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Financial Risk Management Activities | 3 Months Ended
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Mar. 31, 2015
Financial Risk Management Activities | Financial Risk Management Activities The operations of PSEG, Power and PSE&G are exposed to market risks from changes in commodity prices, interest rates and equity prices that could affect their results of operations and financial condition. Exposure to these risks is managed through normal operating and financing activities and, when appropriate, through hedging transactions. Hedging transactions use derivative instruments to create a relationship in which changes to the value of the assets, liabilities or anticipated transactions exposed to market risks are expected to be offset by changes in the value of these derivative instruments. Derivative accounting guidance requires that a derivative instrument be recognized as either an asset or a liability at fair value, with changes in fair value of the derivative recognized in earnings each period. Other accounting treatments are available through special election and designation provided that the derivative instrument meets specific, restrictive criteria, both at the time of designation and on an ongoing basis. These alternative permissible treatments include normal purchase normal sale (NPNS), cash flow hedge and fair value hedge accounting. PSEG, Power and PSE&G have applied the NPNS scope exception to certain derivative contracts for the forward sale of generation, power procurement agreements and fuel agreements. Transactions receiving NPNS treatment are accounted for upon settlement. For a derivative instrument that qualifies and is designated as a cash flow hedge, the changes in the fair value of such a derivative that are highly effective are recorded in Accumulated Other Comprehensive Income (Loss) until earnings are affected by the variability of cash flows of the hedged transaction. For a derivative instrument that qualifies and is designated as a fair value hedge, the gains or losses on the derivative as well as the offsetting losses or gains on the hedged item attributable to the hedged risk are recognized in earnings each period. Power and PSE&G enter into additional contracts that are derivatives, but do not qualify for or are not designated as either cash flow hedges or fair value hedges. These transactions are economic hedges and changes in the fair value of these contracts are recorded in earnings each period. 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 to manage the commodity price risk of its electric generation facilities, including physical and financial transactions in the wholesale energy markets to mitigate the effects of adverse movements in fuel and electricity prices. The fair value for the majority of these contracts is obtained from quoted market sources. Modeling techniques using assumptions reflective of current market rates, yield curves and forward prices are used to interpolate certain prices when no quoted market exists. Cash Flow Hedges PSEG and Power use forward sale and purchase contracts, swaps and futures contracts to hedge certain forecasted natural gas sales and purchases made to support the BGSS contract with PSE&G. These derivative transactions qualify and are designated as cash flow hedges. As of March 31, 2015 and December 31, 2014, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with accounting hedge activity were as follows:
|  | As of |  | As of |
|  | March 31, 2015 |  | December 31, 2014 |
|  | Millions |
| Fair Value of Cash Flow Hedges | $ | 2 |  |  | $ | 18 |  |
| Impact on Accumulated Other Comprehensive Income (Loss) (after tax) | $ | 1 |  |  | $ | 10 |  |
The expiration date of the longest-dated cash flow hedge at Power is in December 2015. Power’s remaining $1 million of after-tax unrealized gains on these derivatives is expected to be reclassified to earnings during the next 12 months. There was no ineffectiveness associated with qualifying hedges as of March 31, 2015. Economic Hedges PSEG and Power enter into derivative contracts that do not qualify or are not designated as either cash flow or fair value hedges. Power enters into financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. These transactions are economic hedges, intended to mitigate exposure to fluctuations in commodity prices and optimize the value of Power's expected generation. PSE&G is a party to certain long-term natural gas sales contracts to optimize its pipeline capacity utilization. Changes in the fair market value of these 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. As of March 31, 2015, PSEG had interest rate swaps outstanding totaling $850 million. These swaps convert Power’s $300 million of 5.5% Senior Notes due December 2015, $300 million of Power’s $303 million of 5.32% Senior Notes due September 2016 and Power’s $250 million of 2.75% Senior Notes due September 2016 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the changes in the fair value of the underlying forecasted interest payments of the debt. As of March 31, 2015 and December 31, 2014, the fair value of all the underlying hedges was $18 million and $22 million, respectively. 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. The Accumulated Other Comprehensive Income (Loss) (after tax) related to interest rate derivatives designated as cash flow hedges was immaterial as of March 31, 2015 and December 31, 2014, respectively. 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 our accounting policy, these positions have been offset on the Condensed Consolidated Balance Sheets of Power, PSE&G and PSEG. The following tabular disclosure does not include the offsetting of trade receivables and payables.
|  |  | As of March 31, 2015 |
|  |  | Power (A) |  | PSE&G (A) |  | PSEG (A) |  | Consolidated |
|  |  | Cash Flow Hedges |  | Not Designated |  |  |  |  |  | Not Designated |  | Fair Value Hedges |  |  |
| Balance Sheet Location |  | Energy- Related Contracts |  | Energy- Related Contracts |  | Netting (B) |  | Total Power |  | Energy- Related Contracts |  | Interest Rate Swaps |  | Total Derivatives |
|  |  | Millions |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Assets |  | $ | 2 |  |  | $ | 526 |  |  | $ | (456 | ) |  | $ | 72 |  |  | $ | — |  |  | $ | 15 |  |  | $ | 87 |  |
| Noncurrent Assets |  | — |  |  | 241 |  |  | (143 | ) |  | 98 |  |  | 7 |  |  | 3 |  |  | 108 |  |
| Total Mark-to-Market Derivative Assets |  | $ | 2 |  |  | $ | 767 |  |  | $ | (599 | ) |  | $ | 170 |  |  | $ | 7 |  |  | $ | 18 |  |  | $ | 195 |  |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Liabilities |  | $ | — |  |  | $ | (547 | ) |  | $ | 453 |  |  | $ | (94 | ) |  | $ | — |  |  | $ | — |  |  | $ | (94 | ) |
| Noncurrent Liabilities |  | — |  |  | (175 | ) |  | 150 |  |  | (25 | ) |  | — |  |  | — |  |  | (25 | ) |
| Total Mark-to-Market Derivative (Liabilities) |  | $ | — |  |  | $ | (722 | ) |  | $ | 603 |  |  | $ | (119 | ) |  | $ | — |  |  | $ | — |  |  | $ | (119 | ) |
| Total Net Mark-to-Market Derivative Assets (Liabilities) |  | $ | 2 |  |  | $ | 45 |  |  | $ | 4 |  |  | $ | 51 |  |  | $ | 7 |  |  | $ | 18 |  |  | $ | 76 |  |
|  |  | As of December 31, 2014 |
|  |  | Power (A) |  | PSE&G (A) |  | PSEG (A) |  | Consolidated |
|  |  | Cash Flow Hedges |  | Not Designated |  |  |  |  |  | Not Designated |  | Fair Value Hedges |  |  |
| Balance Sheet Location |  | Energy- Related Contracts |  | Energy- Related Contracts |  | Netting (B) |  | Total Power |  | Energy- Related Contracts |  | Interest Rate Swaps |  | Total Derivatives |
|  |  | Millions |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Assets |  | $ | 18 |  |  | $ | 597 |  |  | $ | (408 | ) |  | $ | 207 |  |  | $ | 18 |  |  | $ | 15 |  |  | $ | 240 |  |
| Noncurrent Assets |  | — |  |  | 171 |  |  | (109 | ) |  | 62 |  |  | 8 |  |  | 7 |  |  | 77 |  |
| Total Mark-to-Market Derivative Assets |  | $ | 18 |  |  | $ | 768 |  |  | $ | (517 | ) |  | $ | 269 |  |  | $ | 26 |  |  | $ | 22 |  |  | $ | 317 |  |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Liabilities |  | $ | — |  |  | $ | (568 | ) |  | $ | 436 |  |  | $ | (132 | ) |  | $ | — |  |  | $ | — |  |  | $ | (132 | ) |
| Noncurrent Liabilities |  | — |  |  | (138 | ) |  | 105 |  |  | (33 | ) |  | — |  |  | — |  |  | (33 | ) |
| Total Mark-to-Market Derivative (Liabilities) |  | $ | — |  |  | $ | (706 | ) |  | $ | 541 |  |  | $ | (165 | ) |  | $ | — |  |  | $ | — |  |  | $ | (165 | ) |
| Total Net Mark-to-Market Derivative Assets (Liabilities) |  | $ | 18 |  |  | $ | 62 |  |  | $ | 24 |  |  | $ | 104 |  |  | $ | 26 |  |  | $ | 22 |  |  | $ | 152 |  |
(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, 2015 and December 31, 2014. PSE&G does not have any derivative contracts subject to master netting or similar agreements.
(B) | Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. All cash collateral received or posted that has been allocated to derivative positions, where the right of offset exists, has been offset on the Condensed Consolidated Balance Sheets. As of March 31, 2015 and December 31, 2014, net cash collateral (received) paid of $4 million and $24 million, respectively, were netted against the corresponding net derivative contract positions. Of the $4 million as of March 31, 2015, $(9) million and $(3) million of cash collateral were netted against current assets and noncurrent assets, respectively, and $6 million and $10 million were netted against current liabilities and noncurrent liabilities, respectively. Of the $24 million as of December 31, 2014, $(4) million and $(8) million were netted against current assets and noncurrent assets, respectively, and $32 million and $4 million were netted against current liabilities and noncurrent liabilities, respectively.
Certain of Power’s derivative instruments contain provisions that require Power to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon Power’s credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. These credit risk-related contingent features stipulate that if Power were to be downgraded to a below investment grade rating, it would be required to provide additional collateral. 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 $104 million and $127 million as of March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015 and December 31, 2014, Power had the contractual right of offset of $26 million and $18 million, respectively, related to derivative instruments that are assets with the same counterparty under agreements and net of margin posted. If Power had been downgraded to a below investment grade rating, it would have had additional collateral obligations of $78 million and $109 million as of March 31, 2015 and December 31, 2014, respectively, related to its derivatives, net of the contractual right of offset under master agreements and the application of collateral. This potential additional collateral is included in the $881 million and $945 million as of March 31, 2015 and December 31, 2014, respectively, discussed in Note 8. Commitments and Contingent Liabilities. The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended March 31, 2015 and 2014.
| Derivatives in Cash Flow Hedging Relationships |  | Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) |  | Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income |  | Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |  | Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) |  | Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) |
|  | Three Months Ended |  |  |  | Three Months Ended |  |  |  | Three Months Ended |
|  | March 31, |  |  |  | March 31, |  |  |  | March 31, |
|  | 2015 |  | 2014 |  |  |  | 2015 |  | 2014 |  |  |  | 2015 |  | 2014 |
|  |  | Millions |
| PSEG |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Energy-Related Contracts |  | $ | 1 |  |  | $ | (8 | ) |  | Operating Revenues |  | $ | 17 |  |  | $ | (12 | ) |  | Operating Revenues |  | $ | — |  |  | $ | — |  |
| Total PSEG |  | $ | 1 |  |  | $ | (8 | ) |  |  |  | $ | 17 |  |  | $ | (12 | ) |  |  |  | $ | — |  |  | $ | — |  |
| Power |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Energy-Related Contracts |  | $ | 1 |  |  | $ | (8 | ) |  | Operating Revenues |  | $ | 17 |  |  | $ | (12 | ) |  | Operating Revenues |  | $ | — |  |  | $ | — |  |
| Total Power |  | $ | 1 |  |  | $ | (8 | ) |  |  |  | $ | 17 |  |  | $ | (12 | ) |  |  |  | $ | — |  |  | $ | — |  |
The following reconciles the Accumulated Other Comprehensive Income for derivative activity included in the Accumulated Other Comprehensive Loss of PSEG on a pre-tax and after-tax basis.
| Accumulated Other Comprehensive Income |  | Pre-Tax |  | After-Tax |
|  |  | Millions |
| Balance as of December 31, 2013 |  | $ | (4 | ) |  | $ | (2 | ) |
| Gain Recognized in AOCI |  | 12 |  |  | 7 |  |
| Plus: Loss Reclassified into Income |  | 9 |  |  | 5 |  |
| Balance as of December 31, 2014 |  | $ | 17 |  |  | $ | 10 |  |
| Gain Recognized in AOCI |  | 1 |  |  | 1 |  |
| Less: Gain Reclassified into Income |  | (17 | ) |  | (10 | ) |
| Balance as of March 31, 2015 |  | $ | 1 |  |  | $ | 1 |  |
The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months ended March 31, 2015 and 2014.
| 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, |
|  |  |  |  | 2015 |  | 2014 |
|  |  |  |  | Millions |
| PSEG and Power |  |  |  |  |  |  |
| Energy-Related Contracts |  | Operating Revenues |  | $ | (76 | ) |  | $ | (794 | ) |
| Energy-Related Contracts |  | Energy Costs |  | 10 |  |  | 113 |  |
| Total PSEG and Power |  |  |  | $ | (66 | ) |  | $ | (681 | ) |
Power’s derivative contracts reflected in the preceding tables include contracts to hedge the purchase and sale of electricity and natural gas and the purchase of fuel. Not all of these contracts qualify for hedge accounting. Most of these contracts are marked to market. The tables above do not include contracts for which Power has elected the NPNS exemption, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load. In addition, PSEG has interest rate swaps designated as fair value hedges. The effect of these hedges was to reduce interest expense by $5 million for each of the three months ended March 31, 2015 and 2014, respectively. The following reflects the gross volume, on an absolute value basis, of derivatives as of March 31, 2015 and December 31, 2014.
| Type |  | Notional |  | Total |  | PSEG |  | Power |  | PSE&G |
|  |  |  |  | Millions |
| As of March 31, 2015 |  |  |  |  |  |  |  |  |  |  |
| Natural Gas |  | Dth |  | 362 |  |  | — |  |  | 311 |  |  | 51 |  |
| Electricity |  | MWh |  | 307 |  |  | — |  |  | 307 |  |  | — |  |
| Financial Transmission Rights (FTRs) |  | MWh |  | 8 |  |  | — |  |  | 8 |  |  | — |  |
| Interest Rate Swaps |  | U.S. Dollars |  | 850 |  |  | 850 |  |  | — |  |  | — |  |
| As of December 31, 2014 |  |  |  |  |  |  |  |  |  |  |
| Natural Gas |  | Dth |  | 274 |  |  | — |  |  | 216 |  |  | 58 |  |
| Electricity |  | MWh |  | 310 |  |  | — |  |  | 310 |  |  | — |  |
| FTRs |  | MWh |  | 15 |  |  | — |  |  | 15 |  |  | — |  |
| Interest Rate Swaps |  | U.S. Dollars |  | 850 |  |  | 850 |  |  | — |  |  | — |  |
Credit Risk Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. We have established credit policies that we believe significantly minimize credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power’s and PSEG’s financial condition, results of operations or net cash flows. As of March 31, 2015, 96.7% of the credit for Power’s operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives and non-derivatives and normal purchases/normal sales). The following table provides information on Power’s credit risk from others, net of cash collateral, as of March 31, 2015. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of Power’s credit risk by credit rating of the counterparties.
| Rating |  | Current Exposure |  | Securities Held as Collateral |  | Net Exposure |  | Number of Counterparties >10% |  | Net Exposure of Counterparties >10% |  |
|  |  | Millions |  |  |  | Millions |  |
| Investment Grade—External Rating |  | $ | 396 |  |  | $ | 96 |  |  | $ | 388 |  |  | 1 |  |  | $ | 197 |  | (A) |
| Non-Investment Grade—External Rating |  | 2 |  |  | — |  |  | 2 |  |  | — |  |  | — |  |  |
| Investment Grade—No External Rating |  | 4 |  |  | — |  |  | 4 |  |  | — |  |  | — |  |  |
| Non-Investment Grade—No External Rating |  | 11 |  |  | — |  |  | 11 |  |  | — |  |  | — |  |  |
| Total |  | $ | 413 |  |  | $ | 96 |  |  | $ | 405 |  |  | 1 |  |  | $ | 197 |  |  |
(A) | Represents net exposure with PSE&G.
The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more cash collateral than the outstanding exposure, in which case there would be no exposure. When letters of credit have been posted as collateral, the exposure amount is not reduced, but the exposure amount is transferred to the rating of the issuing bank. As of March 31, 2015, Power had 144 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, 2015, primarily all of the posted collateral was in the form of parental guarantees. The unsecured credit used by the suppliers represents PSE&G’s net credit exposure. PSE&G's suppliers’ credit exposure is calculated each business day. As of March 31, 2015, 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.
Power [Member] |
Financial Risk Management Activities | Financial Risk Management Activities The operations of PSEG, Power and PSE&G are exposed to market risks from changes in commodity prices, interest rates and equity prices that could affect their results of operations and financial condition. Exposure to these risks is managed through normal operating and financing activities and, when appropriate, through hedging transactions. Hedging transactions use derivative instruments to create a relationship in which changes to the value of the assets, liabilities or anticipated transactions exposed to market risks are expected to be offset by changes in the value of these derivative instruments. Derivative accounting guidance requires that a derivative instrument be recognized as either an asset or a liability at fair value, with changes in fair value of the derivative recognized in earnings each period. Other accounting treatments are available through special election and designation provided that the derivative instrument meets specific, restrictive criteria, both at the time of designation and on an ongoing basis. These alternative permissible treatments include normal purchase normal sale (NPNS), cash flow hedge and fair value hedge accounting. PSEG, Power and PSE&G have applied the NPNS scope exception to certain derivative contracts for the forward sale of generation, power procurement agreements and fuel agreements. Transactions receiving NPNS treatment are accounted for upon settlement. For a derivative instrument that qualifies and is designated as a cash flow hedge, the changes in the fair value of such a derivative that are highly effective are recorded in Accumulated Other Comprehensive Income (Loss) until earnings are affected by the variability of cash flows of the hedged transaction. For a derivative instrument that qualifies and is designated as a fair value hedge, the gains or losses on the derivative as well as the offsetting losses or gains on the hedged item attributable to the hedged risk are recognized in earnings each period. Power and PSE&G enter into additional contracts that are derivatives, but do not qualify for or are not designated as either cash flow hedges or fair value hedges. These transactions are economic hedges and changes in the fair value of these contracts are recorded in earnings each period. 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 to manage the commodity price risk of its electric generation facilities, including physical and financial transactions in the wholesale energy markets to mitigate the effects of adverse movements in fuel and electricity prices. The fair value for the majority of these contracts is obtained from quoted market sources. Modeling techniques using assumptions reflective of current market rates, yield curves and forward prices are used to interpolate certain prices when no quoted market exists. Cash Flow Hedges PSEG and Power use forward sale and purchase contracts, swaps and futures contracts to hedge certain forecasted natural gas sales and purchases made to support the BGSS contract with PSE&G. These derivative transactions qualify and are designated as cash flow hedges. As of March 31, 2015 and December 31, 2014, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with accounting hedge activity were as follows:
|  | As of |  | As of |
|  | March 31, 2015 |  | December 31, 2014 |
|  | Millions |
| Fair Value of Cash Flow Hedges | $ | 2 |  |  | $ | 18 |  |
| Impact on Accumulated Other Comprehensive Income (Loss) (after tax) | $ | 1 |  |  | $ | 10 |  |
The expiration date of the longest-dated cash flow hedge at Power is in December 2015. Power’s remaining $1 million of after-tax unrealized gains on these derivatives is expected to be reclassified to earnings during the next 12 months. There was no ineffectiveness associated with qualifying hedges as of March 31, 2015. Economic Hedges PSEG and Power enter into derivative contracts that do not qualify or are not designated as either cash flow or fair value hedges. Power enters into financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. These transactions are economic hedges, intended to mitigate exposure to fluctuations in commodity prices and optimize the value of Power's expected generation. PSE&G is a party to certain long-term natural gas sales contracts to optimize its pipeline capacity utilization. Changes in the fair market value of these 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. As of March 31, 2015, PSEG had interest rate swaps outstanding totaling $850 million. These swaps convert Power’s $300 million of 5.5% Senior Notes due December 2015, $300 million of Power’s $303 million of 5.32% Senior Notes due September 2016 and Power’s $250 million of 2.75% Senior Notes due September 2016 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the changes in the fair value of the underlying forecasted interest payments of the debt. As of March 31, 2015 and December 31, 2014, the fair value of all the underlying hedges was $18 million and $22 million, respectively. 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. The Accumulated Other Comprehensive Income (Loss) (after tax) related to interest rate derivatives designated as cash flow hedges was immaterial as of March 31, 2015 and December 31, 2014, respectively. 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 our accounting policy, these positions have been offset on the Condensed Consolidated Balance Sheets of Power, PSE&G and PSEG. The following tabular disclosure does not include the offsetting of trade receivables and payables.
|  |  | As of March 31, 2015 |
|  |  | Power (A) |  | PSE&G (A) |  | PSEG (A) |  | Consolidated |
|  |  | Cash Flow Hedges |  | Not Designated |  |  |  |  |  | Not Designated |  | Fair Value Hedges |  |  |
| Balance Sheet Location |  | Energy- Related Contracts |  | Energy- Related Contracts |  | Netting (B) |  | Total Power |  | Energy- Related Contracts |  | Interest Rate Swaps |  | Total Derivatives |
|  |  | Millions |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Assets |  | $ | 2 |  |  | $ | 526 |  |  | $ | (456 | ) |  | $ | 72 |  |  | $ | — |  |  | $ | 15 |  |  | $ | 87 |  |
| Noncurrent Assets |  | — |  |  | 241 |  |  | (143 | ) |  | 98 |  |  | 7 |  |  | 3 |  |  | 108 |  |
| Total Mark-to-Market Derivative Assets |  | $ | 2 |  |  | $ | 767 |  |  | $ | (599 | ) |  | $ | 170 |  |  | $ | 7 |  |  | $ | 18 |  |  | $ | 195 |  |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Liabilities |  | $ | — |  |  | $ | (547 | ) |  | $ | 453 |  |  | $ | (94 | ) |  | $ | — |  |  | $ | — |  |  | $ | (94 | ) |
| Noncurrent Liabilities |  | — |  |  | (175 | ) |  | 150 |  |  | (25 | ) |  | — |  |  | — |  |  | (25 | ) |
| Total Mark-to-Market Derivative (Liabilities) |  | $ | — |  |  | $ | (722 | ) |  | $ | 603 |  |  | $ | (119 | ) |  | $ | — |  |  | $ | — |  |  | $ | (119 | ) |
| Total Net Mark-to-Market Derivative Assets (Liabilities) |  | $ | 2 |  |  | $ | 45 |  |  | $ | 4 |  |  | $ | 51 |  |  | $ | 7 |  |  | $ | 18 |  |  | $ | 76 |  |
|  |  | As of December 31, 2014 |
|  |  | Power (A) |  | PSE&G (A) |  | PSEG (A) |  | Consolidated |
|  |  | Cash Flow Hedges |  | Not Designated |  |  |  |  |  | Not Designated |  | Fair Value Hedges |  |  |
| Balance Sheet Location |  | Energy- Related Contracts |  | Energy- Related Contracts |  | Netting (B) |  | Total Power |  | Energy- Related Contracts |  | Interest Rate Swaps |  | Total Derivatives |
|  |  | Millions |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Assets |  | $ | 18 |  |  | $ | 597 |  |  | $ | (408 | ) |  | $ | 207 |  |  | $ | 18 |  |  | $ | 15 |  |  | $ | 240 |  |
| Noncurrent Assets |  | — |  |  | 171 |  |  | (109 | ) |  | 62 |  |  | 8 |  |  | 7 |  |  | 77 |  |
| Total Mark-to-Market Derivative Assets |  | $ | 18 |  |  | $ | 768 |  |  | $ | (517 | ) |  | $ | 269 |  |  | $ | 26 |  |  | $ | 22 |  |  | $ | 317 |  |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Liabilities |  | $ | — |  |  | $ | (568 | ) |  | $ | 436 |  |  | $ | (132 | ) |  | $ | — |  |  | $ | — |  |  | $ | (132 | ) |
| Noncurrent Liabilities |  | — |  |  | (138 | ) |  | 105 |  |  | (33 | ) |  | — |  |  | — |  |  | (33 | ) |
| Total Mark-to-Market Derivative (Liabilities) |  | $ | — |  |  | $ | (706 | ) |  | $ | 541 |  |  | $ | (165 | ) |  | $ | — |  |  | $ | — |  |  | $ | (165 | ) |
| Total Net Mark-to-Market Derivative Assets (Liabilities) |  | $ | 18 |  |  | $ | 62 |  |  | $ | 24 |  |  | $ | 104 |  |  | $ | 26 |  |  | $ | 22 |  |  | $ | 152 |  |
(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, 2015 and December 31, 2014. PSE&G does not have any derivative contracts subject to master netting or similar agreements.
(B) | Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. All cash collateral received or posted that has been allocated to derivative positions, where the right of offset exists, has been offset on the Condensed Consolidated Balance Sheets. As of March 31, 2015 and December 31, 2014, net cash collateral (received) paid of $4 million and $24 million, respectively, were netted against the corresponding net derivative contract positions. Of the $4 million as of March 31, 2015, $(9) million and $(3) million of cash collateral were netted against current assets and noncurrent assets, respectively, and $6 million and $10 million were netted against current liabilities and noncurrent liabilities, respectively. Of the $24 million as of December 31, 2014, $(4) million and $(8) million were netted against current assets and noncurrent assets, respectively, and $32 million and $4 million were netted against current liabilities and noncurrent liabilities, respectively.
Certain of Power’s derivative instruments contain provisions that require Power to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon Power’s credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. These credit risk-related contingent features stipulate that if Power were to be downgraded to a below investment grade rating, it would be required to provide additional collateral. 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 $104 million and $127 million as of March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015 and December 31, 2014, Power had the contractual right of offset of $26 million and $18 million, respectively, related to derivative instruments that are assets with the same counterparty under agreements and net of margin posted. If Power had been downgraded to a below investment grade rating, it would have had additional collateral obligations of $78 million and $109 million as of March 31, 2015 and December 31, 2014, respectively, related to its derivatives, net of the contractual right of offset under master agreements and the application of collateral. This potential additional collateral is included in the $881 million and $945 million as of March 31, 2015 and December 31, 2014, respectively, discussed in Note 8. Commitments and Contingent Liabilities. The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended March 31, 2015 and 2014.
| Derivatives in Cash Flow Hedging Relationships |  | Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) |  | Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income |  | Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |  | Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) |  | Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) |
|  | Three Months Ended |  |  |  | Three Months Ended |  |  |  | Three Months Ended |
|  | March 31, |  |  |  | March 31, |  |  |  | March 31, |
|  | 2015 |  | 2014 |  |  |  | 2015 |  | 2014 |  |  |  | 2015 |  | 2014 |
|  |  | Millions |
| PSEG |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Energy-Related Contracts |  | $ | 1 |  |  | $ | (8 | ) |  | Operating Revenues |  | $ | 17 |  |  | $ | (12 | ) |  | Operating Revenues |  | $ | — |  |  | $ | — |  |
| Total PSEG |  | $ | 1 |  |  | $ | (8 | ) |  |  |  | $ | 17 |  |  | $ | (12 | ) |  |  |  | $ | — |  |  | $ | — |  |
| Power |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Energy-Related Contracts |  | $ | 1 |  |  | $ | (8 | ) |  | Operating Revenues |  | $ | 17 |  |  | $ | (12 | ) |  | Operating Revenues |  | $ | — |  |  | $ | — |  |
| Total Power |  | $ | 1 |  |  | $ | (8 | ) |  |  |  | $ | 17 |  |  | $ | (12 | ) |  |  |  | $ | — |  |  | $ | — |  |
The following reconciles the Accumulated Other Comprehensive Income for derivative activity included in the Accumulated Other Comprehensive Loss of PSEG on a pre-tax and after-tax basis.
| Accumulated Other Comprehensive Income |  | Pre-Tax |  | After-Tax |
|  |  | Millions |
| Balance as of December 31, 2013 |  | $ | (4 | ) |  | $ | (2 | ) |
| Gain Recognized in AOCI |  | 12 |  |  | 7 |  |
| Plus: Loss Reclassified into Income |  | 9 |  |  | 5 |  |
| Balance as of December 31, 2014 |  | $ | 17 |  |  | $ | 10 |  |
| Gain Recognized in AOCI |  | 1 |  |  | 1 |  |
| Less: Gain Reclassified into Income |  | (17 | ) |  | (10 | ) |
| Balance as of March 31, 2015 |  | $ | 1 |  |  | $ | 1 |  |
The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months ended March 31, 2015 and 2014.
| 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, |
|  |  |  |  | 2015 |  | 2014 |
|  |  |  |  | Millions |
| PSEG and Power |  |  |  |  |  |  |
| Energy-Related Contracts |  | Operating Revenues |  | $ | (76 | ) |  | $ | (794 | ) |
| Energy-Related Contracts |  | Energy Costs |  | 10 |  |  | 113 |  |
| Total PSEG and Power |  |  |  | $ | (66 | ) |  | $ | (681 | ) |
Power’s derivative contracts reflected in the preceding tables include contracts to hedge the purchase and sale of electricity and natural gas and the purchase of fuel. Not all of these contracts qualify for hedge accounting. Most of these contracts are marked to market. The tables above do not include contracts for which Power has elected the NPNS exemption, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load. In addition, PSEG has interest rate swaps designated as fair value hedges. The effect of these hedges was to reduce interest expense by $5 million for each of the three months ended March 31, 2015 and 2014, respectively. The following reflects the gross volume, on an absolute value basis, of derivatives as of March 31, 2015 and December 31, 2014.
| Type |  | Notional |  | Total |  | PSEG |  | Power |  | PSE&G |
|  |  |  |  | Millions |
| As of March 31, 2015 |  |  |  |  |  |  |  |  |  |  |
| Natural Gas |  | Dth |  | 362 |  |  | — |  |  | 311 |  |  | 51 |  |
| Electricity |  | MWh |  | 307 |  |  | — |  |  | 307 |  |  | — |  |
| Financial Transmission Rights (FTRs) |  | MWh |  | 8 |  |  | — |  |  | 8 |  |  | — |  |
| Interest Rate Swaps |  | U.S. Dollars |  | 850 |  |  | 850 |  |  | — |  |  | — |  |
| As of December 31, 2014 |  |  |  |  |  |  |  |  |  |  |
| Natural Gas |  | Dth |  | 274 |  |  | — |  |  | 216 |  |  | 58 |  |
| Electricity |  | MWh |  | 310 |  |  | — |  |  | 310 |  |  | — |  |
| FTRs |  | MWh |  | 15 |  |  | — |  |  | 15 |  |  | — |  |
| Interest Rate Swaps |  | U.S. Dollars |  | 850 |  |  | 850 |  |  | — |  |  | — |  |
Credit Risk Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. We have established credit policies that we believe significantly minimize credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power’s and PSEG’s financial condition, results of operations or net cash flows. As of March 31, 2015, 96.7% of the credit for Power’s operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives and non-derivatives and normal purchases/normal sales). The following table provides information on Power’s credit risk from others, net of cash collateral, as of March 31, 2015. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of Power’s credit risk by credit rating of the counterparties.
| Rating |  | Current Exposure |  | Securities Held as Collateral |  | Net Exposure |  | Number of Counterparties >10% |  | Net Exposure of Counterparties >10% |  |
|  |  | Millions |  |  |  | Millions |  |
| Investment Grade—External Rating |  | $ | 396 |  |  | $ | 96 |  |  | $ | 388 |  |  | 1 |  |  | $ | 197 |  | (A) |
| Non-Investment Grade—External Rating |  | 2 |  |  | — |  |  | 2 |  |  | — |  |  | — |  |  |
| Investment Grade—No External Rating |  | 4 |  |  | — |  |  | 4 |  |  | — |  |  | — |  |  |
| Non-Investment Grade—No External Rating |  | 11 |  |  | — |  |  | 11 |  |  | — |  |  | — |  |  |
| Total |  | $ | 413 |  |  | $ | 96 |  |  | $ | 405 |  |  | 1 |  |  | $ | 197 |  |  |
(A) | Represents net exposure with PSE&G.
The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more cash collateral than the outstanding exposure, in which case there would be no exposure. When letters of credit have been posted as collateral, the exposure amount is not reduced, but the exposure amount is transferred to the rating of the issuing bank. As of March 31, 2015, Power had 144 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, 2015, primarily all of the posted collateral was in the form of parental guarantees. The unsecured credit used by the suppliers represents PSE&G’s net credit exposure. PSE&G's suppliers’ credit exposure is calculated each business day. As of March 31, 2015, 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.
PSE And G [Member] |
Financial Risk Management Activities | Financial Risk Management Activities The operations of PSEG, Power and PSE&G are exposed to market risks from changes in commodity prices, interest rates and equity prices that could affect their results of operations and financial condition. Exposure to these risks is managed through normal operating and financing activities and, when appropriate, through hedging transactions. Hedging transactions use derivative instruments to create a relationship in which changes to the value of the assets, liabilities or anticipated transactions exposed to market risks are expected to be offset by changes in the value of these derivative instruments. Derivative accounting guidance requires that a derivative instrument be recognized as either an asset or a liability at fair value, with changes in fair value of the derivative recognized in earnings each period. Other accounting treatments are available through special election and designation provided that the derivative instrument meets specific, restrictive criteria, both at the time of designation and on an ongoing basis. These alternative permissible treatments include normal purchase normal sale (NPNS), cash flow hedge and fair value hedge accounting. PSEG, Power and PSE&G have applied the NPNS scope exception to certain derivative contracts for the forward sale of generation, power procurement agreements and fuel agreements. Transactions receiving NPNS treatment are accounted for upon settlement. For a derivative instrument that qualifies and is designated as a cash flow hedge, the changes in the fair value of such a derivative that are highly effective are recorded in Accumulated Other Comprehensive Income (Loss) until earnings are affected by the variability of cash flows of the hedged transaction. For a derivative instrument that qualifies and is designated as a fair value hedge, the gains or losses on the derivative as well as the offsetting losses or gains on the hedged item attributable to the hedged risk are recognized in earnings each period. Power and PSE&G enter into additional contracts that are derivatives, but do not qualify for or are not designated as either cash flow hedges or fair value hedges. These transactions are economic hedges and changes in the fair value of these contracts are recorded in earnings each period. 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 to manage the commodity price risk of its electric generation facilities, including physical and financial transactions in the wholesale energy markets to mitigate the effects of adverse movements in fuel and electricity prices. The fair value for the majority of these contracts is obtained from quoted market sources. Modeling techniques using assumptions reflective of current market rates, yield curves and forward prices are used to interpolate certain prices when no quoted market exists. Cash Flow Hedges PSEG and Power use forward sale and purchase contracts, swaps and futures contracts to hedge certain forecasted natural gas sales and purchases made to support the BGSS contract with PSE&G. These derivative transactions qualify and are designated as cash flow hedges. As of March 31, 2015 and December 31, 2014, the fair value and the impact on Accumulated Other Comprehensive Income (Loss) associated with accounting hedge activity were as follows:
|  | As of |  | As of |
|  | March 31, 2015 |  | December 31, 2014 |
|  | Millions |
| Fair Value of Cash Flow Hedges | $ | 2 |  |  | $ | 18 |  |
| Impact on Accumulated Other Comprehensive Income (Loss) (after tax) | $ | 1 |  |  | $ | 10 |  |
The expiration date of the longest-dated cash flow hedge at Power is in December 2015. Power’s remaining $1 million of after-tax unrealized gains on these derivatives is expected to be reclassified to earnings during the next 12 months. There was no ineffectiveness associated with qualifying hedges as of March 31, 2015. Economic Hedges PSEG and Power enter into derivative contracts that do not qualify or are not designated as either cash flow or fair value hedges. Power enters into financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity. These transactions are economic hedges, intended to mitigate exposure to fluctuations in commodity prices and optimize the value of Power's expected generation. PSE&G is a party to certain long-term natural gas sales contracts to optimize its pipeline capacity utilization. Changes in the fair market value of these 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. As of March 31, 2015, PSEG had interest rate swaps outstanding totaling $850 million. These swaps convert Power’s $300 million of 5.5% Senior Notes due December 2015, $300 million of Power’s $303 million of 5.32% Senior Notes due September 2016 and Power’s $250 million of 2.75% Senior Notes due September 2016 into variable-rate debt. These interest rate swaps are designated and effective as fair value hedges. The fair value changes of the interest rate swaps are fully offset by the changes in the fair value of the underlying forecasted interest payments of the debt. As of March 31, 2015 and December 31, 2014, the fair value of all the underlying hedges was $18 million and $22 million, respectively. 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. The Accumulated Other Comprehensive Income (Loss) (after tax) related to interest rate derivatives designated as cash flow hedges was immaterial as of March 31, 2015 and December 31, 2014, respectively. 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 our accounting policy, these positions have been offset on the Condensed Consolidated Balance Sheets of Power, PSE&G and PSEG. The following tabular disclosure does not include the offsetting of trade receivables and payables.
|  |  | As of March 31, 2015 |
|  |  | Power (A) |  | PSE&G (A) |  | PSEG (A) |  | Consolidated |
|  |  | Cash Flow Hedges |  | Not Designated |  |  |  |  |  | Not Designated |  | Fair Value Hedges |  |  |
| Balance Sheet Location |  | Energy- Related Contracts |  | Energy- Related Contracts |  | Netting (B) |  | Total Power |  | Energy- Related Contracts |  | Interest Rate Swaps |  | Total Derivatives |
|  |  | Millions |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Assets |  | $ | 2 |  |  | $ | 526 |  |  | $ | (456 | ) |  | $ | 72 |  |  | $ | — |  |  | $ | 15 |  |  | $ | 87 |  |
| Noncurrent Assets |  | — |  |  | 241 |  |  | (143 | ) |  | 98 |  |  | 7 |  |  | 3 |  |  | 108 |  |
| Total Mark-to-Market Derivative Assets |  | $ | 2 |  |  | $ | 767 |  |  | $ | (599 | ) |  | $ | 170 |  |  | $ | 7 |  |  | $ | 18 |  |  | $ | 195 |  |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Liabilities |  | $ | — |  |  | $ | (547 | ) |  | $ | 453 |  |  | $ | (94 | ) |  | $ | — |  |  | $ | — |  |  | $ | (94 | ) |
| Noncurrent Liabilities |  | — |  |  | (175 | ) |  | 150 |  |  | (25 | ) |  | — |  |  | — |  |  | (25 | ) |
| Total Mark-to-Market Derivative (Liabilities) |  | $ | — |  |  | $ | (722 | ) |  | $ | 603 |  |  | $ | (119 | ) |  | $ | — |  |  | $ | — |  |  | $ | (119 | ) |
| Total Net Mark-to-Market Derivative Assets (Liabilities) |  | $ | 2 |  |  | $ | 45 |  |  | $ | 4 |  |  | $ | 51 |  |  | $ | 7 |  |  | $ | 18 |  |  | $ | 76 |  |
|  |  | As of December 31, 2014 |
|  |  | Power (A) |  | PSE&G (A) |  | PSEG (A) |  | Consolidated |
|  |  | Cash Flow Hedges |  | Not Designated |  |  |  |  |  | Not Designated |  | Fair Value Hedges |  |  |
| Balance Sheet Location |  | Energy- Related Contracts |  | Energy- Related Contracts |  | Netting (B) |  | Total Power |  | Energy- Related Contracts |  | Interest Rate Swaps |  | Total Derivatives |
|  |  | Millions |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Assets |  | $ | 18 |  |  | $ | 597 |  |  | $ | (408 | ) |  | $ | 207 |  |  | $ | 18 |  |  | $ | 15 |  |  | $ | 240 |  |
| Noncurrent Assets |  | — |  |  | 171 |  |  | (109 | ) |  | 62 |  |  | 8 |  |  | 7 |  |  | 77 |  |
| Total Mark-to-Market Derivative Assets |  | $ | 18 |  |  | $ | 768 |  |  | $ | (517 | ) |  | $ | 269 |  |  | $ | 26 |  |  | $ | 22 |  |  | $ | 317 |  |
| Derivative Contracts |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Current Liabilities |  | $ | — |  |  | $ | (568 | ) |  | $ | 436 |  |  | $ | (132 | ) |  | $ | — |  |  | $ | — |  |  | $ | (132 | ) |
| Noncurrent Liabilities |  | — |  |  | (138 | ) |  | 105 |  |  | (33 | ) |  | — |  |  | — |  |  | (33 | ) |
| Total Mark-to-Market Derivative (Liabilities) |  | $ | — |  |  | $ | (706 | ) |  | $ | 541 |  |  | $ | (165 | ) |  | $ | — |  |  | $ | — |  |  | $ | (165 | ) |
| Total Net Mark-to-Market Derivative Assets (Liabilities) |  | $ | 18 |  |  | $ | 62 |  |  | $ | 24 |  |  | $ | 104 |  |  | $ | 26 |  |  | $ | 22 |  |  | $ | 152 |  |
(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, 2015 and December 31, 2014. PSE&G does not have any derivative contracts subject to master netting or similar agreements.
(B) | Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. All cash collateral received or posted that has been allocated to derivative positions, where the right of offset exists, has been offset on the Condensed Consolidated Balance Sheets. As of March 31, 2015 and December 31, 2014, net cash collateral (received) paid of $4 million and $24 million, respectively, were netted against the corresponding net derivative contract positions. Of the $4 million as of March 31, 2015, $(9) million and $(3) million of cash collateral were netted against current assets and noncurrent assets, respectively, and $6 million and $10 million were netted against current liabilities and noncurrent liabilities, respectively. Of the $24 million as of December 31, 2014, $(4) million and $(8) million were netted against current assets and noncurrent assets, respectively, and $32 million and $4 million were netted against current liabilities and noncurrent liabilities, respectively.
Certain of Power’s derivative instruments contain provisions that require Power to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon Power’s credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. These credit risk-related contingent features stipulate that if Power were to be downgraded to a below investment grade rating, it would be required to provide additional collateral. 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 $104 million and $127 million as of March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015 and December 31, 2014, Power had the contractual right of offset of $26 million and $18 million, respectively, related to derivative instruments that are assets with the same counterparty under agreements and net of margin posted. If Power had been downgraded to a below investment grade rating, it would have had additional collateral obligations of $78 million and $109 million as of March 31, 2015 and December 31, 2014, respectively, related to its derivatives, net of the contractual right of offset under master agreements and the application of collateral. This potential additional collateral is included in the $881 million and $945 million as of March 31, 2015 and December 31, 2014, respectively, discussed in Note 8. Commitments and Contingent Liabilities. The following shows the effect on the Condensed Consolidated Statements of Operations and on Accumulated Other Comprehensive Income (AOCI) of derivative instruments designated as cash flow hedges for the three months ended March 31, 2015 and 2014.
| Derivatives in Cash Flow Hedging Relationships |  | Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) |  | Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income |  | Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |  | Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) |  | Amount of Pre-Tax Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) |
|  | Three Months Ended |  |  |  | Three Months Ended |  |  |  | Three Months Ended |
|  | March 31, |  |  |  | March 31, |  |  |  | March 31, |
|  | 2015 |  | 2014 |  |  |  | 2015 |  | 2014 |  |  |  | 2015 |  | 2014 |
|  |  | Millions |
| PSEG |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Energy-Related Contracts |  | $ | 1 |  |  | $ | (8 | ) |  | Operating Revenues |  | $ | 17 |  |  | $ | (12 | ) |  | Operating Revenues |  | $ | — |  |  | $ | — |  |
| Total PSEG |  | $ | 1 |  |  | $ | (8 | ) |  |  |  | $ | 17 |  |  | $ | (12 | ) |  |  |  | $ | — |  |  | $ | — |  |
| Power |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Energy-Related Contracts |  | $ | 1 |  |  | $ | (8 | ) |  | Operating Revenues |  | $ | 17 |  |  | $ | (12 | ) |  | Operating Revenues |  | $ | — |  |  | $ | — |  |
| Total Power |  | $ | 1 |  |  | $ | (8 | ) |  |  |  | $ | 17 |  |  | $ | (12 | ) |  |  |  | $ | — |  |  | $ | — |  |
The following reconciles the Accumulated Other Comprehensive Income for derivative activity included in the Accumulated Other Comprehensive Loss of PSEG on a pre-tax and after-tax basis.
| Accumulated Other Comprehensive Income |  | Pre-Tax |  | After-Tax |
|  |  | Millions |
| Balance as of December 31, 2013 |  | $ | (4 | ) |  | $ | (2 | ) |
| Gain Recognized in AOCI |  | 12 |  |  | 7 |  |
| Plus: Loss Reclassified into Income |  | 9 |  |  | 5 |  |
| Balance as of December 31, 2014 |  | $ | 17 |  |  | $ | 10 |  |
| Gain Recognized in AOCI |  | 1 |  |  | 1 |  |
| Less: Gain Reclassified into Income |  | (17 | ) |  | (10 | ) |
| Balance as of March 31, 2015 |  | $ | 1 |  |  | $ | 1 |  |
The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as normal purchases and sales for the three months ended March 31, 2015 and 2014.
| 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, |
|  |  |  |  | 2015 |  | 2014 |
|  |  |  |  | Millions |
| PSEG and Power |  |  |  |  |  |  |
| Energy-Related Contracts |  | Operating Revenues |  | $ | (76 | ) |  | $ | (794 | ) |
| Energy-Related Contracts |  | Energy Costs |  | 10 |  |  | 113 |  |
| Total PSEG and Power |  |  |  | $ | (66 | ) |  | $ | (681 | ) |
Power’s derivative contracts reflected in the preceding tables include contracts to hedge the purchase and sale of electricity and natural gas and the purchase of fuel. Not all of these contracts qualify for hedge accounting. Most of these contracts are marked to market. The tables above do not include contracts for which Power has elected the NPNS exemption, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load. In addition, PSEG has interest rate swaps designated as fair value hedges. The effect of these hedges was to reduce interest expense by $5 million for each of the three months ended March 31, 2015 and 2014, respectively. The following reflects the gross volume, on an absolute value basis, of derivatives as of March 31, 2015 and December 31, 2014.
| Type |  | Notional |  | Total |  | PSEG |  | Power |  | PSE&G |
|  |  |  |  | Millions |
| As of March 31, 2015 |  |  |  |  |  |  |  |  |  |  |
| Natural Gas |  | Dth |  | 362 |  |  | — |  |  | 311 |  |  | 51 |  |
| Electricity |  | MWh |  | 307 |  |  | — |  |  | 307 |  |  | — |  |
| Financial Transmission Rights (FTRs) |  | MWh |  | 8 |  |  | — |  |  | 8 |  |  | — |  |
| Interest Rate Swaps |  | U.S. Dollars |  | 850 |  |  | 850 |  |  | — |  |  | — |  |
| As of December 31, 2014 |  |  |  |  |  |  |  |  |  |  |
| Natural Gas |  | Dth |  | 274 |  |  | — |  |  | 216 |  |  | 58 |  |
| Electricity |  | MWh |  | 310 |  |  | — |  |  | 310 |  |  | — |  |
| FTRs |  | MWh |  | 15 |  |  | — |  |  | 15 |  |  | — |  |
| Interest Rate Swaps |  | U.S. Dollars |  | 850 |  |  | 850 |  |  | — |  |  | — |  |
Credit Risk Credit risk relates to the risk of loss that we would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. We have established credit policies that we believe significantly minimize credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on Power’s and PSEG’s financial condition, results of operations or net cash flows. As of March 31, 2015, 96.7% of the credit for Power’s operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives and non-derivatives and normal purchases/normal sales). The following table provides information on Power’s credit risk from others, net of cash collateral, as of March 31, 2015. It further delineates that exposure by the credit rating of the counterparties and provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of Power’s credit risk by credit rating of the counterparties.
| Rating |  | Current Exposure |  | Securities Held as Collateral |  | Net Exposure |  | Number of Counterparties >10% |  | Net Exposure of Counterparties >10% |  |
|  |  | Millions |  |  |  | Millions |  |
| Investment Grade—External Rating |  | $ | 396 |  |  | $ | 96 |  |  | $ | 388 |  |  | 1 |  |  | $ | 197 |  | (A) |
| Non-Investment Grade—External Rating |  | 2 |  |  | — |  |  | 2 |  |  | — |  |  | — |  |  |
| Investment Grade—No External Rating |  | 4 |  |  | — |  |  | 4 |  |  | — |  |  | — |  |  |
| Non-Investment Grade—No External Rating |  | 11 |  |  | — |  |  | 11 |  |  | — |  |  | — |  |  |
| Total |  | $ | 413 |  |  | $ | 96 |  |  | $ | 405 |  |  | 1 |  |  | $ | 197 |  |  |
(A) | Represents net exposure with PSE&G.
The net exposure listed above, in some cases, will not be the difference between the current exposure and the collateral held. A counterparty may have posted more cash collateral than the outstanding exposure, in which case there would be no exposure. When letters of credit have been posted as collateral, the exposure amount is not reduced, but the exposure amount is transferred to the rating of the issuing bank. As of March 31, 2015, Power had 144 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, 2015, primarily all of the posted collateral was in the form of parental guarantees. The unsecured credit used by the suppliers represents PSE&G’s net credit exposure. PSE&G's suppliers’ credit exposure is calculated each business day. As of March 31, 2015, 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.

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