Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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.
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. These factors include, but are not limited to:
fluctuations in wholesale power and natural gas markets, including the potential impacts on the economic viability of our generation units;
changes in technology related to energy generation, distribution and consumption and customer usage patterns;
third-party credit risk relating to our sale of generation output and purchase of fuel;
adverse performance of our decommissioning and defined benefit plan trust fund investments and changes in funding requirements;
adverse changes in energy industry laws, policies and regulations, including market structures and transmission planning;
delays in receipt of, or an inability to receive, necessary licenses and permits;
adverse outcomes of any legal, regulatory or other proceeding, settlement, investigation or claim applicable to us and/or the energy industry;
the impact of our holding company structure on our ability to meet our corporate funding needs, service debt and pay dividends;
lack of growth or slower growth in the number of customers or changes in customer demand;
reliance on transmission facilities that we do not own or control and the impact on our ability to maintain adequate transmission capacity;
any equipment failures, accidents, severe weather events or other incidents that impact our ability to provide safe and reliable service to our customers;
our inability to exercise control over the operations of generation facilities in which we do not maintain a controlling interest;
any inability to recover the carrying amount of our long-lived assets and leveraged leases;
challenges associated with recruitment and/or retention of key executives and a qualified workforce;
the impact of acts of terrorism, cybersecurity attacks or intrusions.
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 consequences to, or effects on, us or our business, prospects, financial condition, results of operations or cash flows. 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 in light of new information or future events, 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.
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.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See Notes to Condensed Consolidated Financial Statements.
See disclosures regarding Public Service Electric and Gas Company included in the Notes to Condensed Consolidated Financial Statements.
See disclosures regarding PSEG Power LLC included in the Notes to Condensed Consolidated Financial Statements.
See disclosures regarding PSEG Power LLC included in the Notes to Condensed Consolidated Financial Statements.
See disclosures regarding PSEG Power LLC included in the Notes to Condensed Consolidated Financial Statements.
See disclosures regarding PSEG Power LLC included in the Notes to the Condensed Consolidated Financial Statements.
Note 1. Organization, Basis of Presentation and Significant Accounting Policies
Public Service Enterprise Group Incorporated (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:
PSEG’s other direct wholly owned subsidiaries are: PSEG Long Island LLC (PSEG LI), which operates the Long Island Power Authority’s (LIPA) electric transmission and distribution (T&D) system under an Operations Services Agreement (OSA); PSEG Energy Holdings L.L.C. (Energy Holdings), which primarily has investments in leveraged leases; and PSEG Services Corporation (Services), which provides certain management, administrative and general services to PSEG and its subsidiaries at cost.
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, 2017.2018.
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 significant 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, 2017.2018.
Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less. Restricted cash consists primarily of deposits received related to various construction projects at PSE&G.
Note 2. Recent Accounting Standards
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities—ASU 2017-12, updated by ASU 2018-16
This accounting standard was issued to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the standard requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income—ASU 2018-02
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.
This accounting standard requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
An entity should apply this standard on a prospective basis and will be required to disclose the nature of and reason for the change in accounting principle upon transition. The new standard is effective for impairment tests for periods beginning January 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. PSEG does not expect adoption of this standard to have a material impact on its financial statements.
Note 3. Revenues
The following is a description of principal activities by reportable segment from which PSEG, PSE&G and Power generate their revenues.
tariffs which are satisfied as the product(s) and/or services are delivered to the customer. The electric and gas commodity and delivery tariffs are recurring contracts in effect until cancellation by the customer. Revenue is recognized over time as the service is rendered to the customer. Included in PSE&G’s regulated revenues are unbilled electric and gas revenues which represent the estimated amount customers will be billed for services rendered from the most recent meter reading to the end of the respective accounting period.
PSE&G’s transmission revenues are earned under a separate FERC tariff. The performance obligation of transmission service is satisfied over time as it is provided to and consumed by the customer. Revenue is recognized upon delivery of the transmission service. PSE&G’s revenues from the transmission of electricity are recorded based on a FERC-approved annual formula rate mechanism. This mechanism provides for an annual filing of an estimated revenue requirement with rates effective January 1 of each year and a mechanism true-up to that estimate based on actual revenue requirements. The true-up mechanism is an alternative revenue which is outside the scope of revenue from contracts with customers.
Other revenues from contracts with customers, which are not a material source of PSE&G revenues, are generated primarily from appliance repair services and solar generation projects. The performance obligations under these contracts are satisfied and revenue is recognized as control of products is delivered or services are rendered.
Payment for services rendered and products transferred are typically due within 30 days of month of delivery.
Other PSE&G revenues unrelated to contracts with customers are derived from alternative revenue mechanisms recorded pursuant to regulatory accounting guidance. These revenues, which include weather normalization, green energy program true-ups and transmission formula rate true-ups, are not a material source of PSE&G revenues.
Power enters into capacity sales and capacity purchases through the ISOs. The transactions are reported on a net basis dependent on Power’s monthly net sale or purchase position through the individual ISOs. The performance obligations with the ISOs are satisfied over time upon delivery of the capacity and revenue is recognized accordingly. In addition to capacity sold through the ISOs, Power sells capacity through bilateral contracts and the related revenue is reported on a gross basis and recognized over time upon delivery of the capacity.
Power enters into bilateral contracts to sell solar power and solar RECs from its solar facilities. Contract terms range from 15 to 30 years. The performance obligations are generally solar power and RECs which are transferred to customers upon generation. Revenue is recognized upon generation of the solar power.
Power has entered into long-term contracts with LIPA for energy management and fuel procurement services. Revenue is recognized over time as services are rendered.
Power’s revenues unrelated to contracts with customers include electric, gas and certain energy-related transactions accounted for in accordance with Derivatives and Hedging accounting guidance. See Note 12.13. Financial Risk Management Activities for further discussion. Power is also a party to solar contracts that qualify as leases and are accounted for in accordance with lease accounting guidance.
PSEG LI has a contract with LIPA which generates revenues. PSEG LI’s subsidiary, Long Island Electric Utility Servco, LLC (Servco) records costs which are recovered from LIPA and records the recovery of those costs as revenues when Servco is a principal in the transaction.
Energy Holdings generates lease revenues which are recorded pursuant to lease accounting guidance.
Power generally collects consideration upon satisfaction of performance obligations, and therefore, Power had no material contract balances as of March 31, 20182019 and 2017.December 31, 2018.
Power’s accounts receivable include amounts resulting from contracts with customers and other contracts which are out of scope of accounting guidance for revenues from contracts with customers. The majority of these accounts receivable are subject to master netting agreements. As a result, accounts receivable resulting from contracts with customers and receivables unrelated to contracts with customers are netted within Accounts Receivable and Accounts Payable on the Condensed Consolidated Balance Sheets. In the wholesale energy markets in which Power operates, payment for services rendered and products transferred are typically due within 30 days of month of delivery. As such, there is little credit risk associated with these receivables and Power typically records no allowances.
Power and PSE&G primarily record revenues as allowed by the guidance, which states that if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity's performance
completed to date, the entity may recognize revenue in the amount to which the entity has a right to invoice. PSEG has future performance obligations under contracts with fixed consideration as follows:
As stated above, capacity transactions with ISOs are reported on a net basis dependent on Power’s monthly net sale or purchase position through the individual ISOs.
Note 4. Early Plant Retirements
among other things. Any early retirement or change in the held for use classification of our remaining coal units may have a material adverse impact on PSEG’s and Power’s future financial results.
Note 5. Variable Interest Entity (VIE)
PSEG LI consolidates 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 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 and controls the services provided to LIPA, 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 O&M Expense, respectively. Servco recorded $120$115 million and $112$120 million for the three months ended March 31, 20182019 and 2017,2018, 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Rate Filings
This Note should be read in conjunction with Note 6.7. Regulatory Assets and Liabilities to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2017.2018.
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:
Electric and Gas Distribution Base Rate Filing—In January 2018, PSE&G filed a distribution base rate case as required as a condition of approval of its Energy Strong Program approved by the BPU in 2014. The filing requested an approximate 1% increase in revenues and recovery of investments made to strengthen the electric and gas distribution systems. The requested increase took into account a reduction in the revenue requirement as a result of the federal corporate income tax rate reduction from 35% to 21% provided in the Tax Cuts and Jobs Act of 2017 (Tax Act), including the flow-back to customers of excess accumulated deferred income taxes. In March 2018, the BPU approved interim rate reductions for all their jurisdictional utilities, including PSE&G, reflecting the reduction in the federal corporate tax rate. The BPU approved a reduction to PSE&G’s current base electric and gas revenues effective April 1, 2018 by $71 million and $43 million, respectively, on an annual basis (or about 2% combined). The refund to customers for over-collection of revenues at the higher tax rate for the January 1 to March 31, 2018 period, and the flow-back to customers of certain excess deferred income taxes will be addressed in PSE&G’s ongoing base rate case proceeding. As a result of the base rate reduction implemented on April 1, 2018, among other factors, PSE&G’s requested revenue requirement in its filing will increase accordingly. PSE&G anticipates a decision by the BPU that new base rates will go into effect in the fourth quarter of 2018.
Transmission Formula Rate Filings—In January 2018, PSE&G filed with FERC a revised 2018 Annual Transmission Formula Rate Update reducing its 2018 transmission annual revenue requirement to reflect the federal corporate income tax rate reduction from 35% to 21% as a result of the Tax Act. This change in the federal corporate tax rate reduces the 2018 annual revenue requirement by $148 million, effective January 1, 2018. FERC continues to assess whether, and if so how, it will address changes and flow-backs to customers relating to accumulated deferred income taxes and bonus depreciation.
BGSS—In April 2018,March 2019, the BPU approved the final BGSS rates which were effective October 1, 2017.
In December 2017, February 2018 and March 2018, PSE&G filed with the BPU for self-implementing monthly bill credits of 15 cents per therm for the months of January through April 2018. Monthly bill credits of $104 million were credited to customers for the months of January through March and an additional $15 million is estimated to be credited in April.
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 February 2018, the BPU approved recovery of an annual revenue requirement of $8 million associated with electric Energy Strong capital investment costs placed in service from June 1, 2017 through November 30, 2017.
Societal Benefits Charge—In February 2018, the BPU approved PSE&G’s petition to increase electric rates by approximately $20 million on an annual basis and to decrease gas rates by approximately $0.8 million on an annual basis, in order to recover electric and gas costs incurred through May 31, 2017 under its Energy Efficiency and Renewable Energy and Social Programs. The new rates are effective April 1, 2018.
Weather Normalization Clause (WNC)—In April 2018,March 2019, the BPU gave final approval to PSE&G’s 2017-2018 WNC petition allowing a net recovery of $14 million to collect $55be collected over the 2018-2019 Winter Period with the new rate effective November 1, 2018. The $14 million in net deficiency gas revenues as arecovery is the result of $9 million of excess revenues from the warmercolder than normal 2016-20172017-2018 Winter Period which resultedoffset by $23 million of remaining prior Winter Period undercollection.
Gas System Modernization Program I (GSMP I)—In April 2019, PSE&G filed its final GSMP I cost recovery petition seeking BPU approval to recover in a deficiencygas base rates an estimated annual revenue increase of $31$12 million plus a carryover balanceeffective October 1, 2019. This increase represents the return on and of $24 million from the 2015-2016 Winter period.GSMP I investments expected to be in service through June 30, 2019. This request will be updated in July 2019 for actual costs.
Note 7. Leases
PSEG and its subsidiaries, when acting as lessee or lessor, determine if an arrangement is a lease at inception. PSEG assesses contracts to determine if the arrangement conveys (i) the right to control the use of the identified property, (ii) the right to obtain substantially all of the economic benefits from the use of the property, and (iii) the right to direct the use of the property.
As of March 31, 2019, PSEG and subsidiaries were both a lessee and a lessor in Operating Leases. PSEG and subsidiaries were neither the lessee nor the lessor in any material non-operating leases.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Lessee
The current portion of Operating Lease Liabilities is included in Other Current Liabilities. Operating Lease Right-of-Use Assets and noncurrent Operating Lease Liabilities are included as separate captions in Noncurrent Assets and Noncurrent Liabilities, respectively, on the Condensed Consolidated Balance Sheets of PSEG, PSE&G and Power. PSEG and its subsidiaries have elected an accounting policy to exclude the application of ASC 842 requirements to recognize Operating Lease Right-of-Use Assets and Operating Lease Liabilities for leases where the term is twelve months or less.
Operating Lease Right-of-Use Assets represent the right to use an underlying asset for the lease term and Operating Lease Liabilities represent the obligation to make lease payments arising from the lease. Operating Lease Right-of-Use Assets and Operating Lease Liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.
PSEG and its subsidiaries recognize the lease payments in O&M Expense on a straight-line basis over the term of the leases and variable lease payments in the period in which the obligations for those payments are incurred.
As lessee, most of the Operating Leases of PSEG and its subsidiaries do not provide an implicit rate; therefore, incremental borrowing rates are used based on the information available at commencement date in determining the present value of lease payments. The implicit rate is used when readily determinable. PSE&G’s incremental borrowing rates are based on secured borrowing rates. PSEG’s and Power’s borrowing rates are generally unsecured rates. Having calculated simulated secured rates for each of PSEG and Power, it was determined that the difference between the unsecured borrowing rates and the simulated secured rates had an immaterial effect on their recorded Operating Lease Right-of-Use Assets and Operating Lease Liabilities.
Services, PSEG LI and other subsidiaries of PSEG that do not borrow funds or issue debt may enter into leases. Since these companies do not have credit ratings and related incremental borrowing rates, PSEG has determined that it is appropriate for these companies to use the incremental borrowing rate of PSEG, the parent company.
Lease terms may include options to extend or terminate the lease when it is reasonably certain that such options will be exercised.
PSEG and its subsidiaries have lease agreements with lease and non-lease components. For real estate, equipment and vehicle leases, the lease and non-lease components are accounted for as a single lease component.
PSE&G
PSE&G has Operating Leases for office space for customer service centers; rooftops and land for its Solar 4 All® facilities; equipment; vehicles; and land for certain electric substations. These leases have remaining lease terms through 2039, some of which include options to extend the leases for terms of one to five years. Some leases have fixed rent payments that have escalations based on certain indices, such as the CPI. Certain leases contain variable payments.
Power
Power has Operating Leases for buildings; land leases for its solar generating facilities; and equipment. These leases have remaining terms through 2052, some of which include options to extend the leases for one or more five-year terms and certain other leases which include options to extend the leases for 15 to 20 year terms. Some leases have fixed rent payments that have escalations based on certain indices, such as the CPI.
Other
Services has Operating Leases for real estate and office equipment. These leases have remaining terms through 2030. Services’ lease for its headquarters, which ends in 2030, includes options to extend for two five-year terms. Energy Holdings has land leases with remaining lease terms through 2027, some of which include options to extend the leases for up to eight five-year terms. Some leases have fixed rent payments that have escalations based on certain indices, such as the CPI. Certain leases contain variable payments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Operating Lease Costs
The following amounts relate to total Operating Lease costs, including both amounts recognized in the Condensed Consolidated Statements of Operations during the three months ended March 31, 2019 and any amounts capitalized as part of the cost of another asset, and the cash flows arising from lease transactions.
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | PSE&G | | Power | | Other | | Total | |
| | | Millions | |
| | Three Months Ended March 31, 2019 | | | | | | | | |
| | Operating Lease Costs | | | | | | | | |
| | Long-term Lease Costs | $ | 4 |
| | $ | 2 |
| | $ | 4 |
| | $ | 10 |
| |
| | Short-term Lease Costs | 5 |
| | 2 |
| | — |
| | 7 |
| |
| | Variable Lease Costs | — |
| | — |
| | 3 |
| | 3 |
| |
| | Total Operating Lease Costs | $ | 9 |
| | $ | 4 |
| | $ | 7 |
| | $ | 20 |
| |
| | | | | | | | | | |
| | Cash Paid for Amounts Included in the Measurement of Operating Lease Liabilities | $ | 4 |
| | $ | 2 |
| | $ | 4 |
| | $ | 10 |
| |
| | | | | | | | | | |
| | Weighted Average Remaining Lease Term in Years | 13 |
| | 20 |
| | 11 |
| | 13 |
| |
| | Weighted Average Discount Rate | 3.7 | % | | 5.0 | % | | 4.2 | % | | 4.2 | % | |
| | | | | | | | | | |
Operating Lease commitments as of December 31, 2018 had the following maturities:
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | PSE&G | | Power | | Other | | Total | |
| | | | Millions | |
| | 2019 | | $ | 15 |
| | $ | 11 |
| | $ | 15 |
| | $ | 41 |
| |
| | 2020 | | 11 |
| | 13 |
| | 16 |
| | 40 |
| |
| | 2021 | | 10 |
| | 13 |
| | 16 |
| | 39 |
| |
| | 2022 | | 8 |
| | 14 |
| | 16 |
| | 38 |
| |
| | 2023 | | 8 |
| | 8 |
| | 15 |
| | 31 |
| |
| | Thereafter | | 66 |
| | 51 |
| | 105 |
| | 222 |
| |
| | Total Minimum Lease Payments | | $ | 118 |
| | $ | 110 |
| | $ | 183 |
| | $ | 411 |
| |
| | | | | | | | | | | |
Operating Lease Liabilities as of March 31, 2019 had the following maturities:
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | PSE&G | | Power | | Other | | Total | |
| | | | Millions | |
| | 2019 | | $ | 11 |
| | $ | 5 |
| | $ | 12 |
| | $ | 28 |
| |
| | 2020 | | 11 |
| | 4 |
| | 16 |
| | 31 |
| |
| | 2021 | | 10 |
| | 4 |
| | 16 |
| | 30 |
| |
| | 2022 | | 8 |
| | 5 |
| | 16 |
| | 29 |
| |
| | 2023 | | 8 |
| | 3 |
| | 15 |
| | 26 |
| |
| | 2024 | | 7 |
| | 3 |
| | 14 |
| | 24 |
| |
| | Thereafter | | 60 |
| | 46 |
| | 90 |
| | 196 |
| |
| | Total Minimum Lease Payments | | $ | 115 |
| | $ | 70 |
| | $ | 179 |
| | $ | 364 |
| |
| | | | | | | | | | | |
As of March 31, 2019, Power was a lessee in an operating lease that was executed but had not yet commenced and, therefore, no lease asset or liability was recognized. Fixed payments under this contract aggregating $35 million are due through 2023 and are not included in the above table.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following is a reconciliation of the undiscounted cash flows to the discounted Operating Lease Liabilities recognized on the Condensed Consolidated Balance Sheets:
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | As of March 31, 2019 | |
| | | | PSE&G | | Power | | Other | | Total | |
| | | | Millions | |
| | Undiscounted Cash Flows | | $ | 115 |
| | $ | 70 |
| | $ | 179 |
| | $ | 364 |
| |
| | Reconciling Amount due to Discount Rate | | (25 | ) | | (27 | ) | | (37 | ) | | (89 | ) | |
| | Total Discounted Operating Lease Liabilities | | $ | 90 |
| | $ | 43 |
| | $ | 142 |
| | $ | 275 |
| |
| | | | | | | | | | | |
As of March 31, 2019, the current portions of Operating Lease Liabilities included in Other Current Liabilities were $25 million, $11 million and $4 million for PSEG, PSE&G and Power, respectively.
Lessor
Property subject to Operating Leases, where PSEG or one of its subsidiaries is the lessor, is included in Property, Plant and Equipment and rental income from these leases is included in Operating Revenues.
PSEG and its subsidiaries, as lessors, have lease agreements with lease and non-lease components, which are primarily related to real estate assets and solar generating facilities. PSEG and subsidiaries account for the lease and non-lease components as a single lease component. Energy Holdings’ leveraged leases are accounted for in Operating Revenues and in Noncurrent Long-Term Investments. See Note 8. Financing Receivables.
Power
Certain of Power’s sales agreements related to its solar generating plants qualify as Operating Leases with remaining terms through 2043 with no extension terms. Lease income is based on solar energy generation; therefore, all rental income is variable under these leases. As of March 31, 2019, Power’s solar generating plants subject to these leases had a total carrying value of $331 million.
Other
Energy Holdings is the lessor in leveraged leases. Leveraged lease accounting guidance is grandfathered for existing leveraged leases. If modified after January 1, 2019, those leveraged leases will be accounted for as operating or financing leases. See Note 8. Financing Receivables.
Energy Holdings is the lessor in various Operating Leases for real estate with remaining terms through 2033. As of March 31, 2019, Energy Holdings’ property subject to these leases had a total carrying value of $24 million.
The following is the Operating Lease Income for Power and Energy Holdings for the three months ended March 31, 2019:
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | | Power | | Energy Holdings | | Total | |
| | | Millions | |
| | Operating Lease Income | | | | |
|
| |
| | Fixed Lease Income | $ | — |
| | $ | 5 |
| | $ | 5 |
| |
| | Variable Lease Income | 4 |
| | — |
| | 4 |
| |
| | Total Operating Lease Income | $ | 4 |
| | $ | 5 |
| | $ | 9 |
| |
| | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Energy Holdings’ Operating Leases had the following minimum future fixed lease receipts as of March 31, 2019:
|
| | | | | | | |
| | | | | | |
| | | | Millions | |
| | 2019 | | $ | 19 |
| | |
| | 2020 | | 20 |
| | |
| | 2021 | | 18 |
| | |
| | 2022 | | 17 |
| | |
| | 2023 | | 17 |
| | |
| | 2024 | | 16 |
| | |
| | Thereafter | | 165 |
| | |
| | Total Minimum Future Lease Receipts | | $ | 272 |
| | |
| | | | | | |
Note 7.8. 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. Interest income on the loans is recorded on an accrual basis. The loans are generally paid back with solar renewable energy certificates (SRECs) generated from the installed solar electric system. In the event of a loan default, the basis of the solar loan would be recovered through a regulatory recovery mechanism. None of the solar loans are impaired; however, in the event a loan becomes impaired, the basis of the loan would be recovered through a regulatory recovery mechanism. 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 arewould be considered “non-performing.”
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | |
| | | | | | | |
| | Outstanding Loans by Class of Customer | |
| | | | As of | | As of | |
| | Consumer Loans | | March 31,
2018 | | December 31,
2017 | |
| | | | Millions | |
| | Commercial/Industrial | | $ | 168 |
| | $ | 158 |
| |
| | Residential | | 10 |
| | 10 |
| |
| | Total | | $ | 178 |
| | $ | 168 |
| |
| | | | | | | |
|
| | | | | | | | | | |
| | | | | | | |
| | Outstanding Loans by Class of Customer | |
| | | | As of | | As of | |
| | Consumer Loans | | March 31,
2019 | | December 31,
2018 | |
| | | | Millions | |
| | Commercial/Industrial | | $ | 169 |
| | $ | 164 |
| |
| | Residential | | 9 |
| | 9 |
| |
| | Total | | $ | 178 |
| | $ | 173 |
| |
| | Current Portion (included in Other Current Assets) | | (22 | ) | | (24 | ) | |
| | Noncurrent Portion (included in Long-Term Investments) | | $ | 156 |
| | $ | 149 |
| |
| | | | | | | |
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’ equity investments in the leases are comprised of the total expected lease receivables 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 first quarter of 2017, due to continuing liquidity issues facing NRGIn December 2018, REMA LLC (REMA), economic challenges facing coal generation in PJM, as discussed in Note 4. Early Plant Retirements, and based upon an ongoing review of available alternatives as well as certain discussions with REMA management, Energy Holdings recorded a $55 million pre-tax charge foremerged from its current best estimate of loss related to the lease receivables. Lease payments and adjustments to qualifying credit support on the REMA leases are received semiannually in January and July of each year.
In June 2017, GenOn Energy, Inc. (GenOn) and certain of its subsidiaries filed voluntary petitions for reliefin-court proceeding under Chapter 11 of the United States Bankruptcy Code. GenOn is a subsidiaryUpon emergence, PSEG received $31.5 million in cash in exchange for transferring the ownership interests in Keystone and Conemaugh to the debtholders of NRG Energy, Inc. and is the parent of REMA. REMA was not included in the GenOn filing. Energy Holdings continues to monitor the restructuring of GenOn and its possible impacts on REMA and continuessatisfaction of all other claims asserted against REMA, as well as certain amendments to discuss the situation with various parties relevantShawville lease. The Shawville lease amendments, among other things, will allow REMA to this matter. During the second quarter of 2017, Energy Holdings completed its review of estimated residual values embeddedexpress interest in its leveraged lease portfolio of generating assets and the outcome indicated that one of the residual value estimates was lower than the recorded residual value due to a further deterioration of market conditions and changes to operating cost estimates. This decline was determined to be other than temporary. As a result, a pre-tax write-down of $7 million was recorded in the quarter ended June 30, 2017.renewal on or after November 24, 2019. In addition, based on an ongoing review of (i) the liquidity challenges facing REMA and (ii) available alternatives, Energy Holdings recorded an additional $15 million pre-tax charge in the quarter ended June 30, 2017, for its current best estimate of loss related to lease receivables. Pre-tax write-downs and additional charges were reflected in Operating Revenues in the first half of 2017 and are included in Gross Investment in Leases as of March 31, 2018.
In January 2018, certain subsidiaries of Energy Holdings, REMA, certain holders of the pass-through certificates and other parties entered into a Forbearance Agreement (Forbearance) relating to the Conemaugh facility. Pursuant to the Forbearance, the parties theretohas agreed to temporarily forbear from exercising rights and remedies related to certain events of default related to REMA’s obligation to procure additionalfund qualifying credit support. The Forbearance will remain effective until the earlier of (i) two weeks following the date on which Energy Holdings subsidiaries, REMA and/or the consenting certificate holders provide written notice to REMA of its intention to terminate the Forbearance, and (ii) the date on which any event of termination as specified in the Forbearance occurs. The Forbearance remains in effect.
PSEG cannot predict the outcome of GenOn’s restructuring process or 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 lease rejections or foreclosures were to occur, Energy Holdings could potentially record additional pre-tax write-offssupport up to its gross investment in these facilities and may also be required to accelerate and pay material $36 million. The remaining
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
deferred tax liabilities related to the Internal Revenue Service (IRS).these lease investments were reclassified to current tax liabilities. PSEG expects to pay approximately $120 million to taxing authorities in 2019 resulting from this restructuring activity.
The following table shows Energy Holdings’ gross and net lease investment as of March 31, 20182019 and December 31, 2017, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | | March 31,
2018 | | December 31,
2017 | |
| | | Millions | |
| | Lease Receivables (net of Non-Recourse Debt) | $ | 545 |
| | $ | 546 |
| |
| | Estimated Residual Value of Leased Assets | 326 |
| | 326 |
| |
| | Total Investment in Rental Receivables | 871 |
| | 872 |
| |
| | Unearned and Deferred Income | (303 | ) | | (307 | ) | |
| | Gross Investment in Leases | 568 |
| | 565 |
| |
| | Deferred Tax Liabilities | (498 | ) | | (480 | ) | |
| | Net Investment in Leases | $ | 70 |
| | $ | 85 |
| |
| | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | �� | March 31,
2019 | | December 31,
2018 | |
| | | Millions | |
| | Lease Receivables (net of Non-Recourse Debt) | $ | 502 |
| | $ | 504 |
| |
| | Estimated Residual Value of Leased Assets | 326 |
| | 326 |
| |
| | Total Investment in Rental Receivables | 828 |
| | 830 |
| |
| | Unearned and Deferred Income | (285 | ) | | (290 | ) | |
| | Gross Investments in Leases | 543 |
| | 540 |
| |
| | Deferred Tax Liabilities | (356 | ) | | (354 | ) | |
| | Net Investments in Leases | $ | 187 |
| | $ | 186 |
| |
| | | | | | |
The corresponding receivables associated with the lease portfolio are reflected as follows, 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 March 31, 2018 | | | |
| | | As of March 31, 2018 | |
| | | | Millions | |
| | AA | | $ | 14 |
| |
| | BBB+ — BBB- | | 316 |
| |
| | BB- | | 133 |
| |
| | CCC- | | 82 |
| |
| | Total | | $ | 545 |
| |
| | | | | |
|
| | | | | | |
| | | | | |
| | | | Lease Receivables, Net of Non-Recourse Debt | |
| | Counterparties’ Credit Rating Standard & Poor’s (S&P) as of March 31, 2019 | | | |
| | | As of March 31, 2019 | |
| | | | Millions | |
| | AA | | $ | 13 |
| |
| | A- | | 58 |
| |
| | BBB+ — BBB- | | 258 |
| |
| | BB | | 133 |
| |
| | NR | | 40 |
| |
| | Total | | $ | 502 |
| |
| | | | | |
The “BB-”“BB” and the “CCC-”“NR” ratings in the preceding table represent lease receivables related to coal and gas-fired assets in Illinois and Pennsylvania, respectively. As of March 31, 20182019, the gross investment in the leases of such assets, net of non-recourse debt, was $335295 million ($(88)7 million, net of deferred taxes). A more detailed description of such assets under lease 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 | | $ | 132 |
| | 64 | % | | 1,538 |
| | Coal | | BB- | | NRG Energy, Inc. | |
| | Joliet Station Units 7 and 8 | | IL | | $ | 85 |
| | 64 | % | | 1,036 |
| | Gas | | BB- | | NRG Energy, Inc. | |
| | Keystone Station Units 1 and 2 | | PA | | $ | 20 |
| | 17 | % | | 1,711 |
| | Coal | | CCC- | | REMA (A) | |
| | Conemaugh Station Units 1 and 2 | | PA | | $ | 20 |
| | 17 | % | | 1,711 |
| | Coal | | CCC- | | REMA (A) | |
| | Shawville Station Units 1, 2, 3 and 4 | | PA | | $ | 78 |
| | 100 | % | | 596 |
| | Gas | | CCC- | | REMA (A) | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | Asset | | Location | | Gross Investment | | % Owned | | Total MW | | Fuel Type | | Counterparties’ S&P Credit Ratings | | Counterparty | |
| | | | | | Millions | | | | | | | | | | | |
| | Powerton Station Units 5 and 6 | | IL | | $ | 133 |
| | 64 | % | | 1,538 |
| | Coal | | BB | | NRG Energy, Inc. | |
| | Joliet Station Units 7 and 8 | | IL | | $ | 85 |
| | 64 | % | | 1,036 |
| | Gas | | BB | | NRG Energy, Inc. | |
| | Shawville Station Units 1, 2, 3 and 4 | | PA | | $ | 77 |
| | 100 | % | | 596 |
| | Gas | | NR | | REMA | |
| | | | | | | | | | | | | | | | | |
| |
(A) | GenOn and certain of its subsidiaries (which did not include REMA) filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. GenOn is currently engaged in a balance sheet restructuring, which will take an undetermined time to complete. Certain subsidiaries of Energy Holdings, REMA, consenting holders of the pass-through certificates and other parties entered into a Forbearance relating to the Conemaugh facility. |
The credit exposure for lessors is partially mitigated through various credit enhancement mechanisms within the lease structures. These credit enhancement features vary from lease to lease. Upon the occurrence of certain defaults, indirect subsidiary companies of Energy Holdings would exercise their rights and seek recovery of their investment, potentially
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and trigger certain material tax obligations which could, for certain leases, wholly or partially be mitigated by tax indemnification claims against the counterparty. A bankruptcy of a lessee
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Additional factors that 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 8.9. Trust Investments
NDTNuclear Decommissioning Trust (NDT) Fund
Power maintains an external master NDT to fund its share of decommissioning costs for its five nuclear facilities upon their respective 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 funds are managed by third-party investment managers who operate under investment guidelines developed by Power.
The following tables show the fair values and gross unrealized gains and losses for the securities held in the NDT Fund. |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | As of March 31, 2018 | |
| | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | Millions | |
| | Equity Securities | | | | | | | | |
| | Domestic | $ | 463 |
| | $ | 226 |
| | $ | (7 | ) | | $ | 682 |
| |
| | International | 318 |
| | 93 |
| | (7 | ) | | 404 |
| |
| | Total Equity Securities | 781 |
| | 319 |
| | (14 | ) | | 1,086 |
| |
| | Available-for Sale Debt Securities | | | | | | | | |
| | Government | 518 |
| | 1 |
| | (11 | ) | | 508 |
| |
| | Corporate | 464 |
| | 1 |
| | (9 | ) | | 456 |
| |
| | Total Available-for-Sale Debt Securities | 982 |
| | 2 |
| | (20 | ) | | 964 |
| |
| | Other | 1 |
| | — |
| | — |
| | 1 |
| |
| | Total NDT Fund Investments (A) | $ | 1,764 |
| | $ | 321 |
| | $ | (34 | ) | | $ | 2,051 |
| |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | As of March 31, 2019 | |
| | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | Millions | |
| | Equity Securities | | | | | | | | |
| | Domestic | $ | 423 |
| | $ | 183 |
| | $ | (6 | ) | | $ | 600 |
| |
| | International | 388 |
| | 68 |
| | (16 | ) | | 440 |
| |
| | Total Equity Securities | 811 |
| | 251 |
| | (22 | ) | | 1,040 |
| |
| | Available-for Sale Debt Securities | | | | | | | | |
| | Government | 509 |
| | 6 |
| | (3 | ) | | 512 |
| |
| | Corporate | 495 |
| | 6 |
| | (4 | ) | | 497 |
| |
| | Total Available-for-Sale Debt Securities | 1,004 |
| | 12 |
| | (7 | ) | | 1,009 |
| |
| | Total NDT Fund Investments | $ | 1,815 |
| | $ | 263 |
| | $ | (29 | ) | | $ | 2,049 |
| |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | As of December 31, 2017 | |
| | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | Millions | |
| | Equity Securities | | | | | | | | |
| | Domestic | $ | 497 |
| | $ | 245 |
| | $ | (2 | ) | | $ | 740 |
| |
| | International | 311 |
| | 99 |
| | (3 | ) | | 407 |
| |
| | Total Equity Securities | 808 |
| | 344 |
| | (5 | ) | | 1,147 |
| |
| | Available-for Sale Debt Securities | | | | | | | | |
| | Government | 586 |
| | 2 |
| | (4 | ) | | 584 |
| |
| | Corporate | 400 |
| | 4 |
| | (2 | ) | | 402 |
| |
| | Total Available-for-Sale Debt Securities | 986 |
| | 6 |
| | (6 | ) | | 986 |
| |
| | Total NDT Fund Investments | $ | 1,794 |
| | $ | 350 |
| | $ | (11 | ) | | $ | 2,133 |
| |
| | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | As of December 31, 2018 | |
| | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | Millions | |
| | Equity Securities | | | | | | | | |
| | Domestic | $ | 447 |
| | $ | 153 |
| | $ | (29 | ) | | $ | 571 |
| |
| | International | 323 |
| | 36 |
| | (30 | ) | | 329 |
| |
| | Total Equity Securities | 770 |
| | 189 |
| | (59 | ) | | 900 |
| |
| | Available-for Sale Debt Securities | | | | | | | | |
| | Government | 498 |
| | 2 |
| | (9 | ) | | 491 |
| |
| | Corporate | 501 |
| | 1 |
| | (15 | ) | | 487 |
| |
| | Total Available-for-Sale Debt Securities | 999 |
| | 3 |
| | (24 | ) | | 978 |
| |
| | Total NDT Fund Investments | $ | 1,769 |
| | $ | 192 |
| | $ | (83 | ) | | $ | 1,878 |
| |
| | | | | | | | | | |
Net unrealized gains (losses) on debt securities of $(10)$3 million (after-tax) were included in Accumulated Other Comprehensive Loss on PSEG’s and Power’s Condensed Consolidated Balance Sheets as of March 31, 2018.2019. The portion of net unrealized gains (losses) recognized during the first quarterthree months of 20182019 related to equity securities still held at the end of March 31, 20182019 was $(10)$88 million.
The amounts in the preceding tables do not include receivables and payables for NDT Fund transactions which have not settled
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 | |
| | | March 31,
2018 | | December 31,
2017 | |
| | | Millions | |
| | Accounts Receivable | $ | 13 |
| | $ | 24 |
| |
| | Accounts Payable | $ | 9 |
| | $ | 74 |
| |
| | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | | March 31,
2019 | | December 31,
2018 | |
| | | Millions | |
| | Accounts Receivable | $ | 16 |
| | $ | 17 |
| |
| | Accounts Payable | $ | 14 |
| | $ | 5 |
| |
| | | | | | |
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 March 31, 2018 | | As of December 31, 2017 | |
| | | 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) | | | | | | | | | | | | | | | | |
| | Domestic | $ | 117 |
| | $ | (7 | ) | | $ | — |
| | $ | — |
| | $ | 40 |
| | $ | (2 | ) | | $ | — |
| | $ | — |
| |
| | International | 65 |
| | (7 | ) | | 1 |
| | — |
| | 29 |
| | (3 | ) | | 2 |
| | — |
| |
| | Total Equity Securities | 182 |
| | (14 | ) | | 1 |
| | — |
| | 69 |
| | (5 | ) | | 2 |
| | — |
| |
| | Available-for Sale Debt Securities | | | | | | | | | | | | | | | | |
| | Government (B) | 364 |
| | (7 | ) | | 80 |
| | (4 | ) | | 343 |
| | (2 | ) | | 91 |
| | (2 | ) | |
| | Corporate (C) | 339 |
| | (8 | ) | | 25 |
| | (1 | ) | | 191 |
| | (1 | ) | | 27 |
| | (1 | ) | |
| | Total Available-for-Sale Debt Securities | 703 |
| | (15 | ) | | 105 |
| | (5 | ) | | 534 |
| | (3 | ) | | 118 |
| | (3 | ) | |
| | NDT Trust Investments | $ | 885 |
| | $ | (29 | ) | | $ | 106 |
| | $ | (5 | ) | | $ | 603 |
| | $ | (8 | ) | | $ | 120 |
| | $ | (3 | ) | |
| | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | As of March 31, 2019 | | As of December 31, 2018 | |
| | | 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) | | | | | | | | | | | | | | | | |
| | Domestic | $ | 45 |
| | $ | (5 | ) | | $ | 4 |
| | $ | (1 | ) | | $ | 147 |
| | $ | (26 | ) | | $ | 5 |
| | $ | (3 | ) | |
| | International | 76 |
| | (10 | ) | | 20 |
| | (6 | ) | | 131 |
| | (28 | ) | | 5 |
| | (2 | ) | |
| | Total Equity Securities | 121 |
| | (15 | ) | | 24 |
| | (7 | ) | | 278 |
| | (54 | ) | | 10 |
| | (5 | ) | |
| | Available-for Sale Debt Securities | | | | | | | | | | | | | | | | |
| | Government (B) | 23 |
| | — |
| | 225 |
| | (3 | ) | | 51 |
| | — |
| | 317 |
| | (9 | ) | |
| | Corporate (C) | 20 |
| | — |
| | 190 |
| | (4 | ) | | 150 |
| | (5 | ) | | 222 |
| | (10 | ) | |
| | Total Available-for-Sale Debt Securities | 43 |
| | — |
| | 415 |
| | (7 | ) | | 201 |
| | (5 | ) | | 539 |
| | (19 | ) | |
| | NDT Trust Investments | $ | 164 |
| | $ | (15 | ) | | $ | 439 |
| | $ | (14 | ) | | $ | 479 |
| | $ | (59 | ) | | $ | 549 |
| | $ | (24 | ) | |
| | | | | | | | | | | | | | | | | | |
| |
| (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. Effective January 1, 2018, unrealizedUnrealized gains and losses on these securities are recorded in Net Income. |
| |
| (B) | Debt Securities (Government)—Unrealized gains and losses on these securities are recorded in Accumulated Other Comprehensive Income (Loss). The unrealized losses on Power’s NDT investments in U.S. Treasury obligations and Federal Agency mortgage-backed securities were caused by interest rate changes. These investments are guaranteed by the U.S. government or an agency of the U.S. government. Power also has investments in municipal bonds that are primarily in investment grade securities. It is not expected that these securities will 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 March 31, 2018.2019. |
| |
| (C) | Debt Securities (Corporate)—Unrealized gains and losses on these securities are recorded in Accumulated Other Comprehensive Income (Loss). 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 March 31, 2018.2019. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The proceeds from the sales of and the net gains (losses) on securities in the NDT Fund were:
|
| | | | | | | | | | |
| | | | | | | |
| | | | Three Months Ended | |
| | | | March 31, | |
| | | | 2018 | | 2017 | |
| | | Millions | |
| | Proceeds from NDT Fund Sales (A) | | $ | 372 |
| | $ | 247 |
| |
| | Net Realized Gains (Losses) on NDT Fund | | | | | |
| | Gross Realized Gains | | $ | 24 |
| | $ | 21 |
| |
| | Gross Realized Losses | | (12 | ) | | (4 | ) | |
| | Net Realized Gains (Losses) on NDT Fund (B) | | 12 |
| | 17 |
| |
| | Unrealized Gains (Losses) on Equity Securities in NDT Fund (C) | | (34 | ) | | N/A |
| |
| | Other-Than-Temporary-Impairments | | — |
| | (1 | ) | |
| | Net Gains (Losses) on NDT Fund Investments | | $ | (22 | ) | | $ | 16 |
| |
| | | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | | 2019 | | 2018 | |
| | | Millions | |
| | Proceeds from NDT Fund Sales (A) | $ | 453 |
| | $ | 372 |
| |
| | Net Realized Gains (Losses) on NDT Fund | | | | |
| | Gross Realized Gains | $ | 45 |
| | $ | 24 |
| |
| | Gross Realized Losses | (19 | ) | | (12 | ) | |
| | Net Realized Gains (Losses) on NDT Fund (B) | $ | 26 |
| | $ | 12 |
| |
| | Unrealized Gains (Losses) on Equity Securities in NDT Fund | 99 |
| | (34 | ) | |
| | Net Gains (Losses) on NDT Fund Investments | $ | 125 |
| | $ | (22 | ) | |
| | | | | | |
(A)Includes activity in accounts related to the liquidation of funds being transitioned to new managers.
(B)The cost of these securities was determined on the basis of specific identification.
| |
(C) | Effective January 1, 2018, unrealized gains (losses) on equity securities are recorded in Net Income instead of Other Comprehensive Income (Loss). |
The NDT Fund debt securities held as of March 31, 20182019 had the following maturities:
|
| | | | | | |
| | | | | |
| | Time Frame | | Fair Value | |
| | | | Millions | |
| | Less than one year | | $ | 15 |
| |
| | 1 - 5 years | | 300 |
| |
| | 6 - 10 years | | 201 |
| |
| | 11 - 15 years | | 40 |
| |
| | 16 - 20 years | | 73 |
| |
| | Over 20 years | | 335 |
| |
| | Total NDT Available-for-Sale Debt Securities | $ | 964 |
| |
| | | | | |
|
| | | | | | |
| | | | | |
| | Time Frame | | Fair Value | |
| | | | Millions | |
| | Less than one year | | $ | 13 |
| |
| | 1 - 5 years | | 257 |
| |
| | 6 - 10 years | | 215 |
| |
| | 11 - 15 years | | 44 |
| |
| | 16 - 20 years | | 71 |
| |
| | Over 20 years | | 409 |
| |
| | Total NDT Available-for-Sale Debt Securities | $ | 1,009 |
| |
| | | | | |
Power periodically assesses individual debt securities whose fair value is less than amortized cost to determine whether the investments are considered to be other-than-temporarily impaired. For these 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). 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.
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.”
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 31, 2018 | |
| | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | Millions | |
| | Equity Securities | | | | | | | | |
| | Domestic | $ | 21 |
| | $ | 2 |
| | $ | — |
| | $ | 23 |
| |
| | International | — |
| | — |
| | — |
| | — |
| |
| | Total Equity Securities | 21 |
| | 2 |
| | — |
| | 23 |
| |
| | Available-for-Sale Debt Securities | | | | | | | | |
| | Government | 91 |
| | — |
| | (2 | ) | | 89 |
| |
| | Corporate | 114 |
| | 1 |
| | (2 | ) | | 113 |
| |
| | Total Available-for-Sale Debt Securities | 205 |
| | 1 |
| | (4 | ) | | 202 |
| |
| | Total Rabbi Trust Investments | $ | 226 |
| | $ | 3 |
| | $ | (4 | ) | | $ | 225 |
| |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | As of March 31, 2019 | |
| | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | Millions | |
| | Domestic Equity Securities | $ | 22 |
| | $ | 3 |
| | $ | — |
| | $ | 25 |
| |
| | Available-for-Sale Debt Securities | | | | | | | | |
| | Government | 108 |
| | 2 |
| | — |
| | 110 |
| |
| | Corporate | 97 |
| | 2 |
| | (1 | ) | | 98 |
| |
| | Total Available-for-Sale Debt Securities | 205 |
| | 4 |
| | (1 | ) | | 208 |
| |
| | Total Rabbi Trust Investments | $ | 227 |
| | $ | 7 |
| | $ | (1 | ) | | $ | 233 |
| |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | As of December 31, 2017 | |
| | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | Millions | |
| | Equity Securities | | | | | | | | |
| | Domestic | $ | 24 |
| | $ | 3 |
| | $ | — |
| | $ | 27 |
| |
| | International | — |
| | — |
| | — |
| | — |
| |
| | Total Equity Securities | 24 |
| | 3 |
| | — |
| | 27 |
| |
| | Available-for-Sale Debt Securities | | | | | | | | |
| | Government | 85 |
| | 1 |
| | (1 | ) | | 85 |
| |
| | Corporate | 118 |
| | 2 |
| | (1 | ) | | 119 |
| |
| | Total Available-for-Sale Debt Securities | 203 |
| | 3 |
| | (2 | ) | | 204 |
| |
| | Total Rabbi Trust Investments | $ | 227 |
| | $ | 6 |
| | $ | (2 | ) | | $ | 231 |
| |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | As of December 31, 2018 | |
| | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| | | Millions | |
| | Domestic Equity Securities | $ | 22 |
| | $ | 1 |
| | $ | — |
| | $ | 23 |
| |
| | Available-for-Sale Debt Securities | | | | | | | | |
| | Government | 110 |
| | 1 |
| | (2 | ) | | 109 |
| |
| | Corporate | 96 |
| | — |
| | (4 | ) | | 92 |
| |
| | Total Available-for-Sale Debt Securities | 206 |
| | 1 |
| | (6 | ) | | 201 |
| |
| | Total Rabbi Trust Investments | $ | 228 |
| | $ | 2 |
| | $ | (6 | ) | | $ | 224 |
| |
| | | | | | | | | | |
Net unrealized gains (losses) on debt securities of $(3)$2 million (after-tax) were included in Accumulated Other Comprehensive Loss on PSEG’s Condensed Consolidated Balance Sheet as of March 31, 2018.2019. The portion of net unrealized gains (losses) recognized during the first quarterthree months of 20182019 related to equity securities still held at the end of March 31, 20182019 was less than $(1)$3 million.
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 | |
| | | March 31,
2018 | | December 31,
2017 | |
| | | Millions | |
| | Accounts Receivable | $ | 2 |
| | $ | 2 |
| |
| | Accounts Payable | $ | — |
| | $ | 1 |
| |
| | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | | March 31,
2019 | | December 31,
2018 | |
| | | Millions | |
| | Accounts Receivable | $ | 2 |
| | $ | 2 |
| |
| | Accounts Payable | $ | 1 |
| | $ | — |
| |
| | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table shows the value of securities in the Rabbi Trust Fund that have been in an unrealized loss position for less than 12 months and greater than 12 months. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | As of March 31, 2018 | | As of December 31, 2017 | |
| | | 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) | | | | | | | | | | | | | | | | |
| | Domestic | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| | International | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| �� | Total Equity Securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| | Available-for-Sale Debt Securities | | | | | | | | | | | | | | | | |
| | Government (B) | 48 |
| | (1 | ) | | 23 |
| | (1 | ) | | 28 |
| | — |
| | 25 |
| | (1 | ) | |
| | Corporate (C) | 73 |
| | (2 | ) | | 8 |
| | — |
| | 39 |
| | (1 | ) | | 9 |
| | — |
| |
| | Total Available-for-Sale Debt Securities | 121 |
| | (3 | ) | | 31 |
| | (1 | ) | | 67 |
| | (1 | ) | | 34 |
| | (1 | ) | |
| | Rabbi Trust Investments | $ | 121 |
| | $ | (3 | ) | | $ | 31 |
| | $ | (1 | ) | | $ | 67 |
| | $ | (1 | ) | | $ | 34 |
| | $ | (1 | ) | |
| | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | As of March 31, 2019 | | As of December 31, 2018 | |
| | | 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 | |
| | Available-for-Sale Debt Securities | | | | | | | | | | | | | | | | |
| | Government (A) | $ | — |
| | $ | — |
| | $ | 27 |
| | $ | — |
| | $ | 18 |
| | $ | — |
| | $ | 59 |
| | $ | (2 | ) | |
| | Corporate (B) | 6 |
| | — |
| | 30 |
| | (1 | ) | | 50 |
| | (3 | ) | | 29 |
| | (1 | ) | |
| | Total Available-for-Sale Debt Securities | 6 |
| | — |
| | 57 |
| | (1 | ) | | 68 |
| | (3 | ) | | 88 |
| | (3 | ) | |
| | Rabbi Trust Investments | $ | 6 |
| | $ | — |
| | $ | 57 |
| | $ | (1 | ) | | $ | 68 |
| | $ | (3 | ) | | $ | 88 |
| | $ | (3 | ) | |
| | | | | | | | | | | | | | | | | | |
| |
| (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. Effective January 1, 2018, unrealized gains and losses on these securities are recorded in Net Income. |
| |
(B) | Debt Securities (Government)—Unrealized gains and losses on these securities are recorded in Accumulated Other Comprehensive Income (Loss). The 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. These investments are guaranteed by the U.S. government or an agency of the U.S. government. PSEG also has investments in municipal bonds that are primarily in investment grade securities. It is not expected that these securities will 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 March 31, 2018.2019. |
| |
(C)(B) | Debt Securities (Corporate)—Unrealized gains and losses on these securities are recorded in Accumulated Other Comprehensive Income (Loss). 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 March 31, 2018.2019. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The proceeds from the sales of and the net gains (losses) on securities in the Rabbi Trust Fund were: |
| | | | | | | | | | |
| | | | | | | |
| | | | Three Months Ended | |
| | | | March 31, | |
| | | | 2018 | | 2017 | |
| | | Millions | |
| | Proceeds from Rabbi Trust Sales (A) | | $ | 25 |
| | $ | 51 |
| |
| | Net Realized Gains (Losses) on Rabbi Trust: | | | | | |
| | Gross Realized Gains | | $ | 2 |
| | $ | 15 |
| |
| | Gross Realized Losses | | (2 | ) | | (3 | ) | |
| | Net Realized Gains (Losses) on Rabbi Trust (B) | | — |
| | 12 |
| |
| | Unrealized Gains (Losses) on Equity Securities in Rabbi Trust (C) | | — |
| | N/A |
| |
| | Other-Than-Temporary-Impairments | | — |
| | — |
| |
| | Net Gains (Losses) on Rabbi Trust Investments | | $ | — |
| | $ | 12 |
| |
| | | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | | 2019 | | 2018 | |
| | | Millions | |
| | Proceeds from Rabbi Trust Sales (A) | $ | 44 |
| | $ | 25 |
| |
| | Net Realized Gains (Losses) on Rabbi Trust: | | | | |
| | Gross Realized Gains | $ | 1 |
| | $ | 2 |
| |
| | Gross Realized Losses | (1 | ) | | (2 | ) | |
| | Net Realized Gains (Losses) on Rabbi Trust (B) | — |
| | — |
| |
| | Unrealized Gains (Losses) on Equity Securities in Rabbi Trust | 3 |
| | — |
| |
| | Net Gains (Losses) on Rabbi Trust Investments | $ | 3 |
| | $ | — |
| |
| | | | | | |
(A)Includes activity in accounts related to the liquidation of funds being transitioned to new managers.
(B)The cost of these securities was determined on the basis of specific identification.
| |
(C) | Effective January 1, 2018, unrealized gains (losses) on equity securities are recorded in Net Income instead of Other Comprehensive Income (Loss). |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Rabbi Trust debt securities held as of March 31, 20182019 had the following maturities:
|
| | | | | | |
| | | | | |
| | Time Frame | | Fair Value | |
| | | | Millions | |
| | Less than one year | | $ | 1 |
| |
| | 1 - 5 years | | 36 |
| |
| | 6 - 10 years | | 29 |
| |
| | 11 - 15 years | | 6 |
| |
| | 16 - 20 years | | 17 |
| |
| | Over 20 years | | 113 |
| |
| | Total Rabbi Trust Available-for-Sale Debt Securities | $ | 202 |
| |
| | | | | |
|
| | | | | | |
| | | | | |
| | Time Frame | | Fair Value | |
| | | | Millions | |
| | Less than one year | | $ | — |
| |
| | 1 - 5 years | | 33 |
| |
| | 6 - 10 years | | 30 |
| |
| | 11 - 15 years | | 10 |
| |
| | 16 - 20 years | | 25 |
| |
| | Over 20 years | | 110 |
| |
| | Total Rabbi Trust Available-for-Sale Debt Securities | $ | 208 |
| |
| | | | | |
PSEG periodically assesses individual debt securities whose fair value is less than amortized cost to determine whether the investments are considered to be other-than-temporarily impaired. For these 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). 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 the Rabbi Trust related to PSEG, PSE&G and Power are detailed as follows: |
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | | March 31,
2018 | | December 31,
2017 | |
| | | Millions | |
| | PSE&G | $ | 45 |
| | $ | 46 |
| |
| | Power | 56 |
| | 57 |
| |
| | Other | 124 |
| | 128 |
| |
| | Total Rabbi Trust Investments | $ | 225 |
| | $ | 231 |
| |
| | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | | March 31,
2019 | | December 31,
2018 | |
| | | Millions | |
| | PSE&G | $ | 46 |
| | $ | 45 |
| |
| | Power | 59 |
| | 56 |
| |
| | Other | 128 |
| | 123 |
| |
| | Total Rabbi Trust Investments | $ | 233 |
| | $ | 224 |
| |
| | | | | | |
Note 9.10. Pension and Other Postretirement Benefits (OPEB)
PSEG sponsors qualified and nonqualified pension plans and OPEB plans covering PSEG’s and its participating affiliates’ current and former employees who meet certain eligibility criteria.
In December 2018, PSEG amended certain provisions of its OPEB plans applicable to all current and future Medicare-eligible retirees and spouses who receive or will receive subsidized healthcare from PSEG. Effective January 1, 2021, the PSEG-sponsored Medicare-eligible plans will be replaced by a Medicare private exchange. For each Medicare-eligible retiree and spouse, PSEG will provide annual credits to a Health Reimbursement Arrangement, which can be used to pay for medical, prescription drug, and dental plan premiums, as well as certain out-of-pocket costs. The amendment resulted in a $559 million reduction in PSEG’s OPEB obligation as of December 31, 2018.
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, excluding Servco. Amounts shown do not reflect the impacts of capitalization. Effective with the adoption of ASU 2017-07 on January 1, 2018, onlycapitalization and co-owner allocations. Only the service cost component is eligible for capitalization, when applicable. For additional information, see Note 2. Recent Accounting Standards.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | Pension Benefits | | OPEB | |
| | | | Three Months Ended | | Three Months Ended | |
| | | | March 31, | | March 31, | |
| | | | 2018 | | 2017 | | 2018 | | 2017 | |
| | | Millions | |
| | Components of Net Periodic Benefit (Credits) Costs | | | | | | | | | |
| | Service Cost (included in O&M Expense) | | $ | 32 |
| | $ | 29 |
| | $ | 4 |
| | $ | 4 |
| |
| | Non-Operating Pension and OPEB (Credits) Costs | | | | | | | | | |
| | Interest Cost | | 52 |
| | 51 |
| | 16 |
| | 16 |
| |
| | Expected Return on Plan Assets | | (110 | ) | | (98 | ) | | (10 | ) | | (8 | ) | |
| | Amortization of Net | | | | | | | | | |
| | Prior Service Cost | | (4 | ) | | (5 | ) | | — |
| | (3 | ) | |
| | Actuarial Loss | | 21 |
| | 24 |
| | 16 |
| | 13 |
| |
| | Non-Operating Pension and OPEB (Credits) Costs | | (41 | ) | | (28 | ) | | 22 |
| | 18 |
| |
| | Total Benefit (Credits) Costs | | $ | (9 | ) | | $ | 1 |
| | $ | 26 |
| | $ | 22 |
| |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Pension Benefits | | OPEB | |
| | | Three Months Ended | | Three Months Ended | |
| | | March 31, | | March 31, | |
| | | 2019 | | 2018 | | 2019 | | 2018 | |
| | | Millions | |
| | Components of Net Periodic Benefit (Credits) Costs | | | | | | | | |
| | Service Cost (included in O&M Expense) | $ | 29 |
| | $ | 32 |
| | $ | 2 |
| | $ | 4 |
| |
| | Non-Service Components of Pension and OPEB (Credits) Costs | | | | | | | | |
| | Interest Cost | 58 |
| | 52 |
| | 11 |
| | 16 |
| |
| | Expected Return on Plan Assets | (97 | ) | | (110 | ) | | (9 | ) | | (10 | ) | |
| | Amortization of Net | | | | | | | | |
| | Prior Service Cost | (5 | ) | | (4 | ) | | (32 | ) | | — |
| |
| | Actuarial Loss | 27 |
| | 21 |
| | 13 |
| | 16 |
| |
| | Non-Service Components of Pension and OPEB (Credits) Costs | (17 | ) | | (41 | ) | | (17 | ) | | 22 |
| |
| | Total Benefit (Credits) Costs | $ | 12 |
| | $ | (9 | ) | | $ | (15 | ) | | $ | 26 |
| |
| | | | | | | | | | |
Pension and OPEB costs for PSE&G, Power and PSEG’s other subsidiaries, excluding Servco, are detailed as follows: |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | Pension Benefits | | OPEB | |
| | | | Three Months Ended | | Three Months Ended | |
| | | | March 31, | | March 31, | |
| | | | 2018 | | 2017 | | 2018 | | 2017 | |
| | | Millions | |
| | PSE&G | | $ | (8 | ) | | $ | (1 | ) | | $ | 17 |
| | $ | 14 |
| |
| | Power | | (2 | ) | | — |
| | 8 |
| | 7 |
| |
| | Other | | 1 |
| | 2 |
| | 1 |
| | 1 |
| |
| | Total Benefit (Credits) Costs | | $ | (9 | ) | | $ | 1 |
| | $ | 26 |
| | $ | 22 |
| |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Pension Benefits | | OPEB | |
| | | Three Months Ended | | Three Months Ended | |
| | | March 31, | | March 31, | |
| | | 2019 | | 2018 | | 2019 | | 2018 | |
| | | Millions | |
| | PSE&G | $ | 7 |
| | $ | (8 | ) | | $ | (16 | ) | | $ | 17 |
| |
| | Power | 3 |
| | (2 | ) | | 1 |
| | 8 |
| |
| | Other | 2 |
| | 1 |
| | — |
| | 1 |
| |
| | Total Benefit (Credits) Costs | $ | 12 |
| | $ | (9 | ) | | $ | (15 | ) | | $ | 26 |
| |
| | | | | | | | | | |
During the three months ended March 31, 2018,2019, PSEG contributed its entire 2019 annual planned contribution for the year 2018 of $14$10 million into its OPEB plan.
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 5. Variable Interest Entity. These obligations, as well as the offsetting long-term receivable, are separately presented on the Condensed Consolidated Balance Sheet of PSEG.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 plans to contribute $40$28 million into its pension plan trusts during 2018.2019. Servco’s pension-related revenues and costs were $10$7 million and $9$10 million for the three months ended March 31, 20182019 and 2017,2018, respectively. The OPEB-related revenues earned and costs incurred were $1 million for each of the three months ended March 31, 20182019 and 2017.2018.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 10.11. 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 as a form of collateral.
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.
Power is subject to
counterparty collateral calls related to commodity contracts, and
certain creditworthiness standards as guarantor under performance guarantees of its subsidiaries.
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
the net position 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.
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table shows the face value of Power’s outstanding guarantees, current exposure and margin positions as of March 31, 20182019 and December 31, 2017.2018.
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | | March 31,
2018 | | December 31,
2017 | |
| | | Millions | |
| | Face Value of Outstanding Guarantees | $ | 1,755 |
| | $ | 1,701 |
| |
| | Exposure under Current Guarantees | $ | 161 |
| | $ | 153 |
| |
| | | | | | |
| | Letters of Credit Margin Posted | $ | 109 |
| | $ | 103 |
| |
| | Letters of Credit Margin Received | $ | 18 |
| | $ | 32 |
| |
| | | | | | |
| | Cash Deposited and Received: | | | | |
| | Counterparty Cash Margin Deposited | $ | — |
| | $ | — |
| |
| | Counterparty Cash Margin Received | $ | (1 | ) | | $ | (1 | ) | |
| | Net Broker Balance Deposited (Received) | $ | 122 |
| | $ | 147 |
| |
| | | | | | |
| | Additional Amounts Posted: | | | | |
| | Other Letters of Credit | $ | 61 |
| | $ | 61 |
| |
| | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | | March 31,
2019 | | December 31,
2018 | |
| | | Millions | |
| | Face Value of Outstanding Guarantees | $ | 1,854 |
| | $ | 1,772 |
| |
| | Exposure under Current Guarantees | $ | 150 |
| | $ | 198 |
| |
| | | | | | |
| | Letters of Credit Margin Posted | $ | 105 |
| | $ | 115 |
| |
| | Letters of Credit Margin Received | $ | 29 |
| | $ | 26 |
| |
| | | | | | |
| | Cash Deposited and Received: | | | | |
| | Counterparty Cash Margin Deposited | $ | — |
| | $ | — |
| |
| | Counterparty Cash Margin Received | $ | (1 | ) | | $ | (10 | ) | |
| | Net Broker Balance Deposited (Received) | $ | 204 |
| | $ | 403 |
| |
| | | | | | |
| | Additional Amounts Posted: | | | | |
| | Other Letters of Credit | $ | 51 |
| | $ | 52 |
| |
| | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As part of determining credit exposure, Power nets receivables and payables with the corresponding net fair values of energy contracts. See Note 12.13. 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 Condensed Consolidated 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 have posted letters of credit to support Power’s various other non-energy contractual and environmental obligations. See preceding table.
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)
The U.S. Environmental Protection Agency (EPA) has determined that a 17-mile stretch of the lower Passaic River from Newark to Clifton, New Jersey is a “Superfund” site under CERCLA and a comprehensive study of the entire 17 miles of the lower Passaic River needed to be performed. 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, certain 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 miles of the lower Passaic River. The CPG has 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 7.6 percent of the RI/FS costs are currently deemed attributable to PSE&G’s former MGP sites and approximately 1.9 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. Certain PRPs are currently involved in discussions with the EPA regarding cost allocations and related indemnification matters.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We cannot predict the outcome of these discussions, or whether individual PRPs will be able to meet their obligations, either of which could have a material impact on PSE&G’s and Power’s allocation of costs.
The CPG’s draft FS set forth various alternatives for remediating the lower Passaic River with an estimated cost to remediate the lower 17 miles of the Passaic River ranging from approximately $518 million to $3.2 billion on an undiscounted basis.
In March 2016, the EPA released its Record of Decision (ROD) for the EPA’s own Focused Feasibility Study (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 EPA estimatesestimated 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. Occidental Chemical Corporation (OCC), one of the PRPs, has committed to performcommenced performance of the remedial design required by the ROD Remedy, reserving its right of cost contribution from all other PRPs.
In September 2017, the EPA concluded that an Agency-commenced allocation process for the Passaic River’s lower 8.3 miles should include only certain PRPs. The allocation is intended to lead to a consent decree in which certain of the PRPs agree to perform and pay for the remedial action under EPA oversight. DiscussionsThe allocation process was delayed due to the partial federal government shutdown in late 2018 through early 2019, together with issues connected to OCC’s complaint in Federal District Court in Newark, and is now currently scheduled to continue into the summer of 2020.
In October 2018, the EPA Region 2 issued a Directive to the CPG instructing the CPG to focus the ongoing RI/FS evaluation on various adaptive management scenarios for remediation of the matter are ongoing. Conversations betweenupper 9 miles of the Passaic River, which approach has been agreed to in concept by the EPA and the PRPs regarding remediationCPG. The Directive does not contain estimates for anticipated costs. Adaptive management focuses on removing targeted “hot spots” of contaminated sediments rather than removing all of the Passaic River’s upper 9sediments as in a “bank to bank” approach.
In a separate matter, two PRPs, Tierra Solutions, Inc. (Tierra) and Maxus Energy Corporation (Maxus), filed for Chapter 11 bankruptcy in Delaware Federal Bankruptcy Court. In June 2018, the trust representing the creditors in this proceeding filed a complaint asserting claims against the current and former parent entities of Tierra and Maxus, among other parties, for up to $14 billion. Any damages awarded may be used to fund, in part, the remediation costs of the lower 8.3 miles areof the Passaic River. The creditor trust has reserved its right to file contribution claims against 28 PRPs, including PSEG. This matter is ongoing.
In June 2018, OCC filed a complaint in Federal District Court in Newark against various defendants, including PSE&G,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
seeking cost recovery and contribution under CERCLA for the remediation of the lower 8.3 miles of the Passaic River. The complaint does not quantify damages sought.
The Complaint alleges that “no single hazardous substance” is to blame for the contamination of the lower Passaic River and lists the eight Contaminants of Concern (COCs) identified by the EPA in the ROD. OCC alleges PSE&G is responsible for a portion of six of the eight COCs. PSE&G cannot predict the outcome of this matter.
Based upon the estimated cost of the ROD Remedy and PSEG’s estimate of PSE&G’s and Power’s shares of that cost, as of March 31, 2018,2019, PSEG has accrued approximately $57 million. Of this amount, PSE&G has accrued $46 million as an Environmental Costs Liability and a corresponding Regulatory Asset based on its continued ability to recover such costs in its rates. Power has accrued $11 million as an Other Noncurrent Liability with the corresponding O&M Expense recorded in the periodsprior years when the liability was accrued.
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 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the site of the Hudson electric generating station. Power contractually transferred all land rights and structures on the site to a third party purchaser, along with the assumption of the environmental liabilities for the site.
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 $345$353 million and $391$404 million on an undiscounted basis through 2021, including its $46 million share for the Passaic River as discussed above. Since no amount within the range is considered to be most likely, PSE&G has recorded a liability of $345$353 million as of March 31, 2018.2019. Of this amount, $79$52 million was recorded in Other Current Liabilities and $266$301 million was reflected as Environmental Costs in Noncurrent Liabilities. PSE&G has recorded a $345$353 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 to what extent
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Clean Water Act (CWA) 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.
In May 2014, the EPA issued a final cooling water intake rule that establishes requirements for the regulation of cooling water intakes at existing power plants and industrial facilities with a design flow of more than two million gallons of water per day.
The EPA has structured the rule so that each state Permitting Director will continue to consider renewal permits for existing
power facilities on a case by case basis, based on studies related to impingement mortality and entrainment and submit the results with their permit applications to be conducted by the facilities seeking renewal permits.
Several environmental organizations and certain energy industry groups have filed suit under the CWA and the Endangered Species Act. The cases have beenwere consolidated at the Second Circuit, and ain July 2018 the Second Circuit upheld the EPA’s final cooling water intake rule. The Court’s decision remains pending.allows Permitting Directors to continue to issue permits in accordance with the flexible, site-specific provisions of the final rule.
In June 2016, the NJDEP issued a final NJPDES permit for Salem. The final permit does not mandate specific service water system modifications, but consistent with Section 316 (b) of the CWA, it requires additional studies and the selection of technology to address impingement for the service water system. In July 2016, the Delaware Riverkeeper Network (Riverkeeper) filed a request challenging the NJDEP’s issuance of the final NJPDES renewal permit for Salem. NJDEP has granted the hearing request, but it has not yet been scheduled. 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 CWA. Potential cooling 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 intakes 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 BH3.Bridgeport Harbor Station Unit 3 (BH3). To address compliance with the EPA’s CWA Section 316(b) final rule, Power has proposed to 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 previously estimated useful life ending in 2025. Power is currently awaiting action by the CTDEEP to issue a draft and then a final permit.
Power has entered into a Community Environmental Benefit Agreement (CEBA) with the City of Bridgeport, Connecticut and local community organizations. That CEBA provides that Power would retire BH3 early if all of its conditions precedent occur, which include receipt of all final permits to build and operate a proposed new combined cycle generating facility on the same site that BH3 currently operates. Absent those conditions being met, and the permit for the cooling water intake structure referred to above not being issued, Power may seek to operate BH3 through the previously estimated useful life.
In February 2016, the proposed new generating facility at Bridgeport Harbor was awarded a capacity obligation. The Connecticut Siting Council issued an order to approve siting Bridgeport Harbor Station Unit 5 (BH5). All major environmental
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
permits have been received; however, secondary approvalsBH5. Operations are still being obtained to allow operationsexpected to begin in mid-2019. Power’s obligations under the CEBA are being monitored regularly and carried out as needed.
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 October 2016, a discharge of dielectric fluid from subsurface feeder cables located in the Hudson River near Jersey City, New Jersey, was identified and reported to the 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of the cables located in New Jersey and Con Edison owning the portion of the cables located in New York. The NJDEP declared an emergency and an emergency response action was undertaken to investigate, contain, remediate and stop the fluid discharge; to assess, repair and restore the cables to good working order, if feasible; and to restore the property. The regulatory agencies overseeing the emergency response, including the U.S. Coast Guard, the NJDEP and the Army Corps of Engineers, have issued multiple notices, orders and directives to the various parties related to this matter and the parties may also be subject to the assessment of civil penalties related to the discharge and response. The U.S. Coast Guard transitioned control of the federal response to the EPA in May 2018. In August 2018, the EPA ended the federal response to the matter. The response has now transitioned to the NJDEP site remediation program.
The impacted cable was repaired in late-Septemberlate September 2017; however, small amounts of residual dielectric fluid continuesbelieved to be contained within the marina sediment continue to appear on the surface and so the investigation and response actions related to the fluid discharge are ongoing.ongoing, although at a significantly reduced scale. PSE&G may determineremains concerned about future leaks and potential environmental impacts as a result of reintroduction of fluid back into these lines and has determined that retirement of the affected facilities would beis appropriate. PSE&G has been unable to reach an agreement with Con Edison and, as a result, in May 2018, PSE&G filed an action at FERC to resolve the matter. FERC dismissed PSE&G’s Complaint against Con Edison in September 2018 andPSE&G has challenged FERC’s decision. Also ongoing is the processlawsuit in federal court to determine ultimate responsibility for the costs to address the leak among PSE&G, Con Edison and NADC, including an action filed by PSE&G in federal court in New Jersey seeking damages from NADC. In that action, NADC has also pursued counterclaimsaddition, Con Edison filed counter claims against PSE&G and Con EdisonNADC, including seeking damages for its costs to address the leak.injunctive relief and damages. Based on the information currently available and depending on the outcome of the federal court action, PSE&G’s portion of the costs to address the leak may be material; however, PSE&G anticipates that it will recover these costs through regulatory proceedings.
Steam Electric Effluent Guidelines
In September 2015, the EPA issued a new Effluent Limitation Guidelines Rule (ELG 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. Power’s Bridgeport Harbor station and the jointly-owned Keystone and Conemaugh stations, have bottom ash transport water discharges that are regulated under the ELG Rule. Keystone and Conemaugh also have flue gas desulfurization wastewaters regulated by the ELG Rule.
Through various orders, the EPA has stayed the compliance dates in the ELG Rule and has announced plans to further revise the requirements and compliance dates of the ELG Rule. Power is unable to determine how this will ultimately impact its compliance requirements or its financial condition and results of operations.
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 partythird-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 ServingLoad-Serving Entity 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, 20182019 is $287.76$281.78 per MW-day, replacing the BGS-CIEP auction year price ending May 31, 20182019 of $276.83$287.76 per MW-day. Energy for BGS-CIEP is priced at hourly PJM locational marginal prices for the contract period.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 | | |
| | | 2015 | | 2016 | | 2017 | | 2018 | | |
| | 36-Month Terms Ending | May 2018 |
| | May 2019 |
| | May 2020 |
| | May 2021 |
| (A) | |
| | Load (MW) | 2,900 |
| | 2,800 |
| | 2,800 |
| | 2,900 |
| | |
| | $ per MWh | $99.54 | | $96.38 | | $90.78 | | $91.77 | | |
| | | | | | | | | | | |
|
| | | | | | | | | | |
| | | | | | | | | | | |
| | | Auction Year | | |
| | | 2016 | | 2017 | | 2018 | | 2019 | | |
| | 36-Month Terms Ending | May 2019 | | May 2020 | | May 2021 | | May 2022 | (A) | |
| | Load (MW) | 2,800 | | 2,800 | | 2,900 | | 2,800 | | |
| | $ per MWh | $96.38 | | $90.78 | | $91.77 | | $98.04 | | |
| | | | | | | | | | | |
| |
| (A) | Prices set in the 20182019 BGS auction year will become effective on June 1, 20182019 when the 20152016 BGS auction agreements expire. |
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 19.20. 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 2020 and a significant portion through 2021 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 in New Jersey.
Power also has various long-term fuel purchase commitments for coal through 20212023 to support its fossil generation stations.
As of March 31, 2018,2019, the total minimum purchase requirements included in these commitments were as follows: |
| | | | | | |
| | | | | |
| | Fuel Type | | Power's Share of Commitments through 2022 | |
| | | | Millions | |
| | Nuclear Fuel | | | |
| | Uranium | | $ | 242 |
| |
| | Enrichment | | $ | 346 |
| |
| | Fabrication | | $ | 170 |
| |
| | Natural Gas | | $ | 1,024 |
| |
| | Coal | | $ | 286 |
| |
| | | | | |
|
| | | | | | |
| | | | | |
| | Fuel Type | | Power's Share of Commitments through 2023 | |
| | | | Millions | |
| | Nuclear Fuel | | | |
| | Uranium | | $ | 221 |
| |
| | Enrichment | | $ | 336 |
| |
| | Fabrication | | $ | 157 |
| |
| | Natural Gas | | $ | 1,121 |
| |
| | Coal | | $ | 380 |
| |
| | | | | |
Pending FERC Matters
In June 2015, Hudson Power Transmission Developers, LLC (Hudson Power), formerly known as Transource LLC, a merchant transmission developer, filed a complaint against PJM claiming that PJM wrongfully refused to provide data and a transparent process for evaluating transmission network upgrade requests that the transmission developer had submitted to PJM. Although not named as a respondent, the complaint identifies PSE&G as one of the companies claimed to have been involved. In January 2018, a FERC administrative law judge (ALJ) issued an order generally finding that PJM and transmission owners, including PSE&G, did not engage in wrongful conduct. In addition, the developer’s assertion of an entitlement to monetary damages was expressly denied. However, in a determination disputed by PSE&G, the order found that the PJM process lacked transparency. The judge’s order has been briefed by all parties for additional determinations by FERC. We are unable to predict the outcome of these proceedings.
PSE&G has also received requests for information and a Notice of Investigation from FERC’s Office of Enforcement concerning a transmission project. PSE&G has retained outside counsel to assist with an internal investigation. PSE&G is fully cooperating with FERC’s requests for information and the investigation. It is not possible at this time to predict the outcome of this matter.
Litigation
Sewaren 7 Construction
In June 2018, a complaint was filed in federal court in Newark, New Jersey against PSEG Fossil LLC, a wholly owned subsidiary of Power, regarding an ongoing dispute with Durr Mechanical Construction, Inc. (Durr), a contractor on the Sewaren 7 project. Among other things, Durr seeks damages of $93 million and alleges that Power withheld money owed to Durr and that Power’s intentional conduct led to the inability of Durr to obtain prospective contracts. Power intends to vigorously defend against these allegations. In December 2018, Durr filed for Chapter 11 bankruptcy in the federal court in the Southern District of New York (SDNY). The SDNY bankruptcy court has allowed the New Jersey litigation to proceed. Power has accrued an amount related to outstanding invoices which does not reflect an assessment of claims and potential counterclaims in this matter. Due to its preliminary nature, Power cannot predict the outcome of this matter.
Newark Customer Incident
On the morning of July 5, 2018, PSE&G discontinued electricity to the home of a customer residing in Newark because of outstanding arrears on that customer’s account. Subsequent to the discontinuation of electricity, that customer died on the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Regulatory Proceedings
FERC Compliance
Inafternoon of July 5th. The family of the first quarter of 2014, Power discovered that it incorrectly calculated certain components of its cost-based bids for its New Jersey fossil generating unitscustomer, who was on hospice care, raised allegations in the PJM energy market. Upon discoverymedia regarding PSE&G’s conduct surrounding the discontinuation and restoration of electricity to the home of the errors, PSEG retained outside counsel to assist incustomer, claiming that the conductdiscontinuation of electric service prevented the customer from using life sustaining medical equipment. The BPU initiated an investigation into the matter and self-reportedthat investigation is ongoing. In addition, PSE&G received a grand jury subpoena from the errors. AsEssex County Prosecutor’s Office (ECPO) for records and correspondence between PSE&G and the internalcustomer. PSE&G is fully cooperating with the BPU and the ECPO in both proceedings. PSEG cannot predict the outcome of the pending proceedings regarding this incident at this time.
The PSEG Board of Directors (PSEG Board) retained outside counsel to conduct an independent investigation proceeded, additional pricing errorsof the facts surrounding this incident with the full support and cooperation of management. The independent investigation concluded that the disconnection itself was not improper; however, it did identify issues related to PSE&G’s response once it was notified of the disconnection. The PSEG Board reviewed and considered the findings and conclusions of the investigation and PSE&G’s proposed corrective actions. PSE&G’s progress on implementation of the corrective actions will continue to be overseen by the PSEG Board.
Caithness Energy, L.L.C. (Caithness)
In August 2018, Caithness, a Long Island power plant developer, filed a complaint in federal district court in the bids were identified. ItEastern District of New York against PSEG and PSEG LI alleging violations of state and federal antitrust laws and a claim of intentional interference of prospective business relations. Caithness alleges that PSEG and PSEG LI interfered with LIPA’s consideration of the Caithness proposal for a 750 MW combined cycle generation project that was further determinedidentified as a finalist for a Request For Proposal issued by LIPA. In addition, Caithness claims that PSEG and PSEG LI induced LIPA to agree to eliminate the quantityproposed project as a potential competitor to other PSEG affiliates with power supply operations. The complaint alleges hundreds of energy that Power offered intomillions of dollars of harm and seeks treble and punitive damages. PSEG intends to vigorously defend against these allegations. Based upon the energy market for its fossil peaking units differed frompreliminary nature of this matter, a loss is not considered probable nor is the amount of loss, if any, estimable as of March 31, 2019.
Hudson Power
In January 2019, Hudson Power filed a complaint against PJM, PSE&G and three other transmission owners in Pennsylvania state court. Hudson Power has sued the transmission owner defendants for whichfraud and intentional misrepresentation relating to information provided to PJM and FERC regarding the costs of upgrades for Hudson Power’s proposed project. These allegations appear to be based on alleged conduct that is the subject of the Hudson Power proceeding discussed under “Pending FERC Matters.” This action was compensatedremoved to federal court in the capacity market for those units. PSEG informedEastern District of Pennsylvania in February 2019. In light of the FERC PJM andproceeding, the PJM Independent Market Monitor (IMM)federal court granted a motion to stay the federal proceeding until the conclusion of these additional issues, corrected the identified errors, and modifiedFERC proceeding. Based upon the bid quantities for Power’s peaking units. Power has implemented procedures and continues to review its policies and practices to mitigate the risk of similar issues occurring in the future.
Since September 2014, FERC Staff has been conducting a preliminary non-public staff investigation into these matters. In April 2018, a settlement agreement was entered into between PSEG and FERC Staff, approved by FERC on April 25, 2018, pursuant to which PSEG agreed to pay approximately $40 million for the full resolutionnature of this matter. Accordingly, Power recorded an additional pre-tax charge to incomematter, a loss is not considered probable nor is the amount of $5 million in the first quarterloss, if any, estimable as of 2018, resulting in a total liability of approximately $40 million accrued for the resolution of this matter. The settlement agreement does not require PSEG to change its business practices in a manner that would have a material impact on its ongoing business operations.March 31, 2019.
Other Litigation and Legal Proceedings
PSEG and its subsidiaries are party to various lawsuits in the ordinary course of business. In view of the inherent difficulty in predicting the outcome of such matters, PSEG, PSE&G and Power generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of these matters, or the eventual loss, fines or penalties related to each pending matter.
In accordance with applicable accounting guidance, a liability is accrued when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. PSEG will continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established.
Based on current knowledge, management does not believe that loss contingencies arising from pending matters, other than the matters described herein, could have a material adverse effect on PSEG’s, PSE&G’s or Power’s consolidated financial position or liquidity. However, in light of the inherent uncertainties involved in these matters, some of which are beyond PSEG’s control, and the large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to PSEG’s, PSE&G’s or Power’s results of operations or liquidity for any particular reporting period.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 11.12. Debt and Credit Facilities
Long-Term Debt Financing Transactions
The following long-term debt transactions occurred in the three months ended March 31, 2019:
PSEG
PSEG repaid a $350 million term loan at an interest rate of 1 month LIBOR + 0.80% that was scheduled to mature in June 2019.
Power
Power executed an extension of the letter of credit backing $44 million of Pennsylvania Economic Development Financing Authority Variable Rate Demand Bonds. The existing letter of credit, which was scheduled to expire in November 2019, has now been extended through March 2022.
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 the $4.2 billion credit facilities are provided by a diverse bank group. As of March 31, 2018,2019, the total available credit capacity was $3.4$2.9 billion.
As of March 31, 2018,2019, no single institution represented more than 8%9% of the total commitments in the credit facilities.
As of March 31, 2018,2019, total credit capacity was in excess of the total anticipated maximum liquidity requirements over PSEG’s 12-month planning horizon.
Each of the 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. The total credit facilities and available liquidity as of March 31, 20182019 were as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | As of March 31, 2018 | | | | | |
| | Company/Facility | | Total Facility | | Usage | | Available Liquidity | | Expiration Date | | Primary Purpose | |
| | | | Millions | | | | | |
| | PSEG | | | | | | | | | | | |
| | 5-year Credit Facilities (A) | | $ | 1,500 |
| | $ | 609 |
| | $ | 891 |
| | Mar 2022 | | Commercial Paper Support/Funding/Letters of Credit | |
| | Total PSEG | | $ | 1,500 |
| | $ | 609 |
| | $ | 891 |
| | | | | |
| | PSE&G | | | | | | | | | | | |
| | 5-year Credit Facility (A) | | $ | 600 |
| | $ | 16 |
| | $ | 584 |
| | Mar 2022 | | Commercial Paper Support/Funding/Letters of Credit | |
| | Total PSE&G | | $ | 600 |
| | $ | 16 |
| | $ | 584 |
| | | | | |
| | Power | | | | | | | | | | | |
| | 3-year Letter of Credit Facilities | | $ | 200 |
| | $ | 112 |
| | $ | 88 |
| | Mar 2020 | | Letters of Credit | |
| | 5-year Credit Facilities | | 1,900 |
| | 46 |
| | 1,854 |
| | Mar 2022 | | Funding/Letters of Credit | |
| | Total Power | | $ | 2,100 |
| | $ | 158 |
| | $ | 1,942 |
| | | | | |
| | Total | | $ | 4,200 |
| | $ | 783 |
| | $ | 3,417 |
| | | | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | As of March 31, 2019 | | | | | |
| | Company/Facility | | Total Facility | | Usage (D) | | Available Liquidity | | Expiration Date | | Primary Purpose | |
| | | | Millions | | | | | |
| | PSEG | | | | | | | | | | | |
| | 5-year Credit Facilities (A) | | $ | 1,500 |
| | $ | 802 |
| | $ | 698 |
| | Mar 2023 | | Commercial Paper Support/Funding/Letters of Credit | |
| | Total PSEG | | $ | 1,500 |
| | $ | 802 |
| | $ | 698 |
| | | | | |
| | PSE&G | | | | | | | | | | | |
| | 5-year Credit Facility (B) | | $ | 600 |
| | $ | 380 |
| | $ | 220 |
| | Mar 2023 | | Commercial Paper Support/Funding/Letters of Credit | |
| | Total PSE&G | | $ | 600 |
| | $ | 380 |
| | $ | 220 |
| | | | | |
| | Power | | | | | | | | | | | |
| | 3-year Letter of Credit Facilities | | $ | 200 |
| | $ | 104 |
| | $ | 96 |
| | Sept 2021 | | Letters of Credit | |
| | 5-year Credit Facilities (C) | | 1,900 |
| | 39 |
| | 1,861 |
| | Mar 2023 | | Funding/Letters of Credit | |
| | Total Power | | $ | 2,100 |
| | $ | 143 |
| | $ | 1,957 |
| | | | | |
| | Total | | $ | 4,200 |
| | $ | 1,325 |
| | $ | 2,875 |
| | | | | |
| | | | | | | | | | | | | |
| |
| (A) | PSEG facilities will be reduced by $9 million in March 2022. |
| |
| (B) | PSE&G facility will be reduced by $4 million in March 2022. |
| |
| (C) | Power facilities will be reduced by $12 million in March 2022. |
| |
| (D) | The primary use of PSEG’s and PSE&G’s credit facilities is to support their respective Commercial Paper Programs, under which as of March 31, 2018,2019, PSEG had $594$787 million outstanding at a weighted average interest rate of 2.57%2.92%. PSE&G had no amounts$364 million outstanding at a weighted average interest rate of 2.80% under its Commercial Paper Program as of March 31, 2018.2019. |
Except as otherwise noted in the table above, in March 2019, PSEG, PSE&G and Power and their respective lenders agreed to
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
extend the expiration dates on their credit agreements from March 2022 to March 2023.
Note 12.13. Financial Risk Management Activities
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 purchases and normal sales (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. PSEG uses interest rate swaps and other derivatives, which are designated and effective as cash flow or fair value hedges. Power and PSE&G enterenters 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 commodity 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, such as financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity, to manage the exposure to fluctuations in commodity prices and optimize the value of Power’s expected generation. Power also uses derivatives to hedge a portion of its anticipated BGSS obligations with PSE&G. For additional information see Note 10.11. Commitments and Contingent Liabilities. Changes in the fair market value of these derivative contracts are recorded in earnings.
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 changes in the fair value of the underlying forecasted interest payments of the debt. There were no outstanding interest rate swaps as of March 31, 20182019 or December 31, 2017.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2018.
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. ThereAs of March 31, 2019, PSEG had interest rate hedges outstanding totaling $900 million that were executed during the first quarter of 2019. PSEG executed interest rate swaps of $700 million that converted PSEG’s $700 million variable rate term loan due November 2020 into a fixed rate loan and $200 million of forward starting swaps that hedge a portion of PSEG’s anticipated issuances.
The fair value of these hedges was $(5) million as of March 31, 2019 and there were no outstanding interest rate hedges as of March 31, 2018 and December 31, 2017.2018. The Accumulated Other Comprehensive Income (Loss) (after tax) related to existingoutstanding and terminated interest rate derivatives designated as cash flow hedges was immaterial$(5) million and $(1) million as of March 31, 20182019 and December 31, 2017,2018, respectively. The after-tax unrealized gainslosses on these hedges expected to be reclassified to earnings during the next 12 months isare immaterial.
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 are offset on the Condensed Consolidated Balance Sheets of Power and PSEG. For additional information see Note 13.14. Fair Value Measurements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tabular disclosure does not include the offsetting of trade receivables and payables. |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | As of March 31, 2019 | |
| | | | Power (A) | | PSEG (A) | | Consolidated | |
| | | | Not Designated | | | | | | Cash Flow Hedges | | | |
| | Balance Sheet Location | | Energy- Related Contracts | | Netting (B) | | Total Power | | Interest Rate Swaps | | Total Derivatives | |
| | | | Millions | |
| | Derivative Contracts | | | | | | | | | | | |
| | Current Assets | | $ | 346 |
| | $ | (327 | ) | | $ | 19 |
| | $ | 1 |
| | $ | 20 |
| |
| | Noncurrent Assets | | 180 |
| | (176 | ) | | 4 |
| | — |
| | 4 |
| |
| | Total Mark-to-Market Derivative Assets | | $ | 526 |
| | $ | (503 | ) | | $ | 23 |
| | $ | 1 |
| | $ | 24 |
| |
| | Derivative Contracts | | | | | | | | | | | |
| | Current Liabilities | | $ | (396 | ) | | $ | 383 |
| | $ | (13 | ) | | $ | — |
| | $ | (13 | ) | |
| | Noncurrent Liabilities | | (169 | ) | | 168 |
| | (1 | ) | | (6 | ) | | (7 | ) | |
| | Total Mark-to-Market Derivative (Liabilities) | | $ | (565 | ) | | $ | 551 |
| | $ | (14 | ) | | $ | (6 | ) | | $ | (20 | ) | |
| | Total Net Mark-to-Market Derivative Assets (Liabilities) | | $ | (39 | ) | | $ | 48 |
| | $ | 9 |
| | $ | (5 | ) | | $ | 4 |
| |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | As of March 31, 2018 | |
| | | | Power (A) | | Consolidated | |
| | | | Not Designated | | | | | | | |
| | Balance Sheet Location | | Energy- Related Contracts | | Netting (B) | | Total Power | | Total Derivatives | |
| | | | Millions | |
| | Derivative Contracts | | | | | | | | | |
| | Current Assets | | $ | 366 |
| | $ | (323 | ) | | $ | 43 |
| | $ | 43 |
| |
| | Noncurrent Assets | | 156 |
| | (108 | ) | | 48 |
| | 48 |
| |
| | Total Mark-to-Market Derivative Assets | | $ | 522 |
| | $ | (431 | ) | | $ | 91 |
| | $ | 91 |
| |
| | Derivative Contracts | | | | | | | | | |
| | Current Liabilities | | $ | (332 | ) | | $ | 322 |
| | $ | (10 | ) | | $ | (10 | ) | |
| | Noncurrent Liabilities | | (109 | ) | | 107 |
| | (2 | ) | | (2 | ) | |
| | Total Mark-to-Market Derivative (Liabilities) | | $ | (441 | ) | | $ | 429 |
| | $ | (12 | ) | | $ | (12 | ) | |
| | Total Net Mark-to-Market Derivative Assets (Liabilities) | | $ | 81 |
| | $ | (2 | ) | | $ | 79 |
| | $ | 79 |
| |
| | | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | As of December 31, 2017 | |
| | | | Power (A) | | Consolidated | |
| | | | Not Designated | | | | | | | |
| | Balance Sheet Location | | Energy- Related Contracts | | Netting (B) | | Total Power | | Total Derivatives | |
| | | | Millions | |
| | Derivative Contracts | | | | | | | | | |
| | Current Assets | | $ | 391 |
| | $ | (362 | ) | | $ | 29 |
| | $ | 29 |
| |
| | Noncurrent Assets | | 78 |
| | (71 | ) | | 7 |
| | 7 |
| |
| | Total Mark-to-Market Derivative Assets | | $ | 469 |
| | $ | (433 | ) | | $ | 36 |
| | $ | 36 |
| |
| | Derivative Contracts | | | | | | | | | |
| | Current Liabilities | | $ | (403 | ) | | $ | 387 |
| | $ | (16 | ) | | $ | (16 | ) | |
| | Noncurrent Liabilities | | (95 | ) | | 90 |
| | (5 | ) | | (5 | ) | |
| | Total Mark-to-Market Derivative (Liabilities) | | $ | (498 | ) | | $ | 477 |
| | $ | (21 | ) | | $ | (21 | ) | |
| | Total Net Mark-to-Market Derivative Assets (Liabilities) | | $ | (29 | ) | | $ | 44 |
| | $ | 15 |
| | $ | 15 |
| |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | As of December 31, 2018 | |
| | | | Power (A) | | Consolidated | |
| | | | Not Designated | | | | | | | |
| | Balance Sheet Location | | Energy- Related Contracts | | Netting (B) | | Total Power | | Total Derivatives | |
| | | | Millions | |
| | Derivative Contracts | | | | | | | | | |
| | Current Assets | | $ | 426 |
| | $ | (415 | ) | | $ | 11 |
| | $ | 11 |
| |
| | Noncurrent Assets | | 137 |
| | (136 | ) | | 1 |
| | 1 |
| |
| | Total Mark-to-Market Derivative Assets | | $ | 563 |
| | $ | (551 | ) | | $ | 12 |
| | $ | 12 |
| |
| | Derivative Contracts | | | | | | | | | |
| | Current Liabilities | | $ | (521 | ) | | $ | 510 |
| | $ | (11 | ) | | $ | (11 | ) | |
| | Noncurrent Liabilities | | (198 | ) | | 194 |
| | (4 | ) | | (4 | ) | |
| | Total Mark-to-Market Derivative (Liabilities) | | $ | (719 | ) | | $ | 704 |
| | $ | (15 | ) | | $ | (15 | ) | |
| | Total Net Mark-to-Market Derivative Assets (Liabilities) | | $ | (156 | ) | | $ | 153 |
| | $ | (3 | ) | | $ | (3 | ) | |
| | | | | | | | | | | |
| |
| (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 March 31, 20182019 and December 31, 2017.2018. |
| |
| (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 March 31, 20182019 and December 31, 2017,2018, Power had net cash collateral/margin payments to counterparties of $121$203 million and $146$393 million, respectively. Of these net cash/collateral margin payments, $(2)$48 million as of March 31, 20182019 and $44$153 million as December 31, 20172018 were netted against the corresponding net derivative contract positions. The $(2)Of the $48 million as of March 31, 20182019, $(9) million was netted against noncurrent assets and $57 million was netted against current assets.liabilities. Of the $44$153 million as of December 31, 2017, $(3)2018, $(2) million was netted against current assets, $28$(3) million was netted against noncurrent assets, $96 million was netted against current liabilities and $19$62 million was netted against noncurrent liabilities. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 by S&P or Moody’s, 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 or 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) was $20$16 million and $30$22 million as of March 31, 20182019 and December 31, 2017,2018, respectively. As of March 31, 20182019 and December 31, 2017,2018, Power had the contractual right of offset of $9$4 million and $13$7 million, respectively, related to derivative instruments that are assets with the same counterparty under master 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 $11$12 million and $17$15 million as of March 31, 20182019 and December 31, 2017,2018, respectively, related to its derivatives, net of the contractual right of offset under master agreements and the application of collateral.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSThe 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 March 31, 2019 and 2018:
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Derivatives in Cash Flow Hedging Relationships | | Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives | | Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income | | Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income | |
| | | Three Months Ended | | | | Three Months Ended | |
| | | March 31, | | | | March 31, | |
| | | 2019 | | 2018 | | | | 2019 | | 2018 | |
| | | | Millions | | | | Millions | |
| | PSEG | | | | | | | | | | | |
| | Interest Rate Swaps | | $ | (5 | ) | | $ | — |
| | Interest Expense | | $ | — |
| | $ | — |
| |
| | Total PSEG | | $ | (5 | ) | | $ | — |
| | | | $ | — |
| | $ | — |
| |
| | | | | | | | | | | | | |
The effect of interest rate cash flow hedges is recorded in Interest Expense in PSEG’s Condensed Consolidated Statement of Operations. For the three months ended March 31, 2019 and 2018, the amount of gain or loss on interest rate hedges reclassified from Accumulated Other Comprehensive Income (Loss) into income was immaterial.
The following reconciles the Accumulated Other Comprehensive Income (Loss) 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, 2016 | | $ | 3 |
| | $ | 2 |
| |
| | Gain Recognized in AOCI | | — |
| | — |
| |
| | Less: Gain Reclassified into Income | | (3 | ) | | (2 | ) | |
| | Balance as of December 31, 2017 | | $ | — |
| | $ | — |
| |
| | Gain Recognized in AOCI | | — |
| | — |
| |
| | Less: Gain Reclassified into Income | | — |
| | — |
| |
| | Balance as of March 31, 2018 | | $ | — |
| | $ | — |
| |
| | | | | | | |
|
| | | | | | | | | | |
| | | | | | | |
| | Accumulated Other Comprehensive Income (Loss) | | Pre-Tax | | After-Tax | |
| | | | Millions | |
| | Balance as of December 31, 2017 | | $ | — |
| | $ | — |
| |
| | Loss Recognized in AOCI | | (2 | ) | | (1 | ) | |
| | Less: Loss Reclassified into Income | | — |
| | — |
| |
| | Balance as of December 31, 2018 | | $ | (2 | ) | | $ | (1 | ) | |
| | Loss Recognized in AOCI | | (5 | ) | | (4 | ) | |
| | Less: Loss Reclassified into Income | | — |
| | — |
| |
| | Balance as of March 31, 2019 | | $ | (7 | ) | | $ | (5 | ) | |
| | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as NPNS for the three months ended March 31, 2019 and 2018, and 2017.respectively. Power’s derivative contracts reflected in this table include contracts to hedge the purchase and sale of electricity and natural gas, and the purchase of fuel. The table does not include contracts that Power has designated as NPNS, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load.
|
| | | | | | | | | | | | |
| | | | | | | | | |
| | 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 | |
| | | | | | March 31, | |
| | | | | | 2018 | | 2017 | |
| | | | | | Millions | |
| | PSEG and Power | | | | | | | |
| | Energy-Related Contracts | | Operating Revenues | | $ | 40 |
| | $ | 78 |
| |
| | Energy-Related Contracts | | Energy Costs | | (8 | ) | | — |
| |
| | Total PSEG and Power | | | | $ | 32 |
| | $ | 78 |
| |
| | | | | | | | | |
|
| | | | | | | | | | | | |
| | | | | | | | | |
| | 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 | |
| | | | | | March 31, | |
| | | | | | 2019 | | 2018 | |
| | | | | Millions | |
| | PSEG and Power | | | | | | | |
| | Energy-Related Contracts | | Operating Revenues | | $ | 139 |
| | $ | 40 |
| |
| | Energy-Related Contracts | | Energy Costs | | (13 | ) | | (8 | ) | |
| | Total PSEG and Power | | | | $ | 126 |
| | $ | 32 |
| |
| | | | | | | | | |
The following table summarizes the net notional volume purchases/(sales) of open derivative transactions by commodity as of March 31, 20182019 and December 31, 2017.2018.
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Type | | Notional | | Total | | PSEG | | Power | | PSE&G | |
| | | | | | Millions | |
| | As of March 31, 2018 | | | | | | | | | | | |
| | Natural Gas | | Dekatherm (Dth) | | 237 |
| | — |
| | 237 |
| | — |
| |
| | Electricity | | MWh | | (74 | ) | | — |
| | (74 | ) | | — |
| |
| | Financial Transmission Rights (FTRs) | | MWh | | 5 |
| | — |
| | 5 |
| | — |
| |
| | As of December 31, 2017 | | | | | | | | | | | |
| | Natural Gas | | Dth | | 154 |
| | — |
| | 154 |
| | — |
| |
| | Electricity | | MWh | | (63 | ) | | — |
| | (63 | ) | | — |
| |
| | FTRs | | MWh | | 6 |
| | — |
| | 6 |
| | — |
| |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Type | | Notional | | Total | | PSEG | | Power | | PSE&G | |
| | | | | | Millions | |
| | As of March 31, 2019 | | | | | | | | | | | |
| | Natural Gas | | Dekatherm (Dth) | | 353 |
| | — |
| | 353 |
| | — |
| |
| | Electricity | | MWh | | (61 | ) | | — |
| | (61 | ) | | — |
| |
| | Financial Transmission Rights (FTRs) | | MWh | | 10 |
| | — |
| | 10 |
| | — |
| |
| | Interest Rate Swaps | | U.S. Dollars | | 900 |
| | 900 |
| | — |
| | — |
| |
| | As of December 31, 2018 | | | | | | | | | | | |
| | Natural Gas | | Dth | | 358 |
| | — |
| | 358 |
| | — |
| |
| | Electricity | | MWh | | (74 | ) | | — |
| | (74 | ) | | — |
| |
| | FTRs | | MWh | | 18 |
| | — |
| | 18 |
| | — |
| |
| | | | | | | | | | | | | |
Credit Risk
Credit risk relates to the risk of loss that Power would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. PSEG has established credit policies that it believes significantly minimize credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit rating), collateral
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The following table provides information on Power’s credit risk from ER&T wholesale counterparties, net of collateral, as of March 31, 2018.2019. It further delineates that exposure by the credit rating of the counterparties, which is determined by the lowest rating from S&P, Moody’s or an internal scoring model. In addition, it 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.
As of March 31, 2018,2019, 99% of the net credit exposure for Power’s wholesale 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, NPNS and non-derivatives).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Rating | | Current Exposure | | Securities held as Collateral | | Net Exposure | | Number of Counterparties >10% | | Net Exposure of Counterparties >10% | | |
| | | | Millions | | | | Millions | | |
| | Investment Grade | | $ | 337 |
| | $ | 12 |
| | $ | 325 |
| | 1 |
| | $ | 191 |
| (A) | |
| | Non-Investment Grade | | 3 |
| | — |
| | 3 |
| | — |
| | — |
| | |
| | Total | | $ | 340 |
| | $ | 12 |
| | $ | 328 |
| | 1 |
| | $ | 191 |
| | |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Rating | | Current Exposure | | Securities held as Collateral | | Net Exposure | | Number of Counterparties >10% | | Net Exposure of Counterparties >10% | | |
| | | | Millions | | | | Millions | | |
| | Investment Grade | | $ | 255 |
| | $ | 15 |
| | $ | 240 |
| | 1 |
| | $ | 166 |
| (A) | |
| | Non-Investment Grade | | 2 |
| | 1 |
| | 1 |
| | — |
| | — |
| | |
| | Total | | $ | 257 |
| | $ | 16 |
| | $ | 241 |
| | 1 |
| | $ | 166 |
| | |
| | | | | | | | | | | | | | |
| |
| (A) | Represents net exposure of $166 million with PSE&G. |
As of March 31, 2018,2019, collateral held from counterparties where Power had credit exposure was comprised of $12included $1 million in cash collateral and $15 million in letters of credit.
As of March 31, 20182019, Power had 142145 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 March 31, 2018,2019, 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 BGS suppliers’ credit exposure is calculated each business day. As of March 31, 2018,2019, 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.
Note 13.14. 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, as well as natural gas futures contracts executed on NYMEX.
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 31, 2018, these consistedThese consist primarily of certain electric load contracts and gas contracts.
Certain derivative transactions may transfer from Level 2 to Level 3 if inputs become unobservable and internal modeling techniques are employed to determine fair value. Conversely, measurements may transfer from Level 3 to Level 2 if the inputs become observable.
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 March 31, 20182019 and December 31, 2017,2018, 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. |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | Recurring Fair Value Measurements as of March 31, 2018 | |
| | Description | | Total | |
Netting (D) | | Quoted Market Prices for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
| | | | Millions | |
| | PSEG | | | | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Energy-Related Contracts (B) | | $ | 91 |
| | $ | (431 | ) | | $ | 10 |
| | $ | 505 |
| | $ | 7 |
| |
| | NDT Fund (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 1,086 |
| | $ | — |
| | $ | 1,084 |
| | $ | 2 |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 223 |
| | $ | — |
| | $ | — |
| | $ | 223 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 285 |
| | $ | — |
| | $ | — |
| | $ | 285 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 456 |
| | $ | — |
| | $ | — |
| | $ | 456 |
| | $ | — |
| |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 23 |
| | $ | — |
| | $ | 23 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 54 |
| | $ | — |
| | $ | — |
| | $ | 54 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 35 |
| | $ | — |
| | $ | — |
| | $ | 35 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 113 |
| | $ | — |
| | $ | — |
| | $ | 113 |
| | $ | — |
| |
| | Liabilities: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (B) | | $ | (12 | ) | | $ | 429 |
| | $ | (6 | ) | | $ | (435 | ) | | $ | — |
| |
| | PSE&G | | | | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 4 |
| | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 7 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 23 |
| | $ | — |
| | $ | — |
| | $ | 23 |
| | $ | — |
| |
| | Power | |
| | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (B) | | $ | 91 |
| | $ | (431 | ) | | $ | 10 |
| | $ | 505 |
| | $ | 7 |
| |
| | NDT Fund (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 1,086 |
| | $ | — |
| | $ | 1,084 |
| | $ | 2 |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 223 |
| | $ | — |
| | $ | — |
| | $ | 223 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 285 |
| | $ | — |
| | $ | — |
| | $ | 285 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 456 |
| | $ | — |
| | $ | — |
| | $ | 456 |
| | $ | — |
| |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 6 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | 13 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | 9 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 28 |
| | $ | — |
| | $ | — |
| | $ | 28 |
| | $ | — |
| |
| | Liabilities: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (B) | | $ | (12 | ) | | $ | 429 |
| | $ | (6 | ) | | $ | (435 | ) | | $ | — |
| |
| | | | | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | Recurring Fair Value Measurements as of December 31, 2017 | |
| | Description | | Total | | Netting (D) | | 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) | | $ | 223 |
| | $ | — |
| | $ | 223 |
| | $ | — |
| | $ | — |
| |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (B) | | $ | 36 |
| | $ | (433 | ) | | $ | 15 |
| | $ | 442 |
| | $ | 12 |
| |
| | NDT Fund (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 1,147 |
| | $ | — |
| | $ | 1,145 |
| | $ | 2 |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 314 |
| | $ | — |
| | $ | — |
| | $ | 314 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 270 |
| | $ | — |
| | $ | — |
| | $ | 270 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 402 |
| | $ | — |
| | $ | — |
| | $ | 402 |
| | $ | — |
| |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 27 |
| | $ | — |
| | $ | 27 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 51 |
| | $ | — |
| | $ | — |
| | $ | 51 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 34 |
| | $ | — |
| | $ | — |
| | $ | 34 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 119 |
| | $ | — |
| | $ | — |
| | $ | 119 |
| | $ | — |
| |
| | Liabilities: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (B) | | $ | (21 | ) | | $ | 477 |
| | $ | (8 | ) | | $ | (485 | ) | | $ | (5 | ) | |
| | PSE&G | | | | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Cash Equivalents (A) | | $ | 223 |
| | $ | — |
| | $ | 223 |
| | $ | — |
| | $ | — |
| |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy Related Contracts (B) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 5 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 10 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 7 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 24 |
| | $ | — |
| |
| | Liabilities: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (B) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| | Power | | | | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (B) | | $ | 36 |
| | $ | (433 | ) | | $ | 15 |
| | $ | 442 |
| | $ | 12 |
| |
| | NDT Fund (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 1,147 |
| | $ | — |
| | $ | 1,145 |
| | $ | 2 |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 314 |
| | $ | — |
| | $ | — |
| | $ | 314 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 270 |
| | $ | — |
| | $ | — |
| | $ | 270 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 402 |
| | $ | — |
| | $ | — |
| | $ | 402 |
| | $ | — |
| |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 6 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | 13 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 8 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 30 |
| | $ | — |
| | $ | — |
| | $ | 30 |
| | $ | — |
| |
| | Liabilities: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (B) | | $ | (21 | ) | | $ | 477 |
| | $ | (8 | ) | | $ | (485 | ) | | $ | (5 | ) | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | Recurring Fair Value Measurements as of March 31, 2019 | |
| | Description | | Total | |
Netting (D) | | Quoted Market Prices for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
| | | | Millions | |
| | PSEG | | | | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (A) | | $ | 23 |
| | $ | (503 | ) | | $ | 11 |
| | $ | 514 |
| | $ | 1 |
| |
| | Interest Rate Swaps (B) | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| |
| | NDT Fund (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 1,040 |
| | $ | — |
| | $ | 1,039 |
| | $ | 1 |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 182 |
| | $ | — |
| | $ | — |
| | $ | 182 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 330 |
| | $ | — |
| | $ | — |
| | $ | 330 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 497 |
| | $ | — |
| | $ | — |
| | $ | 497 |
| | $ | — |
| |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 25 |
| | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 68 |
| | $ | — |
| | $ | — |
| | $ | 68 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 42 |
| | $ | — |
| | $ | — |
| | $ | 42 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 98 |
| | $ | — |
| | $ | — |
| | $ | 98 |
| | $ | — |
| |
| | Liabilities: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (A) | | $ | (14 | ) | | $ | 551 |
| | $ | (6 | ) | | $ | (556 | ) | | $ | (3 | ) | |
| | Interest Rate Swaps (B) | | $ | (6 | ) | | $ | — |
| | $ | — |
| | $ | (6 | ) | | $ | — |
| |
| | PSE&G | | | | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 5 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | 13 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 8 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 20 |
| | $ | — |
| | $ | — |
| | $ | 20 |
| | $ | — |
| |
| | Power | |
| | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (A) | | $ | 23 |
| | $ | (503 | ) | | $ | 11 |
| | $ | 514 |
| | $ | 1 |
| |
| | NDT Fund (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 1,040 |
| | $ | — |
| | $ | 1,039 |
| | $ | 1 |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 182 |
| | $ | — |
| | $ | — |
| | $ | 182 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 330 |
| | $ | — |
| | $ | — |
| | $ | 330 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 497 |
| | $ | — |
| | $ | — |
| | $ | 497 |
| | $ | — |
| |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 6 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 17 |
| | $ | — |
| | $ | — |
| | $ | 17 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | — |
| �� |
| | Debt Securities—Corporate | | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 25 |
| | $ | — |
| |
| | Liabilities: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (A) | | $ | (14 | ) | | $ | 551 |
| | $ | (6 | ) | | $ | (556 | ) | | $ | (3 | ) | |
| | | | | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | Recurring Fair Value Measurements as of December 31, 2018 | |
| | Description | | Total | | Netting (D) | | Quoted Market Prices for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
| | | | Millions | |
| | PSEG | | | | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Cash Equivalents (E) | | $ | 100 |
| | $ | — |
| | $ | 100 |
| | $ | — |
| | $ | — |
| |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (A) | | $ | 12 |
| | $ | (551 | ) | | $ | 29 |
| | $ | 527 |
| | $ | 7 |
| |
| | NDT Fund (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 900 |
| | $ | — |
| | $ | 898 |
| | $ | 2 |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 171 |
| | $ | — |
| | $ | — |
| | $ | 171 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 320 |
| | $ | — |
| | $ | — |
| | $ | 320 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 487 |
| | $ | — |
| | $ | — |
| | $ | 487 |
| | $ | — |
| |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 23 |
| | $ | — |
| | $ | 23 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 69 |
| | $ | — |
| | $ | — |
| | $ | 69 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 40 |
| | $ | — |
| | $ | — |
| | $ | 40 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 92 |
| | $ | — |
| | $ | — |
| | $ | 92 |
| | $ | — |
| |
| | Liabilities: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (A) | | $ | (15 | ) | | $ | 704 |
| | $ | (36 | ) | | $ | (677 | ) | | $ | (6 | ) | |
| | PSE&G | | | | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 5 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | 14 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 8 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 18 |
| | $ | — |
| |
| | Power | | | | | | | | | | | |
| | Assets: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (A) | | $ | 12 |
| | $ | (551 | ) | | $ | 29 |
| | $ | 527 |
| | $ | 7 |
| |
| | NDT Fund (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 900 |
| | $ | — |
| | $ | 898 |
| | $ | 2 |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 171 |
| | $ | — |
| | $ | — |
| | $ | 171 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 320 |
| | $ | — |
| | $ | — |
| | $ | 320 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 487 |
| | $ | — |
| | $ | — |
| | $ | 487 |
| | $ | — |
| |
| | Rabbi Trust (C) | | | | | | | | | | | |
| | Equity Securities | | $ | 6 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| |
| | Debt Securities—U.S. Treasury | | $ | 17 |
| | $ | — |
| | $ | — |
| | $ | 17 |
| | $ | — |
| |
| | Debt Securities—Govt Other | | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 10 |
| | $ | — |
| |
| | Debt Securities—Corporate | | $ | 23 |
| | $ | — |
| | $ | — |
| | $ | 23 |
| | $ | — |
| |
| | Liabilities: | | | | | | | | | | | |
| | Derivative Contracts: | | | | | | | | | | | |
| | Energy-Related Contracts (A) | | $ | (15 | ) | | $ | 704 |
| | $ | (36 | ) | | $ | (677 | ) | | $ | (6 | ) | |
| | | | | | | | | | | | | |
| |
| (A) | Represents money market mutual funds. |
| |
(B) | Level 1—These contracts represent natural gas futures contracts executed on NYMEX, and are being valued solely on settled pricing inputs which come directly from the exchange. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 settled prices from similar assets and liabilities from an exchange, such as NYMEX, ICE and Nodal Exchange, 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
based on market prices, basis adjustments and other premiums where adjustments and premiums are not considered significant to the overall inputs.
Level 3—Unobservable inputs are used for the valuation of certain contracts. See “Additional Information Regarding Level 3 Measurements” below for more information on the utilization of unobservable inputs.
| |
| (B) | 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. |
| |
| (C) | As of March 31, 2018, the fair value measurement table excludes foreign currency of $1 million, which is part of the NDT Fund. The NDT Fund maintains investments in various equity and fixed income securities. The Rabbi Trust maintains investments in various fixed income securities and a Russell 3000 index fund.fund and various fixed income securities. 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 other equity securities in the NDT and Rabbi Trust Funds consist primarily of investments in Dreyfus money market funds which seek a high level of current income as is consistent with the preservation of capital and the maintenance of liquidity. To pursue its goals, the funds normally invest in diversified portfolios of high quality, short-term, dollar-denominated debt securities and government securities. The funds’ Net Asset Valuenet asset value (NAV) is priced and published daily. The Rabbi Trust also has an equityTrust’s Russell 3000 index fund which is valued based on quoted prices in an active market.market and can be redeemed daily without restriction.
Level 2—NDT and Rabbi Trust fixed income securities include investment grade corporate bonds, collateralized mortgage obligations, asset-backed securities and certain government and U.S. Treasury obligations or Federal Agency asset-backed securities and municipal bonds 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. The preferred stocks are not actively traded on a daily basis and therefore, are also priced using an evaluated pricing methodology. 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.
| |
| (D) | 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 March 31, 2018 and December 31, 2017, Power had net cash collateral/margin payments to counterparties of $121 million and $146 million, respectively. Of these net cash collateral/margin payments $(2) million as of March 31, 2018 and $44 million as of December 31, 2017 were netted against the corresponding net derivative contract positions. The $(2) million of cash collateral as of March 31, 2018 was netted against assets. Of the $44 million of cash collateral as of December 31, 2017, $(3) million was netted against assets and $47 million was netted against liabilities.See Note 13. Financial Risk Management Activities for additional detail. |
| |
| (E) | Represents money market mutual funds. |
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 (RMC) approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval and the monitoring and reporting of risk exposures. The RMC reports to the Corporate Governance and Audit Committees 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
For PSE&G, the natural gas supply contract is 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 fair value of Power’s gas physical contracts at certain illiquid delivery locations are measured using average historical basis and, accordingly, are categorized as Level 3. While these physical gas physical contracts have an unobservable component in their respective
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
forward price curves, the fluctuations in fair value have been driven primarily by changes in the observable inputs. The following tables provide details surrounding significant Level 3 valuations as of March 31, 20182019 and December 31, 2017.2018.
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | Quantitative Information About Level 3 Fair Value Measurements | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | Significant | | | |
| | | | | | Fair Value as of | | Valuation | | Unobservable | | | |
| | Commodity | | Level 3 Position | | March 31, 2018 | | Technique(s) | | Input | | Range | |
| | | | | | Assets | | (Liabilities) | | | | | | | |
| | | | | | Millions | | | | | | | |
| | Power | | | | | | | | | | | | | |
| | Electricity | | Electric Load Contracts | | $ | 6 |
| | $ | — |
| | Discounted Cash flow | | Historic Load Variability | | 0% to 10% | |
| | Gas | | Gas Physical Contracts | | 1 |
| | — |
| | Discounted Cash flow | | Average Historical Basis | | -40% to 0% | |
| | Total Power | | | | $ | 7 |
| | $ | — |
| | | | | | | |
| | Total PSEG | | | | $ | 7 |
| | $ | — |
| | | | | | | |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | Quantitative Information About Level 3 Fair Value Measurements | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | Significant | | | |
| | | | | | Fair Value as of | | Valuation | | Unobservable | | | |
| | Commodity | | Level 3 Position | | March 31, 2019 | | Technique(s) | | Input | | Range | |
| | | | | | Assets | | (Liabilities) | | | | | | | |
| | | | | | Millions | | | | | | | |
| | Power | | | | | | | | | | | | | |
| | Electricity | | Electric Load Contracts | | $ | 1 |
| | $ | (3 | ) | | Discounted Cash flow | | Historic Load Variability | | 0% to 15% | |
| | Total Power | | | | $ | 1 |
| | $ | (3 | ) | | | | | | | |
| | Total PSEG | | | | $ | 1 |
| | $ | (3 | ) | | | | | | | |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | Quantitative Information About Level 3 Fair Value Measurements | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | Significant | | | |
| | | | | | Fair Value as of | | Valuation | | Unobservable | | | |
| | Commodity | | Level 3 Position | | December 31, 2017 | | Technique(s) | | Input | | Range | |
| | | | | | Assets | | (Liabilities) | | | | | | | |
| | | | | | Millions | | | | | | | |
| | Power | | | | | | | | | | | | | |
| | Electricity | | Electric Load Contracts | | $ | 1 |
| | $ | (3 | ) | | Discounted Cash flow | | Historic Load Variability | | 0% to 10% | |
| | Gas | | Gas Physical Contracts | | 11 |
| | (2 | ) | | Discounted Cash flow | | Average Historical Basis | | -40% to -10% | |
| | Total Power | | | | $ | 12 |
| | $ | (5 | ) | | | | | | | |
| | Total PSEG | | | | $ | 12 |
| | $ | (5 | ) | | | | | | | |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | Quantitative Information About Level 3 Fair Value Measurements | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | Significant | | | |
| | | | | | Fair Value as of | | Valuation | | Unobservable | | | |
| | Commodity | | Level 3 Position | | December 31, 2018 | | Technique(s) | | Input | | Range | |
| | | | | | Assets | | (Liabilities) | | | | | | | |
| | | | | | Millions | | | | | | | |
| | Power | | | | | | | | | | | | | |
| | Electricity | | Electric Load Contracts | | $ | 2 |
| | $ | (5 | ) | | Discounted Cash flow | | Historic Load Variability | | 0% to 15% | |
| | Gas | | Gas Physical Contracts | | 5 |
| | (1 | ) | | Discounted Cash flow | | Average Historical Basis | | -40% to 0% | |
| | Total Power | | | | $ | 7 |
| | $ | (6 | ) | | | | | | | |
| | Total PSEG | | | | $ | 7 |
| | $ | (6 | ) | | | | | | | |
| | | | | | | | | | | | | | | |
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 energy-related contracts in cases where Power is a seller, an increase in the load variability would decrease the fair value. For gas-related contracts in cases where Power is a buyer, an increase in the average historical basis would increase the fair value.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities for the three months ended March 31, 20182019 and March 31, 2017,2018, respectively, follows:
Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis
for the Three Months Ended March 31, 2019 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2019 | |
| | Description | | Balance as of January 1, 2019 | | Total Gains or (Losses) Realized/Unrealized Included in Income (A) | | Purchases (Sales) | | Issuances/ Settlements (B) | | Transfers In/Out (C) | | Balance as of March 31, 2019 | |
| | | | Millions | |
| | PSEG and Power | | | | | | | | | | | |
| | Net Derivative Assets (Liabilities) | | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | (4 | ) | | $ | — |
| | $ | (2 | ) | |
| | | | | | | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis
for the Three Months Ended March 31, 2018 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2018 | | | |
| | | | | | Total Gains or (Losses) Realized/Unrealized | | | | | | | | | |
| | Description | | Balance as of January 1, 2018 | | Included in Income (A) | | Included in Regulatory Assets/ Liabilities (B) | | Purchases (Sales) | | Issuances/ Settlements (C) | | Transfers In/Out (D) | | Balance as of March 31, 2018 | |
| | | | Millions | | | |
| | PSEG | | | | | | | | | | | | | | | |
| | Net Derivative Assets (Liabilities) | | $ | 7 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 7 |
| |
| | Power | | | | | | | | | | | | | | | |
| | Net Derivative Assets (Liabilities) | | $ | 7 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 7 |
| |
| | | | | | | | | | | | | | | | | |
Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2018 | |
| | Description | | Balance as of January 1, 2018 | | Total Gains or (Losses) Realized/Unrealized Included in Income (A) | | Purchases (Sales) | | Issuances/ Settlements (B) | | Transfers In/Out (C) | | Balance as of March 31, 2018 | |
| | | | Millions | |
| | PSEG and Power | | | | | | | | | | | |
| | Net Derivative Assets (Liabilities) | | $ | 7 |
| | $ | (1 | ) | | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 7 |
| |
| | | | | | | | | | | | | | | |
for(A)Unrealized gains (losses) in the Three Months Endedfollowing table represent the change in derivative assets and liabilities still held as of March 31, 20172019 and 2018. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2017 | | | |
| | | | | | Total Gains or (Losses) Realized/Unrealized | | | | | | | | | |
| | Description | | Balance as of January 1, 2017 | | Included in Income (A) | | Included in Regulatory Assets/ Liabilities (B) | | Purchases (Sales) | | Issuances/ Settlements (C) | | Transfers In/Out (D) | | Balance as of March 31, 2017 | |
| | | | Millions | | | |
| | PSEG | | | | | | | | | | | | | | | |
| | Net Derivative Assets (Liabilities) | | $ | 1 |
| | $ | 19 |
| | $ | 6 |
| | $ | — |
| | $ | (22 | ) | | $ | (1 | ) | | $ | 3 |
| |
| | PSE&G | | | | | | | | | | | | | | | |
| | Net Derivative Assets (Liabilities) | | $ | (5 | ) | | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| |
| | Power | | | | | | | | | | | | | | | |
| | Net Derivative Assets (Liabilities) | | $ | 6 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | (22 | ) | | $ | (1 | ) | | $ | 2 |
| |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | Three Months Ended March 31, | |
| | | | 2019 | | 2018 | |
| | | | Total Gains (Losses) | | Unrealized Gains (Losses) | | Total Gains (Losses) | | Unrealized Gains (Losses) | |
| | | | Millions | |
| | PSEG and Power | | | | | | | | | |
| | Operating Revenues | | $ | 6 |
| | $ | — |
| | $ | 8 |
| | $ | 8 |
| |
| | Energy Costs | | (5 | ) | | (3 | ) | | (9 | ) | | (9 | ) | |
| | Total | | $ | 1 |
| | $ | (3 | ) | | $ | (1 | ) | | $ | (1 | ) | |
| | | | | | | | | | | |
| |
(A)(B) | PSEG’sRepresents settlements of $(4) million and Power’s gains(losses) attributable to changes in net derivative assets and liabilities$1 million for the three months ended March 31, 2018 include $8 million in Operating Revenues, all of which is unrealized2019 and $(9) million in Energy Costs, all of which is unrealized. For the three months ended March 31, 2017, $14 million is included in Operating Revenues, of which $(4) million is unrealized, and $5 million is in Energy Costs, of which $1 million is unrealized. Unrealized gains (losses) represent the change in derivative assets and liabilities still held at the end of the reporting period. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
(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.2018. |
| |
| (C) | Represents $1 million and $(22) million in settlements forThere were no transfers into or out of Level 3 during the three months ended March 31, 20182019 and 2017, respectively.2018. |
| |
(D) | During the three months ended March 31, 2017, $(1) million of net derivatives were transferred from Level 2 to Level 3. |
As of March 31, 2019, PSEG carried $2.3 billion of net assets that are measured at fair value on a recurring basis, of which $2 million of net liabilities was measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
As of March 31, 2018, PSEG carried $2.4 billion of net assets that are measured at fair value on a recurring basis, of which $7 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
As of March 31, 2017, PSEG carried $2.5 billion of net assets that are measured at fair value on a recurring basis, of which $3 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 March 31, 20182019 and December 31, 20172018.
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | As of | | As of | |
| | | March 31, 2018 | | December 31, 2017 | |
| | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | |
| | | Millions | |
| | Long-Term Debt: | | | | | | | | |
| | PSEG (A) (B) | $ | 2,092 |
| | $ | 2,048 |
| | $ | 2,091 |
| | $ | 2,081 |
| |
| | PSE&G (B) | 8,593 |
| | 8,908 |
| | 8,591 |
| | 9,322 |
| |
| | Power (B) | 2,387 |
| | 2,566 |
| | 2,386 |
| | 2,659 |
| |
| | Total Long-Term Debt | $ | 13,072 |
| | $ | 13,522 |
| | $ | 13,068 |
| | $ | 14,062 |
| |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | As of | | As of | |
| | | March 31, 2019 | | December 31, 2018 | |
| | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | |
| | | Millions | |
| | Long-Term Debt: | | | | | | | | |
| | PSEG (A) (B) | $ | 2,094 |
| | $ | 2,082 |
| | $ | 2,443 |
| | $ | 2,397 |
| |
| | PSE&G (B) | 9,186 |
| | 9,780 |
| | 9,184 |
| | 9,374 |
| |
| | Power (B) | 2,836 |
| | 3,069 |
| | 2,835 |
| | 2,996 |
| |
| | Total Long-Term Debt | $ | 14,116 |
| | $ | 14,931 |
| | $ | 14,462 |
| | $ | 14,767 |
| |
| | | | | | | | | | |
| |
| (A) | IncludesAs of March 31, 2019 and December 31, 2018, includes floating rate term loans of $700 million.million and $1,050 million, respectively. The fair values of the term loan debt (Level 2 measurement) approximate the carrying valuesvalue because the interest payments are based on LIBOR rates that are reset monthly and the debt is redeemable at face value by PSEG at any time. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
| (B) | Given that these bonds do not trade actively, 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) is 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. The fair value amounts above do not represent the price at which the outstanding debt may be called for redemption by each issuer under their respective debt agreements. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 14.15. Other Income (Deductions)
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | PSE&G | | Power | | Other (A) | | Consolidated | |
| | | Millions | |
| | Three Months Ended March 31, 2018 | | | | | | | | |
| | NDT Fund Interest and Dividends | $ | — |
| | $ | 12 |
| | $ | — |
| | $ | 12 |
| |
| | Allowance for Funds Used During Construction | 14 |
| | — |
| | — |
| | 14 |
| |
| | Solar Loan Interest | 4 |
| | — |
| | — |
| | 4 |
| |
| | Other | 2 |
| | (1 | ) | | 1 |
| | 2 |
| |
| | Total Other Income (Deductions) | $ | 20 |
| | $ | 11 |
| | $ | 1 |
| | $ | 32 |
| |
| | Three Months Ended March 31, 2017 | | | | | | | | |
| | NDT Fund Interest and Dividends | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | 10 |
| |
| | Allowance for Funds Used During Construction | 14 |
| | — |
| | — |
| | 14 |
| |
| | Solar Loan Interest | 5 |
| | — |
| | — |
| | 5 |
| |
| | Other | 3 |
| | 1 |
| | (1 | ) | | 3 |
| |
| | Total Other Income (Deductions) | $ | 22 |
| | $ | 11 |
| | $ | (1 | ) | | $ | 32 |
| |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | PSE&G | | Power | | Other (A) | | Consolidated | |
| | | Millions | |
| | Three Months Ended March 31, 2019 | | | | | | | | |
| | NDT Fund Interest and Dividends | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | 14 |
| |
| | Allowance for Funds Used During Construction | 13 |
| | — |
| | — |
| | 13 |
| |
| | Solar Loan Interest | 4 |
| | — |
| | — |
| | 4 |
| |
| | Other | 2 |
| | (1 | ) | | 1 |
| | 2 |
| |
| | Total Other Income (Deductions) | $ | 19 |
| | $ | 13 |
| | $ | 1 |
| | $ | 33 |
| |
| | Three Months Ended March 31, 2018 | | | | | | | | |
| | NDT Fund Interest and Dividends | $ | — |
| | $ | 12 |
| | $ | — |
| | $ | 12 |
| |
| | Allowance for Funds Used During Construction | 14 |
| | — |
| | — |
| | 14 |
| |
| | Solar Loan Interest | 4 |
| | — |
| | — |
| | 4 |
| |
| | Other | 2 |
| | (1 | ) | | 1 |
| | 2 |
| |
| | Total Other Income (Deductions) | $ | 20 |
| | $ | 11 |
| | $ | 1 |
| | $ | 32 |
| |
| | | | | | | | | | |
| |
| (A) | Other consists of activity at PSEG (as parent company), Energy Holdings, Services, PSEG LI and intercompany eliminations. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 15.16. Income Taxes
PSEG’s, PSE&G’s and Power’s effective tax rates for the three months ended March 31, 20182019 and 20172018 were as follows:
|
| | | | | | |
| | | | | | | |
| | | | Three Months Ended | |
| | | | March 31, | |
| | | | 2018 | | 2017 | |
| | PSEG | | 26.6% | | 20.3% | |
| | PSE&G | | 26.8% | | 36.4% | |
| | Power | | 26.2% | | 40.6% | |
| | | | | | | |
|
| | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | | 2019 | | 2018 | |
| | PSEG | 17.6% | | 26.6% | |
| | PSE&G | 5.8% | | 26.8% | |
| | Power | 29.5% | | 26.2% | |
| | | | | | |
For the three months ended March 31, 2018,2019, the difference in PSEG’s effective tax rate as compared to the same period in the prior year was due primarily to the absence of benefits associated with uncertain tax positions and interest received in 2017 from a New Jersey state income tax refund, offset by the change in the statutory federal tax rate from 35% to 21% as a result of the Tax Act. For the three months ended March 31, 2018, the difference in PSEG’s effective tax rate as compared to the statutory tax rate of 28.11% was due primarily to changes in uncertainthe flow-back of PSE&G’s excess deferred income tax positions,liabilities as a result of the Tax Act and tax creditsrepair-related accumulated deferred income taxes as a result of PSE&G’s 2018 settled distribution base rate case and plant-related items.the FERC approved Section 205 filing, where applicable.
For the three months ended March 31, 2018,2019, the difference in PSE&G’s effective tax rate as compared to the same period in the prior year was due primarily to the change in the statutory federal tax rate from 35% to 21% as a result of the Tax Act, as well as changes in uncertain tax positions in 2017. For the three months ended March 31, 2018, the difference in PSE&G’s effective tax rate as compared toand the statutory tax rate of 28.11% was due primarily to plant-related itemsthe flow-back of PSE&G’s excess deferred income tax liabilities as a result of the Tax Act and tax credits.repair-related accumulated deferred income taxes as a result of PSE&G’s 2018 settled distribution base rate case and the FERC approved Section 205 filing, where applicable.
For the three months ended March 31, 2018,2019, the difference in Power’s effective tax rate as compared to the same period in the prior year was due primarily to the change in the statutory federal tax rate from 35% to 21% as a result of the Tax Act, as well as changes in uncertain tax positions. For the three months ended March 31, 2018, the difference in Power’s effective tax rate as compared toand the statutory tax rate of 28.11%was due primarily to changes in uncertain tax positions and the additional tax benefit on ahigher pre-tax loss onincome from the NDT qualified fund being taxed at a higher rate than the statutory rate.in 2019, which is subject to an additional trust tax.
PSEG’s federal tax returns for the years 2011 and 2012 are currently being audited by the IRS. The audit and other related claims are reasonably expected to be completed within the next 12 months. As a result, it is reasonably possible that a decrease in PSEG’s total unrecognized tax benefits may be necessary in the range of $80 million to $180 million based on current estimates.
In December 2017, the U.S. government enacted comprehensive tax legislation. The Tax Act establishes new tax laws that took effect in
Effective January 1, 2018, including, but not limited to (1) reduction of the U.S. federal corporate tax rate was reduced from a maximum of 35% to 21%; (2) resulting in a decrease in PSEG’s, PSE&G’s and Power’s effective income tax rates. To the extent allowed under the Tax Act, Power’s operating cash flows reflect the full expensing of capital investments for income tax purposes. The Tax Act has led to lower customer rates due to lower income tax expense recoveries and the BPU and FERC have approved PSEG’s proposals to refund excess deferred income tax Regulatory Liabilities. The impact of the lower federal income tax rate on PSE&G was reflected in PSE&G’s distribution base rate proceeding and its 2018 transmission formula rate filings. The Tax Act is generally expected to result in lower operating cash flows for PSE&G resulting from the elimination of bonus depreciation, partially offset by higher revenues due to the corporate alternative minimum tax; (3)higher rate base.
In August 2018, the IRS issued a new limitation on deductible interest expense; (4)Notice of Proposed Rulemaking (Notice) regarding the repealapplication of
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the domestic production activity deduction; (5) limitations onchanges made by the deductibility of certain executive compensation; and (6) limitations on net operating losses generated after December 31, 2017, to 80% of taxable income. In addition, certain changes were madeTax Act to the bonus depreciation rules, that will impact 2018.
The SEC staffcertain aspects still remain unclear. Further, in November 2018 the IRS issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting forProposed Regulations addressing the tax effects ofinterest disallowance rules contained in the Tax Act. SAB 118 providesFor non-regulated businesses, these rules set a measurement periodcap on the amount of interest that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740.can be deducted in a given year. Any amount that is disallowed can be carried forward indefinitely. For 2019, PSEG PSE&G and Power expect that a portion of the interest will be disallowed in the current period but realized in future periods. However, certain aspects of the proposed regulations are subject to ASC 740. In accordance with SAB 118,unclear. Therefore, PSEG PSE&G and Power made reasonable, good faith estimates for which provisionalrecorded taxes based on its interpretation of the relevant statutes.
Depreciation amounts recorded in 2019 were recorded.
based on PSEG’s accounting for certain elementsinterpretation of the Tax Act is incomplete. However, PSEG recorded provisional adjustments for the following: the tax rules regarding the appropriate bonus depreciation rate that should be applied to assets placed in service after September 27, 2017 for Power and PSE&G, including the information required to compute the applicable depreciable tax basis, and the depreciation rules contained in the Notice. Such amounts are subject to change based on several factors, including but not limited to, the IRS and state taxing authorities issuing final guidance and/or further clarification. Any further guidance or clarification could impact on PSEG’s, PSE&G’s and Power’s deferred taxes associated with FIN 48 reserves.financial statements.
Further,New Jersey State Tax Reform
In 2018, the Tax Act is unclearState of New Jersey made significant changes to its income tax laws, including imposing a temporary surtax of 2.5% effective January 1, 2018 and 2019 and 1.5% in certain respects2020 and will require interpretations and implementing regulations by the IRS,2021, as well as state tax authorities. The Tax Act could alsorequiring corporate taxpayers to file in a combined reporting group as defined under New Jersey law starting in 2019. Both provisions include an exemption for public utilities. At this time, PSEG believes PSE&G meets the definition of a public utility and, therefore, will not be subject to potential amendments and technical corrections which could impact PSEG, PSE&G and Power’s financial statements.impacted by the temporary surtax or be included in the combined reporting group.
The Protecting Americans from Tax Hikes ActIn 2019, the State of 2015 (2015 Tax Act), among other provisions, included an extension of the bonus depreciation rules and the 30% investment tax credit for qualified property placed into service after 2016. Qualified property that is placed into service from January 1, 2015 through December 31, 2017 is eligible for the 50% bonus depreciation. The provisions of the 2015 Tax Act have generated significant cash tax benefits for PSEG, PSE&G and Power through tax benefits related to the accelerated depreciation.
For the period beginning September 28, 2017, subject to the transition rules, the Tax Act modified the bonus depreciation rules of the 2015 Tax Act. Subject toNew Jersey issued further guidance it is expectedregarding the temporary surtax and clarified that Power is entitled to 100% expensing and bonus depreciation will no longer apply to PSE&G.New Jersey net operating loss carryovers can be deducted in computing a taxpayer’s entire net income.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 16.17. Accumulated Other Comprehensive Income (Loss), Net of Tax
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | PSEG | | Other Comprehensive Income (Loss) | |
| | | | Three Months Ended March 31, 2018 | |
| | Accumulated Other Comprehensive Income (Loss) | | Cash Flow Hedges | | Pension and OPEB Plans | | Available-for-Sale Securities | | Total | |
| | | | Millions | |
| | Balance as of December 31, 2017 | | $ | — |
| | $ | (406 | ) | | $ | 177 |
| | $ | (229 | ) | |
| | Cumulative Effect Adjustment to Reclassify Unrealized Net Gains on Equity Investments to Retained Earnings | | — |
| | — |
| | (176 | ) | | (176 | ) | |
| | Current Period Other Comprehensive Income (Loss) | | | | | | | | | |
| | Other Comprehensive Income before Reclassifications | | — |
| | — |
| | (16 | ) | | (16 | ) | |
| | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | — |
| | 8 |
| | 2 |
| | 10 |
| |
| | Net Current Period Other Comprehensive Income (Loss) | | — |
| | 8 |
| | (14 | ) | | (6 | ) | |
| | Net Change in Accumulative Other Comprehensive Income (Loss) | | — |
| | 8 |
| | (190 | ) | | (182 | ) | |
| | Balance as of March 31, 2018 | | $ | — |
| | $ | (398 | ) | | $ | (13 | ) | | $ | (411 | ) | |
| | | | | | | | | | | |
| | PSEG | | Other Comprehensive Income (Loss) | |
| | | | Three Months Ended March 31, 2017 | |
| | Accumulated Other Comprehensive Income (Loss) | | Cash Flow Hedges | | Pension and OPEB Plans | | Available-for-Sale Securities | | Total | |
| | | | Millions | |
| | Balance as of December 31, 2016 | | $ | 2 |
| | $ | (398 | ) | | $ | 133 |
| | $ | (263 | ) | |
| | Other Comprehensive Income before Reclassifications | | — |
| | — |
| | 30 |
| | 30 |
| |
| | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | — |
| | 6 |
| | (15 | ) | | (9 | ) | |
| | Net Current Period Other Comprehensive Income (Loss) | | — |
| | 6 |
| | 15 |
| | 21 |
| |
| | Balance as of March 31, 2017 | | $ | 2 |
| | $ | (392 | ) | | $ | 148 |
| | $ | (242 | ) | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | PSEG | | Other Comprehensive Income (Loss) | |
| | | | Three Months Ended March 31, 2019 | |
| | Accumulated Other Comprehensive Income (Loss) | | Cash Flow Hedges | | Pension and OPEB Plans | | Available-for-Sale Securities | | Total | |
| | | | Millions | |
| | Balance as of December 31, 2018 | | $ | (1 | ) | | $ | (360 | ) | | $ | (16 | ) | | $ | (377 | ) | |
| | Cumulative Effect Adjustment to Reclassify Stranded Tax Effects Resulting from the Change in the Federal Corporate Income Tax Rate to Retained Earnings | | — |
| | (81 | ) | | — |
| | (81 | ) | |
| | Current Period Other Comprehensive Income (Loss) | | | | | | | | | |
| | Other Comprehensive Income before Reclassifications | | (4 | ) | | (3 | ) | | 20 |
| | 13 |
| |
| | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | — |
| | 3 |
| | 1 |
| | 4 |
| |
| | Net Current Period Other Comprehensive Income (Loss) | | (4 | ) | | — |
| | 21 |
| | 17 |
| |
| | Net Change in Accumulated Other Comprehensive Income (Loss) | | (4 | ) | | (81 | ) | | 21 |
| | (64 | ) | |
| | Balance as of March 31, 2019 | | $ | (5 | ) | | $ | (441 | ) | | $ | 5 |
| | $ | (441 | ) | |
| | | | | | | | | | | |
| | PSEG | | Other Comprehensive Income (Loss) | |
| | | | Three Months Ended March 31, 2018 | |
| | Accumulated Other Comprehensive Income (Loss) | | Cash Flow Hedges | | Pension and OPEB Plans | | Available-for-Sale Securities | | Total | |
| | | | Millions | |
| | Balance as of December 31, 2017 | | $ | — |
| | $ | (406 | ) | | $ | 177 |
| | $ | (229 | ) | |
| | Cumulative Effect Adjustment to Reclassify Unrealized Net Gains on Equity Investments to Retained Earnings | | — |
| | — |
| | (176 | ) | | (176 | ) | |
| | Current Period Other Comprehensive Income (Loss) | | | | | | | | | |
| | Other Comprehensive Income before Reclassifications | | — |
| | — |
| | (16 | ) | | (16 | ) | |
| | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | — |
| | 8 |
| | 2 |
| | 10 |
| |
| | Net Current Period Other Comprehensive Income (Loss) | | — |
| | 8 |
| | (14 | ) | | (6 | ) | |
| | Net Change in Accumulated Other Comprehensive Income (Loss) | | — |
| | 8 |
| | (190 | ) | | (182 | ) | |
| | Balance as of March 31, 2018 | | $ | — |
| | $ | (398 | ) | | $ | (13 | ) | | $ | (411 | ) | |
| | | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | Power | | Other Comprehensive Income (Loss) | |
| | | | Three Months Ended March 31, 2018 | |
| | Accumulated Other Comprehensive Income (Loss) | | Cash Flow Hedges | | Pension and OPEB Plans | | Available-for-Sale Securities | | Total | |
| | | | Millions | |
| | Balance as of December 31, 2017 | | $ | — |
| | $ | (347 | ) | | $ | 175 |
| | $ | (172 | ) | |
| | Cumulative Effect Adjustment to Reclassify Unrealized Net Gains on Equity Investments to Retained Earnings | | — |
| | — |
| | (175 | ) | | (175 | ) | |
| | Current Period Other Comprehensive Income (Loss) | | | | | | | | | |
| | Other Comprehensive Income before Reclassifications | | — |
| | — |
| | (13 | ) | | (13 | ) | |
| | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | — |
| | 6 |
| | 2 |
| | 8 |
| |
| | Net Current Period Other Comprehensive Income (Loss) | | — |
| | 6 |
| | (11 | ) | | (5 | ) | |
| | Net Change in Accumulative Other Comprehensive Income (Loss) | | — |
| | 6 |
| | (186 | ) | | (180 | ) | |
| | Balance as of March 31, 2018 | | $ | — |
| | $ | (341 | ) | | $ | (11 | ) | | $ | (352 | ) | |
| | | | | | | | | | | |
| | Power | | Other Comprehensive Income (Loss) | |
| | | | Three Months Ended March 31, 2017 | |
| | Accumulated Other Comprehensive Income (Loss) | | Cash Flow Hedges | | Pension and OPEB Plans | | Available-for-Sale Securities | | Total | |
| | | | Millions | |
| | Balance as of December 31, 2016 | | $ | — |
| | $ | (340 | ) | | $ | 129 |
| | $ | (211 | ) | |
| | Other Comprehensive Income before Reclassifications | | — |
| | — |
| | 28 |
| | 28 |
| |
| | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | — |
| | 5 |
| | (9 | ) | | (4 | ) | |
| | Net Current Period Other Comprehensive Income (Loss) | | — |
| | 5 |
| | 19 |
| | 24 |
| |
| | Balance as of March 31, 2017 | | $ | — |
| | $ | (335 | ) | | $ | 148 |
| | $ | (187 | ) | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | Power | | Other Comprehensive Income (Loss) | |
| | | | Three Months Ended March 31, 2019 | |
| | Accumulated Other Comprehensive Income (Loss) | | Cash Flow Hedges | | Pension and OPEB Plans | | Available-for-Sale Securities | | Total | |
| | | | Millions | |
| | Balance as of December 31, 2018 | | $ | — |
| | $ | (306 | ) | | $ | (13 | ) | | $ | (319 | ) | |
| | Cumulative Effect Adjustment to Reclassify Stranded Tax Effects Resulting from the Change in the Federal Corporate Income Tax Rate to Retained Earnings | | — |
| | (69 | ) | | — |
| | (69 | ) | |
| | Current Period Other Comprehensive Income (Loss) | | | | | | | | | |
| | Other Comprehensive Income before Reclassifications | | — |
| | (3 | ) | | 15 |
| | 12 |
| |
| | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | — |
| | 3 |
| | 1 |
| | 4 |
| |
| | Net Current Period Other Comprehensive Income (Loss) | | — |
| | — |
| | 16 |
| | 16 |
| |
| | Net Change in Accumulated Other Comprehensive Income (Loss) | | — |
| | (69 | ) | | 16 |
| | (53 | ) | |
| | Balance as of March 31, 2019 | | $ | — |
| | $ | (375 | ) | | $ | 3 |
| | $ | (372 | ) | |
| | | | | | | | | | | |
| | Power | | Other Comprehensive Income (Loss) | |
| | | | Three Months Ended March 31, 2018 | |
| | Accumulated Other Comprehensive Income (Loss) | | Cash Flow Hedges | | Pension and OPEB Plans | | Available-for-Sale Securities | | Total | |
| | | | Millions | |
| | Balance as of December 31, 2017 | | $ | — |
| | $ | (347 | ) | | $ | 175 |
| | $ | (172 | ) | |
| | Cumulative Effect Adjustment to Reclassify Unrealized Net Gains on Equity Investments to Retained Earnings | | — |
| | — |
| | (175 | ) | | (175 | ) | |
| | Current Period Other Comprehensive Income (Loss) | | | | | | | | | |
| | Other Comprehensive Income before Reclassifications | | — |
| | — |
| | (13 | ) | | (13 | ) | |
| | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | — |
| | 6 |
| | 2 |
| | 8 |
| |
| | Net Current Period Other Comprehensive Income (Loss) | | — |
| | 6 |
| | (11 | ) | | (5 | ) | |
| | Net Change in Accumulated Other Comprehensive Income (Loss) | | — |
| | 6 |
| | (186 | ) | | (180 | ) | |
| | Balance as of March 31, 2018 | | $ | — |
| | $ | (341 | ) | | $ | (11 | ) | | $ | (352 | ) | |
| | | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | PSEG | | | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement | |
| | | | | Three Months Ended | |
| | Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | Location of Pre-Tax Amount In Statement of Operations | March 31, 2019 | |
| | | Pre-Tax Amount | | Tax (Expense) Benefit | | After-Tax Amount | |
| | | | | Millions | |
| | Pension and OPEB Plans | | | | | | |
| | Amortization of Prior Service (Cost) Credit | | Non-Operating Pension and OPEB Credits (Costs) | $ | 7 |
| | $ | (2 | ) | | $ | 5 |
| |
| | Amortization of Actuarial Loss | | Non-Operating Pension and OPEB Credits (Costs) | (12 | ) | | 4 |
| | (8 | ) | |
| | Total Pension and OPEB Plans | (5 | ) | | 2 |
| | (3 | ) | |
| | Available-for-Sale Debt Securities | | | | | | |
| | Realized Gains (Losses) | | Net Gains (Losses) on Trust Investments | (1 | ) | | — |
| | (1 | ) | |
| | Total Available-for-Sale Debt Securities | (1 | ) | | — |
| | (1 | ) | |
| | Total | | | $ | (6 | ) | | $ | 2 |
| | $ | (4 | ) | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | PSEG | | | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement | |
| | | | | Three Months Ended | |
| | Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | Location of Pre-Tax Amount In Statement of Operations | March 31, 2018 | |
| | | Pre-Tax Amount | | Tax (Expense) Benefit | | After-Tax Amount | |
| | | | | Millions | |
| | Pension and OPEB Plans | | | | | | |
| | Amortization of Prior Service (Cost) Credit | | Non-Operating Pension and OPEB Credits (Costs) | $ | 1 |
| | $ | — |
| | $ | 1 |
| |
| | Amortization of Actuarial Loss | | Non-Operating Pension and OPEB Credits (Costs) | (12 | ) | | 3 |
| | (9 | ) | |
| | Total Pension and OPEB Plans | (11 | ) | | 3 |
| | (8 | ) | |
| | Available-for-Sale Debt Securities | | | | | | |
| | Realized Gains (Losses)
| | Net Gains (Losses) on Trust Investments | (4 | ) | | 2 |
| | (2 | ) | |
| | Total Available-for-Sale Debt Securities | (4 | ) | | 2 |
| | (2 | ) | |
| | Total | | | $ | (15 | ) | | $ | 5 |
| | $ | (10 | ) | |
| | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | PSEG | | | | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement | |
| | | | | | Three Months Ended | |
| | Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | Location of Pre-Tax Amount In Statement of Operations | | March 31, 2017 | |
| | | | Pre-Tax Amount | | Tax (Expense) Benefit | | After-Tax Amount | |
| | | | | | Millions | |
| | Pension and OPEB Plans | | | | | | | | | |
| | Amortization of Prior Service (Cost) Credit | | Non-Operating Pension and OPEB Credits (Costs)
| | $ | 2 |
| | $ | (1 | ) | | $ | 1 |
| |
| | Amortization of Actuarial Loss | | Non-Operating Pension and OPEB Credits (Costs)
| | (12 | ) | | 5 |
| | (7 | ) | |
| | Total Pension and OPEB Plans | | (10 | ) | | 4 |
| | (6 | ) | |
| | Available-for-Sale Securities | | | | | | | |
| | Realized Gains (Losses) and OTTI
| | Net Gains (Losses) on Trust Investments
| | 28 |
| | (13 | ) | | 15 |
| |
| | Total Available-for-Sale Securities | | 28 |
| | (13 | ) | | 15 |
| |
| | Total | | | | $ | 18 |
| | $ | (9 | ) | | $ | 9 |
| |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Power | | | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement | |
| | | | | Three Months Ended | |
| | Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | Location of Pre-Tax Amount In Statement of Operations | March 31, 2019 | |
| | | Pre-Tax Amount | | Tax (Expense) Benefit | | After-Tax Amount | |
| | | | | Millions | |
| | Pension and OPEB Plans | | | | | | |
| | Amortization of Prior Service (Cost) Credit | | Non-Operating Pension and OPEB Credits (Costs) | $ | 6 |
| | $ | (2 | ) | | $ | 4 |
| |
| | Amortization of Actuarial Loss | | Non-Operating Pension and OPEB Credits (Costs) | (10 | ) | | 3 |
| | (7 | ) | |
| | Total Pension and OPEB Plans | (4 | ) | | 1 |
| | (3 | ) | |
| | Available-for-Sale Debt Securities | | | | | | |
| | Realized Gains (Losses) | | Net Gains (Losses) on Trust Investments | (1 | ) | | — |
| | (1 | ) | |
| | Total Available-for-Sale Debt Securities | (1 | ) | | — |
| | (1 | ) | |
| | Total | | | $ | (5 | ) | | $ | 1 |
| | $ | (4 | ) | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Power | | | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement | |
| | | | | Three Months Ended | |
| | Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | Location of Pre-Tax Amount In Statement of Operations | March 31, 2018 | |
| | | Pre-Tax Amount | | Tax (Expense) Benefit | | After-Tax Amount | |
| | | | | Millions | |
| | Pension and OPEB Plans | | | | | | |
| | Amortization of Prior Service (Cost) Credit | | Non-Operating Pension and OPEB Credits (Costs) | $ | 1 |
| | $ | — |
| | $ | 1 |
| |
| | Amortization of Actuarial Loss | | Non-Operating Pension and OPEB Credits (Costs) | (10 | ) | | 3 |
| | (7 | ) | |
| | Total Pension and OPEB Plans | (9 | ) | | 3 |
| | (6 | ) | |
| | Available-for-Sale Debt Securities | | | | | | |
| | Realized Gains (Losses) | | Net Gains (Losses) on Trust Investments | (4 | ) | | 2 |
| | (2 | ) | |
| | Total Available-for-Sale Debt Securities | (4 | ) | | 2 |
| | (2 | ) | |
| | Total | | | $ | (13 | ) | | $ | 5 |
| | $ | (8 | ) | |
| | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | Power | | | | Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement | |
| | | | | | Three Months Ended | |
| | Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | | Location of Pre-Tax Amount In Statement of Operations | | March 31, 2017 | |
| | | | Pre-Tax Amount | | Tax (Expense) Benefit | | After-Tax Amount | |
| | | | | | Millions | |
| | Pension and OPEB Plans | | | | | | | | | |
| | Amortization of Prior Service (Cost) Credit | | Non-Operating Pension and OPEB Credits (Costs)
| | $ | 2 |
| | $ | (1 | ) | | $ | 1 |
| |
| | Amortization of Actuarial Loss | | Non-Operating Pension and OPEB Credits (Costs)
| | (11 | ) | | 5 |
| | (6 | ) | |
| | Total Pension and OPEB Plans | | (9 | ) | | 4 |
| | (5 | ) | |
| | Available-for-Sale Securities | | | | | | | |
| | Realized Gains (Losses) and OTTI | | Net Gains (Losses) on Trust Investments | | 19 |
| | (10 | ) | | 9 |
| |
| | Total Available-for-Sale Securities | | 19 |
| | (10 | ) | | 9 |
| |
| | Total | | | | $ | 10 |
| | $ | (6 | ) | | $ | 4 |
| |
| | | | | | | | | | | |
Note 17.18. Earnings Per Share (EPS) and Dividends
EPS
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 March 31, | |
| | | 2018 | | 2017 | |
| | | Basic | | Diluted | | Basic | | Diluted | |
| | EPS Numerator (Millions): | | | | | | | | |
| | Net Income | $ | 558 |
| | $ | 558 |
| | $ | 114 |
| | $ | 114 |
| |
| | EPS Denominator (Millions): | | | | | | | | |
| | Weighted Average Common Shares Outstanding | 504 |
| | 504 |
| | 505 |
| | 505 |
| |
| | Effect of Stock Based Compensation Awards | — |
| | 3 |
| | — |
| | 3 |
| |
| | Total Shares | 504 |
| | 507 |
| | 505 |
| | 508 |
| |
| | | | | | | | | | |
| | EPS | | | | | | | | |
| | Net Income | $ | 1.11 |
| | $ | 1.10 |
| | $ | 0.23 |
| | $ | 0.22 |
| |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Three Months Ended March 31, | |
| | | 2019 | | 2018 | |
| | | Basic | | Diluted | | Basic | | Diluted | |
| | EPS Numerator (Millions): | | | | | | | | |
| | Net Income | $ | 700 |
| | $ | 700 |
| | $ | 558 |
| | $ | 558 |
| |
| | EPS Denominator (Millions): | | | | | | | | |
| | Weighted Average Common Shares Outstanding | 504 |
| | 504 |
| | 504 |
| | 504 |
| |
| | Effect of Stock Based Compensation Awards | — |
| | 3 |
| | — |
| | 3 |
| |
| | Total Shares | 504 |
| | 507 |
| | 504 |
| | 507 |
| |
| | | | | | | | | | |
| | EPS | | | | | | | | |
| | Net Income | $ | 1.39 |
| | $ | 1.38 |
| | $ | 1.11 |
| | $ | 1.10 |
| |
| | | | | | | | | | |
ForDividends
|
| | | | | | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | Dividend Payments on Common Stock | 2019 | | 2018 | |
| | Per Share | $ | 0.47 |
| | $ | 0.45 |
| |
| | In Millions | $ | 238 |
| | $ | 227 |
| |
| | | | | | |
On April 16, 2019, the three months ended March 31, 2017, there were approximately 0.3 millionPSEG Board approved a $0.47 per share common stock options excluded fromdividend for the weighted average common shares used for diluted EPS due to their antidilutive effect.second quarter of 2019.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dividends
|
| | | | | | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | Dividend Payments on Common Stock | 2018 | | 2017 | |
| | Per Share | $ | 0.45 |
| | $ | 0.43 |
| |
| | In Millions | $ | 227 |
| | $ | 218 |
| |
| | | | | | |
On April 17, 2018, PSEG’s Board of Directors approved a $0.45 per share common stock dividend for the second quarter of 2018.
Note 18.19. Financial Information by Business Segment
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | PSE&G | | Power | | Other (A) | | Eliminations (B) | | Consolidated Total | |
| | | Millions | |
| | Three Months Ended March 31, 2018 | | | | | | | | | | |
| | Operating Revenues | $ | 1,845 |
| | $ | 1,403 |
| | $ | 147 |
| | $ | (577 | ) | | $ | 2,818 |
| |
| | Net Income (Loss) | 319 |
| | 234 |
| | 5 |
| | — |
| | 558 |
| |
| | Gross Additions to Long-Lived Assets | 750 |
| | 299 |
| | 4 |
| | — |
| | 1,053 |
| |
| | Three Months Ended March 31, 2017 | | | | | | | | | | |
| | Operating Revenues | $ | 1,826 |
| | $ | 1,269 |
| | $ | 83 |
| | $ | (587 | ) | | $ | 2,591 |
| |
| | Net Income (Loss) | 299 |
| | (170 | ) | | (15 | ) | | — |
| | 114 |
| |
| | Gross Additions to Long-Lived Assets | 748 |
| | 307 |
| | 7 |
| | — |
| | 1,062 |
| |
| | As of March 31, 2018 | | | | | | | | | | |
| | Total Assets | $ | 28,774 |
| | $ | 12,263 |
| | $ | 2,481 |
| | $ | (728 | ) | | $ | 42,790 |
| |
| | Investments in Equity Method Subsidiaries | $ | — |
| | $ | 86 |
| | $ | — |
| | $ | — |
| | $ | 86 |
| |
| | As of December 31, 2017 | | | | | | | | | | |
| | Total Assets | $ | 28,554 |
| | $ | 12,418 |
| | $ | 2,666 |
| | $ | (922 | ) | | $ | 42,716 |
| |
| | Investments in Equity Method Subsidiaries | $ | — |
| | $ | 87 |
| | $ | — |
| | $ | — |
| | $ | 87 |
| |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | PSE&G | | Power | | Other (A) | | Eliminations (B) | | Consolidated Total | |
| | | Millions | |
| | Three Months Ended March 31, 2019 | | | | | | | | | | |
| | Operating Revenues | $ | 2,032 |
| | $ | 1,416 |
| | $ | 141 |
| | $ | (609 | ) | | $ | 2,980 |
| |
| | Net Income (Loss) | 403 |
| | 296 |
| | 1 |
| | — |
| | 700 |
| |
| | Gross Additions to Long-Lived Assets | 625 |
| | 167 |
| | 3 |
| | — |
| | 795 |
| |
| | Three Months Ended March 31, 2018 | | | | | | | | | | |
| | Operating Revenues | $ | 1,845 |
| | $ | 1,403 |
| | $ | 147 |
| | $ | (577 | ) | | $ | 2,818 |
| |
| | Net Income (Loss) | 319 |
| | 234 |
| | 5 |
| | — |
| | 558 |
| |
| | Gross Additions to Long-Lived Assets | 750 |
| | 299 |
| | 4 |
| | — |
| | 1,053 |
| |
| | As of March 31, 2019 | | | | | | | | | | |
| | Total Assets | $ | 31,500 |
| | $ | 12,671 |
| | $ | 2,333 |
| | $ | (748 | ) | | $ | 45,756 |
| |
| | Investments in Equity Method Subsidiaries | $ | — |
| | $ | 86 |
| | $ | — |
| | $ | — |
| | $ | 86 |
| |
| | As of December 31, 2018 | | | | | | | | | | |
| | Total Assets | $ | 31,109 |
| | $ | 12,594 |
| | $ | 2,604 |
| | $ | (981 | ) | | $ | 45,326 |
| |
| | Investments in Equity Method Subsidiaries | $ | — |
| | $ | 86 |
| | $ | — |
| | $ | — |
| | $ | 86 |
| |
| | | | | | | | | | | | |
| |
| (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. For a further discussion of the intercompany transactions between PSE&G and Power, see Note 19.20. Related-Party Transactions. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 19.20. 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 presented as follows: |
| | | | | | | | | | |
| | | | | | | |
| | | | Three Months Ended | |
| | | | March 31, | |
| | Related-Party Transactions | | 2018 | | 2017 | |
| | | Millions | |
| | Billings from Affiliates: | | | | | |
| | Net Billings from Power primarily through BGS and BGSS (A) | | $ | 578 |
| | $ | 599 |
| |
| | Administrative Billings from Services (B) | | 83 |
| | 65 |
| |
| | Total Billings from Affiliates | | $ | 661 |
| | $ | 664 |
| |
| | | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | Related-Party Transactions | 2019 | | 2018 | |
| | | Millions | |
| | Billings from Affiliates: | | | | |
| | Net Billings from Power primarily through BGS and BGSS (A) | $ | 633 |
| | $ | 578 |
| |
| | Administrative Billings from Services (B) | 75 |
| | 83 |
| |
| | Total Billings from Affiliates | $ | 708 |
| | $ | 661 |
| |
| | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | Related-Party Transactions | March 31, 2018 | | December 31, 2017 | |
| | | Millions | |
| | Payable to Power (A) | $ | 215 |
| | $ | 221 |
| |
| | Payable to Services (B) | 65 |
| | 78 |
| |
| | Payable to PSEG (C) | 105 |
| | 41 |
| |
| | Accounts Payable—Affiliated Companies | $ | 385 |
| | $ | 340 |
| |
| | Working Capital Advances to Services (D) | $ | 33 |
| | $ | 33 |
| |
| | Long-Term Accrued Taxes Payable | $ | 93 |
| | $ | 91 |
| |
| | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | Related-Party Transactions | March 31, 2019 | | December 31, 2018 | |
| | | Millions | |
| | Receivables from PSEG (C) | $ | — |
| | $ | 123 |
| |
| | Payable to Power (A) | $ | 207 |
| | $ | 245 |
| |
| | Payable to Services (B) | 62 |
| | 76 |
| |
| | Payables to PSEG (C) | 5 |
| | — |
| |
| | Accounts Payable—Affiliated Companies | $ | 274 |
| | $ | 321 |
| |
| | Working Capital Advances to Services (D) | $ | 33 |
| | $ | 33 |
| |
| | Long-Term Accrued Taxes Payable | $ | 69 |
| | $ | 69 |
| |
| | | | | | |
Power
The financial statements for Power include transactions with related parties presented as follows:
|
| | | | | | | | | | |
| | | | | | | |
| | | | Three Months Ended | |
| | | | March 31, | |
| | Related-Party Transactions | | 2018 | | 2017 | |
| | | Millions | |
| | Billings to Affiliates: | | | | | |
| | Net Billings to PSE&G primarily through BGS and BGSS (A) | | $ | 578 |
| | $ | 599 |
| |
| | Billings from Affiliates: | | | | | |
| | Administrative Billings from Services (B) | | $ | 43 |
| | $ | 36 |
| |
| | | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | Related-Party Transactions | 2019 | | 2018 | |
| | | Millions | |
| | Billings to Affiliates: | | | | |
| | Net Billings to PSE&G primarily through BGS and BGSS (A) | $ | 633 |
| | $ | 578 |
| |
| | Billings from Affiliates: | | | | |
| | Administrative Billings from Services (B) | $ | 45 |
| | $ | 43 |
| |
| | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | Related-Party Transactions | March 31, 2018 | | December 31, 2017 | |
| | | Millions | |
| | Receivables from PSE&G (A) | $ | 215 |
| | $ | 221 |
| |
| | Accounts Receivable—Affiliated Companies | $ | 215 |
| | $ | 221 |
| |
| | Payable to Services (B) | $ | 23 |
| | $ | 28 |
| |
| | Payable to PSEG (C) | 46 |
| | 29 |
| |
| | Accounts Payable—Affiliated Companies | $ | 69 |
| | $ | 57 |
| |
| | Short-Term Loan from Affiliate (E) | $ | 35 |
| | $ | 281 |
| |
| | Working Capital Advances to Services (D) | $ | 17 |
| | $ | 17 |
| |
| | Long-Term Accrued Taxes Payable | $ | 46 |
| | $ | 52 |
| |
| | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | |
| | | | | | |
| | | As of | | As of | |
| | Related-Party Transactions | March 31, 2019 | | December 31, 2018 | |
| | | Millions | |
| | Receivable from PSE&G (A) | $ | 207 |
| | $ | 245 |
| |
| | Receivables from PSEG (C) | 77 |
| | 29 |
| |
| | Accounts Receivable—Affiliated Companies | $ | 284 |
| | $ | 274 |
| |
| | Payable to Services (B) | $ | 21 |
| | $ | 16 |
| |
| | Accounts Payable—Affiliated Companies | $ | 21 |
| | $ | 16 |
| |
| | Short-Term Loan to (from) Affiliate (E) | $ | 87 |
| | $ | (193 | ) | |
| | Working Capital Advances to Services (D) | $ | 17 |
| | $ | 17 |
| |
| | Long-Term Accrued Taxes Payable | $ | 82 |
| | $ | 76 |
| |
| | | | | | |
| |
| (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. The rates in the BGS and BGSS contracts are prescribed by the BPU. In addition, Power and PSE&G provide certain technical services for each other generally at cost 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. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
| (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. |
Note 20.21. Guarantees of Debt
Power’s Senior Notes 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 March 31, 20182019 and December 31, 20172018 and for the three months ended March 31, 20182019 and 2017.2018. |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Power | | Guarantor Subsidiaries | | Other Subsidiaries | | Consolidating Adjustments | | Total | |
| | | Millions | |
| | Three Months Ended March 31, 2018 | | | | | | | | | | |
| | Operating Revenues | $ | — |
| | $ | 1,386 |
| | $ | 51 |
| | $ | (34 | ) | | $ | 1,403 |
| |
| | Operating Expenses | — |
| | 1,056 |
| | 52 |
| | (34 | ) | | 1,074 |
| |
| | Operating Income (Loss) | — |
| | 330 |
| | (1 | ) | | — |
| | 329 |
| |
| | Equity Earnings (Losses) of Subsidiaries | 234 |
| | (3 | ) | | 2 |
| | (231 | ) | | 2 |
| |
| | Net Gains (Losses) on Trust Investments | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) | |
| | Other Income (Deductions) | 35 |
| | 33 |
| | — |
| | (57 | ) | | 11 |
| |
| | Non-Operating Pension and OPEB Credits (Costs) | — |
| | 4 |
| | — |
| | — |
| | 4 |
| |
| | Interest Expense | (42 | ) | | (17 | ) | | (5 | ) | | 57 |
| | (7 | ) | |
| | Income Tax Benefit (Expense) | 7 |
| | (92 | ) | | 2 |
| | — |
| | (83 | ) | |
| | Net Income (Loss) | $ | 234 |
| | $ | 233 |
| | $ | (2 | ) | | $ | (231 | ) | | $ | 234 |
| |
| | Comprehensive Income (Loss) | $ | 229 |
| | $ | 223 |
| | $ | (2 | ) | | $ | (221 | ) | | $ | 229 |
| |
| | Three Months Ended March 31, 2018 | | | | | | | | | | |
| | Net Cash Provided By (Used In) Operating Activities | $ | (5 | ) | | $ | 525 |
| | $ | (49 | ) | | $ | 71 |
| | $ | 542 |
| |
| | Net Cash Provided By (Used In) Investing Activities | $ | (215 | ) | | $ | (625 | ) | | $ | (82 | ) | | $ | 605 |
| | $ | (317 | ) | |
| | Net Cash Provided By (Used In) Financing Activities | $ | 220 |
| | $ | 100 |
| | $ | 111 |
| | $ | (677 | ) | | $ | (246 | ) | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Power | | Guarantor Subsidiaries | | Other Subsidiaries | | Consolidating Adjustments | | Total | |
| | | Millions | |
| | Three Months Ended March 31, 2019 | | | | | | | | | | |
| | Operating Revenues | $ | — |
| | $ | 1,401 |
| | $ | 56 |
| | $ | (41 | ) | | $ | 1,416 |
| |
| | Operating Expenses | 1 |
| | 1,094 |
| | 61 |
| | (41 | ) | | 1,115 |
| |
| | Operating Income (Loss) | (1 | ) | | 307 |
| | (5 | ) | | — |
| | 301 |
| |
| | Equity Earnings (Losses) of Subsidiaries | 309 |
| | (8 | ) | | 2 |
| | (301 | ) | | 2 |
| |
| | Net Gains (Losses) on Trust Investments | 1 |
| | 125 |
| | — |
| | — |
| | 126 |
| |
| | Other Income (Deductions) | 47 |
| | 55 |
| | — |
| | (89 | ) | | 13 |
| |
| | Non-Operating Pension and OPEB Credits (Costs) | — |
| | 3 |
| | — |
| | — |
| | 3 |
| |
| | Interest Expense | (75 | ) | | (31 | ) | | (8 | ) | | 89 |
| | (25 | ) | |
| | Income Tax Benefit (Expense) | 15 |
| | (144 | ) | | 5 |
| | — |
| | (124 | ) | |
| | Net Income (Loss) | $ | 296 |
| | $ | 307 |
| | $ | (6 | ) | | $ | (301 | ) | | $ | 296 |
| |
| | Comprehensive Income (Loss) | $ | 312 |
| | $ | 322 |
| | $ | (6 | ) | | $ | (316 | ) | | $ | 312 |
| |
| | Three Months Ended March 31, 2019 | | | | | | | | | | |
| | Net Cash Provided By (Used In) Operating Activities | $ | (22 | ) | | $ | 799 |
| | $ | 43 |
| | $ | (94 | ) | | $ | 726 |
| |
| | Net Cash Provided By (Used In) Investing Activities | $ | (167 | ) | | $ | (713 | ) | | $ | (124 | ) | | $ | 728 |
| | $ | (276 | ) | |
| | Net Cash Provided By (Used In) Financing Activities | $ | 189 |
| | $ | (86 | ) | | $ | 87 |
| | $ | (634 | ) | | $ | (444 | ) | |
| | | | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Power | | Guarantor Subsidiaries | | Other Subsidiaries | | Consolidating Adjustments | | Total | |
| | | Millions | |
| | Three Months Ended March 31, 2017 | | | | | | | | | | |
| | Operating Revenues | $ | — |
| | $ | 1,255 |
| | $ | 52 |
| | $ | (38 | ) | | $ | 1,269 |
| |
| | Operating Expenses | 4 |
| | 1,556 |
| | 52 |
| | (38 | ) | | 1,574 |
| |
| | Operating Income (Loss) | (4 | ) | | (301 | ) | | — |
| | — |
| | (305 | ) | |
| | Equity Earnings (Losses) of Subsidiaries | (161 | ) | | (1 | ) | | 3 |
| | 162 |
| | 3 |
| |
| | Net Gains (Losses) on Trust Investments | 4 |
| | 15 |
| | — |
| | — |
| | 19 |
| |
| | Other Income (Deductions) | 20 |
| | 19 |
| | — |
| | (28 | ) | | 11 |
| |
| | Non-Operating Pension and OPEB Credits (Costs) | — |
| | 2 |
| | — |
| | — |
| | 2 |
| |
| | Interest Expense | (30 | ) | | (9 | ) | | (5 | ) | | 28 |
| | (16 | ) | |
| | Income Tax Benefit (Expense) | 1 |
| | 111 |
| | 4 |
| | — |
| | 116 |
| |
| | Net Income (Loss) | $ | (170 | ) | | $ | (164 | ) | | $ | 2 |
| | $ | 162 |
| | $ | (170 | ) | |
| | Comprehensive Income (Loss) | $ | (146 | ) | | $ | (143 | ) | | $ | 2 |
| | $ | 141 |
| | $ | (146 | ) | |
| | Three Months Ended March 31, 2017 | | | | | | | | | | |
| | Net Cash Provided By (Used In) Operating Activities | $ | 77 |
| | $ | 377 |
| | $ | 91 |
| | $ | 35 |
| | $ | 580 |
| |
| | Net Cash Provided By (Used In) Investing Activities | $ | 251 |
| | $ | 20 |
| | $ | (154 | ) | | $ | (511 | ) | | $ | (394 | ) | |
| | Net Cash Provided By (Used In) Financing Activities | $ | (328 | ) | | $ | (395 | ) | | $ | 68 |
| | $ | 476 |
| | $ | (179 | ) | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Power | | Guarantor Subsidiaries | | Other Subsidiaries | | Consolidating Adjustments | | Total | |
| | | Millions | |
| | Three Months Ended March 31, 2018 | | | | | | | | | | |
| | Operating Revenues | $ | — |
| | $ | 1,386 |
| | $ | 51 |
| | $ | (34 | ) | | $ | 1,403 |
| |
| | Operating Expenses | — |
| | 1,056 |
| | 52 |
| | (34 | ) | | 1,074 |
| |
| | Operating Income (Loss) | — |
| | 330 |
| | (1 | ) | | — |
| | 329 |
| |
| | Equity Earnings (Losses) of Subsidiaries | 234 |
| | (3 | ) | | 2 |
| | (231 | ) | | 2 |
| |
| | Net Gains (Losses) on Trust Investments | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) | |
| | Other Income (Deductions) | 35 |
| | 33 |
| | — |
| | (57 | ) | | 11 |
| |
| | Non-Operating Pension and OPEB Credits (Costs) | — |
| | 4 |
| | — |
| | — |
| | 4 |
| |
| | Interest Expense | (42 | ) | | (17 | ) | | (5 | ) | | 57 |
| | (7 | ) | |
| | Income Tax Benefit (Expense) | 7 |
| | (92 | ) | | 2 |
| | — |
| | (83 | ) | |
| | Net Income (Loss) | $ | 234 |
| | $ | 233 |
| | $ | (2 | ) | | $ | (231 | ) | | $ | 234 |
| |
| | Comprehensive Income (Loss) | $ | 229 |
| | $ | 223 |
| | $ | (2 | ) | | $ | (221 | ) | | $ | 229 |
| |
| | Three Months Ended March 31, 2018 | | | | | | | | | | |
| | Net Cash Provided By (Used In) Operating Activities | $ | (5 | ) | | $ | 525 |
| | $ | (49 | ) | | $ | 71 |
| | $ | 542 |
| |
| | Net Cash Provided By (Used In) Investing Activities | $ | (215 | ) | | $ | (625 | ) | | $ | (82 | ) | | $ | 605 |
| | $ | (317 | ) | |
| | Net Cash Provided By (Used In) Financing Activities | $ | 220 |
| | $ | 100 |
| | $ | 111 |
| | $ | (677 | ) | | $ | (246 | ) | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Power | | Guarantor Subsidiaries | | Other Subsidiaries | | Consolidating Adjustments | | Total | |
| | | Millions | |
| | As of March 31, 2018 | | | | | | | | | | |
| | Current Assets | $ | 4,168 |
| | $ | 1,392 |
| | $ | 189 |
| | $ | (4,631 | ) | | $ | 1,118 |
| |
| | Property, Plant and Equipment, net | 55 |
| | 5,094 |
| | 3,540 |
| | — |
| | 8,689 |
| |
| | Investment in Subsidiaries | 5,089 |
| | 1,115 |
| | — |
| | (6,204 | ) | | — |
| |
| | Noncurrent Assets | 90 |
| | 2,295 |
| | 109 |
| | (38 | ) | | 2,456 |
| |
| | Total Assets | $ | 9,402 |
| | $ | 9,896 |
| | $ | 3,838 |
| | $ | (10,873 | ) | | $ | 12,263 |
| |
| | Current Liabilities | $ | 548 |
| | $ | 3,234 |
| | $ | 1,874 |
| | $ | (4,631 | ) | | $ | 1,025 |
| |
| | Noncurrent Liabilities | 521 |
| | 1,961 |
| | 461 |
| | (38 | ) | | 2,905 |
| |
| | Long-Term Debt | 2,137 |
| | — |
| | — |
| | — |
| | 2,137 |
| |
| | Member’s Equity | 6,196 |
| | 4,701 |
| | 1,503 |
| | (6,204 | ) | | 6,196 |
| |
| | Total Liabilities and Member’s Equity | $ | 9,402 |
| | $ | 9,896 |
| | $ | 3,838 |
| | $ | (10,873 | ) | | $ | 12,263 |
| |
| | As of December 31, 2017 | | | | | | | | | | |
| | Current Assets | $ | 4,327 |
| | $ | 1,500 |
| | $ | 200 |
| | $ | (4,686 | ) | | $ | 1,341 |
| |
| | Property, Plant and Equipment, net | 54 |
| | 5,778 |
| | 2,764 |
| | — |
| | 8,596 |
| |
| | Investment in Subsidiaries | 4,844 |
| | 404 |
| | — |
| | (5,248 | ) | | — |
| |
| | Noncurrent Assets | 100 |
| | 2,349 |
| | 110 |
| | (78 | ) | | 2,481 |
| |
| | Total Assets | $ | 9,325 |
| | $ | 10,031 |
| | $ | 3,074 |
| | $ | (10,012 | ) | | $ | 12,418 |
| |
| | Current Liabilities | $ | 689 |
| | $ | 3,586 |
| | $ | 1,846 |
| | $ | (4,686 | ) | | $ | 1,435 |
| |
| | Noncurrent Liabilities | 533 |
| | 1,966 |
| | 459 |
| | (78 | ) | | 2,880 |
| |
| | Long-Term Debt | 2,136 |
| | — |
| | — |
| | — |
| | 2,136 |
| |
| | Member’s Equity | 5,967 |
| | 4,479 |
| | 769 |
| | (5,248 | ) | | 5,967 |
| |
| | Total Liabilities and Member’s Equity | $ | 9,325 |
| | $ | 10,031 |
| | $ | 3,074 |
| | $ | (10,012 | ) | | $ | 12,418 |
| |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Power | | Guarantor Subsidiaries | | Other Subsidiaries | | Consolidating Adjustments | | Total | |
| | | Millions | |
| | As of March 31, 2019 | | | | | | | | | | |
| | Current Assets | $ | 4,518 |
| | $ | 1,693 |
| | $ | 318 |
| | $ | (5,217 | ) | | $ | 1,312 |
| |
| | Property, Plant and Equipment, net | 48 |
| | 4,915 |
| | 3,913 |
| | — |
| | 8,876 |
| |
| | Investment in Subsidiaries | 5,309 |
| | 1,099 |
| | — |
| | (6,408 | ) | | — |
| |
| | Noncurrent Assets | 278 |
| | 2,277 |
| | 137 |
| | (209 | ) | | 2,483 |
| |
| | Total Assets | $ | 10,153 |
| | $ | 9,984 |
| | $ | 4,368 |
| | $ | (11,834 | ) | | $ | 12,671 |
| |
| | Current Liabilities | $ | 776 |
| | $ | 2,966 |
| | $ | 2,113 |
| | $ | (5,217 | ) | | $ | 638 |
| |
| | Noncurrent Liabilities | 519 |
| | 2,072 |
| | 793 |
| | (209 | ) | | 3,175 |
| |
| | Long-Term Debt | 2,836 |
| | — |
| | — |
| | — |
| | 2,836 |
| |
| | Member’s Equity | 6,022 |
| | 4,946 |
| | 1,462 |
| | (6,408 | ) | | 6,022 |
| |
| | Total Liabilities and Member’s Equity | $ | 10,153 |
| | $ | 9,984 |
| | $ | 4,368 |
| | $ | (11,834 | ) | | $ | 12,671 |
| |
| | As of December 31, 2018 | | | | | | | | | | |
| | Current Assets | $ | 4,317 |
| | $ | 1,479 |
| | $ | 304 |
| | $ | (4,593 | ) | | $ | 1,507 |
| |
| | Property, Plant and Equipment, net | 49 |
| | 4,971 |
| | 3,822 |
| | — |
| | 8,842 |
| |
| | Investment in Subsidiaries | 5,062 |
| | 1,107 |
| | — |
| | (6,169 | ) | | — |
| |
| | Noncurrent Assets | 273 |
| | 2,109 |
| | 101 |
| | (238 | ) | | 2,245 |
| |
| | Total Assets | $ | 9,701 |
| | $ | 9,666 |
| | $ | 4,227 |
| | $ | (11,000 | ) | | $ | 12,594 |
| |
| | Current Liabilities | $ | 437 |
| | $ | 2,971 |
| | $ | 2,027 |
| | $ | (4,593 | ) | | $ | 842 |
| |
| | Noncurrent Liabilities | 513 |
| | 1,996 |
| | 730 |
| | (238 | ) | | 3,001 |
| |
| | Long-Term Debt | 2,791 |
| | — |
| | — |
| | — |
| | 2,791 |
| |
| | Member’s Equity | 5,960 |
| | 4,699 |
| | 1,470 |
| | (6,169 | ) | | 5,960 |
| |
| | Total Liabilities and Member’s Equity | $ | 9,701 |
| | $ | 9,666 |
| | $ | 4,227 |
| | $ | (11,000 | ) | | $ | 12,594 |
| |
| | | | | | | | | | | | |
| |
| 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—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 regulated solar generation projects and energy efficiency and related programs in New Jersey, which are regulated by the BPU, and
Power—which is a multi-regional energy supply company that integrates the operations of its merchant nuclear and fossil generating assets with its power marketing businesses and fuel supply functions through competitive energy sales in well-developed energy markets primarily in the Northeast and Mid-Atlantic United States through its principal direct wholly owned subsidiaries. In addition, Power owns and operates solar generation in various states. 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 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; PSEG Energy Holdings L.L.C. (Energy Holdings), which primarily has investments in leveraged leases; and PSEG Services Corporation (Services), which provides certain management, administrative and general services to PSEG and its subsidiaries at cost.
Our business discussion in Part I, Item 1. Business of our 20172018 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 20172018 and Future Outlook provided in Item 7 in our Form 10-K by describing significant events and business developments that have occurred during 20182019 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 2017 Form 10-K.
EXECUTIVE OVERVIEW OF 20182019 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
PSE&G
At PSE&G, our focus is 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 systemenhancing reliability and resiliency and to meetof our T&D system, meeting customer expectations and supporting public policy objectives by investing capital in T&D infrastructure and
clean energy programs. Over the past few years, our investments have altered our business mix to reflect a higher percentage of earnings contribution by PSE&G. Over the next five years, we expect to invest between $11 billion and $16 billion in our business which is expected to provide an annual rate base growth of 7%—9%.maintainingIn May 2018, we received approval for our Gas System Modernization Program II (GSMP II), an expanded, five-year program to invest $1.9 billion beginning in 2019 to replace approximately 875 miles of cast iron and expanding a reliable generation fleetunprotected steel mains in addition to other improvements to the gas system. Approximately $1.6 billion will be recovered through periodic rate roll-ins, with the flexibilityremaining $300 million to utilizebe recovered through a diverse mixfuture base rate proceeding. As part of fuels which allows usthe settlement, PSE&G agreed to respondfile a base rate proceeding no later than five years from the commencement of the program, to market volatilitymaintain a base level of gas distribution capital expenditures of $155 million per year and capitalize on opportunitiesto achieve certain leak reduction targets.
In June 2018, we filed for our Energy Strong Program II (ES II), a proposed five-year $2.5 billion program to harden, modernize and make our electric and gas distribution systems more resilient. The size and duration of ES II, as they arise.well as certain other elements of the program, are subject to BPU approval. The review process is expected to conclude in the third quarter of 2019.
In October 2018, we filed our proposed Clean Energy Future (CEF) program with the BPU, a six-year estimated $3.5 billion investment covering four programs; (i) an Energy Efficiency (EE) program totaling $2.5 billion of investment designed to achieve energy efficiency targets required under New Jersey’s Clean Energy law; (ii) an Electric Vehicle (EV) infrastructure program; (iii) an Energy Storage (ES) program and (iv) an Energy Cloud (EC) program which will include installing approximately two million electric smart meters and associated infrastructure. The review process for the CEF-EE program is expected to conclude by the third quarter of 2019. The CEF-EV/ES and CEF-EC programs will have separate procedural schedules.
In November 2018, the New Jersey Division of Rate Counsel (Rate Counsel) filed a motion to dismiss the CEF-EC filing on the basis that the BPU announced a moratorium on electric distribution companies’ advanced meter infrastructure programs. In December 2018, Rate Counsel filed a motion to stay the CEF-EV/ES filing, arguing that the BPU should conclude other regulatory proceedings addressing EVs and ES, including the new Energy Master Plan and initiatives required by the Clean Energy Act, before it rules on PSE&G’s program. We opposed Rate Counsel’s motions, asking for the BPU to permit these filings to proceed. There is no timetable for the BPU to decide on Rate Counsel’s motions.
We also continue to invest in transmission infrastructure in order to (i) maintain and enhance system integrity and grid reliability, grid security and safety, (ii) address an aging transmission infrastructure, (iii) leverage technology to improve the operation of the system, (iv) reduce transmission constraints, (v) meet growing demand and (vi) meet environmental requirements and standards set by various regulatory bodies. Our planned capital spending for transmission in 2019-2021 is $3.4 billion.
Power
At Power, we strive to improve performance and reduce costs in order to optimize cash flow generation from our fleet in light of low wholesale power and gas prices, environmental considerations and competitive market forces that reward efficiency and reliability. Power continues to move its fleet toward improved efficiency and believes that its investment program enhances its competitive position with the addition of efficient, clean, reliable combined cycle gas turbine capacity. Our commitments for load, such as basic generation service (BGS) in New Jersey and other bilateral supply contracts, are backed by this generation or may be combined with the use of physical commodity purchases and financial instruments from the market to optimize the economic efficiency of serving our obligations. Power’s hedging practices and ability to capitalize on market opportunities help it to balance some of the volatility of the merchant power business. More than half of Power’s expected gross margin in 2019 relates to our hedging strategy, our expected revenues from the capacity market mechanisms and certain ancillary service payments such as reactive power.
In mid-2018, we commenced commercial operations of Keys Energy Center (Keys) and Sewaren 7. Construction continues on Bridgeport Harbor Station Unit 5 (BH5), which is targeted for commercial operation in mid-2019. Our investments in these units reflect our recognition of the value of opportunistic growth in the Power business. These additions to our fleet both expand our geographic diversity and adjust our fuel mix and enhance the environmental profile and overall efficiency of Power’s generation fleet.
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. In the first three months of 2019, our
utility continued its efforts to control costs while maintaining strong operational performance,
diverse fuel mix and dispatch flexibility allowed us to generate approximately 14 terawatt hours while addressing fuel availability and price volatility, and
total nuclear fleet achieved a capacity factor of 98.0%.
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 three months of 2019 as we
maintained sufficient liquidity,
maintained solid investment grade credit ratings, and
increased our indicative annual dividend for 2019 to $1.88 per share.
We expect to be able to fund our planned capital requirements, as described in Liquidity and Capital Resources, and the impacts of the Tax Cuts and Jobs Act of 2017 (Tax Act) without the issuance of new equity. For additional information on the impacts of
the Tax Act, see Tax Legislation below.
Financial Results
As a result of the settlement of PSE&G’s distribution base rate proceeding in October 2018, with new rates effective November 1, 2018, PSE&G expects a net reduction in overall annual revenues of approximately $13 million. This is comprised of a $212 million increase in base revenues, including recovery of deferred storm costs, offset by the return of tax benefits of approximately $225 million. The tax benefits include the flow-back to customers of excess accumulated deferred income taxes resulting from the reduction of the federal income tax rates provided in the Tax Act as well as the accumulated deferred income taxes from previously realized tax repair deductions and tax benefits from future tax repair deductions as realized.
PSE&G also filed a revised 2019 Annual Transmission Formula Rate Update to include the refund of the approved excess deferred income tax benefits. The revised 2019 Annual Transmission Formula Rate, as filed with FERC in January 2019, decreases overall annual transmission revenues by approximately $54 million, subject to true-up.
The results for PSEG, PSE&G and Power for the three months ended March 31, 20182019 and 20172018 are presented as follows:
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| | | | | | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | Earnings (Losses) | 2018 | | 2017 | |
| | | Millions | |
| | PSE&G | $ | 319 |
| | $ | 299 |
| |
| | Power (A) | 234 |
| | (170 | ) | |
| | Other (B) | 5 |
| | (15 | ) | |
| | PSEG Net Income | $ | 558 |
| | $ | 114 |
| |
| | | | | | |
| | PSEG Net Income Per Share (Diluted) | $ | 1.10 |
| | $ | 0.22 |
| |
| | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | Earnings (Losses) | 2019 | | 2018 | |
| | | Millions | |
| | PSE&G | $ | 403 |
| | $ | 319 |
| |
| | Power | 296 |
| | 234 |
| |
| | Other (A) | 1 |
| | 5 |
| |
| | PSEG Net Income | $ | 700 |
| | $ | 558 |
| |
| | | | | | |
| | PSEG Net Income Per Share (Diluted) | $ | 1.38 |
| | $ | 1.10 |
| |
| | | | | | |
| |
| (A) | Includes after-tax expenses of $334 million primarily for accelerated depreciation related to the early retirement of Power’s Hudson and Mercer coal/gas generation plants for the three months ended March 31, 2017. See Item 1. Note 4. Early Plant Retirements for additional information. |
| |
(B) | Other includes after-tax activities at the parent company, PSEG LI, and Energy Holdings as well as intercompany eliminations. Energy Holdings recorded after-tax charges of $32 million related to its investments in NRG REMA, LLC’s (REMA) leveraged leases in the three months ended March 31, 2017. See Item 1. Note 7. Financing Receivables for additional information. |
Power’s results above include the Nuclear Decommissioning Trust (NDT) Fund activity and the impacts of non-trading commodity mark-to-market (MTM) activity, which consist of the financial impact from positions with future delivery dates.
The variances in our Net Income attributable to changes related to the NDT Fund and MTM are shown in the following table:
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| | | | | | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | | 2018 | | 2017 | |
| | | Millions, after tax | |
| | NDT Fund Income (Expense) (A) (B) | $ | (16 | ) | | $ | 8 |
| |
| | Non-Trading MTM Gains (Losses) (C) | $ | 85 |
| | $ | 6 |
| |
| | | | | | |
|
| | | | | | | | | |
| | | | | | |
| | | Three Months Ended | |
| | | March 31, | |
| | | 2019 | | 2018 | |
| | | Millions, after tax | |
| | NDT Fund Income (Expense) (A) (B) | $ | 76 |
| | $ | (16 | ) | |
| | Non-Trading MTM Gains (Losses) (C) | $ | 76 |
| | $ | 85 |
| |
| | | | | | |
| |
| (A) | NDT Fund Income (Expense) includes realized gains and losses and other-than-temporary impairments on certain NDT securities in 2018 and 2017 and unrealized gains and losses on equityNDT securities in 2018, all of which are recorded in Net Gains (Losses) on Trust Investments. See Item 1. Note 9. Trust Investments for additional information. NDT Fund Income (Expense) also includes interest and dividend income and other costs related to the NDT Fund recorded in Other Income (Deductions), interest accretion expense on Power’s nuclear Asset Retirement Obligation (ARO) recorded in Operation and Maintenance (O&M) Expense and the depreciation related to the ARO asset recorded in Depreciation and Amortization (D&A) Expense. |
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| (B) | Net of tax (expense) benefit of $8$(51) million and $(9)$8 million for the three months ended March 31, 20182019 and 2017,2018, respectively. |
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| (C) | Net of tax (expense) benefitexpense of $(33)$(30) million and $(4)$(33) million for the three months ended March 31, 20182019 and 2017,2018, respectively. |
Our $444$142 million increase in Net Income for the three months ended March 31, 20182019 was driven largely by
accelerated depreciationnet unrealized gains in 2017 related2019 as compared to net unrealized losses in 2018 on equity securities in the early retirement of our HudsonNDT Fund at Power, and Mercer coal/gas generation units,
chargeshigher earnings due to investments in 2017 for estimated losses related to our leveraged lease investments,
T&D programs and the favorable impact at Power from the lower federal tax rateof new rates effective JanuaryNovember 1, 2018
higher net MTM gains in 2018, and
higher transmission revenues in 2018. as a result of the BPU approval of our distribution base rate proceeding at PSE&G.
During the first three months of 2018, 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 in recent years for projects on which we receive contemporaneous returns at PSE&G our regulated utility, in recent years has yielded strong results, which when combined with the cash flow generated by Power, our merchant generator and power marketer, has allowed us to increase our dividend.dividend annually. These actions to transition our business to meet customer needs, market conditions and investor expectations reflect our multi-year, long-term approach to managing our company. OurWe continue our focus hason operational excellence, financial strength and disciplined investment. These guiding principles have provided the base from which we have been able to investexecute our strategic initiatives.
Disciplined Investment
We utilize rigorous criteria when deploying capital in T&D and other infrastructure projects aimed at maintaining service reliability to our customers and bolstering our system resiliency. At Power, 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, we continueseek to invest in transmissionareas that complement our existing business and provide reasonable risk-adjusted returns. These areas include upgrading our energy infrastructure and improving our environmental footprint to align with public policy objectives. In the first three months of 2019, we
made additional investments in T&D infrastructure projects, that focus on reliability improvements
continued to execute our Energy Efficiency and replacement of aging infrastructure. We also continue to make investments to improve the resiliencyother existing BPU-approved utility programs, and
continued construction of our gas and electric distribution system as partBH5 generation project, the final stage of our Energy Strong Program that was approved by the BPUinvestment program in 2014 and to seek recovery on such investments. We are modernizing PSE&G’scombined cycle 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.
Power manages its existing firm pipeline transportation contracts for the benefit of PSE&G’s customers through the basic gas supply service (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 may 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 hedging practices and ability to capitalize on market opportunities help it to balance some of the volatility of the merchant power business. More than half of Power’s expected gross margin in 2018 relates to our hedging strategy, our expected revenues from the capacity market mechanisms and certain ancillary service payments such as reactive power.
Our investments in Keys Energy Center (Keys), Sewaren 7 and Bridgeport Harbor Station Unit 5 (BH5) reflect our recognition of the value of opportunistic growth in the Power business. These additions to our fleet both expand our geographic diversity and adjust our fuel mix and are expected to contribute to the overall efficiency of operations.turbines.
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. For additional information about regulatory, legislative and other developments that may affect us, see Part I, Item 1. Business—Regulatory Issues in our Form 10-K and Item 5. Other Information in this Quarterly Report on Form 10-Q.
Transmission Planning
There are several matters pending before FERC and the U. S. Court of Appeals for the District of Columbia Circuit that concernmay impact the allocation of costs associated with transmission projects, including those 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 customers in New Jersey. In addition, as a basic generation service (BGS)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 maywould be entitled to recovery, 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. The results of these other proceedings could set precedents for other transmission owners with formula rates in place, including PSE&G.
Wholesale Power Market Design
Capacity market design, including the Reliability Pricing Model (RPM) in PJM, remainsIn October 2018, FERC issued an important focus for us. During 2015, PJM implementedorder establishing a new “Capacity Performance” (CP) mechanism that createdframework for determining whether a more robust capacity product with enhanced incentives for performance during emergency conditionscompany’s ROE is unjust and significant penalties for non-performance. The CP product was implemented fully in the May 2017 RPM auction for the 2020-2021 Delivery Year. Subsequentunreasonable. FERC proposes to its implementation, FERC approved changesrely on financial models to the CP constructestablish a composite zone of reasonableness that will enhancebe used to determine whether an ROE complaint should be dismissed. If FERC determines that an ROE for a company is not just and reasonable, it intends to reset the participationROE based on averaging the results of intermittent and demand response resources (seasonal resources). However, FERC recently scheduled a technical conference in responsevarious financial models. We continue to two complaints requesting that FERC investigateanalyze the rules governing the participation of seasonal resources and extend the participation of the base resources for future auctions. We cannot predict the outcomepotential impact of these matters.
In April 2018, PJM submitted two proposed alternative and mutually exclusive capacity market reforms for FERC’s approval. One option would be to implement a two-tier clearing mechanism that accommodates states’ subsidies and the other option would be to extend the existing Minimum Offer Price Rule (MOPR) to units that are receiving subsidies. We are currently evaluating these two proposals. In a related matter that is currently pending at FERC, a group of suppliers requested that FERC direct PJM to expand the currently effective MOPR 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’ requestmethodologies and cannot predict the outcome of theseongoing ROE proceedings.
In November 2017, PJMMarch 2019, FERC issued two Notices of Inquiry (NOI) that could affect a company’s ROE: (i) an NOI seeking commenton improvements to FERC’s electric transmission incentives policy to ensure that it appropriately encourages the development of the infrastructure needed to ensure grid reliability and reduce congestion to lower the cost of power for consumers (Incentive NOI), and (ii) an NOI seeking comments whether, and if so how, FERC should change its policies for establishing just and reasonable ROEs.The Incentive NOI is intended to examine whether existing incentives, such as the 50 basis point adder for Regional Transmission Organization membership, should continue to be granted and whether new incentives should be established.
Wholesale Power Market Design
In June 2018, FERC issued an energy price formation proposalorder finding that PJM’s current capacity market is not just and reasonable because it enabled state-supported resources to address a flawbid below their costs which resulted in the energy market by allowing all resources selected for dispatch, both flexible and inflexible, to set price and consequently, result in prices that more accurately reflect the true cost to serve load. PJM’s proposal would allow large, inflexible units to set price. If placed into effect, this proposal will improve price formation by ensuring that the marginal costs of units serving load will be better reflected insuppressed clearing prices. We cannot predictIn particular, FERC found that nuclear generating units that receive zero emission certificate payments were of concern. Depending on the outcome of this matter.
Distribution
The BPU has enacted Infrastructure Investment Program (IIP) regulations that allow utilities to construct, install, or remediate utility plant and facilities related to reliability, resiliency, and/or safety to support the provision of safe and adequate service. Under these regulations, utilities can seek authority to make specified infrastructure investments in programs extending for up to five years with accelerated cost recovery mechanisms. The BPU characterized the IIP regulations as a regulatory initiative intended to create a financial incentive for utilities to accelerate the level of investment needed to promote the timely rehabilitation and replacement of certain non-revenue producing infrastructure that enhances reliability, resiliency, and/or safety. matter, our generating stations could also be impacted.
In July 2017, weOctober 2018, PJM filed a petition with FERC to revise the BPU for a GSMP II program, an extensionshape of GSMP to continue to modernize our gas system. In April 2018, we reached a settlement with the BPU Staff, Division of Rate Counsel and other parties. Under the GSMP II program, PSE&G will invest $1.9 billion over five years beginning in 2019 to replace approximately 175 miles of cast iron and unprotected steel mains in addition to other improvements to the gas system. Approximately $1.6 billionVariable Resource Requirement (VRR) curve that will be recovered through periodic rate roll-ins, withimplemented for the remaining $300 millioncapacity auction to be recovered through a future base rate case. As partheld in August 2019. The VRR curve is the administratively determined demand curve that serves as one of the settlement, PSE&G agreed to file a base rate case no later than five years from the commencement of the program, to maintain a base level of gas distribution capital expenditures of $155 million and to achieve certain leak reduction targets. The ROE and certain otherkey elements for establishing the program will be determined in the pending base rate case proceeding.
As previously disclosed, PSE&G’s Energy Strong Program, a $1.2 billion investment program to harden and make the electric and gas distribution system more resilient, is expectedamount of generation capacity to be completed during 2018. PSE&G expects to file for a five year extension and expansion of the Energy Strong Programprocured in the second quarter of 2018. The extension would seek to continue efforts to harden the electric system against storms and make it more resilient, to implement a more proactive life cycle replacement program to modernize the electric system and to make the gas system more reliable by mitigating the impacts of potential supply curtailments. The size and duration of the Energy Strong Program extension, as well as PSE&G’s return on equity and certain other elements of the program, are subject to BPU approval.
In January 2018, PSE&G filed a distribution base rate case as required as a condition of approval of its Energy Strong Program approved by the BPU in 2014. The filing requested an approximate 1% increase in revenues and recovery of investments made to strengthen the electric and gas distribution systems. The requested increase took into account a reduction in the revenue requirement as a result of the federal corporate income tax rate reduction from 35% to 21% provided in the Tax Act, including the flow-back to customers of excess accumulated deferred income taxes. In March 2018, the BPU approved interim rate reductions for all their jurisdictional utilities, including PSE&G, reflecting the reduction in the federal corporate tax rate. The BPU approved a reduction to PSE&G’s base electric and gas revenues effective April 1, 2018 by $71 million and $43 million, respectively, on an annual basis (or about 2% combined). The refund to customers for over-collection of revenues at the higher tax rate for the January 1 to March 31, 2018 period, and the flow-back to customers of certain excess deferred income taxes will be addressed in PSE&G’s ongoing base rate case proceeding. As a result of the base rate reduction implemented on April 1, 2018, PSE&G’s requested revenue requirement in its filing will increase accordingly. PSE&G anticipates a decision by the BPU that the new base rates will go into effect in the fourth quarter of 2018.
Energy Efficiency
In April 2018, the New Jersey Legislature approved legislation that would require the state’s electric and gas utilities to implement energy efficiency programs that would achieve energy savings of at least 2% per year for electric usage and 0.75% per year for gas usage within five years of the utility’s implementation of its BPU-approved energy efficiency programs. To meet these savings targets, energy usage reductions and peak demand reductions that result from utility and non-utility based programs and investments (including building code changes) will be counted. The specific energy savings target for each public electric and gas utility will be determined from an energy efficiency study to be completed within a year from enactment of the
legislation. The legislationauction. PJM’s proposed tariff revisions will require utilitiesresult in lower Cost of New Entry (CONE) values as compared to make filings with the BPU outlining their planned investmentscurrently effective VRR curve. PSEG protested PJM’s proposal on the grounds that it would result in understated prices for capacity relative to the cost of constructing a new reference generating unit and proposed programs for cost-effectively achieving the targeted energy savings. These filingswill result in prices that are alsounjust and unreasonable. In April 2019, FERC issued an Order approving PJM’s filing without modification and these changes are expected to addressbe in place for the utility’s return of and on those investments and recovery of lost revenues associated with the lower sales. PSE&G cannot predict whether the legislation will2022/2023 PJM capacity auction to be enacted. If enacted, the BPU will issue rules to implement the legislation. PSE&G is evaluating opportunities to broaden its existing energy efficiency programs to achieve New Jersey’s targeted results, as well as make investments to facilitate the development of the electric vehicle market and a pilot program for energy storage investments. held in August 2019.
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 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.
In March 2017, the President of the United States issued an Executive Order that instructed the EPA to review the New Source Performance Standards that establish emissions standards for CO2 for certain new fossil power plants, and the Clean Power Plan (CPP), a greenhouse gas emissions regulation under the Clean Air Act for existing power plants that establishes state-specific emission rate targets based on implementation of the best system of emission reduction. In October 2017, the EPA Administrator signed a proposed repeal of the CPP. The EPA Administrator concluded that the CPP exceeds the EPA’s statutory authority by considering measures that are beyond the control of the owners of the affected sources (fossil fuel-fired electric generating units). The EPA is considering rulemaking to replace the CPP. PSEG cannot assess the impact of any such rulemaking on its business and future results of operations at this time.
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.
In August 2018, the EPA released the proposed Affordable Clean Energy (ACE) rule as a replacement for the EPA’s Clean Power Plan. The proposed ACE rule gives states great flexibility to evaluate specific heat rate improvement technologies and practices to be applied at coal-fired electric generating units. States have three years from the date of finalization to submit a plan that establishes a standard of performance that reflects the degree of emission limitation through the application of heat rate improvement technologies and practices. We cannot estimate the impact of this action on our business or results of operations at this time.
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 10.11. Commitments and Contingent Liabilities.Liabilities.
FERC ComplianceNuclear
In May 2018, the first quartergovernor of 2014, Power discovered that it incorrectly calculated certain components of its cost-based bids for its New Jersey fossil generating unitssigned legislation, referred to as the Zero Emission Certificate (ZEC) legislation, that recognizes that nuclear power is a critical component of New Jersey’s clean energy portfolio and an important element of a diverse energy generation portfolio that currently meets approximately 40 percent of New Jersey’s electric power needs. The ZEC legislation created a program administered by the BPU. The BPU established processes to provide for the purchase of ZECs from selected nuclear plants and recovery of those ZEC payments through a non-bypassable distribution charge (ZEC charge) in the PJM energy market. Upon discoveryamount of $0.004 per kilowatt-hour (which is equivalent to approximately $10 per megawatt hour (MWh)) in payments to selected nuclear plants.
In April 2019, Power’s Salem 1, Salem 2 and Hope Creek nuclear plants were awarded ZECs. As a result, the errors, PSEG retained outside counselfinal “must-offer” exception requests and deactivation notices previously submitted 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)and the PJM Office of Interconnection for the Salem and Hope Creek plants have been withdrawn. These nuclear plants are expected to receive ZEC revenue for approximately three years, through May 2022, and will be obligated to maintain operations, subject to exceptions specified in the ZEC legislation. Power anticipates it will recognize revenue monthly as the nuclear plants generate electricity and satisfy their performance obligations. The ZEC legislation requires nuclear plants to reapply for any subsequent three year periods. The ZEC payment may be adjusted by the BPU (a) at any time to offset environmental or fuel diversity payments that a selected nuclear plant may receive from another source or (b) at certain times specified in the ZEC legislation if the BPU determines that the purposes of the ZEC legislation can be achieved through a reduced charge that will nonetheless be sufficient to achieve the state’s air quality and other environmental objectives by preventing the retirement of nuclear plants. The financial condition of the plants may nonetheless be materially adversely impacted by potential changes to the capacity market construct being considered by FERC (absent sufficient capacity revenues provided under a program approved by the BPU in accordance with a FERC authorized capacity mechanism), and, in the case of the Salem nuclear plants, decisions by the EPA and state environmental regulators regarding the implementation of Section 316(b) of the Clean Water Act and related state regulations, or other factors. Absent a material financial change, these adverse impacts could still result in Power taking all necessary steps to retire all of these additional issues, correctedplants following the identified errors, and modifiedend of the bid quantities for Power’s peaking units. Power has implemented procedures and continues to review its policies and practices to mitigateinitial three year term of the riskZECs program. Retirement of similar issues occurring in the future.
Since September 2014, FERC Staff has been conducting a preliminary, non-public staff investigation into these matters. In April 2018, a settlement agreement was entered into between PSEG and FERC Staff, approved by FERC on April 25, 2018, pursuant to which PSEG agreed to pay approximately $40 million for the full resolution of this matter. Accordingly, Power recorded an additional pre-tax charge to income of $5 million in the first quarter of 2018, resultingplants would result in a total liability of approximately $40 million accrued for the resolution of this matter. The settlement agreement does not require PSEG to change its business practices in a manner that would have a material adverse impact on its ongoing business operations.
Early Retirement of Hudson and Mercer Units
On June 1, 2017, Power completed its previously announced retirement of the generation operations of the existing coal/gas units at the Hudson and Mercer generating stations. The decision to retire the Hudson and Mercer units had a material effect on PSEG’s and Power’s resultsfinancial results.
In addition, in April 2019 Salem 1 began a scheduled refueling outage during which we planned to continue the replacement of operations in 2016degraded bolts inside the reactor vessel. Following an inspection and continuedtesting, it was revealed that a significantlylarger number of bolts than initially anticipated will require replacement during this outage. As a result, we expect the duration of this outage to adverselybe longer than planned, which will impact their resultsSalem Unit 1’s production and margin, including the amount of operations in 2017. As of JuneZEC payments received by Salem 1. Lower production at Salem 1 2017, Power completed recognition of the incremental Depreciation and Amortization (D&A) of $938 million ($964 million in total) due to the significant shortening of the expected economic useful lives of Hudson and Mercer. See Item 1. Note 4. Early Plant Retirements for additional information.may be offset by increased production at our combined cycle generating stations.
Power is exploring various opportunities with these sites, including using the sites for alternative industrial activity or the disposition of one or both of the sites. If Power determines not to use the sites for alternative industrial activity, the early
retirement of the units at such sites would trigger obligations under certain environmental regulations, including possible remediation. The amounts for any such remediation are neither currently probable nor estimable but may be material.Fossil
In addition, PSEG and Power continue to monitor their other coal assets, including their interest in the Keystone and Conemaugh generating stations, to assess their economic viability through the end of their designated useful lives and their continued classification as held for use. 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 or change in the classification as held for use of our remaining coal units may have a material adverse impact on PSEG’s and Power’s future financial results.
NuclearCalifornia Solar Facilities
Since 2013, several nuclear generating stations inAs part of its solar production portfolio, Power owns and operates two California-based solar facilities with an aggregate capacity of approximately 30 MW direct current whose output is sold to Pacific Gas and Electric Company (PG&E) under power purchase agreements (PPAs) with twenty year terms. The net book value of these solar facilities was approximately $57 million as of March 31, 2019. In January 2019, PG&E and its parent company PG&E Corporation filed for Chapter 11 bankruptcy protection. Power cannot predict the United Statesultimate outcome that this bankruptcy proceeding will have closed or announced early retirement dueon our ability to economic reasons, or have announced being at risk for early retirement. In February 2018, Exelon, a co-ownercollect all of the Salem units, announced its intention to acceleraterevenues from these facilities due under the closure of its Oyster Creek nuclear plant located in New Jersey, one year earlier than previously planned for economic reasons. In addition, First Energy announced in March 2018 the early retirement of four nuclear units at the Davis-Besse, Perry Nuclear and Beaver Valley nuclear plants in Ohio and Pennsylvania by 2021. These closures and retirements are generally duePPAs; however, any adverse changes to the decline in market pricesterms of energy, resulting from low natural gas prices driven by the growthPower’s PPAs as a result of shale gas production since 2007, the continuing cost of regulatory compliance and enhanced security for nuclear facilities, both federal and state-level policies that provide financial incentives to construct renewable energy such as wind and solar and the failure to adequately compensate nuclear generating stations for the attributes they bring similar to renewable energy production. These trends have significantly reduced the revenues of nuclear generating stations while limiting their ability to reduce the unit cost of production. This maythis bankruptcy proceeding could result in the electric generation industry experiencing a further shift from nuclear generationfuture impairment of these assets in amounts up to natural gas-fired generation, creating less diversity of the generation fleet.their current net book value.
Offshore Wind
In January 2018, the ordinary course,governor of New Jersey signed Executive Order No. 8 directing the BPU to begin the process of moving the state toward its 2030 goal of 3,500 MW of offshore wind energy generation. An initial solicitation was established for 1,100 MW of offshore wind, with bids due in December 2018. In connection with the bid submitted by Ocean Wind, LLC, a wholly owned subsidiary of Ørsted US Offshore Wind, referred to as the Ocean Wind project, PSEG agreed to provide energy management services and the potential lease of land for use in project development. We also retained an option to acquire an equity interest in the case of the Salem units the co-owner, each makes a number of decisions that impact the operation of our nuclear units beyond the current year, including whether and to what extent these units participate in RPM capacity auctions, commitments relating to refueling outages and significant capital expenditures, and decisions regarding our hedging arrangements. When considering whetherproject. We expect to make these future commitments, management’s decisions will primarily be influenced by the financial outlook of the units, including the progress, timing and continued outlook for enactment of proposed legislationa decision regarding an equity investment in the stateOcean Wind project in the second half of New Jersey. At a co-owners meeting in February 2018, Exelon and Power agreed to cancel the funding of future capital projects at the Salem generating station that are not required to meet NRC or other regulatory requirements or that are not required to ensure its safe operation. The companies agreed that the funding of these projects may be restored when and if legislation is enacted in New Jersey that sufficiently values the attributes of nuclear generation and Salem benefits from such legislation.
If any or all of the Salem and Hope Creek units were shut down, it would significantly alter New Jersey’s energy supply predominately by increasing New Jersey’s reliance on natural gas generation. Such a decrease in fuel diversity could also increase the market’s vulnerability to price fluctuations and power disruptions in times of high demand. In April 2018, the New Jersey Legislature voted to pass legislation that would provide a safety net in order to prevent the loss of environmental attributes from selected nuclear generating stations. Power cannot predict whether the legislation will be enacted or, if enacted, whether our nuclear generating stations in New Jersey will be selected or whether the legislation will provide a sufficient safety net for the continued operation of nuclear generating stations in New Jersey.
If market prices continue to be depressed and legislation is not enacted that adequately compensates nuclear generating stations for their attributes, Power anticipates it will no longer be covering its costs nor be adequately compensated for its market and operational risks at the Salem and Hope Creek nuclear units and would anticipate retiring these units early. 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, environmental remediation costs and additional funding of the NDT Fund would be material to both PSEG and Power.2019.
Leveraged Lease ImpairmentsLeases
GenOn Energy, Inc. (GenOn) and certain ofIn December 2018, NRG REMA, LLC emerged from its subsidiaries filed voluntary petitions for reliefin-court proceeding under Chapter 11 of the United States Bankruptcy Code on June 14, 2017. REMA was not included inCode. As a result of the GenOn bankruptcy filing. GenOn is currently engaged in a balance sheet restructuring, which will take an undetermined timethe remaining deferred tax liabilities related to complete. PSEG cannot predict the outcome of GenOn’s efforts to restructure its balance sheetKeystone and improve its liquidity.
PSEG continues to monitor any changes to REMA’s and GenOn’s status and potential impacts on Energy Holdings’Conemaugh lease investments which could include further write-downs of the values of Energy Holdings’ leveraged lease receivables, and continuewere reclassified to discuss the situation with various parties relevantcurrent tax liabilities. PSEG expects to pay approximately $120 million to taxing authorities resulting from this matter. For additional information, see Item 1. Note 7. Financing Receivables. 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.restructuring activity.
Additional facilities in our leveraged lease portfolio include the Shawville, Joliet and Powerton generating facilities. Converted natural gas units such as Shawville and Joliet may have higher operating costs and fuel consumption, as well as longer start-up times, compared to newer combined cycle gas units. Powerton is a coal-fired generating facility in Illinois. Each of these three 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 other less efficient natural gas and coal generation facilities, which could require Energy Holdings to write down the residual value of the leveraged lease receivables associated with these facilities.
Tax Legislation
In December 2017, the U.S. government enacted comprehensive tax legislation (Tax Act), which,The Tax Act, among other things, decreased the statutory U.S. corporate income tax rate from a maximum of 35% to 21%, effective January 1, 2018, and made certain changes to the bonus depreciation and interest disallowance rules.
AsIn August 2018, the Internal Revenue Service (IRS) issued a resultNotice of Proposed Rulemaking (Notice) regarding the application of tax depreciation rules as amended by the Tax Act. While the Notice provides some guidance as to the application of the enacted reduction in the statutory U.S. corporate income tax rate, as well as other aspects ofchanges made by the Tax Act to the bonus depreciation rules, certain aspects remain unclear. Further, in December 2017 PSE&G recorded excess deferred taxesNovember 2018 the IRS issued Proposed Regulations addressing the interest disallowance rules contained in the Tax Act. For non-regulated businesses, these rules set acap on the amount of approximately $2.1 billion and recorded an approximate $2.9 billion revenue impact of these excess deferred taxes as Regulatory Liabilities where it is probableinterest that refunds willcan be made to customers in future rates. The amount and timing of any such refund cannot be determined at this time.
Beginning in 2018, PSEG, on a consolidated basis, is incurring lower income tax expense resultingdeducted in a decrease in its projected effective income tax rate. Thisgiven year. Any amount that is also expected to increase PSEG’s and Power’s net income. To the extent allowed under the Tax Act, Power’s operating cash flows will reflect the full expensing of capital investments for income tax purposes.disallowed can be carried forward indefinitely. For 2019, PSEG and Power expect that a portion of their interest will be disallowed in the interest on their debt will continue to be fully tax deductible albeit at a lower tax rate. For PSE&G, the Tax Act is expected to lead to lower customer rates due to lower income tax expense recoveries and the refund of deferred income tax regulatory liabilities, partially offset by the impacts of higher rate base. The impactcurrent period but realized in future periods. However, certain aspects of the lower federal income tax rateproposed regulations are unclear. Therefore, we recorded taxes based on PSE&G was reflected in PSE&G’s recently filed distribution base rate case and its 2018 transmission formula rate filings. The Tax Act is generally expectedour interpretation of the relevant statute. Such amounts are subject to result in lower operating cash flows for PSE&G resulting from the elimination of bonus depreciation, partially offset by higher revenues duechange based on several factors, including but not limited to, the higher rate base. Due to the recent enactment of the Tax Act, the fullIRS and state taxing authorities issuing final guidance and/or further clarification. Any further guidance or clarification could impact of thesePSEG’s, PSE&G’s and other provisions of the Tax Act cannot be determined at this time.
The impact of the Tax Act may differ from these estimates, possibly materially, due to, among other things, changes in interpretations and assumptions PSEG has made, guidance that may be issued and actions PSEG may take as a result of the Tax Act.Power’s financial statements. For additional information, see Item 1. Note 15.16. Income Taxes.
As a resultIn July 2018, the State of the enactment of the Tax Act, various state regulatory authorities, including the BPU, have taken actionNew Jersey made changes to ensure that excess federal income taxes previously collected in rates are returned to customers. We have made filings to adjust the revenue requirement in certain of our rate matters as a result of the change in the federalits income tax rate. We continuelaws, including imposing a temporary surtax of 2.5% effective January 1, 2018 and 2019 and 1.5% in 2020 and 2021, as well as requiring corporate taxpayers to assess whether we need to take any further action at this time.
In addition, FERC continues to assess whether, and if so how, it will address changes and flow-backs to customers relating to accumulated deferred income taxes and bonus depreciation. See Item 1. Note 6. Rate Filings for additional information.
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 opportunitiesfile in a rapidly evolving market as we remain diligent in managing costs. For the first three months of 2018, our
utility, beginning with comprehensive storm preparation, efficiently and safely completed our customer restorations and then assisted neighboring utilities with their restoration efforts,
diverse fuel mix and dispatch flexibility allowed us to generate approximately 13 terawatt hours while addressing fuel availability and price volatility, and
total nuclear fleet achieved an average capacity factor of 99.5%.
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 three months of 2018 as we
maintained sufficient liquidity,combined
maintained solid investment grade credit ratings,reporting group as defined under New Jersey law starting in 2019. Both provisions include an exemption for public utilities. We believe PSE&G meets the definition of a public utility and,
increased our indicative annual dividend for 2018 to $1.80 per share.
therefore, will not be impacted by the temporary surtax or be included in the combined reporting group. We expect these new provisions to unfavorably affect our non-utility business. In accordance with accounting principles generally accepted in the United States for income taxes, deferred taxes are required to be ablemeasured at the enacted tax rate expected to fund our planned capital requirements and manageapply to taxable income in the impacts ofperiods in which the Tax Act without the issuance of new equity.
Disciplined Investment
We utilize rigorous investment criteria when deploying capital and seekdeferred taxes are expected 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 three months of 2018, we
made additional investments in transmission infrastructure projects,
continued to execute our GSMP, Energy Strong, Energy Efficiency and other existing BPU-approved utility programs, and
continued construction of our Keys and Sewaren 7 generation projects for targeted commercial operation in 2018 and our BH5 generation project for targeted commercial operation in mid-2019.settle. The newly enacted New Jersey tax legislation did not have a material impact on PSEG’s deferred income tax balance.
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-constrainedan 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, reliability and reliabilitycustomer satisfaction and complying with applicable standards and requirements,
successfully manage our energy obligations and re-contract our open supply positions in response to changes in prices and demand,
obtain approval of and execute our utility capital investment program, including ES II, GSMP II, our Energy Strong Program, GSMPCEF program and transmission 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, and obtain approval for the extension of these programs,
effectively managecomplete 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, including recognition of the cost of emissions,
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 2018In addition to the risks described elsewhere in this Form 10-Q and in our Form 10-K, for 2019 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 distribution base rate case which was filed with the BPU in January 2018,
continuing discussions regarding the restructuring of GenOn and REMA and its potential impact on the value of our Keystone, Conemaugh and Shawville leveraged leases,proceedings,
the continuing impacts of the Tax Act
national and regional economic conditions, continuing customer conservation efforts, changes in energy usage patternsstate tax laws, and evolving technologies, which impact customer behaviors and demand,
the potential for continuedimpact of 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,costs.
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, and
maintaining a diverse mix of fuels to mitigate risks associated with fuel price volatility and market demand cycles.
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, customers 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 T&D facilities, clean energy investments and/or generation units,projects, including offshore wind opportunities,
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, including the operation of T&D facilities outside of our traditional service territory, 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.
Power is developing a retail energy business to sell energy, which we believe complements our existing wholesale marketing business. Power began these marketing activities in 2017 and has been granted retail energy supplier licenses in New Jersey, Pennsylvania and Maryland.
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 19.20. Related-Party Transactions.
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | Three Months Ended | | Increase/ (Decrease) | |
| | | | March 31, | | |
| | | | 2018 | | 2017 | | 2018 vs. 2017 | |
| | | | Millions | | Millions | | % | |
| | Operating Revenues | | $ | 2,818 |
| | $ | 2,591 |
| | $ | 227 |
| | 9 |
| |
| | Energy Costs | | 952 |
| | 868 |
| | 84 |
| | 10 |
| |
| | Operation and Maintenance | | 754 |
| | 717 |
| | 37 |
| | 5 |
| |
| | Depreciation and Amortization | | 280 |
| | 828 |
| | (548 | ) | | (66 | ) | |
| | Income from Equity Method Investments | | 2 |
| | 3 |
| | (1 | ) | | (33 | ) | |
| | Net Gains (Losses) on Trust Investments | | (22 | ) | | 28 |
| | (50 | ) | | N/A |
| |
| | Other Income (Deductions) | | 32 |
| | 32 |
| | — |
| | — |
| |
| | Non-Operating Pension and OPEB Credits (Costs) | | 19 |
| | — |
| | 19 |
| | N/A |
| |
| | Interest Expense | | 103 |
| | 98 |
| | 5 |
| | 5 |
| |
| | Income Tax Expense | | 202 |
| | 29 |
| | 173 |
| | N/A |
| |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Three Months Ended | | Increase/ (Decrease) | |
| | | March 31, | | |
| | | 2019 | | 2018 | | 2019 vs. 2018 | |
| | | Millions | | Millions | | % | |
| | Operating Revenues | $ | 2,980 |
| | $ | 2,818 |
| | $ | 162 |
| | 6 |
| |
| | Energy Costs | 1,124 |
| | 952 |
| | 172 |
| | 18 |
| |
| | Operation and Maintenance | 756 |
| | 754 |
| | 2 |
| | — |
| |
| | Depreciation and Amortization | 314 |
| | 280 |
| | 34 |
| | 12 |
| |
| | Income from Equity Method Investments | 2 |
| | 2 |
| | — |
| | — |
| |
| | Net Gains (Losses) on Trust Investments | 128 |
| | (22 | ) | | 150 |
| | N/A |
| |
| | Other Income (Deductions) | 33 |
| | 32 |
| | 1 |
| | 3 |
| |
| | Non-Operating Pension and OPEB Credits (Costs) | 33 |
| | 19 |
| | 14 |
| | 74 |
| |
| | Interest Expense | 133 |
| | 103 |
| | 30 |
| | 29 |
| |
| | Income Tax Expense | 149 |
| | 202 |
| | (53 | ) | | (26 | ) | |
| | | | | | | | | | |
The following discussions for PSE&G and Power provide a detailed explanation of their respective variances.
PSE&G
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| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Three Months Ended | | Increase/ (Decrease) | |
| | | March 31, | | |
| | | 2018 | | 2017 | | 2018 vs. 2017 | |
| | | Millions | | Millions | | % | |
| | Operating Revenues | $ | 1,845 |
| | $ | 1,826 |
| | $ | 19 |
| | 1 |
| |
| | Energy Costs | 782 |
| | 762 |
| | 20 |
| | 3 |
| |
| | Operation and Maintenance | 391 |
| | 370 |
| | 21 |
| | 6 |
| |
| | Depreciation and Amortization | 190 |
| | 171 |
| | 19 |
| | 11 |
| |
| | Net Gains (Losses) on Trust Investments | — |
| | 2 |
| | (2 | ) | | N/A |
| |
| | Other Income (Deductions) | 20 |
| | 22 |
| | (2 | ) | | (9 | ) | |
| | Non-Operating Pension and OPEB Credits (Costs) | 15 |
| | (2 | ) | | 17 |
| | N/A |
| |
| | Interest Expense | 81 |
| | 75 |
| | 6 |
| | 8 |
| |
| | Income Tax Expense | 117 |
| | 171 |
| | (54 | ) | | (32 | ) | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Three Months Ended | | Increase/ (Decrease) | |
| | | March 31, | | |
| | | 2019 | | 2018 | | 2019 vs. 2018 | |
| | | Millions | | Millions | | % | |
| | Operating Revenues | $ | 2,032 |
| | $ | 1,845 |
| | $ | 187 |
| | 10 |
| |
| | Energy Costs | 947 |
| | 782 |
| | 165 |
| | 21 |
| |
| | Operation and Maintenance | 408 |
| | 391 |
| | 17 |
| | 4 |
| |
| | Depreciation and Amortization | 212 |
| | 190 |
| | 22 |
| | 12 |
| |
| | Net Gains (Losses) on Trust Investments | 1 |
| | — |
| | 1 |
| | N/A |
| |
| | Other Income (Deductions) | 19 |
| | 20 |
| | (1 | ) | | (5 | ) | |
| | Non-Operating Pension and OPEB Credits (Costs) | 30 |
| | 15 |
| | 15 |
| | 100 |
| |
| | Interest Expense | 87 |
| | 81 |
| | 6 |
| | 7 |
| |
| | Income Tax Expense | 25 |
| | 117 |
| | (92 | ) | | (79 | ) | |
| | | | | | | | | | |
Three Months Ended March 31, 20182019 as Compared to 20172018
Operating Revenues increased $19$187 million due to changes in delivery, commodity, clause and other operating revenues.
Delivery Revenues increased $7decreased $22 million due primarily to an increase in transmission revenues.
Gas, Electric and Transmission revenuesrevenue requirements were $8reduced by $129 million higher due to higher revenue requirements calculated through our transmission formula rate, primarily to recover required investments.the flowback of excess deferred tax liabilities and tax repair-related accumulated deferred income tax benefits as a result of settlements with the BPU and FERC. This reduction is offset in Income Tax Expense.
Gas distribution revenues increased $5$54 million due primarily to a $17$46 million increase due to the favorable impact of the distribution tariff rate effective November 2018, a $10 million increase from the inclusion of the GSMP I in base rates,
and a $7$9 million increase due to higher sales volumes. These increases were partially offset by a $19decreases in 2019 of $9 million decrease in Weather Normalization collections.Clause collections and $2 million in Green Program Recovery Charges (GPRC).
Electric distribution revenues decreased $6increased $29 million due to $7a $20 million in lowerincrease resulting from the favorable impact of the distribution tariff rate, a $5 million increase due to higher sales volumes and lower Green Program Recovery Charges of $1 million, partially offset by a $2$4 million increase from the Energy Strong Program in base rates.GPRC collections.
Transmission revenues were $24 million higher due to revenue requirements calculated through our transmission formula rate.
Commodity Revenues increased $20$165 million as a result of higher Gas and Electric revenues partially offset by lower Gas revenues. The changes in Commodity revenues for both electricgas and gaselectric are entirely offset by the changes in Energy Costs. PSE&G earns no margin on the provision of BGSbasic gas supply service (BGSS) and BGSSBGS to retail customers.
Gas commodity revenues increased $133 million due to higher BGSS prices of $94 million and higher BGSS sales volumes of $39 million.
Electric commodity revenues increased $34$32 million due primarily to a $29 million increase in BGS revenues due to $21 million in higher BGS sales volumes and $8$15 million fromin higher prices, a $3BGS prices. These increases were partially offset by $2 million increase fromdecreases in each of sales of solar renewable energy credits and $2 million of higher revenues from collections ofthe Non-Utility Generation Charges.
Gas commodity revenues decreased $14 million due to lower BGSS sales prices of $32 million, partially offset by higher BGSS sales volumes of $18 million.Charge.
Clause Revenues decreasedincreased $47 million due to a $31 million increase in Tax Adjustment Credit (TAC) deferrals, higher Societal Benefit Charge (SBC) collections of $11 million due primarily toand a $6 million decreaseincrease in Margin Adjustment Clause (MAC) revenues and lower Societal Benefit Charges (SBC) of $5 million.revenues. These increases were partially offset by a $1 million decrease in GPRC deferrals. The changes in the SBC and MAC collections and SBCTAC and GPRC deferral amounts are entirely offset by changes in the amortization of Regulatory Assets and Regulatory Liabilities and related costs in O&M, D&A and Interest Expense.Expenses. PSE&G does not earn margin on SBC or MAC collections or SBC collections.on TAC or GPRC deferrals.
Operating Expenses
Energy Costs increased $20$165 million. This is entirely offset by the change in Commodity Revenues.
Operation and Maintenance increased $21$17 million due primarily due to a $10net $26 million increase in transmission operating expenses, a $6 millionclause and renewable related expenditures. This increase in winter storm costs, a $5 million increase in appliance service costs, a $5 million increase in the gas distribution tariff, a $3 million increase in renewables and a $5 million increase in other operating expenses. These increases werewas partially offset by a $13$9 million reduction in clause-related expenditures.seasonal storm costs.
Depreciation and Amortization increased $19$22 million due primarily to an $18a $17 million increase in depreciation duerelated to additional plant inplaced into service, and an increase of $2$3 million in the amortization of Regulatory Assets.Assets and a $2 million increase due to revised depreciation rates effective November 2018.
Non-Operating Pension and OPEB Credits (Costs) reflectedreflect an increase of $1715 million in credits due to a $26 million decrease in the adoptionamortization of new accounting guidance effective January 1, 2018 which no longer allows capitalizationthe prior service cost, partially offset by an $8 million reduction in the long-term expected return on plan assets, a $2 million increase in the amortization of any portion of these benefit costs. See Item 1. Note 2. Recent Accounting Standards.the net unrecognized loss and a $1 million increase in interest cost.
Interest Expense increased $6 million due primarily related to net debt issuances in May and December 2017.September 2018.
Income Tax Expense decreased $54$92 million due primarily to the decrease in the federal statutoryflowback of excess deferred income tax rate from 35% in 2017 to 21% in 2018, partially offset by uncertainliabilities and tax positions and plant-related items.repair-related accumulated deferred income taxes.
Power
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | Three Months Ended | | Increase/ (Decrease) | |
| | | | March 31, | | |
| | | | 2018 | | 2017 | | 2018 vs. 2017 | |
| | | | Millions | | Millions | | % | |
| | Operating Revenues | | $ | 1,403 |
| | $ | 1,269 |
| | $ | 134 |
| | 11 |
| |
| | Energy Costs | | 746 |
| | 692 |
| | 54 |
| | 8 |
| |
| | Operation and Maintenance | | 246 |
| | 232 |
| | 14 |
| | 6 |
| |
| | Depreciation and Amortization | | 82 |
| | 650 |
| | (568 | ) | | (87 | ) | |
| | Income from Equity Method Investments | | 2 |
| | 3 |
| | (1 | ) | | (33 | ) | |
| | Net Gains (Losses) on Trust Investments | | (22 | ) | | 19 |
| | (41 | ) | | N/A |
| |
| | Other Income (Deductions) | | 11 |
| | 11 |
| | — |
| | — |
| |
| | Non-Operating Pension and OPEB Credits (Costs) | | 4 |
| | 2 |
| | 2 |
| | 100 |
| |
| | Interest Expense | | 7 |
| | 16 |
| | (9 | ) | | (56 | ) | |
| | Income Tax Expense (Benefit) | | 83 |
| | (116 | ) | | 199 |
| | N/A |
| |
| | | | | | | | | | | |
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| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Three Months Ended | | Increase/ (Decrease) | |
| | | March 31, | | |
| | | 2019 | | 2018 | | 2019 vs. 2018 | |
| | | Millions | | Millions | | % | |
| | Operating Revenues | $ | 1,416 |
| | $ | 1,403 |
| | $ | 13 |
| | 1 |
| |
| | Energy Costs | 786 |
| | 746 |
| | 40 |
| | 5 |
| |
| | Operation and Maintenance | 235 |
| | 246 |
| | (11 | ) | | (4 | ) | |
| | Depreciation and Amortization | 94 |
| | 82 |
| | 12 |
| | 15 |
| |
| | Income from Equity Method Investments | 2 |
| | 2 |
| | — |
| | — |
| |
| | Net Gains (Losses) on Trust Investments | 126 |
| | (22 | ) | | 148 |
| | N/A |
| |
| | Other Income (Deductions) | 13 |
| | 11 |
| | 2 |
| | 18 |
| |
| | Non-Operating Pension and OPEB Credits (Costs) | 3 |
| | 4 |
| | (1 | ) | | (25 | ) | |
| | Interest Expense | 25 |
| | 7 |
| | 18 |
| | N/A |
| |
| | Income Tax Expense (Benefit) | 124 |
| | 83 |
| | 41 |
| | 49 |
| |
| | | | | | | | | | |
Three Months Ended March 31, 20182019 as Compared to 20172018
Operating Revenuesincreased$134 million increased $13 million due primarily to changes in generation and gas supply revenues.
GenerationGas Supply Revenuesincreased increased $140$37 million due primarily to
an increase of $134$52 million due to higher MTM gains in 2018 as compared to 2017. Of this amount, $112sales under the BGSS contract, of which $30 million was due to higher average sales prices and $22 million to an increase in sales volumes during the 2019 winter heating season,
partially offset by a decrease of $18 million related to sales to third parties, of which $14 million was due to lower average sales prices and $4 million to lower volumes sold.
Generation Revenues decreased $24 million due primarily to
a net decrease of $44 million due to lower MTM gains in 2019 as compared to 2018. Of this amount, a $53 million decrease was due to gains on positions reclassified to realized upon settlement, coupled withpartially offset by a $22$9 million increase due tofrom changes in forward prices this year as compared to last year, and
a net decrease of $39 million in electricity sold under our BGS contracts due to lower volumes and lower prices,
partially offset by a net increase of $10$48 million due primarily to higher volumes of electricity sold under wholesale load contracts in the PJM region offset by lower volumes of electricity soldand under wholesale load contracts in the New England (NE) region, and
a net increase of $7 million in capacity revenues due primarily to increases in cleared capacity auction prices in the NE region,
partially offset by a net decrease of $13 million in energy sales due primarily to lower volumes and lower average realized prices in the PJM region, offset by higher average prices in the NE and New York (NY) regions, and
a decreasenet increase of $9$14 million in electricity sold under our BGS contracts due primarily to lower prices offset by higher volumes.
Gas Supply Revenuesdecreased $6 million due primarily to
a decrease of $13 million due to MTM losses in 2018 as compared to gains in 2017, and
a decrease of $12 million related to sales to third parties due to lower average sales prices,
partially offset by an increase of $19 million in sales under the BGSS contractcapacity revenues due primarily to an increase in sales volumes due to colder average temperaturesauction prices in the 2018 winter heating season.
PJM region.
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 $54$40 million due to
GenerationGas costsincreased increased $43$41 million due primarilymainly to
higher fuel costs of $46 million reflecting utilization of higher volumes of oil in the PJM region coupled with utilization of higher volumes and higher prices of natural gas in the NY region, and
an increase of $10$50 million duerelated to MTM losses in 2018 as compared to gains in 2017. Of this amount, $6sales under the BGSS contract, of which $33 million was due to changes in forward prices coupled with an increase in the average cost of $4gas and $17 million due to higher losses on positions reclassified to realized upon settlementan increase in 2018,send-out volumes during the 2019 winter heating season,
partially offset by a net decrease of $15 million primarily due to a decrease in energy purchase volumes in the NE region to serve load obligations.
Gas costsincreased $11 million due mainly to
an increase of $29 million related to sales under the BGSS contract due primarily to increased volumes sold, coupled with higher average gas costs due to colder average temperatures during the 2018 winter heating season,
partially offset by a decrease of $18$8 million related to sales to third parties due primarily to lower average gas costs and a decrease in volumes sold.sold, partially offset by an increase in gas costs.
Operation and MaintenanceGeneration costs increased $14decreased $1 million due primarily to
a $10decrease of $29 million due to MTM gains in 2019 as compared to losses in 2018 due to changes in forward prices, and
a net decrease of $6 million from charges primarily related to additional retirement costs incurred in 2018 associated with early retirement of the Mercer and Hudson coal units,
partially offset by higher fuel costs of $27 million, reflecting utilization of higher volumes of gas, primarily due to the commencement of commercial operations of Keys and Sewaren 7 fossil stations in mid-2018, coupled with higher prices of gas in the PJM region, partially offset by the utilization of lower volumes and gas prices in the New York region, lower volumes of oil in the PJM region, and lower coal prices in the PJM and NE regions, and
a net increase of $7 million primarily due to higher volumes of energy purchased in the NE region to serve load obligations.
Operation and Maintenance decreased $11 million due primarily to
a $14 million net increasedecrease at our fossil plants, largely due primarily to higher planned outage costs in 2018,
partially offset by a net increase related to our nuclear plants, due primarily to planned outage costs incurred in 2019 for our 57%-owned Salem Unit 1 as compared to 2017, and
a $5 million net increase due primarily to higher planned outage costs at our 100%-owned Hope Creek nuclear plant in 2018 as compared to planned outage costs incurred in 2017 for our 57%-owned Salem Unit 2.2018.
Depreciation and Amortization decreasedincreased $56812 million due primarily to
$574 million of higher depreciation in 2017 for Hudson Keys and Mercer due to the early retirement of those units,
partially offset by a $5 million increase in 2018 due to a higher nuclear asset base primarily from increased capitalized asset retirement costs.Sewaren 7 fossil stations being placed into service.
Net Gains (Losses) on Trust Investments decreased $41increased $148 million due primarily to the inclusion in 2018 of $34a $133 million ofincrease resulting from net unrealized gains in 2019 as compared to net unrealized losses in 2018 on equity investments in the NDT Fund in accordance with new accounting guidance and a $5$14 million decreaseincrease in net realized gains on NDT Fund investments.
Interest Expense decreased $9increased $18 million due primarily to higher$14 million in lower capitalized interest capitalized for the constructionas a result of the BH5,Keys and Sewaren 7 and Keys fossil stations.stations being placed into service.
Income Tax Expense (Benefit) increased $199$41 million due primarily to higher pre-tax income in 2018 as compared2019, including income from the NDT qualified fund, which is subject to a pre-tax loss in 2017. This increase in income tax expense was diminished by the decrease in the federal statutory income tax rate from 35% in 2017 to 21% in 2018.an additional trust tax.
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 our operating cash flows combined with cash on hand and financing activities to be sufficient to fund capital expenditures and shareholder dividend payments.
For the three months ended March 31, 20182019, our operating cash flow decreasedincreased $5778 million as compared to the same period in 2017.2018. The net changes were primarily due to tax refunds in 2017 at Energy Holdings combined withthe net changes from our subsidiaries as discussed below.
PSE&G
PSE&G’s operating cash flow increaseddecreased $6257 million from $515577 million to $577520 million for the three months ended March 31, 20182019, as compared to the same period in 20172018, due primarily to a decrease of $143 million relating to accounts receivable and unbilled revenues due primarily to higher billings in 2019 reflecting increased prices and volumes and $96 million in increased vendor payments, offset by tax refunds in 2019, an increase of $58$75 million primarily due to a reduction in
unbilled revenues resulting from lower prices and volumes in 2018, an increase of $54 million due to a change in regulatory deferrals and higher earnings in 2018, partially offset by a tax refund in 2017.earnings.
Power
Power’s operating cash flow decreasedincreased $38184 million from $580542 million to $542726 million for the three months ended March 31, 20182019, as compared to the same period in 2017,2018, due primarily to ana decrease in margin deposit requirements of $165 million, a $56 million increase of $71 million in payments to counterparties and a $22 million decrease from fuels, materials and supplies and higher earnings, partially offset by a $69$59 million increasedecrease from net collections of counterparty receivables.
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 March 31, 20182019 were as follows:
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| | | | | | | | | | | | | | |
| | | | | | | | | |
| | Company/Facility | | As of March 31, 2018 | |
| | Total Facility | | Usage | | Available Liquidity | |
| | | | Millions | |
| | PSEG | | $ | 1,500 |
| | $ | 609 |
| | $ | 891 |
| |
| | PSE&G | | 600 |
| | 16 |
| | 584 |
| |
| | Power | | 2,100 |
| | 158 |
| | 1,942 |
| |
| | Total | | $ | 4,200 |
| | $ | 783 |
| | $ | 3,417 |
| |
| | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | | | | | | |
| | Company/Facility | | As of March 31, 2019 | |
| | Total Facility | | Usage | | Available Liquidity | |
| | | | Millions | |
| | PSEG | | $ | 1,500 |
| | $ | 802 |
| | $ | 698 |
| |
| | PSE&G | | 600 |
| | 380 |
| | 220 |
| |
| | Power | | 2,100 |
| | 143 |
| | 1,957 |
| |
| | Total | | $ | 4,200 |
| | $ | 1,325 |
| | $ | 2,875 |
| |
| | | | | | | | | |
As of March 31, 2018,2019, 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 from S&P or Moody’s, which would represent a three level downgrade from its current S&P or 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 $867$850 million and $848$857 million as of March 31, 20182019 and December 31, 2017,2018, respectively.
For additional information, see Item 1. Note 11.12. Debt and Credit Facilities.
Long-Term Debt Financing
During the next twelve months,, PSE&G PSEG has $400 million of 5.30% Medium-Term Notes maturing in May 2018 and $350 million of 2.30% Medium-Term Notes maturing in September 2018. Power has $250 million of 2.45%1.60% Senior Notes maturing in November 2018.2019. PSE&G has $250 million of 1.80% Medium Term Notes maturing in June 2019 and $250 million of 2.00% Medium Term Notes maturing in August 2019.
For additional information see Item 1. Note 11.12. Debt and Credit Facilities.
Common Stock Dividends
On February 20, 2018, our Board of Directors approved a $0.45 dividend per share of common stock for the first quarter of 2018. On April 17, 2018,16, 2019, our Board of Directors declared a $0.45$0.47 dividend per share of common stock for the second quarter of 2018.2019. This reflects an indicative annual dividend rate of $1.80$1.88 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. Note17.Note 18. 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.
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| | | | | | |
| | | | | | | |
| | | | Moody’s (A) | | S&P (B) | |
| | PSEG | | | | | |
| | Outlook | | Stable | | Stable | |
| | Senior Notes | | Baa1 | | BBB | |
| | 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. |
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 as compared to amounts disclosed in our 2017 Form 10-K. See Executive Overview of 2019 and Future Outlook for additional information.
PSE&G
During the three months ended March 31, 2018,2019, PSE&G made capital expenditures of $759$630 million, primarily for T&D system reliability. This does not include expenditures for cost of removal, net of salvage, of $38$30 million, which are included in operating cash flows.
Power
During the three months ended March 31, 2018,2019, Power made capital expenditures of $283$156 million, excluding $1611 million for nuclear fuel, primarily related to our Keys, Sewaren 7, BH5 and other generation projects.
ACCOUNTING MATTERS
For information related to recent accounting matters, see Item 1. Note 2. Recent Accounting Standards.
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| 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.Notes. 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. 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 January through March 2018,2019, MTM VaR variedwas relatively stable between a low of $8$6 million and a high of $38$35 million at the 95% confidence level. The range of VaR was narrower for the three months ended March 31, 20182019 as compared with the year ended December 31, 2017.2018. |
| | | | | | | | | | |
| | | | | | | |
| | | | MTM VaR | |
| | | | Three Months Ended March 31, 2018 | | Year Ended December 31, 2017 | |
| | | | Millions | |
| | 95% Confidence Level, Loss could exceed VaR one day in 20 days | | | | | |
| | Period End | | $ | 9 |
| | $ | 39 |
| |
| | Average for the Period | | $ | 21 |
| | $ | 10 |
| |
| | High | | $ | 38 |
| | $ | 39 |
| |
| | Low | | $ | 8 |
| | $ | 5 |
| |
| | 99.5% Confidence Level, Loss could exceed VaR one day in 200 days | | | | | |
| | Period End | | $ | 14 |
| | $ | 60 |
| |
| | Average for the Period | | $ | 32 |
| | $ | 15 |
| |
| | High | | $ | 60 |
| | $ | 60 |
| |
| | Low | | $ | 13 |
| | $ | 8 |
| |
| | | | | | | |
|
| | | | | | | | | | |
| | | | | | | |
| | | | MTM VaR | |
| | | | Three Months Ended March 31, 2019 | | Year Ended December 31, 2018 | |
| | | | Millions | |
| | 95% Confidence Level, Loss could exceed VaR one day in 20 days | | | | | |
| | Period End | | $ | 8 |
| | $ | 21 |
| |
| | Average for the Period | | $ | 15 |
| | $ | 14 |
| |
| | High | | $ | 35 |
| | $ | 46 |
| |
| | Low | | $ | 6 |
| | $ | 6 |
| |
| | 99.5% Confidence Level, Loss could exceed VaR one day in 200 days | | | | | |
| | Period End | | $ | 12 |
| | $ | 32 |
| |
| | Average for the Period | | $ | 23 |
| | $ | 22 |
| |
| | High | | $ | 54 |
| | $ | 72 |
| |
| | Low | | $ | 9 |
| | $ | 9 |
| |
| | | | | | | |
See Item 1. Note 12.13. Financial Risk Management Activities for a discussion of credit risk.
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| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
PSEG, PSE&G and Power
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 PSEG, PSE&G and Power. The committee monitors and evaluates the effectiveness of these disclosure controls and procedures. The CFO and CEO of each of PSEG, PSE&G and Power 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
PSEG, PSE&G and Power
There have been no changes in internal control over financial reporting that occurred during the first quarter of 20182019 that have materially affected, or are reasonably likely to materially affect, each registrant’s internal control over financial reporting.
PART II. OTHER INFORMATION
We are party to various lawsuits and environmental and regulatory matters, including in the ordinary course of business. For information regarding material legal proceedings, including updates to information reported in Item 3 of Part I of the 2017 Annual Report on Form 10-K, see Part I, Item 1. Note 10.11. Commitments and Contingent Liabilities and Item 5. Other Information.
The discussion of our business and operations in this Quarterly Report on Form 10-Q should be read together with the risk factors contained in Part I, Item 1A of our 2017 Annual Report on Form 10-K, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, which describedescribes various risks and uncertainties that could have a material adverse impact on our business, prospects, financial position, results of operations or cash flows and could cause results to differ materially from those expressed elsewhere in this report. There have been no material changes to the risk factors set forth in the above-referenced filings as of March 31, 2018.2019.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
In December 2017,2018, we entered into a share repurchase plan that complies with Rule 10b5-1 of the Securities Exchange Act, of 1934, as amended, solely with respect to the repurchase of shares to satisfy obligations under equity compensation awards that are expected to vest or be exercised in 2018 and under PSEG’s Employee Stock Purchase Plan for expected employee purchases in 2018.2019. The following table indicates our common share repurchases in the open market during the first quarter of 2018.2019.
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| | | | | | | | |
| | | | | | |
| | Three Months Ended March 31, 2018 | Total Number of Shares Purchased | | Average Price Paid per Share | |
| | January 1 - January 31 | 1,300,000 |
| | $ | 50.00 |
| |
| | February 1 - February 28 | — |
| | $ | — |
| |
| | March 1- March 31 | — |
| | $ | — |
| |
| | | | | | |
|
| | | | | | | | | |
| | | | | | | |
| | Three Months Ended March 31, 2019 | | Total Number of Shares Purchased | | Average Price Paid per Share | |
| | January 1 - January 31 | | 900,000 |
| | $ | 51.15 |
| |
| | February 1 - February 28 | | — |
| | $ | — |
| |
| | March 1 - March 31 | | — |
| | $ | — |
| |
| | | | | | | |
ITEM 5. OTHER INFORMATION
Certain information reported in the 2017 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 2017 Annual Report on Form 10-K. References are to the related pages on the Form 10-K as printed and distributed.
Federal Regulation
Energy Clearing Prices
December 31, 2017 Form2018 From 10-K page 16.15. FERC has ordered certain favorable changes toAs part of its broader initiative regarding energy market price formation rules, improving shortagein April 2019 FERC issued a final Order on fast-start pricing applicable to resources in PJM and enhancing bidding flexibility for units.the New York ISO (NYISO). In its Order FERC found that current fast-start pricing practices are unjust and unreasonable because they do not allow prices to reflect the marginal cost of serving load. FERC has required that each of PJM and NYISO make various changes to their respective tariffs to allow the start-up costs of fast-start resources to be reflected in prices, among other things. We will continue to advocateparticipate in this contextprocess before FERC.
December 31, 2018 From 10-K page 16. In March 2019, PJM filed a proposal under section 206 of the Federal Power Act to modify the curves used for additional changes in market rules that would provide more transparency regarding operator actions affecting energy market prices and would promotepricing reserves with FERC. The reforms include a consolidation of synchronized reserve products, improved use of existing capability for locational reserve needs, better alignment between generation dispatch decisionsof reserve products in day-ahead and energy market price outcomes. In November 2017, PJM issued an energy price formation proposalreal-time markets, a downward-sloping operating reserve demand curve, and increased penalty factors to addressensure use of all supply prior to a flaw in the energy market by allowing all resources selected for dispatch, both flexible and inflexible, to set price and consequently, result in prices that more accurately reflect the true cost to serve load. PJM’s proposal would allow large, inflexible units to set price.reserve shortage. If placed into effect, this proposal willthese reforms are expected to improve price formationenergy and reserve prices by ensuring that when operators commit resources to ensure reliability, the marginal costs of units serving load will be bettercommitments are reflected in market clearing prices. WeHowever, these reforms could result in lower capacity payments. There is no timeline for this type of filing and therefore we cannot predict when FERC will act on the filing or the outcome of this matter.
Capacity Market Issues—PJM
December 31, 20172018 Form 10-K page 16. In October 2018, PJM fullyfiled with FERC to revise the shape of the VRR curve that will be implemented in the May 2017 RPM auction for the 2020-2021 Delivery Year a “Capacity Performance” (CP) mechanism that created a more robust capacity product with enhanced incentives for performance during emergency conditions and significant penalties for non-performance. The CP mechanism is intended to enhance the participation of intermittent and demand response resources (seasonal resources). Specifically, FERC approved PJM’s modifications to the aggregation rules to improve the ability of seasonal resources to participate. However, FERC recently scheduled a technical conference in response to two complaints requesting that FERC investigate the rules governing the participation of seasonal resources and extend the participation of the base resources for future auctions. We cannot predict the outcome of these matters.
In April, 2018, PJM submitted two proposed alternative and mutually exclusive capacity market reforms for FERC’s approval. One option would be to implement a two-tier clearing mechanism that accommodates states’ subsidies and the other option would be to extend the existing Minimum Offer Price Rule to units that are receiving subsidies. We are currently evaluating these two proposals.
Capacity Market Issues— ISO-NE
Recently, ISO-NE submitted proposed changes to the Forward Capacity Market referred to as the Competitive Auctions and Sponsored Policy Resources (CASPR) proposal to accommodate clean and renewable energy policy resources. The CASPR design creates a second auction that commences immediately following the Forward Capacity Auction and provides the opportunity for certain renewable, clean and alternative energy resources to acquire supply obligations when they cannot clear economically in the Forward Capacity Auction. The CASPR design also proposed to phase out the exemption from the minimum offer price rule (MOPR) in the capacity market afforded for up to 200MW annually (600 MW cumulatively) of renewable resources, an aspect of the market design that we did not support due to the capacity market suppression associated with this mechanism. In March 2018, FERC approved the filing, including the phase out of the 200MW renewables exemptions, with an effective date beginning with the next Forward Capacity Auction to be held in FebruaryAugust 2019. The VRR curve is the administratively determined demand curve that serves as one of the key elements for establishing the amount of generation capacity to be procured in the auction. PJM’s proposed tariff revisions will result in lower CONE values as compared to the currently effective VRR curve. PSEG protested PJM’s proposal on the grounds that it would result in understated prices for capacity relative to the cost of constructing a new reference generating unit and will result in prices that are unjust and unreasonable. In April 2019, FERC issued an Order approving PJM’s filing without modification and these changes are expected to be in place for the 2022/2023 PJM capacity auction to be held in August 2019.
Transmission Regulation—-Transmission Policy Developments
December 31, 20172018 Form 10-K page 18.17. There are several matters pending before FERC that concern the allocation of costs associated with transmission projects contending that insufficient levels of costs are being allocated to customers in the PSE&G transmission zone. Projects involved include the Artificial Island project and the Bergen-Linden Corridor (BLC) project in New Jersey. In April 2016, FERC issued orders denying the complaints and leaving the current cost allocation in effect as to the Bergen-Linden project. The BLC order is subject to a pending rehearing request. In March 2019, FERC issued an order establishing an alternative cost allocation methodology for the Artificial Island project. This resulted in increased costs being allocated to the PSE&G zone.
Another proceeding is a matter remanded from a federal appellate court concerning the appropriate cost allocation for certain 500 kilovolt (kV) projects in PJM that either have been built or are in the process of being built. In May 2018, FERC approved a settlement for this matter that is expected to result in increased annual cost allocations to customers in the PSE&G transmission zone. The cost reallocation was implemented by PJM in July 2018. Under this settlement, Power, as a BGS supplier is obligated to pay amounts previously paid by other PJM transmission customers. The approved settlement is subject to a pending rehearing request.
Transmission Regulation—Transmission Rate Proceedings and Return on Equity (ROE)
December 31, 2018 Form 10-K page 17. In FebruaryOctober 2018, FERC issued an order finding that the transmission planning procedures used by the PJM transmission owners,establishing a group that includes PSE&G,new framework for supplemental projects do not adhere to the coordination and transparency principles of FERC’s Order No. 890. FERC determined that certain terms and conditions in the PJM governing documents aredetermining whether a company’s ROE is unjust and unreasonable. FERC directed PJMproposes to rely on financial models to establish a composite zone of reasonableness that will be used to determine whether an ROE complaint should be dismissed. If FERC determines that an ROE for a company is not just and reasonable, it intends to reset the PJMROE based on averaging the results of various financial models.
In March 2019, FERC issued two NOIs that could affect a company’s ROE: (i) an NOI seeking comment on improvements to FERC’s electric transmission ownersincentives policy to submit certain revisions toensure that it appropriately encourages the manner in which the stakeholder process for supplemental projects is conducted. PSE&G participated in the PJM transmission owners’ compliance filing. A number of parties also sought rehearingdevelopment of the infrastructure needed to ensure grid reliability and reduce congestion to lower the cost of power for consumers (Incentive NOI) and (ii) an NOI seeking comments whether, and if so how, FERC order seeking more onerous requirements that, if accepted,should change its policies for establishing just and reasonable ROEs. The Incentive NOI is intended to examine whether existing incentives, such as the 50 basis point adder for RTO membership, should continue to be granted and whether new incentives should be established. The Incentive NOI includes the consideration of incentives for economic efficiency and reliability benefits, RTO membership, improvements to existing transmission facilities, consideration of the costs and benefits of projects in awarding incentives, and determination of whether to review incentive applications on a case-specific or standardized basis. While we cannot predict the outcome of ongoing transmission ROE proceedings, an adverse change to PSE&G’s base transmission ROE or ROE incentives could be disruptive of the planning process.
State Regulationmaterial.
BGSS Process
December 31, 2018 Form 10-K page 19. In November 2017, a filing was made by the Retail Energy Supply Association (RESA) made a filing with the BPU requesting that the BPU revisit the BGSS process and establish a gas capacity release program. This filing is applicable to all New Jersey gas utilities. In March 2018, the RESA filed an amended petition with the BPU requesting a formal proceeding to establish a gas capacity release program. This filing is applicableapplied to all New Jersey gas utilities. In late February 2019, the BPU found that RESA had not demonstrated that the gas utilities have sufficient excess capacity to create the type of release program proposed by RESA and determined to close the proceeding commenced by RESA’s filing.
As a result of representations made by RESA regarding concerns over sufficient gas capacity for all New Jersey customers, including those served by third party suppliers, the BPU opened a stakeholder proceeding. This proceeding will explore whether sufficient gas capacity has been secured to serve all New Jerseynatural gas customers, whether served through BGSS or a third party supplier. In addition, the proceeding will review whether, and to what extent, third party suppliers are providing savings to New Jersey customers on their natural gas supply.
A listing of exhibits being filed with this document is as follows:
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| a. PSEG: | | |
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| 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: | | |
| | |
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| 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 |
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| c. Power: | | |
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| 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 |
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.
|
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED |
| (Registrant) |
| | |
| By: | /S/ SRTUARTOSE J. BM. CLACKHERNICK |
| | Stuart J. BlackRose M. Chernick
Vice President and Controller (Principal Accounting Officer) |
Date: April 30, 2018May 2, 2019
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.
|
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PUBLIC SERVICE ELECTRIC AND GAS COMPANY |
| (Registrant) |
| | |
| By: | /S/ SRTUARTOSE J. BM. CLACKHERNICK |
| | Stuart J. BlackRose M. Chernick
Vice President and Controller (Principal Accounting Officer) |
Date: April 30, 2018May 2, 2019
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.
|
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PSEG POWER LLC |
| (Registrant) |
| | |
| By: | /S/ SRTUARTOSE J. BM. CLACKHERNICK |
| | Stuart J. BlackRose M. Chernick
Vice President and Controller (Principal Accounting Officer) |
Date: April 30, 2018May 2, 2019