
$
69

 
 
Allowance for Funds Used During Construction
35

 

 

 
35

 
 
Solar Loan Interest
17

 

 

 
17

 
 
Other
9

 
5

 
4

 
18

 
 
  Total Other Income
$
61

 
$
74

 
$
4

 
$
139

 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
NDT Fund Gains, Interest, Dividend and Other Income
$

 
$
24

 
$

 
$
24

 
 
Allowance for Funds Used During Construction
14

 

 

 
14

 
 
Solar Loan Interest
6

 

 

 
6

 
 
Other
2

 
1

 

 
3

 
 
Total Other Income
$
22

 
$
25

 
$

 
$
47

 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
NDT Fund Gains, Interest, Dividend and Other Income
$

 
$
78

 
$

 
$
78

 
 
Allowance for Funds Used During Construction
36

 

 

 
36

 
 
Solar Loan Interest
18

 

 

 
18

 
 
     Gain on Insurance Recovery

 
28

 

 
28

 
 
Other
5

 
3

 
3

 
11

 
 
Total Other Income
$
59

 
$
109

 
$
3

 
$
171

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Deductions
PSE&G
 
Power
 
Other (A)
 
Consolidated
 
 
 
Millions
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
  NDT Fund Realized Losses and Expenses
$

 
$
5

 
$

 
$
5

 
 
  Other
1

 
1

 
1

 
3

 
 
    Total Other Deductions
$
1

 
$
6

 
$
1

 
$
8

 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
  NDT Fund Realized Losses and Expenses
$

 
$
31

 
$

 
$
31

 
 
  Other
3

 
2

 
3

 
8

 
 
    Total Other Deductions
$
3

 
$
33

 
$
3

 
$
39

 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
  NDT Fund Realized Losses and Expenses
$

 
$
13

 
$

 
$
13

 
 
  Other

 
1

 

 
1

 
 
  Total Other Deductions
$

 
$
14

 
$

 
$
14

 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
  NDT Fund Realized Losses and Expenses
$

 
$
30

 
$

 
$
30

 
 
  Other
2

 
2

 
2

 
6

 
 
  Total Other Deductions
$
2

 
$
32

 
$
2

 
$
36

 
 
 
 
 
 
 
 
 
 
 
(A)
Other consists of activity at PSEG (as parent company), Energy Holdings, Services, PSEG LI and intercompany eliminations.


53

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Note 14. Income Taxes
PSEG’s, PSE&G’s and Power’s effective tax rates for the three months and nine months ended September 30, 2016 and 2015 were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
PSEG
36.5%
 
39.4%
 
36.3%
 
38.8%
 
 
PSE&G
36.1%
 
38.2%
 
36.1%
 
38.7%
 
 
Power
39.3%
 
40.3%
 
39.4%
 
38.6%
 
 
 
 
 
 
 
 
 
 
 
For the three months and nine months ended September 30, 2016, the overall decreases in PSEG’s effective tax rates as compared to the same periods in the prior year as well as to the statutory tax rate of 40.85%, were due primarily to changes in uncertain tax positions and plant related items.
For the three months and nine months ended September 30, 2016, the overall decreases in PSE&G’s effective tax rates as compared to the same periods in the prior year as well as to the statutory tax rate of 40.85%, were due primarily to changes in uncertain tax positions and plant and other flow through items.
The Tax Increase Prevention Act of 2014 extended the 50% bonus depreciation rules for qualified property placed in service before January 1, 2015 and for long production property placed in service in 2015.
The Protecting Americans from Tax Hikes Act of 2015 (Tax Act) extended the 50% bonus depreciation rules for qualified property placed in service from January 1, 2015 through December 31, 2017. The rate is reduced to 40% and 30% for eligible property placed in service in 2018 and 2019, respectively. In addition, long production property placed in service in 2020 will also qualify for 30% bonus depreciation. The Tax Act also extended the 30% ITC for qualified property placed in service starting January 1, 2016 through December 31, 2019 but reduces the ITC rate to 26% and 22% for projects commenced in 2020 and 2021, respectively. The financial impact of the extensions of the ITC rate will depend upon future transactions.
These provisions have generated significant cash tax benefits for PSEG, PSE&G and Power through tax benefits related to the accelerated depreciation. These tax benefits would have otherwise been received over an estimated average 20 year period. However, these tax benefits will have a negative impact on the rate base of several of PSE&G’s programs.


54

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Note 15. Accumulated Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
 
 
 
 
 
PSEG
 
Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended September 30, 2016
 
 
Accumulated Other Comprehensive Income (Loss)
 
Cash Flow Hedges
 
Pension and OPEB Plans
 
Available-for-Sale Securities
 
Total
 
 
 
 
Millions
 
 
Balance as of June 30, 2016
 
$
1

 
$
(370
)
 
$
117

 
$
(252
)
 
 
Other Comprehensive Income before Reclassifications
 
1

 

 
26

 
27

 
 
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 

 
9

 
(2
)
 
7

 
 
Net Current Period Other Comprehensive Income (Loss)
 
1

 
9

 
24

 
34

 
 
Balance as of September 30, 2016
 
$
2

 
$
(361
)
 
$
141

 
$
(218
)
 
 
 
 
 
 
 
 
 
 
 
 
 
PSEG
 
Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended September 30, 2015
 
 
Accumulated Other Comprehensive Income (Loss)
 
Cash Flow Hedges
 
Pension and OPEB Plans
 
Available-for-Sale Securities
 
Total
 
 
 
 
Millions
 
 
Balance as of June 30, 2015
 
$
1

 
$
(395
)
 
$
117

 
$
(277
)
 
 
Other Comprehensive Income before Reclassifications
 

 

 
(46
)
 
(46
)
 
 
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 

 
9

 
15

 
24

 
 
Net Current Period Other Comprehensive Income (Loss)
 

 
9

 
(31
)
 
(22
)
 
 
Balance as of September 30, 2015
 
$
1

 
$
(386
)
 
$
86

 
$
(299
)
 
 
 
 
 
 
 
PSEG
 
Other Comprehensive Income (Loss)
 
 
 
 
Nine Months Ended September 30, 2016
 
 
Accumulated Other Comprehensive Income (Loss)
 
Cash Flow Hedges
 
Pension and OPEB Plans
 
Available-for-Sale Securities
 
Total
 
 
 
 
Millions
 
 
Balance as of December 31, 2015
 
$

 
$
(386
)
 
$
91

 
$
(295
)
 
 
Other Comprehensive Income before Reclassifications
 
2

 

 
44

 
46

 
 
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 

 
25

 
6

 
31

 
 
Net Current Period Other Comprehensive Income (Loss)
 
2

 
25

 
50

 
77

 
 
Balance as of September 30, 2016
 
$
2

 
$
(361
)
 
$
141

 
$
(218
)
 
 
 
 
 
 
 
 
 
 
 
 
 
PSEG
 
Other Comprehensive Income (Loss)
 
 
 
 
Nine Months Ended September 30, 2015
 
 
Accumulated Other Comprehensive Income (Loss)
 
Cash Flow Hedges
 
Pension and OPEB Plans
 
Available-for-Sale Securities
 
Total
 
 
 
 
Millions
 
 
Balance as of December 31, 2014
 
$
10

 
$
(411
)
 
$
118

 
$
(283
)
 
 
Other Comprehensive Income before Reclassifications
 
1

 

 
(44
)
 
(43
)
 
 
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
(10
)
 
25

 
12

 
27

 
 
Net Current Period Other Comprehensive Income (Loss)
 
(9
)
 
25

 
(32
)
 
(16
)
 
 
Balance as of September 30, 2015
 
$
1

 
$
(386
)
 
$
86

 
$
(299
)
 
 
 
 
 
 
 
 
 
 
 
 

55

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
Power
 
Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended September 30, 2016
 
 
Accumulated Other Comprehensive Income (Loss)
 
Cash Flow Hedges
 
Pension and OPEB Plans
 
Available-for-Sale Securities
 
Total
 
 
 
 
Millions
 
 
Balance as of June 30, 2016
 
$

 
$
(313
)
 
$
112

 
$
(201
)
 
 
Other Comprehensive Income before Reclassifications
 

 

 
24

 
24

 
 
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 

 
7

 
(2
)
 
5

 
 
Net Current Period Other Comprehensive Income (Loss)
 

 
7

 
22

 
29

 
 
Balance as of September 30, 2016
 
$

 
$
(306
)
 
$
134

 
$
(172
)
 
 
 
 
 
 
 
Power
 
Other Comprehensive Income (Loss)
 
 
 
 
Three Months Ended September 30, 2015
 
 
Accumulated Other Comprehensive Income (Loss)
 
Cash Flow Hedges
 
Pension and OPEB Plans
 
Available-for-Sale Securities
 
Total
 
 
 
 
Millions
 
 
Balance as of June 30, 2015
 
$
2

 
$
(337
)
 
$
112

 
$
(223
)
 
 
Other Comprehensive Income before Reclassifications
 

 

 
(43
)
 
(43
)
 
 
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 

 
7

 
14

 
21

 
 
Net Current Period Other Comprehensive Income (Loss)
 

 
7

 
(29
)
 
(22
)
 
 
Balance as of September 30, 2015
 
$
2

 
$
(330
)
 
$
83

 
$
(245
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Power
 
Other Comprehensive Income (Loss)
 
 
 
 
Nine Months Ended September 30, 2016
 
 
Accumulated Other Comprehensive Income (Loss)
 
Cash Flow Hedges
 
Pension and OPEB Plans
 
Available-for-Sale Securities
 
Total
 
 
 
 
Millions
 
 
Balance as of December 31, 2015
 
$

 
$
(327
)
 
$
87

 
$
(240
)
 
 
Other Comprehensive Income before Reclassifications
 

 

 
40

 
40

 
 
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 

 
21

 
7

 
28

 
 
Net Current Period Other Comprehensive Income (Loss)
 

 
21

 
47

 
68

 
 
Balance as of September 30, 2016
 
$

 
$
(306
)
 
$
134

 
$
(172
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Power
 
Other Comprehensive Income (Loss)
 
 
 
 
Nine Months Ended September 30, 2015
 
 
Accumulated Other Comprehensive Income (Loss)
 
Cash Flow Hedges
 
Pension and OPEB Plans
 
Available-for-Sale Securities
 
Total
 
 
 
 
Millions
 
 
Balance as of December 31, 2014
 
$
11

 
$
(351
)
 
$
112

 
$
(228
)
 
 
Other Comprehensive Income before Reclassifications
 
1

 

 
(41
)
 
(40
)
 
 
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
(10
)
 
21

 
12

 
23

 
 
Net Current Period Other Comprehensive Income (Loss)
 
(9
)
 
21

 
(29
)
 
(17
)
 
 
Balance as of September 30, 2015
 
$
2

 
$
(330
)
 
$
83

 
$
(245
)
 
 
 
 
 
 
 
 
 
 
 
 

56

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PSEG
 
 
 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Location of Pre-Tax Amount In Statement of Operations
September 30, 2016
 
September 30, 2016
 
 
 
Pre-Tax Amount
 
Tax (Expense) Benefit
 
After-Tax Amount
 
Pre-Tax Amount
 
Tax (Expense) Benefit
 
After-Tax Amount
 
 
 
 
 
Millions
 
 
Pension and OPEB Plans
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of Prior Service (Cost) Credit
 
O&M Expense
$
3

 
$
(2
)
 
$
1

 
$
9

 
$
(4
)
 
$
5

 
    
Amortization of Actuarial Loss
 
O&M Expense
(17
)
 
7

 
(10
)
 
(51
)
 
21

 
(30
)
 
 
Total Pension and OPEB Plans
(14
)
 
5

 
(9
)
 
(42
)
 
17

 
(25
)
 
 
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized Gains
 
Other Income
13

 
(6
)
 
7

 
41

 
(20
)
 
21

 
 
Realized Losses
 
Other Deductions
(5
)
 
3

 
(2
)
 
(29
)
 
15

 
(14
)
 
 
Other-Than-Temporary Impairments (OTTI)
 
OTTI
(5
)
 
2

 
(3
)
 
(25
)
 
12

 
(13
)
 
 
Total Available-for-Sale Securities
3

 
(1
)
 
2

 
(13
)
 
7

 
(6
)
 
 
Total
 
 
$
(11
)
 
$
4

 
$
(7
)
 
$
(55
)
 
$
24

 
$
(31
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PSEG
 
 
 
 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Location of Pre-Tax Amount In Statement of Operations
 
September 30, 2015
 
September 30, 2015
 
 
 
 
Pre-Tax Amount
 
Tax (Expense) Benefit
 
After-Tax Amount
 
Pre-Tax Amount
 
Tax (Expense) Benefit
 
After-Tax Amount
 
 
 
 
 
 
Millions
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts
 
Operating Revenues
 
$

 
$

 
$

 
$
17

 
$
(7
)
 
$
10

 
 
Total Cash Flow Hedges
 
 
 

 

 

 
17

 
(7
)
 
10

 
 
Pension and OPEB Plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of Prior Service (Cost) Credit
 
O&M Expense
 
3

 
(1
)
 
2

 
9

 
(3
)
 
6

 
    
Amortization of Actuarial Loss
 
O&M Expense
 
(17
)
 
6

 
(11
)
 
(51
)
 
20

 
(31
)
 
 
Total Pension and OPEB Plans
 
(14
)
 
5

 
(9
)
 
(42
)
 
17

 
(25
)
 
 
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized Gains
 
Other Income
 
14

 
(7
)
 
7

 
49

 
(25
)
 
24

 
 
Realized Losses
 
Other Deductions
 
(12
)
 
5

 
(7
)
 
(25
)
 
12

 
(13
)
 
 
OTTI
 
OTTI
 
(30
)
 
15

 
(15
)
 
(45
)
 
22

 
(23
)
 
 
Total Available-for-Sale Securities
 
(28
)
 
13

 
(15
)
 
(21
)
 
9

 
(12
)
 
 
Total
 
 
 
$
(42
)
 
$
18

 
$
(24
)
 
$
(46
)
 
$
19

 
$
(27
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

57

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Power
 
 
 
 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Location of Pre-Tax Amount In Statement of Operations
 
September 30, 2016
 
September 30, 2016
 
 
 
 
Pre-Tax Amount
 
Tax (Expense) Benefit
 
After-Tax Amount
 
Pre-Tax Amount
 
Tax (Expense) Benefit
 
After-Tax Amount
 
 
 
 
 
 
Millions
 
 
Pension and OPEB Plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of Prior Service (Cost) Credit
 
O&M Expense
 
$
3

 
$
(1
)
 
$
2

 
$
8

 
$
(3
)
 
$
5

 
    
Amortization of Actuarial Loss
 
O&M Expense
 
(15
)
 
6

 
(9
)
 
(44
)
 
18

 
(26
)
 
 
Total Pension and OPEB Plans
 
(12
)
 
5

 
(7
)
 
(36
)
 
15

 
(21
)
 
 
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized Gains
 
Other Income
 
12

 
(5
)
 
7

 
37

 
(18
)
 
19

 
 
Realized Losses
 
Other Deductions
 
(4
)
 
2

 
(2
)
 
(26
)
 
13

 
(13
)
 
 
OTTI
 
OTTI
 
(5
)
 
2

 
(3
)
 
(25
)
 
12

 
(13
)
 
 
Total Available-for-Sale Securities
 
3

 
(1
)
 
2

 
(14
)
 
7

 
(7
)
 
 
Total
 
 
 
$
(9
)
 
$
4

 
$
(5
)
 
$
(50
)
 
$
22

 
$
(28
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Power
 
 
 
 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Location of Pre-Tax Amount In Statement of Operations
 
September 30, 2015
 
September 30, 2015
 
 
 
 
Pre-Tax Amount
 
Tax (Expense) Benefit
 
After-Tax Amount
 
Pre-Tax Amount
 
Tax (Expense) Benefit
 
After-Tax Amount
 
 
 
 
 
 
Millions
 
 
Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy-Related Contracts
 
Operating Revenues
 
$

 
$

 
$

 
$
17

 
$
(7
)
 
$
10

 
 
Total Cash Flow Hedges
 
 
 

 

 

 
17

 
(7
)
 
10

 
 
Pension and OPEB Plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of Prior Service (Cost) Credit
 
O&M Expense
 
3

 
(1
)
 
2

 
9

 
(3
)
 
6

 
    
Amortization of Actuarial Loss
 
O&M Expense
 
(15
)
 
6

 
(9
)
 
(45
)
 
18

 
(27
)
 
 
Total Pension and OPEB Plans
 
(12
)
 
5

 
(7
)
 
(36
)
 
15

 
(21
)
 
 
Available-for-Sale Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized Gains
 
Other Income
 
14

 
(7
)
 
7

 
47

 
(24
)
 
23

 
 
Realized Losses
 
Other Deductions
 
(11
)
 
5

 
(6
)
 
(24
)
 
12

 
(12
)
 
 
OTTI
 
OTTI
 
(30
)
 
15

 
(15
)
 
(45
)
 
22

 
(23
)
 
 
Total Available-for-Sale Securities
 
(27
)
 
13

 
(14
)
 
(22
)
 
10

 
(12
)
 
 
Total
 
 
 
$
(39
)
 
$
18

 
$
(21
)
 
$
(41
)
 
$
18

 
$
(23
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


58

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Note 16. Earnings Per Share (EPS) and Dividends
Diluted EPS is calculated by dividing Net Income by the weighted average number of shares of common stock outstanding, including shares issuable upon exercise of stock options outstanding or vesting of restricted stock awards granted under PSEG’s stock compensation plans and upon payment of performance units or restricted stock units. The following table shows the effect of these stock options, performance units and restricted stock units on the weighted average number of shares outstanding used in calculating diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
Basic
 
Diluted
 
Basic
 
Diluted
 
Basic
 
Diluted
 
Basic
 
Diluted
 
 
EPS Numerator (Millions):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
$
327

 
$
327

 
$
439

 
$
439

 
$
985

 
$
985

 
$
1,370

 
$
1,370

 
 
EPS Denominator (Millions):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Common Shares Outstanding
505

 
505

 
505

 
505

 
505

 
505

 
505

 
505

 
 
Effect of Stock Based Compensation Awards

 
3

 

 
3

 

 
3

 

 
3

 
 
Total Shares
505

 
508

 
505

 
508

 
505

 
508

 
505

 
508

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EPS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
$
0.65

 
$
0.64

 
$
0.87

 
$
0.87

 
$
1.95

 
$
1.94

 
$
2.71

 
$
2.70

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
There were approximately 0.4 million stock options excluded from the weighted average common shares used for diluted EPS due to their antidilutive effect for the three months and nine months ended September 30, 2016 and 2015.
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
Dividend Payments on Common Stock
2016
 
2015
 
2016
 
2015
 
 
Per Share
$
0.41

 
$
0.39

 
$
1.23

 
$
1.17

 
 
In Millions
$
207

 
$
198

 
$
622

 
$
592

 
 
 
 
 
 
 
 
 
 
 



59

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Note 17. Financial Information by Business Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PSE&G
 
Power
 
Other (A)
 
Eliminations (B)
 
Consolidated
 
 
 
Millions
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Total Operating Revenues
$
1,684

 
$
1,075

 
$
7

 
$
(316
)
 
$
2,450

 
 
Net Income (Loss)
255

 
139

 
(67
)
 

 
327

 
 
Gross Additions to Long-Lived Assets
680

 
325

 
9

 

 
1,014

 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
$
4,746

 
$
3,102

 
$
256

 
$
(1,133
)
 
$
6,971

 
 
Net Income (Loss)
696

 
320

 
(31
)
 

 
985

 
 
Gross Additions to Long-Lived Assets
2,035

 
923

 
27

 

 
2,985

 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Total Operating Revenues
$
1,766

 
$
1,096

 
$
120

 
$
(294
)
 
$
2,688

 
 
Net Income (Loss)
222

 
206

 
11

 

 
439

 
 
Gross Additions to Long-Lived Assets
716

 
310

 
13

 

 
1,039

 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
$
5,234

 
$
3,846

 
$
326

 
$
(1,269
)
 
$
8,137

 
 
Net Income (Loss)
631

 
707

 
32

 

 
1,370

 
 
Gross Additions to Long-Lived Assets
1,946

 
797

 
39

 

 
2,782

 
 
As of September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Total Assets
$
25,486

 
$
12,810

 
$
2,385

 
$
(1,193
)
 
$
39,488

 
 
Investments in Equity Method Subsidiaries
$

 
$
106

 
$

 
$

 
$
106

 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Total Assets
$
23,677

 
$
12,250

 
$
2,810

 
$
(1,202
)
 
$
37,535

 
 
Investments in Equity Method Subsidiaries
$

 
$
119

 
$

 
$

 
$
119

 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Includes amounts applicable to Energy Holdings and PSEG LI, which are below the quantitative threshold for separate disclosure as reportable segments. Other also includes amounts applicable to PSEG (parent corporation) and Services.
(B)
Intercompany eliminations primarily relate to intercompany transactions between PSE&G and Power. No gains or losses are recorded on any intercompany transactions; rather, all intercompany transactions are at cost or, in the case of the BGS and BGSS contracts between PSE&G and Power, at rates prescribed by the BPU. For a further discussion of the intercompany transactions between PSE&G and Power, see Note 18. Related-Party Transactions.


60

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Note 18. Related-Party Transactions
The following discussion relates to intercompany transactions, which are eliminated during the PSEG consolidation process in accordance with GAAP.

PSE&G
The financial statements for PSE&G include transactions with related parties as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
Related-Party Transactions
2016
 
2015
 
2016
 
2015
 
 
 
Millions
 
 
Billings from Affiliates:
 
 
 
 
 
 
 
 
 
Net Billings from Power primarily through BGS and BGSS (A)
$
320

 
$
294

 
$
1,162

 
$
1,287

 
 
Administrative Billings from Services (B)
73

 
66

 
224

 
197

 
 
Total Billings from Affiliates
$
393

 
$
360

 
$
1,386

 
$
1,484

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
As of
 
 
Related-Party Transactions
September 30, 2016
 
December 31, 2015
 
 
 
Millions
 
 
Receivables from PSEG (C)
$
28

 
$
222

 
 
Payable to Power (A)
$
126

 
$
212

 
 
Payable to Services (B)
88

 
80

 
 
Accounts Payable—Affiliated Companies
$
214

 
$
292

 
 
Working Capital Advances to Services (D)
$
33

 
$
33

 
 
Long-Term Accrued Taxes Payable 
$
92

 
$
109

 
 
 
 
 
 
 
Power
The financial statements for Power include transactions with related parties as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
Related-Party Transactions
2016
 
2015
 
2016
 
2015
 
 
 
Millions
 
 
Billings to Affiliates:
 
 
 
 
 
 
 
 
 
Net Billings to PSE&G primarily through BGS and BGSS (A)
$
320

 
$
294

 
$
1,162

 
$
1,287

 
 
Billings from Affiliates:
 
 
 
 
 
 
 
 
 
Administrative Billings from Services (B)
$
44

 
$
44

 
$
134

 
$
135

 
 
 
 
 
 
 
 
 
 
 

61

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

 
 
 
 
 
 
 
 
As of
 
As of
 
 
Related-Party Transactions
September 30, 2016
 
December 31, 2015
 
 
 
Millions
 
 
Receivables from PSE&G (A)
$
126

 
$
212

 
 
Receivables from PSEG (C)

 
64

 
 
Accounts Receivable—Affiliated Companies
$
126

 
$
276

 
 
Payable to Services (B)
$
27

 
$
33

 
 
Payable to PSEG (C)
129

 

 
 
Accounts Payable—Affiliated Companies
$
156

 
$
33

 
 
Short-Term Loan Due (to) from Affiliate (E)
$
514

 
$
363

 
 
Working Capital Advances to Services (D)
$
17

 
$
17

 
 
Long-Term Accrued Taxes Payable 
$
79

 
$
35

 
 
 
 
 
 
 
(A)
PSE&G has entered into a requirements contract with Power under which Power provides the gas supply services needed to meet PSE&G’s BGSS and other contractual requirements. Power has also entered into contracts to supply energy, capacity and ancillary services to PSE&G through the BGS auction process. In addition, Power and PSE&G provide certain technical services for each other in compliance with FERC and BPU affiliate rules.
(B)
Services provides and bills administrative services to PSE&G and Power at cost. In addition, PSE&G and Power have other payables to Services, including amounts related to certain common costs, such as pension and OPEB costs, which Services pays on behalf of each of the operating companies.
(C)
PSEG files a consolidated federal income tax return with its affiliated companies. A tax allocation agreement exists between PSEG and each of its affiliated companies. The general operation of these agreements is that the subsidiary company will compute its taxable income on a stand-alone basis. If the result is a net tax liability, such amount shall be paid to PSEG. If there are net operating losses and/or tax credits, the subsidiary shall receive payment for the tax savings from PSEG to the extent that PSEG is able to utilize those benefits.
(D)
PSE&G and Power have advanced working capital to Services. The amounts are included in Other Noncurrent Assets on PSE&G’s and Power’s Condensed Consolidated Balance Sheets.
(E)
Power’s short-term loans with PSEG are for working capital and other short-term needs. Interest Income and Interest Expense relating to these short-term funding activities were immaterial.



62

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

Note 19. Guarantees of Debt
Each series of Power’s Senior Notes, Pollution Control Notes and its syndicated revolving credit facilities are fully and unconditionally and jointly and severally guaranteed by its subsidiaries, PSEG Fossil LLC, PSEG Nuclear LLC and PSEG Energy Resources & Trade LLC. The following tables present condensed financial information for the guarantor subsidiaries, as well as Power’s non-guarantor subsidiaries, as of September 30, 2016 and December 31, 2015 and for the three months and nine months ended September 30, 2016 and 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Power
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
 
 
Millions
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
$

 
$
1,059

 
$
43

 
$
(27
)
 
$
1,075

 
 
Operating Expenses
(2
)
 
826

 
40

 
(27
)
 
837

 
 
Operating Income (Loss)
2

 
233

 
3

 

 
238

 
 
Equity Earnings (Losses) of Subsidiaries
143

 
(1
)
 
3

 
(142
)
 
3

 
 
Other Income
18

 
26

 

 
(21
)
 
23

 
 
Other Deductions
(2
)
 
(4
)
 

 

 
(6
)
 
 
Other-Than-Temporary Impairments

 
(5
)
 

 

 
(5
)
 
 
Interest Expense
(30
)
 
(12
)
 
(3
)
 
21

 
(24
)
 
 
Income Tax Benefit (Expense)
8

 
(97
)
 
(1
)
 

 
(90
)
 
 
Net Income (Loss)
$
139

 
$
140

 
$
2

 
$
(142
)
 
$
139

 
 
Comprehensive Income (Loss)
$
168

 
$
161

 
$
2

 
$
(163
)
 
$
168

 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
$

 
$
3,061

 
$
131

 
$
(90
)
 
$
3,102

 
 
Operating Expenses
10

 
2,494

 
119

 
(90
)
 
2,533

 
 
Operating Income (Loss)
(10
)
 
567

 
12

 

 
569

 
 
Equity Earnings (Losses) of Subsidiaries
347

 
(1
)
 
9

 
(346
)
 
9

 
 
Other Income
52

 
88

 

 
(66
)
 
74

 
 
Other Deductions
(2
)
 
(31
)
 

 

 
(33
)
 
 
Other-Than-Temporary Impairments

 
(25
)
 

 

 
(25
)
 
 
Interest Expense
(91
)
 
(29
)
 
(12
)
 
66

 
(66
)
 
 
Income Tax Benefit (Expense)
24

 
(234
)
 
2

 

 
(208
)
 
 
Net Income (Loss)
$
320

 
$
335

 
$
11

 
$
(346
)
 
$
320

 
 
Comprehensive Income (Loss)
$
388

 
$
381

 
$
11

 
$
(392
)
 
$
388

 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Net Cash Provided By (Used In)
   Operating Activities
$
175

 
$
1,261

 
$
234

 
$
(410
)
 
$
1,260

 
 
Net Cash Provided By (Used In)
   Investing Activities
$
(588
)
 
$
(1,166
)
 
$
(549
)
 
$
1,152

 
$
(1,151
)
 
 
Net Cash Provided By (Used In)
   Financing Activities
$
413

 
$
(95
)
 
$
315

 
$
(742
)
 
$
(109
)
 
 
 
 
 
 
 
 
 
 
 
 
 

63

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Power
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
 
 
Millions
 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
$

 
$
1,084

 
$
37

 
$
(25
)
 
$
1,096

 
 
Operating Expenses
3

 
692

 
35

 
(25
)
 
705

 
 
Operating Income (Loss)
(3
)
 
392

 
2

 

 
391

 
 
Equity Earnings (Losses) of Subsidiaries
220

 
(2
)
 
3

 
(218
)
 
3

 
 
Other Income
10

 
26

 

 
(11
)
 
25

 
 
Other Deductions

 
(14
)
 

 

 
(14
)
 
 
Other-Than-Temporary
   Impairments

 
(30
)
 

 

 
(30
)
 
 
Interest Expense
(28
)
 
(8
)
 
(5
)
 
11

 
(30
)
 
 
Income Tax Benefit (Expense)
7

 
(148
)
 
2

 

 
(139
)
 
 
Net Income (Loss)
$
206

 
$
216

 
$
2

 
$
(218
)
 
$
206

 
 
Comprehensive Income (Loss)
$
184

 
$
187

 
$
2

 
$
(189
)
 
$
184

 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
$

 
$
3,811

 
$
144

 
$
(109
)
 
$
3,846

 
 
Operating Expenses
7

 
2,610

 
135

 
(109
)
 
2,643

 
 
Operating Income (Loss)
(7
)
 
1,201

 
9

 

 
1,203

 
 
Equity Earnings (Losses) of Subsidiaries
755

 
(4
)
 
11

 
(751
)
 
11

 
 
Other Income
33

 
111

 

 
(35
)
 
109

 
 
Other Deductions
(1
)
 
(31
)
 

 

 
(32
)
 
 
Other-Than-Temporary Impairments

 
(45
)
 

 

 
(45
)
 
 
Interest Expense
(90
)
 
(24
)
 
(15
)
 
35

 
(94
)
 
 
Income Tax Benefit (Expense)
17

 
(463
)
 
1

 

 
(445
)
 
 
Net Income (Loss)
$
707

 
$
745

 
$
6

 
$
(751
)
 
$
707

 
 
Comprehensive Income (Loss)
$
690

 
$
707

 
$
6

 
$
(713
)
 
$
690

 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Net Cash Provided By (Used In)
   Operating Activities
$
435

 
$
1,826

 
$
66

 
$
(769
)
 
$
1,558

 
 
Net Cash Provided By (Used In)
   Investing Activities
$
(656
)
 
$
(1,382
)
 
$
(303
)
 
$
1,191

 
$
(1,150
)
 
 
Net Cash Provided By (Used In)
   Financing Activities
$
221

 
$
(446
)
 
$
245

 
$
(422
)
 
$
(402
)
 
 
 
 
 
 
 
 
 
 
 
 
 

64

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Power
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Consolidating
Adjustments
 
Total
 
 
 
Millions
 
 
As of September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Current Assets
$
4,889

 
$
1,845

 
$
287

 
$
(5,262
)
 
$
1,759

 
 
Property, Plant and Equipment, net
57

 
6,570

 
2,080

 

 
8,707

 
 
Investment in Subsidiaries
4,709

 
483

 

 
(5,192
)
 

 
 
Noncurrent Assets
157

 
2,140

 
123

 
(76
)
 
2,344

 
 
Total Assets
$
9,812

 
$
11,038

 
$
2,490

 
$
(10,530
)
 
$
12,810

 
 
Current Liabilities
$
818

 
$
3,888

 
$
1,350

 
$
(5,262
)
 
$
794

 
 
Noncurrent Liabilities
473

 
2,704

 
394

 
(76
)
 
3,495

 
 
Long-Term Debt
2,381

 

 

 

 
2,381

 
 
Member’s Equity
6,140

 
4,446

 
746

 
(5,192
)
 
6,140

 
 
Total Liabilities and Member’s Equity
$
9,812

 
$
11,038

 
$
2,490

 
$
(10,530
)
 
$
12,810

 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Current Assets
$
4,501

 
$
1,912

 
$
364

 
$
(4,828
)
 
$
1,949

 
 
Property, Plant and Equipment, net
83

 
6,502

 
1,542

 

 
8,127

 
 
Investment in Subsidiaries
4,501

 
346

 

 
(4,847
)
 

 
 
Noncurrent Assets
155

 
1,959

 
136

 
(76
)
 
2,174

 
 
Total Assets
$
9,240

 
$
10,719

 
$
2,042

 
$
(9,751
)
 
$
12,250

 
 
Current Liabilities
$
1,112

 
$
3,866

 
$
1,076

 
$
(4,828
)
 
$
1,226

 
 
Noncurrent Liabilities
442

 
2,597

 
375

 
(76
)
 
3,338

 
 
Long-Term Debt
1,684

 

 

 

 
1,684

 
 
Member’s Equity
6,002

 
4,256

 
591

 
(4,847
)
 
6,002

 
 
Total Liabilities and Member’s Equity
$
9,240

 
$
10,719

 
$
2,042

 
$
(9,751
)
 
$
12,250

 
 
 
 
 
 
 
 
 
 
 
 
 

65


Table of Contents


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
This combined MD&A is separately filed by Public Service Enterprise Group Incorporated (PSEG), Public Service Electric and Gas Company (PSE&G) and PSEG Power LLC (Power). Information contained herein relating to any individual company is filed by such company on its own behalf. PSE&G and Power 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:
PSE&G, our public utility company which is engaged principally in the transmission of electricity and distribution of electricity and natural gas in certain areas of New Jersey. PSE&G is subject to regulation by the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). PSE&G also invests in solar generation projects and has implemented energy efficiency and demand response programs in New Jersey, which are regulated by the BPU, and
Power, our multi-regional, wholesale energy supply company that integrates its generating asset operations and gas supply commitments with its wholesale energy, fuel supply and energy transacting functions primarily in the Northeast and Mid-Atlantic United States through its principal direct wholly owned subsidiaries. Power’s subsidiaries are subject to regulation by FERC, the Nuclear Regulatory Commission (NRC), the Environmental Protection Agency (EPA), and the states in which they operate.
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 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 2015 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 Executive Overview of 2015 and Future Outlook provided in Item 7 in our Form 10-K by describing significant events and business developments that have occurred during 2016 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 2015 Form 10-K.

EXECUTIVE OVERVIEW OF 2016 AND FUTURE OUTLOOK
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:
improving utility operations through growth in investment in T&D and other infrastructure projects designed to enhance resiliency, and
maintaining and expanding a reliable generation fleet with the flexibility to utilize a diverse mix of fuels which allows us to respond to market volatility and capitalize on opportunities as they arise.




66


Table of Contents


Financial Results
The results for PSEG, PSE&G and Power for the three months and nine months ended September 30, 2016 and 2015 are presented as follows:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
Earnings
2016
 
2015
 
2016
 
2015
 
 
 
Millions
 
 
PSE&G
$
255

 
$
222

 
$
696

 
$
631

 
 
Power (A) (B)
139

 
206

 
320

 
707

 
 
Other (C)
(67
)
 
11

 
(31
)
 
32

 
 
PSEG Net Income
$
327

 
$
439

 
$
985

 
$
1,370

 
 
 
 
 
 
 
 
 
 
 
 
PSEG Net Income Per Share (Diluted)
$
0.64

 
$
0.87

 
$
1.94

 
$
2.70

 
 
 
 
 
 
 
 
 
 
 
(A)
Includes after-tax expenses of $67 million related to the early retirement of Power’s Hudson and Mercer coal/gas generation plants in the three months and nine months ended September 30, 2016. See Item 1. Note 3. Early Plant Retirements for additional information.
(B)
Includes an after-tax insurance recovery for Superstorm Sandy of $102 million in the nine months ended September 30, 2015.
(C)
Other includes activities at the parent company, PSEG LI, and Energy Holdings as well as intercompany eliminations. Energy Holdings recorded an after-tax impairment of $86 million related to its investments in NRG REMA, LLC’s leveraged leases in the three months and nine months ended September 30, 2016. See Item 1. Note 6. Financing Receivables for further information.
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 future delivery dates.
The variances in our Net Income include the changes related to NDT and MTM shown in the following table:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
 
 
Millions, after tax
 
 
NDT Fund Income (Expense) (A) (B)
$
2

 
$
(14
)
 
$
(4
)
 
$
(11
)
 
 
Non-Trading MTM Gains (Losses) (C)
$
34

 
$
50

 
$
(54
)
 
$
58

 
 
 
 
 
 
 
 
 
 
 
(A)
NDT Fund Income (Expense) includes the realized gains and losses, 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 Operation and Maintenance (O&M) Expense and the depreciation related to the ARO asset is recorded in Depreciation and Amortization Expense.
(B)
Net of tax (expense) benefit of $(2) million, $10 million, $0 million and $3 million for the three and nine months ended September 30, 2016 and 2015, respectively.
(C)
Net of tax (expense) benefit of $(24) million, $(34) million, $37 million and $(40) million for the three and nine months ended September 30, 2016 and 2015, respectively.
Our $112 million decrease in Net Income for the three months ended September 30, 2016 was driven primarily by
an impairment related to investments in certain leveraged leases at Energy Holdings (See Item 1. Note 6. Financing Receivables),
charges related to the early retirement of two coal/gas generation units at Power (See Item 1. Note 3. Early Plant Retirements), and

67


Table of Contents


lower volumes of energy sold at lower average realized prices and lower capacity revenues, primarily in the PJM Interconnection, L.L.C. (PJM) region.
These decreases were partially offset by
higher revenues due to increased investments in transmission projects,
higher electricity sales under non-BGS wholesale load contracts in PJM and New England (NE) and higher volumes of electricity sold at higher prices under our Basic Generation Service (BGS) contracts, and
lower other-than-temporary impairments of the NDT Fund.
Our $385 million decrease in Net Income for the nine months ended September 30, 2016 was driven primarily by
the aforementioned charges in the 2016 third quarter for the early retirement of the two coal/gas generation units at Power,
MTM losses in 2016 as compared to MTM gains in 2015,
lower volumes of energy sold at lower average realized sales prices,
lower capacity and operating reserve revenues in PJM,
higher 2016 congestion costs in PJM as a result of credits received in 2015 due to extremely colder weather,
lower volumes of gas sold at lower average prices under the Basic Gas Supply Service (BGSS) contract,
insurance recoveries received primarily by Power in 2015 related to Superstorm Sandy, and
the aforementioned third quarter 2016 impairment on leveraged leases at Energy Holdings.
These decreases were partially offset by
lower generation costs driven by lower fuel costs, particularly for natural gas, and reduced generation output at Power,
higher costs incurred at Power for planned outages in 2015, and
higher revenues due to increased investments in transmission projects.
During the first nine months of 2016, we maintained a strong balance sheet. We continued to effectively deploy capital without the need for additional equity, while our solid credit ratings aided our ability to access capital and credit markets. The greater emphasis on capital spending for projects on which we receive contemporaneous returns at PSE&G, our regulated utility, in recent years has yielded strong results and allowed us to increase our dividend. These actions to transition our business to meet market conditions and investor expectations reflect our multi-year, long-term approach to managing our company. Our focus has been to invest capital in T&D and other infrastructure projects aimed at maintaining service reliability to our customers and bolstering our system resiliency. At Power, our merchant generator, we strive to improve performance and reduce costs in order to enhance the value of our generation fleet in light of low gas prices, environmental considerations and competitive market forces that reward efficiency and reliability.
At PSE&G, in 2016 we continue to make investments to improve the resiliency of our gas and electric distribution system as part of our Energy Strong program that was approved by the BPU in 2014 and to seek recovery on such investments. We also commenced modernizing PSE&G’s gas distribution systems as part of our Gas System Modernization Program (GSMP) that was approved by the BPU in late 2015. Over the past few years, these types of investments have altered our business mix to reflect a higher percentage of earnings contribution by PSE&G. In 2017, as a result of our Energy Strong Order from the BPU, we will be required to file a Distribution rate case proceeding. We cannot predict the impact such proceeding will have on our distribution business.
Despite the unseasonable warm winter weather patterns in 2016, Power’s results benefited from access to natural gas supplies through existing firm pipeline transportation contracts. Power manages these contracts for the benefit of PSE&G’s customers through the BGSS arrangement. The contracts are sized to provide for 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 make third party sales and supply gas to its generating units in New Jersey. Alternatively, gas supply and pipeline capacity constraints could adversely impact our ability to meet the needs of our utility customers and generating units. Power’s strategic hedging practices and ability to capitalize on market opportunities help it to balance some of the volatility of the merchant power business.
Our recent investments in the latter half of 2015 and early 2016 in Keys Energy Center (Keys), Sewaren 7 and Bridgeport Harbor Station 5 (BH5) reflect our recognition of the value of opportunistic growth in the Power business. These additions to

68


Table of Contents


our fleet both expand our geographic diversity and adjust our fuel mix and are expected to contribute to the overall efficiency of operations.
Since 2013, eight nuclear generating stations in the United States have closed or announced early retirement due to economic reasons, and four additional stations have been announced as being at risk for early retirement. This situation is generally due to low natural gas prices resulting from the growth of shale gas production since 2007, the continuing cost of regulatory compliance for nuclear facilities and both federal and state-level policies that provide credits to renewable energy such as wind and solar, but do not apply to nuclear generating stations. These trends have significantly reduced the revenues to nuclear generating stations while simultaneously raising the unit cost of production. This may result in the electric generation industry experiencing a shift from nuclear generation to natural gas-fired generation, creating greater reliance on natural gas pipelines for delivery and less diversity of the generation fleet.
If trends noted above continue or worsen, our nuclear generating units could cease being economically competitive which may cause us to retire such units prior to the end of their useful lives. The costs associated with any such retirement, which may include, among other things, accelerated depreciation and amortization or impairment charges, accelerated asset retirement costs, severance costs and environmental remediation costs, could be material. We continue to advocate for sound policies that recognize nuclear power as a source of clean energy and an important part of a diverse and reliable energy portfolio. 
Regulatory, Legislative and Other Developments
In our pursuit of operational excellence, financial strength and disciplined investment, we closely monitor and engage with stakeholders on significant regulatory and legislative developments. Transmission planning rules and wholesale power market design are of particular importance to our results and we continue to advocate for policies and rules that promote fair and efficient electricity markets.
Transmission
In April 2013, PJM initiated its first “open window” solicitation process to allow both incumbents and non-incumbents the opportunity to submit transmission project proposals to address identified high voltage issues in New Jersey. In February 2016, FERC issued an order granting PSE&G’s request that it be permitted to seek recovery of 100% of its portion of prudently incurred Artificial Island project costs if the project is cancelled for reasons beyond PSE&G’s control. In April 2016, PSE&G accepted construction responsibility for three components of the Artificial Island project that PJM assigned to us. On August 5, 2016, PJM announced that it has suspended the Artificial Island transmission project and is performing a comprehensive analysis to determine a future course of action, which is expected to be completed by February 2017. We may also from time to time have opportunities to submit transmission project proposals in regions where we are not the incumbent. However, there can be no assurance that any such proposals would be successful.
In April 2016, PJM filed at FERC to incorporate a voltage threshold into PJM’s Regional Transmission Expansion Plan (RTEP) process to exempt, except under certain circumstances, reliability violations on facilities below 200 kV from PJM’s proposal window process. We generally support this reform as a measure to improve the efficiency of the open window procedure that will permit transmission developers to focus on the projects most likely to benefit from a competitive process. 
There are several matters pending before FERC that concern the allocation of costs associated with transmission projects being constructed by PSE&G. Regardless of how these proceedings are resolved, PSE&G’s ability to recover the costs of these projects will not be affected. However, the result of these proceedings could ultimately impact the amount of costs borne by ratepayers in New Jersey and may cause increased scrutiny regarding PSE&G’s future capital investments. In addition, as a basic generation service (BGS) supplier, Power provides services that include specified transmission costs. If the allocation of the costs associated with the transmission projects were to increase these BGS-related transmission costs, BGS suppliers may be entitled to an adjustment, subject to BPU approval. We do not believe that these matters will have a material effect on Power’s business or results of operations.
Several complaints have been filed and several remain pending at FERC against transmission owners around the country, challenging those transmission owners’ base return on equity (ROE). Certain of those complaints have resulted in decisions and others have been settled, resulting in reductions of those transmission owners’ base ROEs. While we are not the subject of a challenge to the ROE employed in PSE&G’s transmission formula rate, the results of these other proceedings could set precedents for other transmission owners with formula rates in place, including PSE&G.

69


Table of Contents


Wholesale Power Market Design
Capacity market design, including the Reliability Pricing Model (RPM) in PJM, remains an important focus for us. In June 2015, FERC conditionally accepted a proposal from PJM for a capacity performance product to include generators, Demand Response and energy efficiency providers, which will be required to perform during emergency conditions, as a supplement to the base capacity product. The proposal included enhanced performance-based incentives and penalties. We believe that the auction pricing adequately reflects the increased costs that could result from operating under more stringent rules for generation availability. Based on the auction results, the capacity performance mechanism appears to have provided the opportunity for enhanced capacity market revenue streams for Power, but future impacts cannot be assured. Further, there may be requirements for additional investment and there are additional performance and financial risks. Appeals of FERC’s capacity performance orders are pending.
In May 2016, PJM announced the results of the RPM capacity auction for the 2019-2020 delivery year. Power cleared 8,895 MW of its generating capacity at an average price of $116 per MW-day for the 2019-2020 delivery period. Of the cleared capacity, Power believes that nearly all is compliant with PJM’s capacity performance requirements. In the two prior capacity auctions covering the 2017-2018 and 2018-2019 delivery years, Power cleared approximately 8,700 MW at average prices of $177 per MW-day and $215 per MW-day, respectively. Prices in the most recent auction reflect PJM’s downwardly-revised demand forecast, changes in the emergency transfer limits due to transmission expansion and the effects of both the new generation and uncleared generation from the prior year’s auction.
As a result of the efforts of certain entities in PJM to obtain financial support arrangements from their state commission, a group of suppliers requested that FERC direct PJM to expand the currently effective “minimum offer price rule” to apply to certain existing units seeking subsidies. The suppliers’ request was intended to avoid a scenario where the subsidized generators would submit bids into the PJM capacity market that did not reflect their actual costs of operation and could artificially suppress capacity market prices. We are currently awaiting FERC action on the suppliers’ request and cannot predict the outcome of the proceeding. See Part II, Item 5. Other Information—Federal Regulation—Capacity Market Issues—PJM for additional information.
Environmental Regulation
We continue to advocate for the development and implementation of fair and reasonable rules by the EPA and state environmental regulators. In particular, section 316(b) of the Federal Water Pollution Control Act (FWPCA) requires that cooling water intake structures, which are a significant part of the generation of electricity at steam-electric generating stations, reflect the best technology available for minimizing adverse environmental impacts. Implementation of Section 316(b) and related state regulations could adversely impact future nuclear and fossil operations and costs. See Item 1. Note 9. Commitments and Contingent Liabilities for further information.
In October 2015, the EPA published the Clean Power Plan (CPP), a greenhouse gas emissions regulation under the Clean Air Act (CAA) for existing power plants. The regulation establishes state-specific emission targets based on implementation of the best systems of emission reduction. We continue to work with FERC and other federal and state regulators, as well as industry partners, to determine the potential impact of these regulations.
The U.S. Supreme Court’s February 2016 decision to stay the implementation of the CPP will delay deadlines for submission of state requests for extensions and final plans. If the CPP is upheld, new deadlines will need to be established and the effective date of the compliance period may be impacted.
We are subject to liability under environmental laws for the costs of remediating environmental contamination of property now or formerly owned by us and of property contaminated by hazardous substances that we generated. In particular, the historic operations of PSEG companies and the operations of numerous other companies along the Passaic and Hackensack Rivers are alleged by Federal and State agencies to have discharged substantial contamination into the Passaic River/Newark Bay Complex in violation of various statutes. We are also currently involved in a number of proceedings relating to sites where other hazardous substances may have been discharged and may be subject to additional proceedings in the future, and the costs of any such remediation efforts could be material.
For further information regarding the matters described above as well as other matters that may impact our financial condition and results of operations, see Item 1. Note 9. Commitments and Contingent Liabilities.
FERC Compliance
Since September 2014, FERC Staff has been conducting a preliminary non-public investigation regarding errors in the calculation of certain components of Power’s cost-based bids for its New Jersey fossil generating units in the PJM energy market and the quantity of energy that Power offered into the energy market for its fossil peaking units compared to the amounts for which Power was compensated in the capacity market for those units. This investigation is ongoing. The amounts of potential disgorgement and other potential penalties that we may incur span a wide range depending on the success of our legal arguments. If our legal arguments do not prevail, in whole or in part with FERC or in a judicial challenge that we may

70


Table of Contents


choose to pursue, it is likely that Power would record losses that would be material to PSEG’s and Power’s results of operations in the quarterly and annual periods in which they are recorded. For additional information, see Item 1. Note 9. Commitments and Contingent Liabilities.
Early Retirement of Hudson and Mercer Units
In October 2016, Power determined it will cease generation operations of the existing coal/gas units at the Hudson and Mercer generating stations on June 1, 2017. The exact timing of the early retirement of these units will be reviewed for reliability impacts by PJM, and may be impacted by operational and other conditions that could subsequently arise. The decision to retire the Hudson and Mercer units will have a material effect on PSEG’s and Power’s results of operations. In the third quarter of 2016, PSEG and Power recognized one-time pre-tax charges in Energy Costs, Operation and Maintenance and Depreciation and Amortization of $62 million, $48 million and $4 million, respectively, related to coal inventory adjustments, capacity penalties, materials and supplies inventory reserve adjustments for parts that cannot be used at other generating units, employee-related severance benefits costs, construction work in progress impairments, and asset retirement obligation (ARO) adjustments, among other shut down items. In addition to these one-time charges, Power will recognize incremental Depreciation and Amortization during the remainder of 2016 of $568 million and $946 million into 2017 due to the significant shortening of the expected economic useful lives of Hudson and Mercer. Additional employee-related salary continuance and severance costs and various miscellaneous costs may also be incurred during the period prior to retirement. Finally, Power currently anticipates using the sites for alternative industrial activity. However, if Power determines not to use the sites for alternative industrial activity, the early retirement of the units at such sites would trigger investigation and possible remediation of identified environmental contamination. The amounts for any such environmental investigation or remediation are not currently probable or estimable but may be material. For additional information, including our estimated costs through 2017, see Item 1. Note 3. Early Plant Retirements.
The primary factors considered during our annual five-year strategic planning process that contributed to the decision to retire these units early include significant declines in revenues and margin caused by a sustained period of depressed wholesale power prices and reduced capacity factors caused by lower natural gas prices making coal generation less economically competitive than natural gas-fired generation. Despite experiencing recent warmer than normal weather in PJM this summer, Power did not experience the usual increase in electricity prices in PJM as it had in past hot summers. This trend has a further adverse economic impact to these units because they generally dispatch and earn energy margin on peak hot and cold days. In addition, the upcoming PJM capacity auction in May 2017 will be the first to require all generating units to meet the increased operating performance standards of PJM’s new capacity performance construct. Power determined that the costs to upgrade the existing units at the Hudson and Mercer stations to be able to comply with these higher reliability standards are too significant and not economic given current market conditions. 
In addition, PSEG and Power continue to monitor their other coal assets, including the Keystone, Conemaugh and Bridgeport Harbor generating stations, to ensure their economic viability through the end of their designated useful lives. The precise timing of a change in useful lives may be dependent upon events out of PSEG’s and Power’s control and may impact our ability to operate or maintain certain assets in the future. These generating stations may be impacted by factors such as environmental legislation, co-owner capital requirements and continued depressed wholesale power prices or capacity factors, among other things. Any early retirement of our other coal units before the end of their current estimated useful lives may have a material adverse impact on PSEG’s and Power’s future financial results.
Leveraged Lease Impairments
During the third quarter of 2016, Energy Holdings completed its annual review of estimated residual values embedded in the NRG REMA, LLC (REMA) leveraged leases. The outcome indicated that the revised residual value estimates were lower than the recorded residual values and the decline was deemed to be other than temporary due to the adverse economic conditions experienced by coal generation in PJM, as discussed in Note 3. Early Plant Retirements, negatively impacting the economic outlook of the leased assets. As a result, a pre-tax write-down of $137 million was reflected in Operating Revenues in the quarter ended September 30, 2016, calculated by comparing the gross investment in the leases before and after the revised residual estimates. There can be no assurance that a continuation or worsening of the adverse economic conditions would not lead to additional write-downs at any of our other generation units in our leveraged lease portfolio, and such write-downs could be material.
Additional facilities in our leveraged lease portfolio include the Joliet facility, which has converted to natural gas. The coal-fired units at the Shawville generating facility are expected to return to service in the fall of 2016 with the ability to use natural gas. However, these units may have higher operating costs and fuel consumption as well as longer start-up times compared to newer combined cycle gas units. As a result, these facilities may not be as economically competitive as newer combined cycle gas units and could continue to be adversely impacted by the same economic conditions experienced by coal generation facilities, which could require Energy Holdings to write down the residual value of the leveraged leases associated with these facilities.  

71


Table of Contents


REMA’s parent company, GenOn Energy, Inc. (GenOn), reported in August 2016 that it did not expect to have sufficient liquidity to repay their senior unsecured notes due in June 2017. Although all lease payments are current, PSEG cannot predict the outcome of GenOn’s efforts to restructure its portfolio and improve its liquidity and the possible related impact on REMA. PSEG continues to monitor any changes to REMA’s and GenOn’s status and potential impacts on Energy Holdings’ lease investments, which could include further write-downs of the values of Energy Holdings’ leveraged leases.
Salem Operations
The previously announced bolt replacement at Salem Unit 1 was completed and the unit returned to service on July 30, 2016. We expect to continue to inspect and replace degraded bolts at both Salem units over the next several refueling outage cycles. We are participating with the Electric Power Research Institute, the Nuclear Energy Institute and other operators of similarly-designed pressurized water reactors in developing a strategy to maintain the long-term health of the reactor vessel internals. 
Extension of the Salem Unit 1 outage into July and an unplanned outage at Salem Unit 2 due to transformer issues reduced output from the Salem units in the third quarter, which was partially offset by increased production at our Hope Creek and Peach Bottom units. As a result, our nuclear capacity factor for the nine months ended September 30, 2016 was 88%.

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 opportunities in a rapidly evolving market as we remain diligent in managing costs. For the first nine months of 2016, our
diverse fuel mix and dispatch flexibility allowed us to generate approximately 40 terra-watt hours while addressing fuel availability and price volatility and compensating for the extended outages at our Salem units, and
combined cycle fleet produced 13 terawatt hours at an average capacity factor of 63%.
Financial Strength
Our financial strength is predicated on a solid balance sheet, positive operating cash flow and reasonable risk-adjusted returns on increased investment. Our financial position remained strong during the first nine months of 2016 as we
had cash on hand of $450 million as of September 30, 2016,
maintained solid investment grade credit ratings, and
increased our indicative annual dividend for 2016 to $1.64 per share.
We expect to be able to fund our planned capital requirements, as described in Liquidity and Capital Resources, without the issuance of new equity.
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 nine months of 2016, we
made additional investments in transmission infrastructure projects,
began executing our GSMP and continued executing Energy Strong and other existing BPU-approved utility programs,
commenced construction of our Keys and Sewaren 7 generation projects for targeted commercial operation in 2018 and announced our plan to construct BH5 and commence operations in mid-2019, and
acquired three solar energy projects totaling 100 MW-direct current. Two of these projects are already in service in North Carolina and Colorado. The third project is in Colorado and expected to be in service by year end.
Future Outlook    
Our future success will depend on our ability to continue to maintain strong operational and financial performance in a slow-growing economy and a cost-constrained environment with low gas prices, to capitalize on or otherwise address appropriately regulatory and legislative developments that impact our business 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,

72


Table of Contents


successfully manage our energy obligations and re-contract our open supply positions in response to changes in demand,
execute our utility capital investment program, including our Energy Strong program, GSMP 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,
effectively manage construction of our Keys, Sewaren 7, BH5 and other generation projects,
advocate for measures to ensure the implementation by PJM and FERC of market design and transmission planning rules that continue to promote fair and efficient electricity markets,
engage multiple stakeholders, including regulators, government officials, customers and investors, and
successfully operate the LIPA T&D system and manage LIPA’s fuel supply and generation dispatch obligations.
For 2016 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,
fair and timely rate relief from the BPU and FERC for recovery of costs and return on investments, including with respect to our base rate case which must be filed with the BPU no later than November 1, 2017,
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 behaviors and demand,
the potential for continued reductions in demand and sustained lower natural gas and electricity prices, both at market hubs and the locations where we operate,
the impact of lower natural gas prices and increasing environmental compliance costs on the competitiveness of our nuclear and remaining coal-fired generation plants, and the potential for retirement of such plants earlier than their current useful lives,
delays and other obstacles that might arise in connection with the construction of our T&D, generation and other development projects, including in connection with permitting and regulatory approvals,
maintaining a diverse mix of fuels to mitigate risks associated with fuel price volatility and market demand cycles, and
FERC Staff’s continuing investigation of certain of Power’s New Jersey fossil generating unit bids in the PJM energy market.
Our primary investment opportunities are in two areas: our regulated utility business and our merchant power business. We continually assess a broad range of strategic options to maximize long-term stockholder value. In assessing our options, we consider a wide variety of factors, including the performance and prospects of our businesses; the views of investors, regulators and rating agencies; our existing indebtedness and restrictions it imposes; and tax considerations, among other things. Strategic options available to us include:
the acquisition, construction or disposition of transmission and distribution facilities and/or generation units,
the disposition or reorganization of our merchant generation business or other existing businesses or the acquisition or development of new businesses,
the expansion of our geographic footprint,
continued or expanded participation in solar, demand response and energy efficiency programs, and
investments in capital improvements and additions, including the installation of environmental upgrades and retrofits, improvements to system resiliency, modernizing existing infrastructure and participation in transmission projects through FERC’s “open window” solicitation process.
We continue to actively explore opportunities in the retail energy marketing business, which we believe would complement our existing wholesale marketing business. Our entry into the retail energy marketing business is subject to market conditions and regulatory approval, among other things.

73


Table of Contents


There can be no assurance, however, that we will successfully develop and execute any of the strategic options noted above, or any additional options we may consider in the future. The execution of any such strategic plan may not have the expected benefits or may have unexpected adverse consequences.

RESULTS OF OPERATIONS
PSEG
Our results of operations are primarily comprised of the results of operations of our principal operating subsidiaries, PSE&G and Power, excluding charges related to intercompany transactions, which are eliminated in consolidation. For additional information on intercompany transactions, see Item 1. Note 18. Related-Party Transactions.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Increase/
(Decrease)
 
Nine Months Ended
 
Increase/
(Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2016
 
2015
 
2016 vs. 2015
 
2016
 
2015
 
2016 vs. 2015
 
 
 
Millions
 
Millions
 
%
 
Millions
 
Millions
 
%
 
 
Operating Revenues
$
2,450

 
$
2,688

 
$
(238
)
 
(9
)
 
$
6,971

 
$
8,137

 
$
(1,166
)
 
(14
)
 
 
Energy Costs
866

 
815

 
51

 
6

 
2,326

 
2,577

 
(251
)
 
(10
)
 
 
Operation and Maintenance
776

 
746

 
30

 
4

 
2,215

 
2,170

 
45

 
2

 
 
Depreciation and Amortization
231

 
313

 
(82
)
 
(26
)
 
679

 
960

 
(281
)
 
(29
)
 
 
Income from Equity Method Investments
3

 
3

 

 

 
9

 
10

 
(1
)
 
(10
)
 
 
Other Income (Deductions)
39

 
33

 
6

 
18

 
100

 
135

 
(35
)
 
(26
)
 
 
Other-Than-Temporary Impairments
5

 
30

 
(25
)
 
(83
)
 
25

 
45

 
(20
)
 
(44
)
 
 
Interest Expense
99

 
96

 
3

 
3

 
288

 
291

 
(3
)
 
(1
)
 
 
Income Tax Expense
188

 
285

 
(97
)
 
(34
)
 
562

 
869

 
(307
)
 
(35
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following discussions for PSE&G and Power provide a detailed explanation of their respective variances.
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Increase/
(Decrease)
 
Nine Months Ended
 
Increase/
(Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2016
 
2015
 
2016 vs. 2015
 
2016
 
2015
 
2016 vs. 2015
 
 
 
Millions
 
Millions
 
%
 
Millions
 
Millions
 
%
 
 
Operating Revenues
$
1,684

 
$
1,766

 
$
(82
)
 
(5
)
 
$
4,746

 
$
5,234

 
$
(488
)
 
(9
)
 
 
Energy Costs
721

 
740

 
(19
)
 
(3
)
 
1,979

 
2,176

 
(197
)
 
(9
)
 
 
Operation and Maintenance
376

 
391

 
(15
)
 
(4
)
 
1,110

 
1,171

 
(61
)
 
(5
)
 
 
Depreciation and Amortization
137

 
231

 
(94
)
 
(41
)
 
412

 
712

 
(300
)
 
(42
)
 
 
Other Income (Deductions)
21

 
22

 
(1
)
 
(5
)
 
58

 
57

 
1

 
2

 
 
Interest Expense
72

 
67

 
5

 
7

 
214

 
203

 
11

 
5

 
 
Income Tax Expense
144

 
137

 
7

 
5

 
393

 
398

 
(5
)
 
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016 as Compared to 2015
Operating Revenues decreased $82 million due to changes in delivery, commodity, clause and other operating revenues.
Delivery Revenues increased $57 million due primarily to an increase in transmission revenues.
Transmission revenues were $50 million higher due to increased capital investments.
Electric distribution revenues increased $8 million due primarily to $12 million in higher sales volumes and $12 million due to the inclusion of Energy Strong in base rates, partially offset by lower Green Program Recovery Charges (GPRC) of $16 million.

74


Table of Contents


Commodity Revenue decreased $19 million as a result of $14 million of lower Gas revenues and $5 million of lower Electric revenues. Commodity revenue for both gas and electric is entirely offset with the change in Energy Costs. PSE&G earns no margin on the provision of BGSS and BGS to retail customers.
Gas revenues decreased $14 million due to $25 million of lower BGSS sales volumes, partially offset by $11 million in higher prices.
Electric revenues decreased $5 million due primarily to $17 million of lower revenues from collections of Non-Utility Generation Charges (NGC) and a decrease of $14 million due to lower volumes of Non-Utility Generation (NUG) energy sold at lower prices. These decreases were partially offset by a $26 million increase in BGS revenues due to higher sales volumes.
Clause Revenues decreased $121 million due primarily to lower Securitization Transition Charges (STC) of $118 million. The STC reduction was a result of rate reductions due to the completion of securitization collections in 2015. The changes in the STC amounts are entirely offset by decreases in the amortization of Regulatory Assets and related costs in O&M, Depreciation and Amortization and Interest Expense. PSE&G does not earn margin on STC collections.
Operating Expenses
Energy Costs decreased $19 million. This is entirely offset by the change in Commodity Revenue.
Operation and Maintenance decreased $15 million, of which the most significant components were
a $23 million net reduction in costs related to various clause mechanisms, including SBC and STC, and GPRC, and
a $2 million decrease in pension and OPEB costs, net of capitalized amounts,
partially offset by a net increase of $10 million in operating expenses, including increases in appliance service costs, gas distribution costs and electric distribution corrective maintenance.
Depreciation and Amortization decreased $94 million due to a decrease of $114 million in amortization of Regulatory Assets primarily as a result of the completion of the amortization of the securitization charges in 2015 (which is completely offset in STC Revenues), partially offset by an $18 million increase in depreciation due to additional plant in service.
Interest Expense increased $5 million due primarily to an increase of $7 million due to net debt issuances in 2015 and 2016, partially offset by a $2 million decrease due to the redemption of securitization debt in 2015.
Income Tax Expense increased $7 million due primarily to higher pre-tax income, partially offset by plant-related items and uncertain tax positions.
Nine Months Ended September 30, 2016 as Compared to 2015
Operating Revenues decreased $488 million due to changes in delivery, commodity, clause and other operating revenues.
Delivery Revenues increased $116 million due primarily to an increase in transmission revenues.
Transmission revenues were $152 million higher due to increased capital investments.
Electric distribution revenues decreased $30 million due primarily to lower GPRC of $42 million and a $4 million decrease due to lower sales volumes partially offset by $16 million increase due to the inclusion of Energy Strong in base rates.
Gas distribution revenues decreased $6 million due primarily to $75 million of lower delivery volumes and lower GPRC of $7 million due to lower sales volumes from warmer winter weather. These decreases were almost entirely offset by $64 million in higher Weather Normalization Clause revenue and a $12 million increase due to the inclusion of Energy Strong in base rates effective September 1, 2015.
Commodity Revenue decreased $197 million as a result of lower Gas and Electric revenues. Commodity revenue for both gas and electric is entirely offset with decreased Energy Costs. PSE&G earns no margin on the provision of BGSS and BGS to retail customers.
Gas revenues decreased $108 million due primarily to lower BGSS sales volumes.
Electric revenues decreased $89 million due primarily to $43 million of lower revenues from collections of NGC, a decrease of $31 million due to lower volumes of NUG energy sold and a $15 million or 1% decrease in BGS revenues due primarily to lower sales volumes.

75


Table of Contents


Clause Revenues decreased $402 million due primarily to lower STC of $370 million, lower SBC of $38 million and $9 million of lower SPRC, partially offset by higher Margin Adjustment Clause (MAC) revenue of $15 million. The STC reduction is a result of rate reductions due to the completion of securitization collections in 2015. The changes in the STC, SBC, SPRC and MAC amounts are entirely offset by decreases in the amortization of Regulatory Assets and related costs in O&M, Depreciation and Amortization and Interest Expense. PSE&G does not earn margin on STC, SBC, SPRC or MAC collections.
Operating Expenses
Energy Costs decreased $197 million. This is entirely offset by the change in Commodity Revenue.
Operation and Maintenance decreased $61 million, of which the most significant components were
a $95 million net reduction in costs related to various clause mechanisms, including SBC, SPRC, STC and MAC, and GPRC, and
a $10 million decrease in pension and OPEB costs, net of capitalized amounts,
partially offset by $10 million of storm insurance recovery proceeds received in 2015,
an $8 million increase in electric distribution corrective maintenance,
a $5 million increase in vegetation management,
a $5 million increase in transmission related maintenance and
a $16 million increase in operating expenses, including $3 million increases related to both appliance service costs and gas distribution costs.
Depreciation and Amortization decreased $300 million due to a decrease of $353 million in amortization of Regulatory Assets primarily as a result of the completion of the amortization of the securitization charges in 2015 (which is completely offset in STC Revenues), partially offset by a $49 million increase in depreciation due to additional plant in service.
Interest Expense increased $11 million due primarily to an increase of $20 million due to net debt issuances in 2015 and 2016, partially offset by a $10 million decrease due to the redemption of securitization debt in 2015.
Income Tax Expense decreased $5 million due primarily to uncertain tax positions, plant-related and other flow through items, partially offset by higher pre-tax income.

76


Table of Contents


Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Increase/
(Decrease)
 
Nine Months Ended
 
Increase/
(Decrease)
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2016
 
2015

 
2016 vs. 2015
 
2016
 
2015
 
2016 vs. 2015
 
 
 
Millions
 
Millions
 
%
 
Millions
 
Millions
 
%
 
 
Operating Revenues
$
1,075

 
$
1,096

 
$
(21
)
 
(2
)
 
$
3,102

 
$
3,846

 
$
(744
)
 
(19
)
 
 
Energy Costs
462

 
367

 
95

 
26

 
1,481

 
1,669

 
(188
)
 
(11
)
 
 
Operation and Maintenance
289

 
263

 
26

 
10

 
807

 
748

 
59

 
8

 
 
Depreciation and Amortization
86

 
75

 
11

 
15

 
245

 
226

 
19

 
8

 
 
Income from Equity Method Investments
3

 
3

 

 

 
9

 
11

 
(2
)
 
(18
)
 
 
Other Income (Deductions)
17

 
11

 
6

 
55

 
41

 
77

 
(36
)
 
(47
)
 
 
Other-Than-Temporary Impairments
5

 
30

 
(25
)
 
(83
)
 
25

 
45

 
(20
)
 
(44
)
 
 
Interest Expense
24

 
30

 
(6
)
 
(20
)
 
66

 
94

 
(28
)
 
(30
)
 
 
Income Tax Expense
90

 
139

 
(49
)
 
(35
)
 
208

 
445

 
(237
)
 
(53
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016 as Compared to 2015
Operating Revenues decreased $21 million due to changes in generation, gas supply and other revenues.
Generation Revenues decreased $23 million due primarily to
a decrease of $73 million in energy sales volumes and lower average realized prices, primarily in the PJM region, and
a decrease of $24 million in capacity revenue, primarily in the PJM region,
partially offset by a net increase of $44 million in electricity sold under non-BGS wholesale load contracts in the PJM and NE regions due to higher volumes sold partially offset by lower average prices, and
an increase of $24 million in electricity sold under our BGS contracts due primarily to higher volumes as a result of warmer weather, coupled with higher average prices.
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 $95 million due primarily to

Generation costs increased $93 million due to
a $62 million charge associated with the announced early retirement of the coal/gas Mercer and Hudson generation units, primarily related to a coal inventory write-down of $57 million,
an increase of $32 million due to MTM losses in 2016 as compared to MTM gains in 2015. Of this amount, $25 million was due to lower gains on positions reclassified to realized upon settlement this year compared to last year, and
an increase of $13 million due to increases in purchases of renewable energy credits and energy to serve load contracts,
partially offset by a decrease of $20 million due primarily to lower natural gas costs reflecting lower average realized prices.
Operation and Maintenance increased $26 million due primarily to
$48 million of charges related to the early retirement of the Hudson and Mercer units,
partially offset by a net decrease of $18 million due to the timing of a planned outage at our 50%-owned Peach Bottom nuclear plant.

77


Table of Contents


Depreciation and Amortization increased $11 million due primarily to
a $7 million increase due primarily to a higher nuclear asset base, and
$4 million of accelerated depreciation on asset retirement costs from previously retired assets at the Hudson and Mercer plants.
Other Income (Deductions) increased $6 million due primarily to lower net realized losses from the NDT Fund in 2016.
Other-Than-Temporary Impairments decreased $25 million due to lower impairments of equity securities in the NDT Fund in 2016.
Interest Expense decreased $6 million due primarily to higher capitalized interest in 2016.
Income Tax Expense decreased $49 million in 2016 due primarily to lower pre-tax income.
Nine Months Ended September 30, 2016 as Compared to 2015
Operating Revenues decreased $744 million due to changes in generation, gas supply and other revenues.
Generation Revenues decreased $497 million due primarily to
a decrease of $213 million in energy sales volumes in the PJM, NE and New York (NY) regions due primarily to milder weather and lower average realized prices,
a decrease of $166 million due to MTM losses in 2016 as compared to MTM gains in 2015. Of this amount, $127 million was due to higher gains on positions reclassified to realized upon settlement this year compared to last year. Also contributing to the decrease were lower MTM gains of $39 million due to minor changes in forward power prices this year compared to last year,
a net decrease of $113 million primarily in the PJM region due to lower capacity revenue resulting from the retirement of older peaking units in June 2015, coupled with lower operating reserve revenue, and
a net decrease of $10 million in electricity sold under our BGS contracts due primarily to lower volumes as a result of milder weather, partially offset by higher average prices.

Gas Supply Revenues decreased $248 million due primarily to
a decrease of $241 million in sales under the BGSS contract, substantially comprised of lower sales volumes due to warmer average temperatures in the 2016 winter heating season, coupled with lower average sales prices, and
a net decrease of $7 million in sales to third party customers, of which $45 million was due to lower average prices, partially offset by $38 million of higher volumes sold.
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 $188 million due to

Generation costs decreased $67 million due primarily to
lower fuel costs of $287 million reflecting lower average realized prices for natural gas and the utilization of lower volumes of fuel,
partially offset by higher congestion costs in PJM of $137 million, mainly as a result of credits received in the prior year due to extremely cold winter weather,
a $62 million charge associated with the announced early retirement of the Mercer and Hudson units, primarily related to a coal inventory write-down of $57 million, and
a net increase of $15 million due to lower MTM gains in 2016 as compared to 2015. Of this amount, $10 million was due to lower gains on positions reclassified to realized upon settlement this year compared to last year.

78


Table of Contents


Gas costs decreased $121 million mainly related to
a decrease of $142 million related to sales under the BGSS contract due primarily to lower volumes sold due to warmer average temperatures during the 2016 winter heating season and lower average gas costs,
partially offset by a net increase of $21 million related to sales to third parties due primarily to an increase in volumes sold.
Operation and Maintenance increased $59 million due primarily to
$145 million of insurance recoveries received in 2015 related to Superstorm Sandy,
$48 million of charges related to early retirement of the Hudson and Mercer units,
partially offset by a net decrease of $75 million related to our fossil plants, largely due to higher costs incurred in 2015 for our planned major outages at the Bethlehem Energy Center and Bergen generating plants, and
a net decrease of $58 million related to our nuclear plants due primarily to a planned outage at our 100%-owned Hope Creek plant and our 50%-owned Peach Bottom plant in 2015, partly offset in 2016 by an extended refueling outage at our 57%-owned Salem Unit 1 plant.
Depreciation and Amortization increased $19 million due primarily to
a $12 million increase due primarily to a higher nuclear asset base,
$4 million of accelerated depreciation on asset retirement costs from previously retired assets at the Hudson and Mercer plants, and
$3 million of higher depreciation due to new solar projects.
Other Income (Deductions) decreased $36 million due primarily to $28 million of insurance recoveries received in 2015 related to Superstorm Sandy and lower net realized gains from the NDT Fund in 2016.
Other-Than-Temporary Impairments decreased $20 million due to lower impairments of equity securities in the NDT Fund in 2016.
Interest Expense decreased $28 million due primarily to higher capitalized interest in 2016 and the maturity of $300 million of 5.50% Senior Notes in December 2015, partially offset by the issuance of $700 million of 3.00% Senior Notes in June 2016.
Income Tax Expense decreased $237 million in 2016 due primarily to lower pre-tax income.

LIQUIDITY AND CAPITAL RESOURCES
The following discussion of our liquidity and capital resources is on a consolidated basis, noting the uses and contributions, where material, of our two direct major operating subsidiaries.
Operating Cash Flows
We expect operating cash flows combined with cash on hand and financing activities to be sufficient to fund planned capital expenditures and shareholder dividend payments.
For the nine months ended September 30, 2016, our operating cash flow decreased $467 million as compared to the same period in 2015. The net change was due primarily to the net changes from PSE&G and Power as discussed below.
PSE&G
PSE&G’s operating cash flow decreased $117 million from $1,518 million to $1,401 million for the nine months ended September 30, 2016, as compared to the same period in 2015, due primarily to a decrease of $113 million due to a change in regulatory deferrals, a $64 million decrease due to higher vendor payments and a decrease due to the completion of securitization collections in 2015. These amounts were partially offset by higher earnings and higher tax refunds in 2016.
Power
Power’s operating cash flow decreased $298 million from $1,558 million to $1,260 million for the nine months ended September 30, 2016, as compared to the same period in 2015, primarily due to lower earnings, a $140 million decrease from fuels, materials and supplies, and a $146 million increase in margin deposit requirements, partially offset by a reduction in tax payments.

79


Table of Contents


Short-Term Liquidity
PSEG meets its short-term liquidity requirements, as well as those of Power, primarily with cash and through the issuance of commercial paper. PSE&G maintains its own separate commercial paper program to meet its short-term liquidity requirements. Each commercial paper program is fully back-stopped by its own separate credit facilities.
We continually monitor our liquidity and seek to add capacity as needed to meet our liquidity requirements. Each of our credit facilities is restricted as to availability and use to the specific companies as listed below; however, if necessary, the PSEG facilities can also be used to support our subsidiaries’ liquidity needs. Our total credit facilities and available liquidity as of September 30, 2016 were as follows:
 
 
 
 
 
 
 
 
 
 
Company/Facility
 
As of September 30, 2016
 
 
Total
Facility
 
Usage
 
Available
Liquidity
 
 
 
 
Millions
 
 
PSEG
 
$
1,000

 
$
265

 
$
735

 
 
PSE&G
 
600

 
14

 
586

 
 
Power
 
2,553

 
205

 
2,348

 
 
Total
 
$
4,153

 
$
484

 
$
3,669

 
 
 
 
 
 
 
 
 
 
As of September 30, 2016, our credit facility capacity was in excess of our projected maximum liquidity requirements over our 12 month planning horizon. Our maximum liquidity requirements are based on stress scenarios that incorporate changes in commodity prices and the potential impact of Power losing its investment grade credit rating, which would represent a three level downgrade from its current S&P and Moody’s ratings. In the event of a deterioration of Power’s credit rating certain of Power’s agreements allow the counterparty to demand further performance assurance. The potential additional collateral that we would be required to post under these agreements if Power were to lose its investment grade credit rating was approximately $807 million and $864 million as of September 30, 2016 and December 31, 2015, respectively. The early retirement of Power’s Hudson and Mercer coal/gas generation units is not expected to have a material impact on Power’s debt covenant ratios or its ability to obtain credit facilities. See Item 1. Note 3. Early Plant Retirements.
As of September 30, 2016, PSEG’s credit facilities are primarily available to back-stop its Commercial Paper Program under which PSEG had $255 million outstanding. PSE&G’s credit facility primary use is to support its Commercial Paper Program under which as of September 30, 2016, no amounts were outstanding. Most of our credit facilities expire in 2019 and 2020.
For additional information, see Item 1.Note 10. Debt and Credit Facilities.
Long-Term Debt Financing
For a discussion of our long-term debt transactions during 2016, see Item 1. Note 10. Debt and Credit Facilities.
Common Stock Dividends
On July 19, 2016, our Board of Directors approved a quarterly dividend of $0.41 per share of common stock for the third quarter of 2016. This reflects an indicative annual dividend rate of $1.64 per share. We expect to continue to pay cash dividends on our common stock; however, the declaration and payment of future dividends to holders of our common stock will be at the discretion of the Board of Directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our businesses, alternate investment opportunities, legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors deems relevant. For additional information related to cash dividends on our common stock, see Item 1. Note 16. Earnings Per Share (EPS) and Dividends.
Credit Ratings
If the rating agencies lower or withdraw our credit ratings, such revisions may adversely affect the market price of our securities and serve to materially increase our cost of capital and limit access to capital. Credit Ratings shown are for securities that we typically issue. Outlooks are shown for Corporate Credit Ratings (S&P) and Issuer Credit Ratings (Moody’s) and can be Stable, Negative, or Positive. There is no assurance that the ratings will continue for any given period of time or that they will not be revised by the rating agencies, if, in their respective judgments, circumstances warrant. Each rating given by an agency should be evaluated independently of the other agencies’ ratings. The ratings should not be construed as an indication to buy, hold or sell any security.
In January 2016, S&P published updated research reports on PSEG and PSE&G and the existing ratings and outlooks were unchanged. In June 2016, Moody’s published credit opinions on Power and PSE&G and the existing ratings and outlooks were

80


Table of Contents


unchanged. In June 2016, S&P published an updated research report on Power and the existing rating and outlook were unchanged. In September 2016, Moody’s published an updated research report on PSEG and the existing rating and outlook were unchanged.
 
 
 
 
 
 
 
 
 
 
Moody’s (A)
 
S&P (B)
 
 
PSEG
 
 
 
 
 
 
Outlook
 
Positive
 
Stable
 
 
Commercial Paper
 
P2
 
A2
 
 
PSE&G
 
 
 
 
 
 
Outlook
 
Stable
 
Stable
 
 
Mortgage Bonds
 
Aa3
 
A
 
 
Commercial Paper
 
P1
 
A2
 
 
Power
 
 
 
 
 
 
Outlook
 
Stable
 
Stable
 
 
Senior Notes
 
Baa1
 
BBB+
 
 
 
 
 
 
 
 
(A)
Moody’s ratings range from Aaa (highest) to C (lowest) for long-term securities and P1 (highest) to NP (lowest) for short-term securities.
(B)
S&P ratings range from AAA (highest) to D (lowest) for long-term securities and A1 (highest) to D (lowest) for short-term securities. The Corporate Credit Rating outlook does not apply to PSEG’s or PSE&G’s Commercial Paper Rating or PSE&G’s Mortgage Bond rating.

CAPITAL REQUIREMENTS
We expect that all of our capital requirements over the next three years will come from a combination of internally generated funds and external debt financing. There were no material changes to our projected capital expenditures at Power and Services as compared to amounts disclosed in our 2015 Form 10-K.
PSEG
In July 2016, PSEG partnered with Vectren Corporation on a FERC 1000 proposal to construct, own and operate a twenty mile, 345 kilovolt transmission line in the midwest region served by the Midcontinent Independent System Operator (MISO). MISO estimated the project would cost approximately $60 million and would go in service in 2021. MISO is expected to select a proposal in December 2016. This project is not included in PSEG’s projected capital expenditures.    
PSE&G
PSE&G increased its estimate of its capital expenditure program as reported in our 2015 Form 10-K by approximately $300 million from $8.3 billion to $8.6 billion primarily to address new business requests and replace aging equipment and infrastructure.   
In August 2016, PSE&G filed a petition with the BPU requesting approval of the $268 million investment and an associated cost recovery mechanism to develop a project where PSE&G would rebuild New Jersey Transit’s Mason substation and related facilities in Kearny, NJ. This is not included in PSE&G’s projected capital expenditures.
On October 20, 2016, PSE&G submitted a settlement agreement to the BPU providing for an extension of the existing landfill/brownfield solar program to construct up to 33 MW of grid connected facilities with projected capital expenditures of approximately $80 million through May 2020. This extension is pending approval by the BPU. This is not included in PSE&G’s projected capital expenditures.
During the nine months ended September 30, 2016, PSE&G made capital expenditures of $2,035 million, primarily for transmission and distribution system reliability. This does not include expenditures for cost of removal, net of salvage, of $109 million, which are included in operating cash flows.
Power
During the nine months ended September 30, 2016, Power made capital expenditures of $767 million, excluding $156 million for nuclear fuel, primarily related to our Keys, Sewaren 7, BH5 and other generation projects.


81


ACCOUNTING MATTERS
For information related to recent accounting matters, see Item 1. Note 2. Recent Accounting Standards.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk inherent in our market-risk sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices, equity security prices and interest rates as discussed in the Notes to Condensed Consolidated Financial Statements. It is our policy to use derivatives to manage risk consistent with business plans and prudent practices. We have a Risk Management Committee comprised of executive officers who utilize a risk oversight function to ensure compliance with our corporate policies and risk management practices.
Additionally, we are exposed to counterparty credit losses in the event of non-performance or non-payment. We have a credit management process, which is used to assess, monitor and mitigate counterparty exposure. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on our financial condition, results of operations or net cash flows.
Commodity Contracts
The availability and price of energy-related commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market rules and other events. To reduce price risk caused by market fluctuations, we enter into supply contracts and derivative contracts, including forwards, futures, swaps and options with approved counterparties. These contracts, in conjunction with physical sales and other services, help reduce risk and optimize the value of owned electric generation capacity.
Value-at-Risk (VaR) Models
VaR represents the potential losses, under normal market conditions, for instruments or portfolios due to changes in market factors, for a specified time period and confidence level. We estimate VaR across our commodity businesses.
MTM VaR consists of MTM derivatives that are economic hedges, some of which qualify for hedge accounting. The MTM VaR calculation does not include market risks associated with activities that are subject to accrual accounting, primarily our generating facilities and some load serving activities.
The VaR models used are variance/covariance models adjusted for the change of positions with 95% and 99.5% confidence levels and a one-day holding period for the MTM activities. The models assume no new positions throughout the holding periods; however, we actively manage our portfolio.
From July through September 2016, MTM VaR remained relatively stable between low of $11 million to high of $16 million at 95% confidence level. The range of VaR was narrower for the three months ended September 30, 2016 as compared with the year ended December 31, 2015.
 
 
 
 
 
 
 
 
 
 
MTM VaR
 
 
 
 
Three Months Ended September 30, 2016
 
Year Ended December 31, 2015
 
 
 
 
Millions
 
 
95% Confidence Level, Loss could exceed VaR one day in 20 days
 
 
 
 
 
 
Period End
 
$
11

 
$
24

 
 
Average for the Period
 
$
13

 
$
17

 
 
High
 
$
16

 
$
40

 
 
Low
 
$
11

 
$
8

 
 
99.5% Confidence Level, Loss could exceed VaR one day in 200 days
 
 
 
 
 
 
Period End
 
$
17

 
$
38

 
 
Average for the Period
 
$
21

 
$
26

 
 
High
 
$
25

 
$
63

 
 
Low
 
$
17

 
$
12

 
 
 
 
 
 
 
 
See Item 1. Note 11. Financial Risk Management Activities for a discussion of credit risk.

82


Table of Contents


ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have established and maintain disclosure controls and procedures as defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported and is accumulated and communicated to the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of each respective company, as appropriate, by others within the entities to allow timely decisions regarding required disclosure. We have established a disclosure committee which includes several key management employees and which reports directly to the CFO and CEO of each of Public Service Enterprise Group Incorporated, Public Service Electric and Gas Company and PSEG Power LLC. The committee monitors and evaluates the effectiveness of these disclosure controls and procedures. The CFO and CEO of each of Public Service Enterprise Group Incorporated, Public Service Electric and Gas Company and PSEG Power LLC have evaluated the effectiveness of the disclosure controls and procedures and, based on this evaluation, have concluded that disclosure controls and procedures at each respective company were effective at a reasonable assurance level as of the end of the period covered by the report.
Internal Controls
There have been no changes in internal control over financial reporting that occurred during the third quarter of 2016 that have materially affected, or are reasonably likely to materially affect, each registrant’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS
We are party to various lawsuits and regulatory matters in the ordinary course of business. For additional information regarding material legal proceedings, including updates to information reported in Item 3 of Part I of the 2015 Annual Report on Form 10-K, see Part I, Item 1. Note 9. Commitments and Contingent Liabilities and Item 5. Other Information.
Ewing Explosion
In February 2014, pursuant to an existing contract, PSE&G assigned Henkels and McCoy (Henkels) to replace the electrical service at a home in the South Fork Townhouse Community in Ewing Township, Mercer County, New Jersey. In March 2014, after Henkels began work to install new electric service, a gas explosion occurred in the townhouse community resulting in damage to numerous properties, personal injuries and one fatality.
Twenty-two lawsuits have been filed to date relating to the gas explosion, of which PSE&G was named as a defendant in nineteen cases. To date, six of these cases have resolved through private negotiations and/or mediation. In one of the remaining pending matters, plaintiffs representing the estate of the decedent are seeking damages under the New Jersey Wrongful Death Act and the New Jersey Survivors Act as well as punitive damages. PSE&G has denied all allegations of liability. We intend to continue to vigorously defend these lawsuits. At this stage of the litigation, we are unable to determine or predict the ultimate outcome of any of the remaining lawsuits.

ITEM 1A.
RISK FACTORS
There are no additional Risk Factors to be added to those disclosed in Part I, Item 1A of our 2015 Annual Report on Form 10-K.


83


Table of Contents


ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table indicates our common share repurchases in the open market to satisfy obligations under various equity compensation awards during the third quarter of 2016.
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
 
July 1 - July 31

 
$

 
 
August 1 - August 31
167,430

 
$
45.21

 
 
September 1- September 30
43,000

 
$
42.85

 
 
 
 
 
 
 

ITEM 5. OTHER INFORMATION
Certain information reported in the 2015 Annual Report on Form 10-K is updated below. Additionally, certain information is provided for new matters that have arisen subsequent to the filing of the 2015 Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016. References are to the related pages on the Forms 10-K and 10-Q as printed and distributed.
Federal Regulation
FERC
Capacity Market Issues-PJM
December 31, 2015 Form 10-K page 17, March 31, 2016 Form 10-Q page 70 and June 30, 2016 Form 10-Q page 80. Over the past several years, certain entities in PJM, namely, FirstEnergy Corp. (FE) and American Electric Power (AEP) have been looking to the Ohio Public Utility Commission (PUCO) to provide financial support arrangements for their coal plants and a nuclear plant (FE). FE and AEP originally proposed to enter into power purchase agreements (PPAs) with their non-utility generation affiliates providing for above-market purchases from certain coal plants and a nuclear plant (in FE's case). The PUCO Staff proposed a payment to support modernization of the distribution system (distribution modernization rider) in the FE case which was ultimately accepted by the PUCO. The Dayton Power and Light Company also recently filed for a distribution modernization rider for the generating plants that it owns.  
The PUCO proceedings created a concern that subsidized units within the PJM footprint would submit bids in the capacity market that are not reflective of their actual operating costs and would, in turn, artificially suppress capacity prices. As a result, certain parties requested that FERC should direct PJM to expand the “minimum offer price rule” to apply to existing units.   
We are unable to predict the results of these pending proceedings or any future related proceedings or to calculate the potential impacts on our business.
 Transmission Regulation
December 31, 2015 Form 10-K page 19 and June 30, 2016 Form 10-Q page 80. In October 2016, PSE&G filed its 2017 Annual Formula Rate Update with FERC which requests approximately $121 million in increased annual transmission revenues effective January 1, 2017, subject to true-up. For additional information about our transmission formula rate, see Part 1, Item 1. Financial Information—Note 5. Recent Rate Filings.
Transmission RegulationTransmission Policy Developments
December 31, 2015 Form 10-K page 19, March 31, 2016 Form 10-Q page 71 and June 30, 2016 Form 10-Q page 80. FERC concluded in Order 1000 that the incumbent transmission owner should not always have a Right of First Refusal (ROFR) to construct and own transmission projects in its service territory. We and other companies appealed various aspects of the FERC order approving PJM’s implementation of Order 1000, including the elimination of the ROFR from the PJM Tariff. In July 2016, the D.C. Court dismissed the case, thus upholding FERC’s determination. We have decided not to pursue further action on this decision.
In April 2016, PSE&G accepted construction responsibility for the three components of the transmission project involving upgrades at Artificial Island in New Jersey. On August 5, 2016, PJM announced that it has suspended the Artificial Island transmission project and is performing a comprehensive analysis to determine a future course of action, which is expected to be completed by February 2017. 

84


Table of Contents


In August 2016, FERC issued an order to PJM and the PJM Transmission Owners with respect to their compliance with a previous FERC order (Order 890) that requires transparency in the transmission planning process. The order directs PJM and PJM Transmission Owners to propose revisions to the PJM governing documents to ensure compliance with Order 890 or show cause why they should not do so. The PJM Transmission Owners jointly filed for rehearing of the order to show cause and jointly responded to FERC’s directives. FERC is also evaluating issues related to competitive transmission development processes, including the use of cost containment provisions. PSE&G has argued against the use of cost caps in the assessment of Order 1000 open window project bids. We are unable to predict at this time the results of these proceedings and the impact they will have on our business.
State Regulation
Solar 4 All Program Extension II
On October 20, 2016, PSE&G submitted a settlement agreement to the BPU providing for an extension of the existing landfill/brownfield solar program to construct up to 33 MW of grid connected facilities with projected capital expenditures of approximately $80 million through May 2020. This matter is pending approval by the BPU.

Environmental Matters
Air Pollution Control
Cross-State Air Pollution Rule (CSAPR)    
December 31, 2015 Form 10-K page 24. In September 2016, the EPA published the final CSAPR Updating Rule to address the 2008 National Ambient Air Quality Standards for ground-level ozone. The rule establishes more stringent annual ozone season (May 1 through September 30) caps beginning in May 2017. We do not anticipate any material impact on our business or financial condition due to the CSAPR.
    

85


Table of Contents


ITEM 6.
EXHIBITS
A listing of exhibits being filed with this document is as follows:
a. PSEG:
 
 
Exhibit 12:
 
Computation of Ratios of Earnings to Fixed Charges
Exhibit 31:
 
Certification by Ralph Izzo Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 31.1:
 
Certification by Daniel J. Cregg Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 32:
 
Certification by Ralph Izzo Pursuant to Section 1350 of Chapter 63 of Title 18 of the U.S. Code
Exhibit 32.1:
 
Certification by Daniel J. Cregg Pursuant to Section 1350 of Chapter 63 of Title 18 of the U.S. Code
Exhibit 101.INS:
 
XBRL Instance Document
Exhibit 101.SCH:
 
XBRL Taxonomy Extension Schema
Exhibit 101.CAL:
 
XBRL Taxonomy Extension Calculation Linkbase
Exhibit 101.LAB:
 
XBRL Taxonomy Extension Labels Linkbase
Exhibit 101.PRE:
 
XBRL Taxonomy Extension Presentation Linkbase
Exhibit 101.DEF:
 
XBRL Taxonomy Extension Definition Document
 
 
 
b. PSE&G:
 
 
Exhibit 12.1:
 
Computation of Ratios of Earnings to Fixed Charges Plus Preferred Securities Dividend Requirements
Exhibit 31.2:
 
Certification by Ralph Izzo Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 31.3:
 
Certification by Daniel J. Cregg Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 32.2:
 
Certification by Ralph Izzo Pursuant to Section 1350 of Chapter 63 of Title 18 of the U.S. Code
Exhibit 32.3:
 
Certification by Daniel J. Cregg Pursuant to Section 1350 of Chapter 63 of Title 18 of the U.S. Code
Exhibit 101.INS:
 
XBRL Instance Document
Exhibit 101.SCH:
 
XBRL Taxonomy Extension Schema
Exhibit 101.CAL:
 
XBRL Taxonomy Extension Calculation Linkbase
Exhibit 101.LAB:
 
XBRL Taxonomy Extension Labels Linkbase
Exhibit 101.PRE:
 
XBRL Taxonomy Extension Presentation Linkbase
Exhibit 101.DEF:
 
XBRL Taxonomy Extension Definition Document
 
 
 
c. Power:
 
 
Exhibit 12.2:
 
Computation of Ratios of Earnings to Fixed Charges
Exhibit 31.4:
 
Certification by Ralph Izzo Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 31.5:
 
Certification by Daniel J. Cregg Pursuant to Rules 13a-14 and 15d-14 of the 1934 Act
Exhibit 32.4:
 
Certification by Ralph Izzo Pursuant to Section 1350 of Chapter 63 of Title 18 of the U.S. Code
Exhibit 32.5:
 
Certification by Daniel J. Cregg Pursuant to Section 1350 of Chapter 63 of Title 18 of the U.S. Code
Exhibit 101.INS:
 
XBRL Instance Document
Exhibit 101.SCH:
 
XBRL Taxonomy Extension Schema
Exhibit 101.CAL:
 
XBRL Taxonomy Extension Calculation Linkbase
Exhibit 101.LAB:
 
XBRL Taxonomy Extension Labels Linkbase
Exhibit 101.PRE:
 
XBRL Taxonomy Extension Presentation Linkbase
Exhibit 101.DEF:
 
XBRL Taxonomy Extension Definition Document



86


Table of Contents


SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
 
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
(Registrant)
 
 
By:
/S/ STUART J. BLACK
 
Stuart J. Black
Vice President and Controller
(Principal Accounting Officer)
Date: October 31, 2016

87


Table of Contents


SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
 
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
(Registrant)
 
 
By:
/S/ STUART J. BLACK
 
Stuart J. Black
Vice President and Controller
(Principal Accounting Officer)
Date: October 31, 2016


88


Table of Contents


SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
 
PSEG POWER LLC
(Registrant)
 
 
By:
/S/ STUART J. BLACK
 
Stuart J. Black
Vice President and Controller
(Principal Accounting Officer)
Date: October 31, 2016


89