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

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

 
$
—

 
$
357

 
$
—

 
$
—

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

 
$
(502
)
 
$
—

 
$
722

 
$
15

 
 
Interest Rate Swaps (C)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
922

 
$
—

 
$
922

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
530

 
$
—

 
$
—

 
$
530

 
$
—

 
 
Debt Securities—Other
 
$
360

 
$
—

 
$
—

 
$
360

 
$
—

 
 
Other Securities
 
$
45

 
$
—

 
$
45

 
$
—

 
$
—

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

 
$
—

 
$
22

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
107

 
$
—

 
$
—

 
$
107

 
$
—

 
 
Debt Securities—Other
 
$
94

 
$
—

 
$
—

 
$
94

 
$
—

 
 
Other Securities
 
$
1

 
$
—

 
$
1

 
$
—

 
$
—

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

 
$
—

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

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
357

 
$
—

 
$
—

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

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
4

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
22

 
$
—

 
$
—

 
$
22

 
$
—

 
 
Debt Securities—Other
 
$
18

 
$
—

 
$
—

 
$
18

 
$
—

 
 
Other Securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
—

 
$
(4
)
 
 
Power
 

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

 
$
(502
)
 
$
—

 
$
722

 
$
15

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
922

 
$
—

 
$
922

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
530

 
$
—

 
$
—

 
$
530

 
$
—

 
 
Debt Securities—Other
 
$
360

 
$
—

 
$
—

 
$
360

 
$
—

 
 
Other Securities
 
$
45

 
$
—

 
$
45

 
$
—

 
$
—

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

 
$
—

 
$
6

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
26

 
$
—

 
$
—

 
$
26

 
$
—

 
 
Debt Securities—Other
 
$
23

 
$
—

 
$
—

 
$
23

 
$
—

 
 
Other Securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
(533
)
 
$
—

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

 
$
—

 
$
326

 
$
—

 
$
—

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

 
$
(608
)
 
$
—

 
$
896

 
$
25

 
 
Interest Rate Swaps (C)
 
$
6

 
$
—

 
$
—

 
$
6

 
$
—

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
865

 
$
—

 
$
865

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
488

 
$
—

 
$
—

 
$
488

 
$
—

 
 
Debt Securities—Other
 
$
359

 
$
—

 
$
—

 
$
359

 
$
—

 
 
Other Securities
 
$
42

 
$
—

 
$
42

 
$
—

 
$
—

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

 
$
—

 
$
22

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
108

 
$
—

 
$
—

 
$
108

 
$
—

 
 
Debt Securities—Other
 
$
81

 
$
—

 
$
—

 
$
81

 
$
—

 
 
Other Securities
 
$
2

 
$
—

 
$
2

 
$
—

 
$
—

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

 
$
—

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

 
$
—

 
$
160

 
$
—

 
$
—

 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy Related Contracts (B)
 
$
13

 
$
—

 
$
—

 
$
—

 
$
13

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

 
$
—

 
$
5

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
21

 
$
—

 
$
—

 
$
21

 
$
—

 
 
Debt Securities—Other
 
$
16

 
$
—

 
$
—

 
$
16

 
$
—

 
 
Other Securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
—

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

 
$
(608
)
 
$
—

 
$
896

 
$
12

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
865

 
$
—

 
$
865

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
488

 
$
—

 
$
—

 
$
488

 
$
—

 
 
Debt Securities—Other
 
$
359

 
$
—

 
$
—

 
$
359

 
$
—

 
 
Other Securities
 
$
42

 
$
—

 
$
42

 
$
—

 
$
—

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

 
$
—

 
$
5

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
26

 
$
—

 
$
—

 
$
26

 
$
—

 
 
Debt Securities—Other
 
$
20

 
$
—

 
$
—

 
$
20

 
$
—

 
 
Other Securities
 
$
1

 
$
—

 
$
1

 
$
—

 
$
—

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

 
$
—

 
$
(644
)
 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Represents money market mutual funds.
(B)
Level 2—Fair values for energy-related contracts are obtained primarily using a market-based approach. Most derivative contracts (forward purchase or sale contracts and swaps) are valued using the average of the bid/ask midpoints from multiple broker or dealer quotes or auction prices. Prices used in the valuation process are also corroborated independently by management to determine that values are based on actual transaction data or, in the absence of transactions, bid and offers for the day. Examples may include certain exchange and non-exchange traded capacity and electricity contracts and natural gas physical or swap contracts based on market prices, basis adjustments and other premiums where adjustments and premiums are not considered significant to the overall inputs.
Level 3—For energy-related contracts, which include more complex agreements where limited observable inputs or pricing information are available, modeling techniques are employed using assumptions reflective of contractual terms, current market rates, forward price curves, discount rates and risk factors, as applicable. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data.
(C)
Interest rate swaps are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.
(D)
The NDT Fund maintains investments in various equity and fixed income securities classified as “available for sale.” The Rabbi Trust maintains investments in an S&P 500 index fund and various fixed income securities classified as “available for sale.” These securities are generally valued with prices that are either exchange provided (equity securities) or market transactions for comparable securities and/or broker quotes (fixed income securities).
Level 1—Investments in marketable equity securities within the NDT Fund are primarily investments in common stocks across a broad range of industries and sectors. Most equity securities are priced utilizing the principal market close price or, in some cases, midpoint, bid or ask price. Certain open-ended mutual funds with mainly short-term investments are valued based on unadjusted quoted prices in active markets. The Rabbi Trust equity index fund is valued based on quoted prices in an active market.
Level 2—NDT and Rabbi Trust fixed income securities are limited to investment grade corporate bonds, collateralized mortgage obligations, asset backed securities and government obligations or Federal Agency asset-backed securities with a wide range of maturities. Since many fixed income securities do not trade on a daily basis, they are priced using an evaluated pricing methodology that varies by asset class and reflects observable market information such as the most recent exchange price or quoted bid for similar securities. Market-based standard inputs typically include benchmark yields, reported trades, broker/dealer quotes and issuer spreads. Certain short-term investments are valued using observable market prices or market parameters such as time-to-maturity, coupon rate, quality rating and current yield.
(E)
Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. All cash collateral received or posted that has been allocated to derivative positions, where the right of offset exists, has been offset in the Condensed Consolidated Balance Sheets. As of September 30, 2016, net cash collateral (received) paid of $(18) million was netted against the corresponding net derivative contract positions. Of the $(18) million as of September 30, 2016, $(27) million of cash collateral was netted against assets, and $9 million was netted against liabilities. As of December 31, 2015, net cash collateral (received) paid of $(55) million was netted against the corresponding net derivative contract positions. Of the $(55) million of cash collateral as of December 31, 2015, $(69) million was netted against assets, and $14 million was netted against liabilities.
Additional Information Regarding Level 3 Measurements
For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in Level 3. This includes derivatives valued using indicative price quotations for contracts with tenors that extend into periods with no observable pricing. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 because the model inputs generally are not observable. PSEG’s Risk Management Committee approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval and the monitoring and reporting of risk exposures. The Risk Management Committee reports to the Audit Committee of the PSEG Board of Directors on the scope of the risk management activities and is responsible for approving all valuation procedures at PSEG. Forward price curves for the power market utilized by Power to manage the portfolio are maintained and reviewed by PSEG’s Enterprise Risk Management market pricing group and used for financial reporting purposes. PSEG considers credit and nonperformance risk in the valuation of derivative contracts categorized in Levels 2 and 3, including both historical and current market data, in its assessment of credit and nonperformance risk by counterparty. The impacts of credit and nonperformance risk were not material to the financial statements.
For PSE&G, natural gas supply contracts are measured at fair value using modeling techniques taking into account the current price of natural gas adjusted for appropriate risk factors, as applicable, and internal assumptions about transportation costs, and accordingly, the fair value measurements are classified in Level 3. The fair value of Power’s electric load contracts in which load consumption may change hourly based on demand are measured using certain unobservable inputs, such as historic load variability and, accordingly, are categorized as Level 3. The following tables provide details surrounding significant Level 3 valuations as of September 30, 2016 and December 31, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quantitative Information About Level 3 Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Significant
 
 
 
 
 
 
 
 
Fair Value as of
 
Valuation
 
Unobservable
 
 
 
 
Commodity
 
Level 3 Position
 
September 30, 2016
 
Technique(s)
 
 Input
 
Range
 
 
 
 
 
 
Assets
 
(Liabilities)
 
 
 
 
 
 
 
 
 
 
 
 
Millions
 
 
 
 
 
 
 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gas
 
Natural Gas Supply Contracts 
 
$
—

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

 
$
(4
)
 
 
 
 
 
 
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
 
Electric Load Contracts
 
$
12

 
$
—

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

 
—

 
 
 
 
 
 
 
 
Total Power
 
 
 
$
15

 
$
—

 
 
 
 
 
 
 
 
Total PSEG
 
 
 
$
15

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

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

 
$
(11
)
 
 
 
 
 
 
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
 
Electric Load Contracts
 
$
11

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

 
—

 
 
 
 
 
 
 
 
Total Power
 
 
 
$
12

 
$
(1
)
 
 
 
 
 
 
 
 
Total PSEG
 
 
 
$
25

 
$
(12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

 
$
8

 
$
(2
)
 
$
4

 
$
(4
)
 
$
—

 
$
11

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

 
$
(2
)
 
$
—

 
$
—

 
$
—

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

 
$
8

 
$
—

 
$
4

 
$
(4
)
 
$
—

 
$
15

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

 
$
24

 
$
(6
)
 
$
4

 
$
(24
)
 
$
—

 
$
11

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
2

 
$
—

 
$
(6
)
 
$
—

 
$
—

 
$
—

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

 
$
24

 
$
—

 
$
4

 
$
(24
)
 
$
—

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







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

 
$
4

 
$
(8
)
 
$
—

 
$
(2
)
 
$
—

 
$
2

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
5

 
$
—

 
$
(8
)
 
$
—

 
$
—

 
$
—

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

 
$
4

 
$
—

 
$
—

 
$
(2
)
 
$
—

 
$
5

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

 
$
12

 
$
(29
)
 
$
—

 
$
(18
)
 
$
—

 
$
2

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
26

 
$
—

 
$
(29
)
 
$
—

 
$
—

 
$
—

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

 
$
12

 
$
—

 
$
—

 
$
(18
)
 
$
—

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
PSEG’s and Power’s gains and losses attributable to changes in net derivative assets and liabilities include $8 million and $24 million in Operating Income for the three months and nine months ended September 30, 2016, respectively. Of the $8 million in Operating Income, $4 million is unrealized. The $24 million in Operating Income is realized.
(B)
Mainly includes gains/losses on PSE&G’s derivative contracts that are not included in either earnings or Accumulated Other Comprehensive Income, as they are deferred as a Regulatory Asset/Liability and are expected to be recovered from/returned to PSE&G’s customers.
(C)
Represents $(4) million and $(24) million in settlements for the three months and nine months ended September 30, 2016, respectively. Represents $(2) million and $(18) million in settlements for the three months and nine months ended September 30, 2015, respectively.
(D)
There were no transfers among levels during the three months and nine months ended September 30, 2016 and 2015.
(E)
PSEG’s and Power’s gains and losses attributable to changes in net derivative assets and liabilities include $4 million and $12 million in Operating Income for the three months and nine months ended September 30, 2015, respectively. Of the $4 million in Operating Income, $3 million is unrealized. Of the $12 million in Operating Income, $(6) million is unrealized.
As of September 30, 2016, PSEG carried $2.6 billion of net assets that are measured at fair value on a recurring basis, of which $11 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
As of September 30, 2015, PSEG carried $2.3 billion of net assets that are measured at fair value on a recurring basis, of which $2 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
Fair Value of Debt
The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions as of September 30, 2016 and December 31, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
September 30, 2016
 
December 31, 2015
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
Millions
 
 
Long-Term Debt:
 
 
 
 
 
 
 
 
 
PSEG (Parent) (A)
$
500

 
$
500

 
$
503

 
$
506

 
 
PSE&G (B)
7,816

 
8,996

 
6,821

 
7,235

 
 
Power - Recourse Debt (B)
2,381

 
2,788

 
2,237

 
2,508

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

 
—

 
7

 
7

 
 
Total Long-Term Debt
$
10,697

 
$
12,284

 
$
9,568

 
$
10,256

 
 
 
 
 
 
 
 
 
 
 
(A)
Fair value includes a $500 million floating rate term loan and net offsets to debt resulting from adjustments from interest rate swaps entered into to hedge certain debt at Power. The fair value of the term loan debt (Level 2 measurement) was considered to be equal to the carrying value because the interest payments are based on LIBOR rates that are reset monthly. Carrying amount includes such fair value reduced by the unamortized premium resulting from a debt exchange entered into between Power and Energy Holdings.
(B)
Given that most bonds do not trade, the fair value amounts of taxable debt securities (primarily Level 2 measurements) are generally determined by a valuation model that is based on a conventional discounted cash flow methodology and utilizes assumptions of current market pricing curves. In order to incorporate the credit risk into the discount rates, pricing is obtained (i.e. U.S. Treasury rate plus credit spread) based on expected new issue pricing across each of the companies’ respective debt maturity spectrum. The credit spreads of various tenors obtained from this information are added to the appropriate benchmark U.S. Treasury rates in order to determine the current market yields for the various tenors. The yields are then converted into discount rates of various tenors that are used for discounting the respective cash flows of the same tenor for each bond or note.
(C)
Non-recourse project debt is valued as equivalent to the amortized cost and is classified as a Level 3 measurement.
PSE And G [Member]  
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]  
Fair Value Measurements
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance for fair value measurement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources and those based on an entity’s own assumptions. The hierarchy prioritizes the inputs to fair value measurement into three levels:
Level 1—measurements utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that PSEG, PSE&G and Power have the ability to access. These consist primarily of listed equity securities and money market mutual funds.
Level 2—measurements include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable inputs such as interest rates and yield curves that are observable at commonly quoted intervals. These consist primarily of non-exchange traded derivatives such as forward contracts or options and most fixed income securities.
Level 3—measurements use unobservable inputs for assets or liabilities, based on the best information available and might include an entity’s own data and assumptions. In some valuations, the inputs used may fall into different levels of the hierarchy. In these cases, the financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. As of September 30, 2016, these consisted primarily of long-term gas supply contracts and certain electric load contracts.
The following tables present information about PSEG’s, PSE&G’s and Power’s respective assets and (liabilities) measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, including the fair value measurements and the levels of inputs used in determining those fair values. Amounts shown for PSEG include the amounts shown for PSE&G and Power.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recurring Fair Value Measurements as of September 30, 2016
 
 
Description
 
Total
 

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

 
$
—

 
$
357

 
$
—

 
$
—

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

 
$
(502
)
 
$
—

 
$
722

 
$
15

 
 
Interest Rate Swaps (C)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
922

 
$
—

 
$
922

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
530

 
$
—

 
$
—

 
$
530

 
$
—

 
 
Debt Securities—Other
 
$
360

 
$
—

 
$
—

 
$
360

 
$
—

 
 
Other Securities
 
$
45

 
$
—

 
$
45

 
$
—

 
$
—

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

 
$
—

 
$
22

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
107

 
$
—

 
$
—

 
$
107

 
$
—

 
 
Debt Securities—Other
 
$
94

 
$
—

 
$
—

 
$
94

 
$
—

 
 
Other Securities
 
$
1

 
$
—

 
$
1

 
$
—

 
$
—

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

 
$
—

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

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
357

 
$
—

 
$
—

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

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
4

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
22

 
$
—

 
$
—

 
$
22

 
$
—

 
 
Debt Securities—Other
 
$
18

 
$
—

 
$
—

 
$
18

 
$
—

 
 
Other Securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
—

 
$
(4
)
 
 
Power
 

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

 
$
(502
)
 
$
—

 
$
722

 
$
15

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
922

 
$
—

 
$
922

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
530

 
$
—

 
$
—

 
$
530

 
$
—

 
 
Debt Securities—Other
 
$
360

 
$
—

 
$
—

 
$
360

 
$
—

 
 
Other Securities
 
$
45

 
$
—

 
$
45

 
$
—

 
$
—

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

 
$
—

 
$
6

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
26

 
$
—

 
$
—

 
$
26

 
$
—

 
 
Debt Securities—Other
 
$
23

 
$
—

 
$
—

 
$
23

 
$
—

 
 
Other Securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
(533
)
 
$
—

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

 
$
—

 
$
326

 
$
—

 
$
—

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

 
$
(608
)
 
$
—

 
$
896

 
$
25

 
 
Interest Rate Swaps (C)
 
$
6

 
$
—

 
$
—

 
$
6

 
$
—

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
865

 
$
—

 
$
865

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
488

 
$
—

 
$
—

 
$
488

 
$
—

 
 
Debt Securities—Other
 
$
359

 
$
—

 
$
—

 
$
359

 
$
—

 
 
Other Securities
 
$
42

 
$
—

 
$
42

 
$
—

 
$
—

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

 
$
—

 
$
22

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
108

 
$
—

 
$
—

 
$
108

 
$
—

 
 
Debt Securities—Other
 
$
81

 
$
—

 
$
—

 
$
81

 
$
—

 
 
Other Securities
 
$
2

 
$
—

 
$
2

 
$
—

 
$
—

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

 
$
—

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

 
$
—

 
$
160

 
$
—

 
$
—

 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy Related Contracts (B)
 
$
13

 
$
—

 
$
—

 
$
—

 
$
13

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

 
$
—

 
$
5

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
21

 
$
—

 
$
—

 
$
21

 
$
—

 
 
Debt Securities—Other
 
$
16

 
$
—

 
$
—

 
$
16

 
$
—

 
 
Other Securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
—

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

 
$
(608
)
 
$
—

 
$
896

 
$
12

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
865

 
$
—

 
$
865

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
488

 
$
—

 
$
—

 
$
488

 
$
—

 
 
Debt Securities—Other
 
$
359

 
$
—

 
$
—

 
$
359

 
$
—

 
 
Other Securities
 
$
42

 
$
—

 
$
42

 
$
—

 
$
—

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

 
$
—

 
$
5

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
26

 
$
—

 
$
—

 
$
26

 
$
—

 
 
Debt Securities—Other
 
$
20

 
$
—

 
$
—

 
$
20

 
$
—

 
 
Other Securities
 
$
1

 
$
—

 
$
1

 
$
—

 
$
—

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

 
$
—

 
$
(644
)
 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Represents money market mutual funds.
(B)
Level 2—Fair values for energy-related contracts are obtained primarily using a market-based approach. Most derivative contracts (forward purchase or sale contracts and swaps) are valued using the average of the bid/ask midpoints from multiple broker or dealer quotes or auction prices. Prices used in the valuation process are also corroborated independently by management to determine that values are based on actual transaction data or, in the absence of transactions, bid and offers for the day. Examples may include certain exchange and non-exchange traded capacity and electricity contracts and natural gas physical or swap contracts based on market prices, basis adjustments and other premiums where adjustments and premiums are not considered significant to the overall inputs.
Level 3—For energy-related contracts, which include more complex agreements where limited observable inputs or pricing information are available, modeling techniques are employed using assumptions reflective of contractual terms, current market rates, forward price curves, discount rates and risk factors, as applicable. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data.
(C)
Interest rate swaps are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.
(D)
The NDT Fund maintains investments in various equity and fixed income securities classified as “available for sale.” The Rabbi Trust maintains investments in an S&P 500 index fund and various fixed income securities classified as “available for sale.” These securities are generally valued with prices that are either exchange provided (equity securities) or market transactions for comparable securities and/or broker quotes (fixed income securities).
Level 1—Investments in marketable equity securities within the NDT Fund are primarily investments in common stocks across a broad range of industries and sectors. Most equity securities are priced utilizing the principal market close price or, in some cases, midpoint, bid or ask price. Certain open-ended mutual funds with mainly short-term investments are valued based on unadjusted quoted prices in active markets. The Rabbi Trust equity index fund is valued based on quoted prices in an active market.
Level 2—NDT and Rabbi Trust fixed income securities are limited to investment grade corporate bonds, collateralized mortgage obligations, asset backed securities and government obligations or Federal Agency asset-backed securities with a wide range of maturities. Since many fixed income securities do not trade on a daily basis, they are priced using an evaluated pricing methodology that varies by asset class and reflects observable market information such as the most recent exchange price or quoted bid for similar securities. Market-based standard inputs typically include benchmark yields, reported trades, broker/dealer quotes and issuer spreads. Certain short-term investments are valued using observable market prices or market parameters such as time-to-maturity, coupon rate, quality rating and current yield.
(E)
Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. All cash collateral received or posted that has been allocated to derivative positions, where the right of offset exists, has been offset in the Condensed Consolidated Balance Sheets. As of September 30, 2016, net cash collateral (received) paid of $(18) million was netted against the corresponding net derivative contract positions. Of the $(18) million as of September 30, 2016, $(27) million of cash collateral was netted against assets, and $9 million was netted against liabilities. As of December 31, 2015, net cash collateral (received) paid of $(55) million was netted against the corresponding net derivative contract positions. Of the $(55) million of cash collateral as of December 31, 2015, $(69) million was netted against assets, and $14 million was netted against liabilities.
Additional Information Regarding Level 3 Measurements
For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in Level 3. This includes derivatives valued using indicative price quotations for contracts with tenors that extend into periods with no observable pricing. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 because the model inputs generally are not observable. PSEG’s Risk Management Committee approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval and the monitoring and reporting of risk exposures. The Risk Management Committee reports to the Audit Committee of the PSEG Board of Directors on the scope of the risk management activities and is responsible for approving all valuation procedures at PSEG. Forward price curves for the power market utilized by Power to manage the portfolio are maintained and reviewed by PSEG’s Enterprise Risk Management market pricing group and used for financial reporting purposes. PSEG considers credit and nonperformance risk in the valuation of derivative contracts categorized in Levels 2 and 3, including both historical and current market data, in its assessment of credit and nonperformance risk by counterparty. The impacts of credit and nonperformance risk were not material to the financial statements.
For PSE&G, natural gas supply contracts are measured at fair value using modeling techniques taking into account the current price of natural gas adjusted for appropriate risk factors, as applicable, and internal assumptions about transportation costs, and accordingly, the fair value measurements are classified in Level 3. The fair value of Power’s electric load contracts in which load consumption may change hourly based on demand are measured using certain unobservable inputs, such as historic load variability and, accordingly, are categorized as Level 3. The following tables provide details surrounding significant Level 3 valuations as of September 30, 2016 and December 31, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quantitative Information About Level 3 Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Significant
 
 
 
 
 
 
 
 
Fair Value as of
 
Valuation
 
Unobservable
 
 
 
 
Commodity
 
Level 3 Position
 
September 30, 2016
 
Technique(s)
 
 Input
 
Range
 
 
 
 
 
 
Assets
 
(Liabilities)
 
 
 
 
 
 
 
 
 
 
 
 
Millions
 
 
 
 
 
 
 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gas
 
Natural Gas Supply Contracts 
 
$
—

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

 
$
(4
)
 
 
 
 
 
 
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
 
Electric Load Contracts
 
$
12

 
$
—

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

 
—

 
 
 
 
 
 
 
 
Total Power
 
 
 
$
15

 
$
—

 
 
 
 
 
 
 
 
Total PSEG
 
 
 
$
15

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

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

 
$
(11
)
 
 
 
 
 
 
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
 
Electric Load Contracts
 
$
11

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

 
—

 
 
 
 
 
 
 
 
Total Power
 
 
 
$
12

 
$
(1
)
 
 
 
 
 
 
 
 
Total PSEG
 
 
 
$
25

 
$
(12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

 
$
8

 
$
(2
)
 
$
4

 
$
(4
)
 
$
—

 
$
11

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

 
$
(2
)
 
$
—

 
$
—

 
$
—

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

 
$
8

 
$
—

 
$
4

 
$
(4
)
 
$
—

 
$
15

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

 
$
24

 
$
(6
)
 
$
4

 
$
(24
)
 
$
—

 
$
11

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
2

 
$
—

 
$
(6
)
 
$
—

 
$
—

 
$
—

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

 
$
24

 
$
—

 
$
4

 
$
(24
)
 
$
—

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







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

 
$
4

 
$
(8
)
 
$
—

 
$
(2
)
 
$
—

 
$
2

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
5

 
$
—

 
$
(8
)
 
$
—

 
$
—

 
$
—

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

 
$
4

 
$
—

 
$
—

 
$
(2
)
 
$
—

 
$
5

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

 
$
12

 
$
(29
)
 
$
—

 
$
(18
)
 
$
—

 
$
2

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
26

 
$
—

 
$
(29
)
 
$
—

 
$
—

 
$
—

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

 
$
12

 
$
—

 
$
—

 
$
(18
)
 
$
—

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
PSEG’s and Power’s gains and losses attributable to changes in net derivative assets and liabilities include $8 million and $24 million in Operating Income for the three months and nine months ended September 30, 2016, respectively. Of the $8 million in Operating Income, $4 million is unrealized. The $24 million in Operating Income is realized.
(B)
Mainly includes gains/losses on PSE&G’s derivative contracts that are not included in either earnings or Accumulated Other Comprehensive Income, as they are deferred as a Regulatory Asset/Liability and are expected to be recovered from/returned to PSE&G’s customers.
(C)
Represents $(4) million and $(24) million in settlements for the three months and nine months ended September 30, 2016, respectively. Represents $(2) million and $(18) million in settlements for the three months and nine months ended September 30, 2015, respectively.
(D)
There were no transfers among levels during the three months and nine months ended September 30, 2016 and 2015.
(E)
PSEG’s and Power’s gains and losses attributable to changes in net derivative assets and liabilities include $4 million and $12 million in Operating Income for the three months and nine months ended September 30, 2015, respectively. Of the $4 million in Operating Income, $3 million is unrealized. Of the $12 million in Operating Income, $(6) million is unrealized.
As of September 30, 2016, PSEG carried $2.6 billion of net assets that are measured at fair value on a recurring basis, of which $11 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
As of September 30, 2015, PSEG carried $2.3 billion of net assets that are measured at fair value on a recurring basis, of which $2 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
Fair Value of Debt
The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions as of September 30, 2016 and December 31, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
September 30, 2016
 
December 31, 2015
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
Millions
 
 
Long-Term Debt:
 
 
 
 
 
 
 
 
 
PSEG (Parent) (A)
$
500

 
$
500

 
$
503

 
$
506

 
 
PSE&G (B)
7,816

 
8,996

 
6,821

 
7,235

 
 
Power - Recourse Debt (B)
2,381

 
2,788

 
2,237

 
2,508

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

 
—

 
7

 
7

 
 
Total Long-Term Debt
$
10,697

 
$
12,284

 
$
9,568

 
$
10,256

 
 
 
 
 
 
 
 
 
 
 
(A)
Fair value includes a $500 million floating rate term loan and net offsets to debt resulting from adjustments from interest rate swaps entered into to hedge certain debt at Power. The fair value of the term loan debt (Level 2 measurement) was considered to be equal to the carrying value because the interest payments are based on LIBOR rates that are reset monthly. Carrying amount includes such fair value reduced by the unamortized premium resulting from a debt exchange entered into between Power and Energy Holdings.
(B)
Given that most bonds do not trade, the fair value amounts of taxable debt securities (primarily Level 2 measurements) are generally determined by a valuation model that is based on a conventional discounted cash flow methodology and utilizes assumptions of current market pricing curves. In order to incorporate the credit risk into the discount rates, pricing is obtained (i.e. U.S. Treasury rate plus credit spread) based on expected new issue pricing across each of the companies’ respective debt maturity spectrum. The credit spreads of various tenors obtained from this information are added to the appropriate benchmark U.S. Treasury rates in order to determine the current market yields for the various tenors. The yields are then converted into discount rates of various tenors that are used for discounting the respective cash flows of the same tenor for each bond or note.
(C)
Non-recourse project debt is valued as equivalent to the amortized cost and is classified as a Level 3 measurement.
Power [Member]  
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]  
Fair Value Measurements
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance for fair value measurement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources and those based on an entity’s own assumptions. The hierarchy prioritizes the inputs to fair value measurement into three levels:
Level 1—measurements utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that PSEG, PSE&G and Power have the ability to access. These consist primarily of listed equity securities and money market mutual funds.
Level 2—measurements include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable inputs such as interest rates and yield curves that are observable at commonly quoted intervals. These consist primarily of non-exchange traded derivatives such as forward contracts or options and most fixed income securities.
Level 3—measurements use unobservable inputs for assets or liabilities, based on the best information available and might include an entity’s own data and assumptions. In some valuations, the inputs used may fall into different levels of the hierarchy. In these cases, the financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. As of September 30, 2016, these consisted primarily of long-term gas supply contracts and certain electric load contracts.
The following tables present information about PSEG’s, PSE&G’s and Power’s respective assets and (liabilities) measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, including the fair value measurements and the levels of inputs used in determining those fair values. Amounts shown for PSEG include the amounts shown for PSE&G and Power.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recurring Fair Value Measurements as of September 30, 2016
 
 
Description
 
Total
 

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

 
$
—

 
$
357

 
$
—

 
$
—

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

 
$
(502
)
 
$
—

 
$
722

 
$
15

 
 
Interest Rate Swaps (C)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
922

 
$
—

 
$
922

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
530

 
$
—

 
$
—

 
$
530

 
$
—

 
 
Debt Securities—Other
 
$
360

 
$
—

 
$
—

 
$
360

 
$
—

 
 
Other Securities
 
$
45

 
$
—

 
$
45

 
$
—

 
$
—

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

 
$
—

 
$
22

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
107

 
$
—

 
$
—

 
$
107

 
$
—

 
 
Debt Securities—Other
 
$
94

 
$
—

 
$
—

 
$
94

 
$
—

 
 
Other Securities
 
$
1

 
$
—

 
$
1

 
$
—

 
$
—

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

 
$
—

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

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
357

 
$
—

 
$
—

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

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
4

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
22

 
$
—

 
$
—

 
$
22

 
$
—

 
 
Debt Securities—Other
 
$
18

 
$
—

 
$
—

 
$
18

 
$
—

 
 
Other Securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
—

 
$
(4
)
 
 
Power
 

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

 
$
(502
)
 
$
—

 
$
722

 
$
15

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
922

 
$
—

 
$
922

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
530

 
$
—

 
$
—

 
$
530

 
$
—

 
 
Debt Securities—Other
 
$
360

 
$
—

 
$
—

 
$
360

 
$
—

 
 
Other Securities
 
$
45

 
$
—

 
$
45

 
$
—

 
$
—

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

 
$
—

 
$
6

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
26

 
$
—

 
$
—

 
$
26

 
$
—

 
 
Debt Securities—Other
 
$
23

 
$
—

 
$
—

 
$
23

 
$
—

 
 
Other Securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
(533
)
 
$
—

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

 
$
—

 
$
326

 
$
—

 
$
—

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

 
$
(608
)
 
$
—

 
$
896

 
$
25

 
 
Interest Rate Swaps (C)
 
$
6

 
$
—

 
$
—

 
$
6

 
$
—

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
865

 
$
—

 
$
865

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
488

 
$
—

 
$
—

 
$
488

 
$
—

 
 
Debt Securities—Other
 
$
359

 
$
—

 
$
—

 
$
359

 
$
—

 
 
Other Securities
 
$
42

 
$
—

 
$
42

 
$
—

 
$
—

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

 
$
—

 
$
22

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
108

 
$
—

 
$
—

 
$
108

 
$
—

 
 
Debt Securities—Other
 
$
81

 
$
—

 
$
—

 
$
81

 
$
—

 
 
Other Securities
 
$
2

 
$
—

 
$
2

 
$
—

 
$
—

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

 
$
—

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

 
$
—

 
$
160

 
$
—

 
$
—

 
 
Derivative Contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Energy Related Contracts (B)
 
$
13

 
$
—

 
$
—

 
$
—

 
$
13

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

 
$
—

 
$
5

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
21

 
$
—

 
$
—

 
$
21

 
$
—

 
 
Debt Securities—Other
 
$
16

 
$
—

 
$
—

 
$
16

 
$
—

 
 
Other Securities
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
—

 
$
—

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

 
$
(608
)
 
$
—

 
$
896

 
$
12

 
 
NDT Fund (D)
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
 
$
865

 
$
—

 
$
865

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
488

 
$
—

 
$
—

 
$
488

 
$
—

 
 
Debt Securities—Other
 
$
359

 
$
—

 
$
—

 
$
359

 
$
—

 
 
Other Securities
 
$
42

 
$
—

 
$
42

 
$
—

 
$
—

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

 
$
—

 
$
5

 
$
—

 
$
—

 
 
Debt Securities—Govt Obligations
 
$
26

 
$
—

 
$
—

 
$
26

 
$
—

 
 
Debt Securities—Other
 
$
20

 
$
—

 
$
—

 
$
20

 
$
—

 
 
Other Securities
 
$
1

 
$
—

 
$
1

 
$
—

 
$
—

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

 
$
—

 
$
(644
)
 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Represents money market mutual funds.
(B)
Level 2—Fair values for energy-related contracts are obtained primarily using a market-based approach. Most derivative contracts (forward purchase or sale contracts and swaps) are valued using the average of the bid/ask midpoints from multiple broker or dealer quotes or auction prices. Prices used in the valuation process are also corroborated independently by management to determine that values are based on actual transaction data or, in the absence of transactions, bid and offers for the day. Examples may include certain exchange and non-exchange traded capacity and electricity contracts and natural gas physical or swap contracts based on market prices, basis adjustments and other premiums where adjustments and premiums are not considered significant to the overall inputs.
Level 3—For energy-related contracts, which include more complex agreements where limited observable inputs or pricing information are available, modeling techniques are employed using assumptions reflective of contractual terms, current market rates, forward price curves, discount rates and risk factors, as applicable. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data.
(C)
Interest rate swaps are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.
(D)
The NDT Fund maintains investments in various equity and fixed income securities classified as “available for sale.” The Rabbi Trust maintains investments in an S&P 500 index fund and various fixed income securities classified as “available for sale.” These securities are generally valued with prices that are either exchange provided (equity securities) or market transactions for comparable securities and/or broker quotes (fixed income securities).
Level 1—Investments in marketable equity securities within the NDT Fund are primarily investments in common stocks across a broad range of industries and sectors. Most equity securities are priced utilizing the principal market close price or, in some cases, midpoint, bid or ask price. Certain open-ended mutual funds with mainly short-term investments are valued based on unadjusted quoted prices in active markets. The Rabbi Trust equity index fund is valued based on quoted prices in an active market.
Level 2—NDT and Rabbi Trust fixed income securities are limited to investment grade corporate bonds, collateralized mortgage obligations, asset backed securities and government obligations or Federal Agency asset-backed securities with a wide range of maturities. Since many fixed income securities do not trade on a daily basis, they are priced using an evaluated pricing methodology that varies by asset class and reflects observable market information such as the most recent exchange price or quoted bid for similar securities. Market-based standard inputs typically include benchmark yields, reported trades, broker/dealer quotes and issuer spreads. Certain short-term investments are valued using observable market prices or market parameters such as time-to-maturity, coupon rate, quality rating and current yield.
(E)
Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. All cash collateral received or posted that has been allocated to derivative positions, where the right of offset exists, has been offset in the Condensed Consolidated Balance Sheets. As of September 30, 2016, net cash collateral (received) paid of $(18) million was netted against the corresponding net derivative contract positions. Of the $(18) million as of September 30, 2016, $(27) million of cash collateral was netted against assets, and $9 million was netted against liabilities. As of December 31, 2015, net cash collateral (received) paid of $(55) million was netted against the corresponding net derivative contract positions. Of the $(55) million of cash collateral as of December 31, 2015, $(69) million was netted against assets, and $14 million was netted against liabilities.
Additional Information Regarding Level 3 Measurements
For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in Level 3. This includes derivatives valued using indicative price quotations for contracts with tenors that extend into periods with no observable pricing. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 because the model inputs generally are not observable. PSEG’s Risk Management Committee approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval and the monitoring and reporting of risk exposures. The Risk Management Committee reports to the Audit Committee of the PSEG Board of Directors on the scope of the risk management activities and is responsible for approving all valuation procedures at PSEG. Forward price curves for the power market utilized by Power to manage the portfolio are maintained and reviewed by PSEG’s Enterprise Risk Management market pricing group and used for financial reporting purposes. PSEG considers credit and nonperformance risk in the valuation of derivative contracts categorized in Levels 2 and 3, including both historical and current market data, in its assessment of credit and nonperformance risk by counterparty. The impacts of credit and nonperformance risk were not material to the financial statements.
For PSE&G, natural gas supply contracts are measured at fair value using modeling techniques taking into account the current price of natural gas adjusted for appropriate risk factors, as applicable, and internal assumptions about transportation costs, and accordingly, the fair value measurements are classified in Level 3. The fair value of Power’s electric load contracts in which load consumption may change hourly based on demand are measured using certain unobservable inputs, such as historic load variability and, accordingly, are categorized as Level 3. The following tables provide details surrounding significant Level 3 valuations as of September 30, 2016 and December 31, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quantitative Information About Level 3 Fair Value Measurements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Significant
 
 
 
 
 
 
 
 
Fair Value as of
 
Valuation
 
Unobservable
 
 
 
 
Commodity
 
Level 3 Position
 
September 30, 2016
 
Technique(s)
 
 Input
 
Range
 
 
 
 
 
 
Assets
 
(Liabilities)
 
 
 
 
 
 
 
 
 
 
 
 
Millions
 
 
 
 
 
 
 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gas
 
Natural Gas Supply Contracts 
 
$
—

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

 
$
(4
)
 
 
 
 
 
 
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
 
Electric Load Contracts
 
$
12

 
$
—

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

 
—

 
 
 
 
 
 
 
 
Total Power
 
 
 
$
15

 
$
—

 
 
 
 
 
 
 
 
Total PSEG
 
 
 
$
15

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

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

 
$
(11
)
 
 
 
 
 
 
 
 
Power
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Electricity
 
Electric Load Contracts
 
$
11

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

 
—

 
 
 
 
 
 
 
 
Total Power
 
 
 
$
12

 
$
(1
)
 
 
 
 
 
 
 
 
Total PSEG
 
 
 
$
25

 
$
(12
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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

 
$
8

 
$
(2
)
 
$
4

 
$
(4
)
 
$
—

 
$
11

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

 
$
(2
)
 
$
—

 
$
—

 
$
—

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

 
$
8

 
$
—

 
$
4

 
$
(4
)
 
$
—

 
$
15

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

 
$
24

 
$
(6
)
 
$
4

 
$
(24
)
 
$
—

 
$
11

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
2

 
$
—

 
$
(6
)
 
$
—

 
$
—

 
$
—

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

 
$
24

 
$
—

 
$
4

 
$
(24
)
 
$
—

 
$
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







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

 
$
4

 
$
(8
)
 
$
—

 
$
(2
)
 
$
—

 
$
2

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
5

 
$
—

 
$
(8
)
 
$
—

 
$
—

 
$
—

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

 
$
4

 
$
—

 
$
—

 
$
(2
)
 
$
—

 
$
5

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

 
$
12

 
$
(29
)
 
$
—

 
$
(18
)
 
$
—

 
$
2

 
 
PSE&G
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Derivative Assets (Liabilities)
 
$
26

 
$
—

 
$
(29
)
 
$
—

 
$
—

 
$
—

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

 
$
12

 
$
—

 
$
—

 
$
(18
)
 
$
—

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(A)
PSEG’s and Power’s gains and losses attributable to changes in net derivative assets and liabilities include $8 million and $24 million in Operating Income for the three months and nine months ended September 30, 2016, respectively. Of the $8 million in Operating Income, $4 million is unrealized. The $24 million in Operating Income is realized.
(B)
Mainly includes gains/losses on PSE&G’s derivative contracts that are not included in either earnings or Accumulated Other Comprehensive Income, as they are deferred as a Regulatory Asset/Liability and are expected to be recovered from/returned to PSE&G’s customers.
(C)
Represents $(4) million and $(24) million in settlements for the three months and nine months ended September 30, 2016, respectively. Represents $(2) million and $(18) million in settlements for the three months and nine months ended September 30, 2015, respectively.
(D)
There were no transfers among levels during the three months and nine months ended September 30, 2016 and 2015.
(E)
PSEG’s and Power’s gains and losses attributable to changes in net derivative assets and liabilities include $4 million and $12 million in Operating Income for the three months and nine months ended September 30, 2015, respectively. Of the $4 million in Operating Income, $3 million is unrealized. Of the $12 million in Operating Income, $(6) million is unrealized.
As of September 30, 2016, PSEG carried $2.6 billion of net assets that are measured at fair value on a recurring basis, of which $11 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
As of September 30, 2015, PSEG carried $2.3 billion of net assets that are measured at fair value on a recurring basis, of which $2 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
Fair Value of Debt
The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions as of September 30, 2016 and December 31, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
As of
 
 
 
September 30, 2016
 
December 31, 2015
 
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
 
 
Millions
 
 
Long-Term Debt:
 
 
 
 
 
 
 
 
 
PSEG (Parent) (A)
$
500

 
$
500

 
$
503

 
$
506

 
 
PSE&G (B)
7,816

 
8,996

 
6,821

 
7,235

 
 
Power - Recourse Debt (B)
2,381

 
2,788

 
2,237

 
2,508

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

 
—

 
7

 
7

 
 
Total Long-Term Debt
$
10,697

 
$
12,284

 
$
9,568

 
$
10,256

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